y posted by
@Jon Schwartz:
Originally posted by @Etienne Dubois:
If money was not an issue and i had 100,000 USD on the side to put for down payments, would investing in expensive cities like los angeles be a good idea because of the rental occupancy rate there, or would it be wiser to invest it in somewhere that has a lower occupancy rate but i can buy more with 100,000 in down payments.
Etienne, I'd invest for appreciation in a market like Los Angeles. If money's not an issue at present, and you want your money put to best use, invest in a place like LA (and I vote specifically for LA).
Let's just do some quick math:
Let's say $100K is going to be 25% down payment on one or several properties. In your appreciation market, you'll receive no cashflow, but the building will appreciate 5% per year. In the cashflow market, you'll earn a fantastic 15% cash-on-cash return but no appreciation. All financing terms are identical. Let's remove costs associated by buying and selling. To further simplify, let's say there's no principal paydown (since it will be equivalent in both examples).
What's your investment horizon? Let's say seven years...
In seven years, in your appreciation market, you'll own a property worth $562,840. You borrowed $300k to buy it, so you profit in year 7 is $262,840.
In the cashflow market, after seven years, you will have made $105,000 in cashflow. You'll have no profit in the sale of the building because it didn't appreciate.
Now, cashflow-lovers are going to make the following argument: cashflow is money-in-hand whereas appreciation is speculative.
They would be right that cashflow is money-in-hand in that you get it regularly, not as a big lump sum at the end. This makes the early cashflow payments more valuable than the later appreciation harvesting. However, if money is not a current concern, as is the case in this example, the actual value of those earlier payments is lower. To be really nerdy and mathy about it, you can use a much lower discount rate when analyzing the value of future earnings.
However, is appreciation speculative? In the Midwest, yes. In cities that have populations under 1M and might or might not be ascendant, absolutely. But in an international gateway city with a longterm average appreciation rate of 6.7% going back to 1975 -- meaning this longterm average incorporates the five recessions that have occurred since? Appreciation is far less speculative than Midwestern investors make it out to be, and to the extent that it is more speculative, the reward is much greater.
So, buy LA, my friend!
Best,
Jon
