Quote from @Marcus Auerbach:
Totally agree with having both, that's IMO a balanced investment. But why would you sell a property that is performing well? Amongst other issues selling will cost you at least 6%. And then you have to find another one, 1031 etc. If the asset continues to perform well, why would you sell it, like.. ever?
And to clarify, you are leaning heavey towards cash flow? If your trigger point is to accumulate CF to match your original cash outlay (buy+rehab). If you have a unit that cashflows $200 per month, $2400 per year it takes 10-30 years to get there depending on how much you originally spent. Whereas, if appreciation just follows inflation (no real gain) you reach your equity goal within 10 years, at the moment more like 3-5 years.
In either case, it takes time. If a new investor wants to get started and use cash flow as a propellant to grow, it has to come from somewhere else and not from the first property they bought.
A property that is gaining equity isn't performing well, it's losing value. Your assumption that gained equity defines a performing property is wrong. It's actually the opposite. Let's look at the numbers:
1 - Property bought at $100k, paid 20% DP ($20k) cash = 20%/$20k equity.
2 - Property gains $20k in value, and thus $20k in appreciation. New PV is $120k, and new equity is $40k. Sounds good, right? Wrong. You think you gained $40k in equity, but you really doubled the cost of the property from $20k to $40k.
3 - With new values, you are paying $40k for a property worth $120k,...that's a 3 to 1 ratio. You started with a 5 to 1 ratio.
4 - Sell that property and that $40k in equity, the same equity, now goes back to a 5 to 1 ratio, and buys you a property worth $200k. That's an $80k difference/loss.
Notice I didn't mention the paydown, that's because I don't count it in the new equity. This paydown is usually enough to cover the closing costs.
In my experience, it takes between 3 to 7 years for the CF to payback my costs, and the equity to double.
I never said this happens overnight. Of course it takes time, but not that much time, and as you continue to move your equity forward as it grows, you are gaining an exponential return, not a linear one.
