All Forum Posts by: Tyler D.

Interesting points. I started thinking this way as well after I purchased my first cashflow property. It brings in a great amount of CoC, but the fundamentals of the area mean that cashflow will likely not increase by any meaningful number in the future. Property values have remained pretty much stagnant for the past 20 years and it is losing population.

On the flipside, places like NYC/SF are and have always been incredibly pricy. I would say that buying in a market like this is a huge gamble, but you can't deny that along with skyrocketing purchase prices, rents have also gone through the roof. If I could go back in time, I would much rather buy 1 of these properties than a similar value in a cheaper, stagnant area that won't increase in price/ rent.

 How do you capture this equity in the real world? Is this done by fixing up distressed properties, or buying in up and coming areas, or something else?

Thanks for this post. I don't see this line of thinking often in the RE community.

Given that taxes can be as high as the 50%s for high earners, I could definitely see a benefit to having flat or negative present cash flow.

It's also interesting how you can use things like depreciation/ property taxes/ interest to mitigate income taxes.

I love high property tax areas for this reason, as they would reduce my taxable income and the cost of property taxes is usually paid off by higher rent, or lower purchase prices. It's almost a free benefit.

Random question, can you keep these tax benefits when the properties are put into an LLC? I would like to reduce my liability but not if it means a loss to the tax benefits on my personal income.

I'm looking at both appreciation and CF from the perspective of long term buy and hold. I don't consider flipping to be an investment, it's more like a 2nd job.

I agree that cash flow is hard to use effectively. If the strategy is to hit $x in CF, then quit your job and sit on a beach somewhere, I get it. If the goal is to deploy the maximum amount of $ into income producing investments, that is a bit more problematic. You'd need to constantly be on the hunt for deals, which could end up being close to a part time job.

I disagree on paying down debt. The whole point of taking on debt is leverage, and by paying down debt you are giving back that leverage. Even if you don't want to look for more properties, you could put that money in stocks which should give a higher return.

I'm not sure of what my opinion is on this, and would like to see what others think on the matter.

Here on BP, the mass majority of advice and articles are focused on cashflow. I see the obvious benefits of cashflow, which are the following:

• 1) Safer in the case of a downturn. Even if property values tank, people still need a place to rent and rents may even go up.
• 2) You can easily access the returns from cashflow, and potentially live off of cashflow passively.
• 3) Since cashflow returns are immediate, you can reinvest those returns quickly as opposed to value locked away in equity.
• 4) Cashflow properties are often cheaper, meaning a lower barrier for entry.
• 5) You don't have to worry about buying at the wrong time, as you are profiting immediately.
• 6) Predictable. You don't know for sure whether a market will appreciate or not, but you can see pretty clearly what will cashflow.

On the flipside, the benefits for appreciation:

• 1) Higher property values, meaning you can invest more $ with less properties acquired, less time spent buying/managing/maintaining.
• 2) Maintenance costs, and sometimes taxes, are proportionally lower in a more expensive house. 10 new roofs on a $40k house will cost a lot more than 1 roof on a $400k house.
• 3) Loans are easier to get and better interest rate. Most banks won't even consider a $40k property, and the few that will charge higher rates or huge origination fees. You can invest more $ into real estate before hitting your 10 conventional loan limit.
• 4) Tend to be in more desirable areas, meaning lower chances for bad tenants. Also higher chances for rent/ property value growth in the future. Most appreciation markets tend to be in areas with positive growth, whereas many cashflow markets are depressed and losing population and jobs.
• 5) Though you may not cash flow immediately, after held for long enough it likely will, and will possibly even surpass an equal value of cashflow from cashflow properties.

I think that both make sense for different reasons, with cashflow markets being better for those who are just getting started, and those who want to aggressively scale up using the cashflow from previous properties to buy new ones. Appreciation markets seem like they would favor a more passive investor who can afford to buy and sit back for a decade or two, using the investment as a supplement to their primary income. 

I currently own property in a cashflow market, and am looking at picking up some properties in a mixed market before potentially moving into appreciation. I'd love to hear your thoughts on this complex topic.

Hey BP,

I am looking to invest in San Antonio as it seems to have great potential for long-term buy and hold. My goal is simply to maximize long-term ROI, as a combination of appreciation and cashflow.

I see that there is a huge amount of properties available at all price ranges. Which areas in particular should I target for cashflow and long term growth?

I recently contacted my property management company about picking up more properties, and they hooked me up with one of their agents. After we talked for a bit about my goals, he sent me an off-market property that he would sell me for roughly 80% of its market value. It is rehabbed, tenant-occupied, good neighborhood and otherwise looks perfect. 

That being said, my internal alarm bells are ringing. Why they would send this deal to me, if they could throw it on the open market for a higher price? I've heard that off-market deals are the way to go, but why would a seller do this?

If it is truly a deal, why wouldn't the agent (who is also an investor) take the deal for himself? I think that because this is an agent that works with my management company, he would have a vested interest in sending me good deals, but I want to make sure I'm not buying a lipsticked pig, or otherwise being scammed.

I have been living in the Bay Area for a few years. The upsides are excellent universities, density of smart people, great weather, and some of the highest salaries on the planet. By the way, California alone is roughly 25% of the US GDP.

That being said, it has serious problems. You need to make a lot of money to live a normal life there, which also applies to a lesser extent to LA and San Diego. The home prices are astronomically high and while they could go higher, I think that buying one would be a huge gamble. As it stands, not many normal people can afford to spend $1.4million for an average house. It IS a great place to be a high earner, as you can make so much more than other cities that it makes the astronomical costs worth it. If you have an average or below average income, this is not the case.

California's government seems to be doing everything in its power to drive away businesses and those with options by making higher taxes and business-unfriendly policies. On the flipside, Cali is the home to Silicon Valley and Hollywood. While they might do better relocating elsewhere, it's unlikely that will happen immediately, or ever.

On a personal level, I think it is currently a good place to be but it is crumbling. I absolutely would not invest in California property aside from maybe a personal residence. In the bay area, you are lucky if you can break even from rents, most likely you will be underwater hoping that property values and rents appreciate enough for you to make a profit. Seeing as the prices are already at the point where people can barely afford them, that's not a bet I'd be willing to make.

One interesting metric you should look at is the price to move TO California vs the price to move FROM California. A few months back, a regular u-haul from the bay area to Oregon cost about $1200. The reverse was about $250. When I asked about the huge price disparity, they said it was due to supply and demand. That sounds like a ticking time bomb if I ever heard one.

I'm looking to deploy about $200k by buying and financing cheaper houses (up to 100k each), which means I'd need to buy up to or over 10 houses to use it all, which could take a while.

Every once in a while I see property portfolios for sale. They usually strike me as a bad idea from the get go, because why would an investor sell an asset that's performing well? My gut reaction is that there is something wrong with the properties/ area.

Generally speaking, would you do it or would you recommend against it?

Leverage works for the midwest too ;). You get more properties with higher CoC that collectively cashflow harder.

That aside, I really want someone to convince me to invest in Texas, as it's the sexier option and I could invest more $ with a smaller amount of properties to manage. If the numbers work, I'm interested. 

A couple of questions for you:

Is that 4% appreciation sustainable over the long term, or is it only happening now in the short term?

Would you be willing to recommend some neighborhoods where I can find those properties at 1% and higher?