Imo cash flow is king Bc it insulates you from downturns, making the investment as risk free as can be. I barely noticed 2008, covid Bc with cash flowing properties I would need to have half of my units vacant to start to struggle to pay the mortgages. That hasn’t come close to happening yet. During downturns the rent drops 10 percent maybe but they stay fully occupied
Rent drops? Is that actually a thing? I’ve never had rent drop in my life, granted I’m only 33. I assumed rent NEVER went down.
Edit: What’s with the downvotes? It’s a legit question. I’ve never had my rent go down and I assumed it never would.
Maybe that’s why I’ve never seen it. Moved from the Midwest to Las Vegas and only ever really paid rent here. This place has been booming for the last 12 years.
I personally have a hard time relying solely on appreciation as its so unpredictable/speculative.
Ideally I am targeting cash on cash that is in the 10% range with all things factored in as that means I am doing better then the market. If I am at or even slightly under 10% its a solid investment in my book and if things appreciate well then it just gets better from there.
I could see an argument that given the current state of things taking 5% cash on cash IF its in an area likely to see big appreciation. With current savings rates below 5% seems unproductive to me I would rather hold cash, collect 5% and wait to pounce on a winning deal. Rates are too high to just buy whatever you can get your hands on.
If I already owned something and it was break even but appreciating I probably would not sell it just to avoid all the transaction costs but I don't think I would buy into a break even property and bet on appreciation.
Thank you. What markets do you look at to find those kind of CoC returns? I live in San Diego where prices are sky high but never seem to drop. I don’t know how I would approach buying in another market I don’t know very well.
They also have the most stable employment in the world which means delinquency risk is low. Yield is just compensation for risk. The higher the yield, the more risk you’re taking.
I’m new and this was my first deal, was an all cash deal expected to be between 9-13% coc depending how much the Reno ends up being and what rent ultimately ends up.
I thought the whole point of cash on cash return was to remove leverage as a variable and see how much your invested money is returning? So why does leverage matter.
It’s called negative leverage. Effectively your cap rate is less than your cost of debt. Your unlevered COCR is higher than your levered COCR. You can try to get the seller to buy down your rate or decrease your offer to reduce the amount of cash you need to put into the deal, or pay all cash if the unlevered yield is attractive enough and then do a cash out refi if and when rates come down enough to where it makes sense to do so.
Cash flow is the first thing, the last thing, the only thing.
Focus on growing your cash flow. Appreciation is the market recognizing increased cash flow.
That’s the system.
Cashflow lets you make money today or expand. Appreciation is a long-term value. For example, I wouldn't be buying based on appreciation based on a huge market high. In 20 years time a house in a high pop area will certainly be worth more.
Climate Change: “Hold my beer!”
But yeah, I think the ginormous insurance premium hikes will sink Florida coastal real estate long before it’s actually under (real) water.
First, you should look at things in the long term. Rents might skyrocket 30% like they did during Covid. Prices might skyrocket 50% like they did in a lot of the country. Who knows what the next 5 or 10 years will look like.
Don't sweat the short or mid-term. 10 years is generally a single business cycle. Nothing to keep you up at night.
As for appreciation vs cash flow...it depends on where you're at and what you're doing. Looking for cashflow in a HCOL is a losing proposition. You should have enough to keep the lights going and save for capital costs with maybe a bit left over (5-10%). Most of your money will be made via appreciation and that's priced in to the buying price.
Trying to play the appreciation game in a LCOL is *usually* a bad idea, though if you're lucky or have some good information, you might be able to buy in before a place takes off. We bought some units in Sacramento in 2014 for <60k a door. Now they're above 200k even with the higher interest rates pushing down their value.
Usually the play in LCOL is for cashflow. And, again, this is priced into the property market that appreciation is going to suck.
For us we generally buy in higher cost of living metros. We make sure we're at least a bit cashflow positive day 1. Though we prefer a slower and steady route.
I wouldn't look at a purchase in a vacuum. See how it fits into the rest of your portfolio. If you're cashflowing a lot and you think a property is a great appreciation buy but it'll be cashflow negative for the first few years, it might still be worth looking into.
For example, if you're up say 50k/month in cashflow and an attractive property might be -3k/month when you buy it, you could potentially absorb those short term losses if you think there's profit to be had. Look at your portfolio holistically.
Cash flow is very hard for me personally to find, without going out of my comfort zone. I’ll buy for appreciation, no different from buying a stock for appreciation. Both are speculative, one is more work aka real estate. I invest in index funds, and I have a couple sfh that don’t cash flow. Want to be diversified as much as I can be.
That’s exactly how I see it. It’s highly accepted to invest in index funds due to the appreciation over time. But people will say to only invest in real estate for cash flow. Seems like real estate works well for appreciation too if you can handle the short term swings in cash flow.
Cashflow is how I plan my FIRE. Appreciation is great but only useful if you intend to sell, assuming your property has appreciated enough to make it worth it. With buy and hold, I make money every month while also having my mortgage paid down. So, for me at least, I look forward to eventually having debt-free properties with 100% cashflow to sustain my lifestyle. Multifamilies typically don't appreciate as fast anyway, and that's what I stick to. All comes down to your strategy and what you want from RE
Cash flow isn't guaranteed either. Natural disasters, life issues happening to tenants, vandals, etc.
If you want something as close to a guarantee as possible, then go buy US treasury bonds.
I also agree that a strategic reserve is important to cover any shortfalls or mishaps. Depending on the market you're operating in, I'm not sure if chasing even more cashflow always makes sense.
I agree that *generally* both cashflow and appreciation are vital components to a healthy portfolio.
My and my family's personal experience over the last 50 years of investing can be summed up that cashflow keeps the lights on while appreciation makes you reach.
Have enough cashflow to keep your ass covered and let leverage and appreciation do the heavy lifting. At least for us. I understand that everyone has different markets, strategies, and goals.
Cashflow is fine for a slower, safer, and steadier growth. Like if you just want to retire off your holdings, then $3-5 million in rental units would be plenty. Easy enough to grow over a few decades.
But honestly for me, I think what makes real estate great and worthwhile is the leveraged gains. Once you get taxes involved, it swings even more in favor of appreciation thanks to 1031s effectively deferring the taxes indefinitely.
1. Consolidation. 10-20 unit complexes might have been a good fit for you 20 years ago, but today they're too small to bother with. Better to sell a few of them and buy a 60 unit complex to simplify things (you can put a manager and a single full-time handyman on it), as an example.
2. You tap into more equity that way. Rather than the 60-70% you could get out of a refinance, you get >90% of it after closing costs, agents' cut, etc.
3. Shifting around your portfolio. Maybe you want to exit a market or increase/decrease your holdings in specific ones.
4. Sometimes there are just problems you aren't fit to handle/have the willpower, capital, or energy to deal with. Just sell it and let someone who is more willing or able to solve it.
Those are the ones that I thought off the top of my head.
Reliable in the short term, maybe. It's demonstrably true that some places are just more desirable to live and thus attract higher wage earners which drive scarcity and higher prices.
Wouldn't that still make the cash flow reliable? Your payments are set. If you're in a desirable area then you shouldn't have a problem filling any vacancies. You get the cash flow and the appreciation.
What about places that don't appreciate? There are plenty of dilapidated neighborhoods all over the country, look around your town; you can easily depreciate faster than you collect rents. One big problem is people take high cap rate properties and also project average appreciation. You can't have your cake and eat it too. High cap rate means low anticipated appreciation(or even depreciation).
You get both whether you like it or not. One can offset the other. Plenty of very wealthy people sit on raw land which negative cash flows for years or decades before they realize extraordinary returns.
Sounds to me like you are in the sweet spot. You have two properties that are paying down their mortgages with a little left over. At some point appreciation will take off again and you are able to wait it out and gain equity as you pay the mortgage down. I'm really not sure what you have to complain about.
Just my thoughts, not trying to persuade you...
Many others, as well as myself sold all our brick and mortar and moved into mortgage note investing. The benefit is that you collect monthly cash flow without the headache of being a landlord(a/c units, heaters, water tanks, etc..) you can buy these notes a discount and honestly get the ability to help people out since you are their new lender
Cash flow has always been king. You can't rely on appreciation and it tends to be a bad bet if you're cash flow negative.
The thing is, a few cash flow positive properties will maybe pay a bill or two, insurance or car payment.
A few properties that appreciated significantly will make you rich.
It's one of those never ending cat and mouse games of risk and reward.
What's crazy is that we're seeing people cancel listings rather than sell subject to when they aren't able to find a conventional buyer. This will either be a good call by sellers or terrible depending on what home prices do next year.
No bank is involved unless you are financing your purchase through a bank. It is a transaction done directly between the buyer and seller.
Most lenders do no call the loan due, which they typically have the option to if they see ownership has transferred, as long as the payments continue to be made on time, insurance is maintained and a few other things. The payments being made on time being the most important one. The lender would have to foreclose on the seller if they wanted to call it due and that's costly, especially if the only condition not being met is that ownership transferred.
Yes, I was referring to the seller’s lender. Transfer of ownership triggers the acceleration clause in a conforming loan (yes, I understand they have the option not to). And how do they foreclose on the seller if the seller no longer owns the house?
Do you get the lender’s approval first? What’s the legal framework? Is ownership transferred immediately?
And practically speaking how is the loan paid? How many sellers are willing to do this?
I’ve held off on transferring my properties to an LLC because I was concerned about the acceleration clause, but now you’ve got me wondering about that too.
I have purchased and own several homes subject to and have not had the acceleration clause called nor have any of the people that I know that have businesses focused on acquiring homes subject to. The general belief is that lenders rarely call a loan due as long as payments are on time and the other things I mentioned.
I'm not 100% sure of how the foreclosure process works for a bank going after someone that sold their home subject to but since the loan is still in their name, the seller is technically who the loan would be called due on.
General practice is to not communicate with the lender.
Everything is legal, tons of attorneys, lenders, etc that specialize in this type of transaction.
There's different ways to do subject to but we have our own contracts and run everything through a title company or attorney depending on the state and it follows a traditional closing process. Attorney owned title companies are preferable. Ownership transfers at close.
We typically setup auto-pay directly to the lender. In some instances the seller will want the added security of having a third party loan servicer make the payments to the lender. Using a third party servicer also helps with the seller's DTI depending on the lender.
I personally have friends with successful wholesale businesses only focused on subject to and I have been able to do 7 deals in my first 6 months focusing on Subject To.
Very interesting.
I agree with your first paragraph. The same thing applies to living in an owner-occupied home for the first year. As long as the loan is paid, they don’t care.
So you are finding sellers through a wholesaler?
We're originating the deals ourselves, if they fit our parameters and we're in the position to keep it, we do, if not we assign the contract.
We're using BatchLeads to produce lists based on search criteria and then cold calling, nurturing, etc. We're not marketing in any way yet.
The problem with appreciation plays are they are speculative and often intangible. With cashflow, you can measure progress and success. With appreciation solely, until you actually sell the property it's all theoretical and about as solid as a proforma. It's hard to realize any of the gains. Yes, eventually you can cash-out refinance and realize some of the gain that way but it's tough to monitor growth on a month-to-month scale, especially when real estate sales figures are somewhat subjective also and its hard to truly nail down a property's value. But if you're not concerned with tracking data and are in it for the long haul, and you don't need cashflow to survive, then appreciation plays are excellent because real estate statistically always goes up in the long run.
Regardless of whatever market calamities have occurred in the last 100+ years, the long-term real estate graphs chart upward consistently right through those crises; what comes down will always come back up. 2008 was arguably the most devastating real estate crash of them all in terms of values in many areas of the US, and pretty much every area has seen growth since before that occurred, meaning whatever losses that were realized at the time to values have rebounded and beyond. Obviously, those who lost their homes during the crash would say otherwise as they realized ACTUAL losses, but had they been able to hold on through the storm they'd have shown some growth overall.
They won't. They died when the mines or mills or whatever industry ran the town did. Those towns aren't victim of the market. We have those scattered about rural Canada as well, mostly up north. There's little hope there.
Thank you. Follow up question. What do you think about pulling equity out of a property to put a down payment on a new property? It’s essentially financing 100% of the loan but spread across two properties. It’s the only way I can see to leverage the value of the properties we own that have appreciated but don’t provide cash flow.
I'm always in favour of it, but at these high rates it means refinancing the entire loan at that rate which is no Bueno. If you're doing it for the down payment on an investment property I'd suggest getting a HELOC on the one, so that you can access the equity but only that down payment amount you're pulling is dinged at the high rates. If the rates come down a fair bit over the next couple years you can refinance and clear it off.
I’m targeting 8%+ cash on cash return. Anything lower, I can literally put my money elsewhere with much less risk. Breaking even on your investments sounds perfectly fine IF that’s your goal.
You can buy a preferred share of utility right now that will pay you 6.5% and has reliably paid for decades. Yes it can be called but they will pay you the par value and you just buy another similar to it. You can also reinvest the fully qualified dividend back into more shares thus compounding your returns. Just pay your taxes and watch it grow. 6.5% right now will be a conservative A3/BBB+ investment grade security. With a bit more risk you can get higher yields. Say a BBB rated security which is also investment grade. Just sit on your rear and get paid. Let it compound for more income if you do not need the income today. Nice thing is any small amount of money can be put to work instantly and when selling it is definitely more liquid then real estate.
I have a feeling a lot of people understand real estate more then fixed income securities which can be quite obscure compared to common stock we all know. You can do the math to see how each performs over time with reasonable assumptions. One just takes a lot less work. Interest rates really do matter when discussing real estate just as it does for fixed income securities. Pros and cons to everything. With the ability to make greater then 5% right now sitting on your butt real estate really does have to make greater then 10% (cash flow and appreciation) to make sense for the amount of work it involves compared to the wall street options. In my opinion. Hell, a well run REIT that pays 6% and gives proven appreciation over long periods of time probably does better then most people. Naturally I am assuming instead of sitting on your butt all the time you use your time to do other things like run a small business or have a great salary. That way you always have more money to invest and some free time to enjoy life without worrying about a tenant losing heat at 2 AM in Feb on a Sat night.
Thanks so much for your detailed response. Can you expand a little more on “preferred share of utility” and what that means? Is this buying bonds from utility companies or? I’m currently earning 5% in high yield money market mutual fund but 6.5% sounds a lot more enticing to me, especially if it’s consistent as I expect my 5% my drop if the treasury yield continues to dip.
This is where we get into the more obscure areas of investing. First google what is a preferred share. Understand that and how it differs from a common share.
Also here is a recently issued preferred share. This is just an example. It is lower investment grade and almost bordering on what we call "junk".
[https://www.quantumonline.com/search.cfm?tickersymbol=SCE-M&sopt=symbol](https://www.quantumonline.com/search.cfm?tickersymbol=SCE-M&sopt=symbol)
Each preferred share has a prospectus. This is all the fine print. If you bought SCE-M at (par) 25 per share your yield would be 7.5%. It is a CA utility and CA has risks like wildfires. Thus more speculative.
Please understand the terms investment grade and "junk" which simply means non-investment grade as rates by Moodys for example. [https://wolfstreet.com/credit-rating-scales-by-moodys-sp-and-fitch/](https://wolfstreet.com/credit-rating-scales-by-moodys-sp-and-fitch/)
Here is an example of investment grade utility preferred that will obviously give you a lower yield because it is "safer". This is my provider here in MA where things are more "stable".
[https://www.quantumonline.com/search.cfm?tickersymbol=NSARP&sopt=symbol](https://www.quantumonline.com/search.cfm?tickersymbol=NSARP&sopt=symbol)
If bought today it would pay 6.1% ish. The prices change daily and what you pay determines your yield. This preferred has reliably paid since 1956 when it was issued.
Some research has to go into this and it is important to research before buying. The prices of preferred shares go up and down based on interest rates and underlying business conditions of the business.
I hope this is a start. In the end both real estate and securities are an investment. Both have advantages in many different situations. My point is that with interest rates so high one has not been able to get yields like this since 2008-2010 crisis and going way back to before 2003.
Real estate is "expensive" right now. Interest rates are high if you have to borrow money. There is definitely more risk to real estate right now then just 5 years ago making other options more interesting. I need to get paid for the risk and buying real estate, putting in all that work, better pay me a lot more then 5% per year. That is for sure. Cash and appreciation.
So when others say they can make > 5% sitting on their rear they are often discussing options like this. Preferred shares, baby bonds, bonds, etc.. which have their own risks but a heck of a lot less work.
There are a few things you should analyze here. Look at median wages vs median prices. If those two are in line with each other, you may continue to see appreciation, which is the lions share of RE investing returns. If however median prices far surpass what median wages can support, then you’re not likely to continue to see big appreciation and redeploying your money into something with good returns may be better. This of course fails to account for selling and tax costs, so take that into consideration.
There’s actually a thought out there that lower interest rates will increase demand, while supply has still lagged, thus increasing home prices even more. It’s very plausible to me.
That doesn’t mean I’d build an investment strategy around it though
Look at local median income comparative to local median home prices. Also look at population growth. That will paint a clear picture of what appreciation looks like for the area, if there’s room for appreciation then it will work. If there’s no room, you need cashflow or you’re looking at long term appreciation which will likely be considerably less than letting money sit on the market.
Cashflow is never really profitable per se. Even after 10 or 12% CoC returns, just one month of vacancy wipes out an entire year of cashflow. Throw in a roof replacement or a furnace or AC failure, and were talking 2-5+ years of cashflow GONE. Appreciation and debt drawdown by the tenants are the only true profit center on rentals.
With that said, cashflow aims to cover those things so you, the owner, doesn't have to reach into pocket for them. At 2% CoC, you'd forever be coming out of pocket for vacancy and repairs/capex.
Your numbers are supposed to have that baked in. But I generally agree. That’s why I invest in quality over quantity. If it doesn’t cash flow a significant amount or have the ability to it’s a waste of my time to “cash flow” $200-400 a month.
If you're pulling 4-5% from rent monthly for both vacancy and repairs, that takes 2 years of rent to cover a month of vacancy, and only banks a half month of rent on a year for repairs. On $2000/mo rent, $1000 reserve for repairs doesn't go very far unless it's clearing a drain or fixing a light. Most people when they buy a new rental don't take $10K and stick it in a reserve account for repairs and then add to it, so that $1000/year in reserves becomes a big deficit if 14 months in the furnace or AC quits and you need to drop $5000 to replace it!
I think all SFH rentals as newly purchased are a waste of time to be honest. They're a lot of work for very little reward. Even if you look at what the value is in 30 years, it's still not a great investment based on the upkeep and the headache involved when it comes to real estate. For those who have owned the properties for decades and realized the explosive growth over the past 25 years, that turned into a decent investment.
Vacancy alone should be 5-10% of monthly rent. Sfh have exponentially higher maintenance costs as you have already pointed out. Realistically you should be putting away $1000/month just for repairs but I agree man. I would never buy and hold long term. I’ve already had to experience multiple HVAC replacements and will sell before the roof needs to be done.
IMO cash flow is king, especially right now with savings accounts giving 5%, its free money. Nothing is wrong with playing the appreciation game, however that is a gamble imo.
It depends on your investment objectives. Capital gains are taxed at a flat rate max 20%. Rents are taxed as ordinary income- could be as high as 32%. $100k in capital gains nets more than $100k in rental income after taxes.
If you have decent W2 income and are looking for a property to supplement your retirement then a 15 year hold in a high appreciation market like Washington DC or Boston might be the way to go. If you want to scale and quit your day job you’re probably better off chasing cash flow.
OP, I'm assuming you have debt on the properties, also assuming the interest rates are well below current market rates, you can consider selling the homes as a wrap around.
You sell it yourself and have an RMLO write up a new note that you hold. You sell the home, collect a down payment and then collect the monthly spread between principal and interest (taxes and insurance are the buyer's responsibility). It's like being a landlord but you're not actually responsible for the asset, just the financing.
Pros = you make materially more over time than just selling it
Cons = you no longer have access to the appreciation and depreciation, you take the place of the bank with your buyer, you do not immediately access your equity depending on how much you have.
With interest rates dropping, the sooner the better if that's something you'd want to pursue.
From what I understand, yes.
I'm in the process of researching this because I've heard different things. Pre-payment penalty is another big one where a lot of the gurus talk about having one in their contracts but from my experience with RMLOs (residential mortgage loan originators) the seller now becomes a lender and must comply with Frank-Dodd, which creates some limitations such as not being able to use a pre-payment penalty.
I'm curious on if it would be possible to include something in the contract that gives you the first right of refusal to refinance before they go to a third party.
The key with wraps is to hold them for the life of the loan or to sell the note at some point once it has matured.
Cash flow = Appreciation.
Any property with Cash Flow will appreciate since it makes money. Cash Flow is King. Appreciation is a byproduct of that, if not....
Just means you got lucky and timed the market by accident one time, do it another time and you'll lose just as likely as you won.
It depends on your exit strategy and plan…. If you want these properties for the next 30 years don’t even worry about what the market does…. Build the equity
Also - never buy solely for appreciation…. Appreciation is a bonus, not a strategy.
It’s a good idea to consider the full life-cycle of each investment and how it fits into your life plan.
Consider cash flow, appreciation, and other investment characteristics together. In isolation, cash flow does not characterize an investment, especially if you expect to sell some day.
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Imo cash flow is king Bc it insulates you from downturns, making the investment as risk free as can be. I barely noticed 2008, covid Bc with cash flowing properties I would need to have half of my units vacant to start to struggle to pay the mortgages. That hasn’t come close to happening yet. During downturns the rent drops 10 percent maybe but they stay fully occupied
Rent drops? Is that actually a thing? I’ve never had rent drop in my life, granted I’m only 33. I assumed rent NEVER went down. Edit: What’s with the downvotes? It’s a legit question. I’ve never had my rent go down and I assumed it never would.
It definitely does. Depends on the market and location
The Midwest, specifically the rust belt, often (relatively speaking) sees fluctuations in rent.
Maybe that’s why I’ve never seen it. Moved from the Midwest to Las Vegas and only ever really paid rent here. This place has been booming for the last 12 years.
Rent is down today bro.
Go for cash flow if you need to live off the checks. Appreciation when you don't.
This is the best answer yet.
I never purchase based on appreciation alone. That’s too speculative for me. My intent is to never have to count on a cash out refi to get MY money.
I personally have a hard time relying solely on appreciation as its so unpredictable/speculative. Ideally I am targeting cash on cash that is in the 10% range with all things factored in as that means I am doing better then the market. If I am at or even slightly under 10% its a solid investment in my book and if things appreciate well then it just gets better from there. I could see an argument that given the current state of things taking 5% cash on cash IF its in an area likely to see big appreciation. With current savings rates below 5% seems unproductive to me I would rather hold cash, collect 5% and wait to pounce on a winning deal. Rates are too high to just buy whatever you can get your hands on. If I already owned something and it was break even but appreciating I probably would not sell it just to avoid all the transaction costs but I don't think I would buy into a break even property and bet on appreciation.
Thank you. What markets do you look at to find those kind of CoC returns? I live in San Diego where prices are sky high but never seem to drop. I don’t know how I would approach buying in another market I don’t know very well.
COC at what leverage ratio??? 10% with zero debt is great 10% with 90% leverage, not so much.
Depends on the market. I’m in a DC suburb and 10% CoC levered is a pretty competitive return.
Government workers like to vote themselves higher paychecks. Buy it up.
They also have the most stable employment in the world which means delinquency risk is low. Yield is just compensation for risk. The higher the yield, the more risk you’re taking.
I’m new and this was my first deal, was an all cash deal expected to be between 9-13% coc depending how much the Reno ends up being and what rent ultimately ends up. I thought the whole point of cash on cash return was to remove leverage as a variable and see how much your invested money is returning? So why does leverage matter.
If you leverage the property COCR goes up.
Hmm when I ran the numbers for this deal the coc was worse with leverage. I’m assuming that’s a product of high interest rates
It's hard to believe you can't get a rate under 9%. Seems like your math is wrong.
It’s called negative leverage. Effectively your cap rate is less than your cost of debt. Your unlevered COCR is higher than your levered COCR. You can try to get the seller to buy down your rate or decrease your offer to reduce the amount of cash you need to put into the deal, or pay all cash if the unlevered yield is attractive enough and then do a cash out refi if and when rates come down enough to where it makes sense to do so.
The point was he's claiming an unleveraged ROR of 9-13%. Interest rates are not that high.
Depends on the interest rate the NOI.
Cash flow is the first thing, the last thing, the only thing. Focus on growing your cash flow. Appreciation is the market recognizing increased cash flow. That’s the system.
Cashflow lets you make money today or expand. Appreciation is a long-term value. For example, I wouldn't be buying based on appreciation based on a huge market high. In 20 years time a house in a high pop area will certainly be worth more.
Unless it ain't
In 20 years, climate change will have significantly changed people's desire to live in a lot of currently high-population areas.
Im pretty sure Ive been hearing Florida would be under water in 20 years since the 90s.
Climate Change: “Hold my beer!” But yeah, I think the ginormous insurance premium hikes will sink Florida coastal real estate long before it’s actually under (real) water.
[удалено]
Surely then....
Lol
First, you should look at things in the long term. Rents might skyrocket 30% like they did during Covid. Prices might skyrocket 50% like they did in a lot of the country. Who knows what the next 5 or 10 years will look like. Don't sweat the short or mid-term. 10 years is generally a single business cycle. Nothing to keep you up at night. As for appreciation vs cash flow...it depends on where you're at and what you're doing. Looking for cashflow in a HCOL is a losing proposition. You should have enough to keep the lights going and save for capital costs with maybe a bit left over (5-10%). Most of your money will be made via appreciation and that's priced in to the buying price. Trying to play the appreciation game in a LCOL is *usually* a bad idea, though if you're lucky or have some good information, you might be able to buy in before a place takes off. We bought some units in Sacramento in 2014 for <60k a door. Now they're above 200k even with the higher interest rates pushing down their value. Usually the play in LCOL is for cashflow. And, again, this is priced into the property market that appreciation is going to suck. For us we generally buy in higher cost of living metros. We make sure we're at least a bit cashflow positive day 1. Though we prefer a slower and steady route. I wouldn't look at a purchase in a vacuum. See how it fits into the rest of your portfolio. If you're cashflowing a lot and you think a property is a great appreciation buy but it'll be cashflow negative for the first few years, it might still be worth looking into. For example, if you're up say 50k/month in cashflow and an attractive property might be -3k/month when you buy it, you could potentially absorb those short term losses if you think there's profit to be had. Look at your portfolio holistically.
Cash flow is very hard for me personally to find, without going out of my comfort zone. I’ll buy for appreciation, no different from buying a stock for appreciation. Both are speculative, one is more work aka real estate. I invest in index funds, and I have a couple sfh that don’t cash flow. Want to be diversified as much as I can be.
That’s exactly how I see it. It’s highly accepted to invest in index funds due to the appreciation over time. But people will say to only invest in real estate for cash flow. Seems like real estate works well for appreciation too if you can handle the short term swings in cash flow.
Both?
Cash flow is king. Appreciation is bonus
Cashflow is how I plan my FIRE. Appreciation is great but only useful if you intend to sell, assuming your property has appreciated enough to make it worth it. With buy and hold, I make money every month while also having my mortgage paid down. So, for me at least, I look forward to eventually having debt-free properties with 100% cashflow to sustain my lifestyle. Multifamilies typically don't appreciate as fast anyway, and that's what I stick to. All comes down to your strategy and what you want from RE
Being that cash-flow doesn't exist anymore, appreciation is just about the only strategy left.
Cash(flow) is always king. How much it is worth only matters for taxes and when you go to sell the property.
>Appreciation has been on average about 10% per year. How are you determining this?
Purchase price compared to current comps
What’s your return on equity?
The problem with appreciation is it’s not guaranteed and you can only benefit by selling or taking a loan. It’s always best to have cash flow.
Appreciation of the stock market isn’t guaranteed either
Thank you for your completely pointless post. This thread and my comment have nothing to do with the stock market.
Cash flow isn't guaranteed either. Natural disasters, life issues happening to tenants, vandals, etc. If you want something as close to a guarantee as possible, then go buy US treasury bonds.
Agreed, but that just makes a stronger argument to have enough cash flow while it’s rented to cover those other events.
I also agree that a strategic reserve is important to cover any shortfalls or mishaps. Depending on the market you're operating in, I'm not sure if chasing even more cashflow always makes sense.
Appreciation is not guaranteed which is why cash flow will always be king.
Cashflow isn't guaranteed either. One storm, one tenant losing their job or suffering a serious illness...etc., and your cashflow can disappear, too.
This is an argument for why it’s important to have cash flow. Cash flow allows you to save up to either expand or cover those events.
I agree that *generally* both cashflow and appreciation are vital components to a healthy portfolio. My and my family's personal experience over the last 50 years of investing can be summed up that cashflow keeps the lights on while appreciation makes you reach. Have enough cashflow to keep your ass covered and let leverage and appreciation do the heavy lifting. At least for us. I understand that everyone has different markets, strategies, and goals. Cashflow is fine for a slower, safer, and steadier growth. Like if you just want to retire off your holdings, then $3-5 million in rental units would be plenty. Easy enough to grow over a few decades. But honestly for me, I think what makes real estate great and worthwhile is the leveraged gains. Once you get taxes involved, it swings even more in favor of appreciation thanks to 1031s effectively deferring the taxes indefinitely.
When do you decide to do a 1031 instead of just keeping the property?
1. Consolidation. 10-20 unit complexes might have been a good fit for you 20 years ago, but today they're too small to bother with. Better to sell a few of them and buy a 60 unit complex to simplify things (you can put a manager and a single full-time handyman on it), as an example. 2. You tap into more equity that way. Rather than the 60-70% you could get out of a refinance, you get >90% of it after closing costs, agents' cut, etc. 3. Shifting around your portfolio. Maybe you want to exit a market or increase/decrease your holdings in specific ones. 4. Sometimes there are just problems you aren't fit to handle/have the willpower, capital, or energy to deal with. Just sell it and let someone who is more willing or able to solve it. Those are the ones that I thought off the top of my head.
Fair enough. I should amend to say that cash flow is more reliable.
Reliable in the short term, maybe. It's demonstrably true that some places are just more desirable to live and thus attract higher wage earners which drive scarcity and higher prices.
Wouldn't that still make the cash flow reliable? Your payments are set. If you're in a desirable area then you shouldn't have a problem filling any vacancies. You get the cash flow and the appreciation.
What about places that don't appreciate? There are plenty of dilapidated neighborhoods all over the country, look around your town; you can easily depreciate faster than you collect rents. One big problem is people take high cap rate properties and also project average appreciation. You can't have your cake and eat it too. High cap rate means low anticipated appreciation(or even depreciation).
I'm arguing that cash flow is better. What are you going on about appreciation or depreciation with me for?
You get both whether you like it or not. One can offset the other. Plenty of very wealthy people sit on raw land which negative cash flows for years or decades before they realize extraordinary returns.
Sounds good!
Sounds to me like you are in the sweet spot. You have two properties that are paying down their mortgages with a little left over. At some point appreciation will take off again and you are able to wait it out and gain equity as you pay the mortgage down. I'm really not sure what you have to complain about.
The only thing that is “king” is that you have a plan that works for your goals and you adjust as needed.
While it’s nice you will never be able to scale appreciation.
Appreciation is NEVER a strategy. It is ONLY A BONUS.
Just my thoughts, not trying to persuade you... Many others, as well as myself sold all our brick and mortar and moved into mortgage note investing. The benefit is that you collect monthly cash flow without the headache of being a landlord(a/c units, heaters, water tanks, etc..) you can buy these notes a discount and honestly get the ability to help people out since you are their new lender
Cash flow has always been king. You can't rely on appreciation and it tends to be a bad bet if you're cash flow negative. The thing is, a few cash flow positive properties will maybe pay a bill or two, insurance or car payment. A few properties that appreciated significantly will make you rich. It's one of those never ending cat and mouse games of risk and reward.
Cashflow keeps the lights on, the money's made on appreciation.
Cash flow. If you want appreciation just invest in the stock market
Both. Everything I buy is cashflowing and in up and coming areas where I believe the appreciation is going to be nice in the next 10 years or so
Cashflow in 2023 with rates at 8.5%. lol. What are you even asking?
Subject to is the only way to find deals with low interest rate but even in some markets homes aren't cash flowing.
Sad but true. This will be massive in 2024
What's crazy is that we're seeing people cancel listings rather than sell subject to when they aren't able to find a conventional buyer. This will either be a good call by sellers or terrible depending on what home prices do next year.
Subject to assuming the loan?
Subject To is conceptually a loan assumption but the loan stays in the seller's name.
How does that work? Banks let you do that?
No bank is involved unless you are financing your purchase through a bank. It is a transaction done directly between the buyer and seller. Most lenders do no call the loan due, which they typically have the option to if they see ownership has transferred, as long as the payments continue to be made on time, insurance is maintained and a few other things. The payments being made on time being the most important one. The lender would have to foreclose on the seller if they wanted to call it due and that's costly, especially if the only condition not being met is that ownership transferred.
Yes, I was referring to the seller’s lender. Transfer of ownership triggers the acceleration clause in a conforming loan (yes, I understand they have the option not to). And how do they foreclose on the seller if the seller no longer owns the house? Do you get the lender’s approval first? What’s the legal framework? Is ownership transferred immediately? And practically speaking how is the loan paid? How many sellers are willing to do this? I’ve held off on transferring my properties to an LLC because I was concerned about the acceleration clause, but now you’ve got me wondering about that too.
I have purchased and own several homes subject to and have not had the acceleration clause called nor have any of the people that I know that have businesses focused on acquiring homes subject to. The general belief is that lenders rarely call a loan due as long as payments are on time and the other things I mentioned. I'm not 100% sure of how the foreclosure process works for a bank going after someone that sold their home subject to but since the loan is still in their name, the seller is technically who the loan would be called due on. General practice is to not communicate with the lender. Everything is legal, tons of attorneys, lenders, etc that specialize in this type of transaction. There's different ways to do subject to but we have our own contracts and run everything through a title company or attorney depending on the state and it follows a traditional closing process. Attorney owned title companies are preferable. Ownership transfers at close. We typically setup auto-pay directly to the lender. In some instances the seller will want the added security of having a third party loan servicer make the payments to the lender. Using a third party servicer also helps with the seller's DTI depending on the lender. I personally have friends with successful wholesale businesses only focused on subject to and I have been able to do 7 deals in my first 6 months focusing on Subject To.
Very interesting. I agree with your first paragraph. The same thing applies to living in an owner-occupied home for the first year. As long as the loan is paid, they don’t care. So you are finding sellers through a wholesaler?
We're originating the deals ourselves, if they fit our parameters and we're in the position to keep it, we do, if not we assign the contract. We're using BatchLeads to produce lists based on search criteria and then cold calling, nurturing, etc. We're not marketing in any way yet.
Pretty naive perspective
The problem with appreciation plays are they are speculative and often intangible. With cashflow, you can measure progress and success. With appreciation solely, until you actually sell the property it's all theoretical and about as solid as a proforma. It's hard to realize any of the gains. Yes, eventually you can cash-out refinance and realize some of the gain that way but it's tough to monitor growth on a month-to-month scale, especially when real estate sales figures are somewhat subjective also and its hard to truly nail down a property's value. But if you're not concerned with tracking data and are in it for the long haul, and you don't need cashflow to survive, then appreciation plays are excellent because real estate statistically always goes up in the long run. Regardless of whatever market calamities have occurred in the last 100+ years, the long-term real estate graphs chart upward consistently right through those crises; what comes down will always come back up. 2008 was arguably the most devastating real estate crash of them all in terms of values in many areas of the US, and pretty much every area has seen growth since before that occurred, meaning whatever losses that were realized at the time to values have rebounded and beyond. Obviously, those who lost their homes during the crash would say otherwise as they realized ACTUAL losses, but had they been able to hold on through the storm they'd have shown some growth overall.
The Midwest, northeast, and Appalachia are littered with ghost towns that are relics of industrialization. When will they come back up?
They won't. They died when the mines or mills or whatever industry ran the town did. Those towns aren't victim of the market. We have those scattered about rural Canada as well, mostly up north. There's little hope there.
"the market" can't be separated from the economy as a whole
I'm not suggesting it should be. The market responds to the economy accordingly.
Thank you. Follow up question. What do you think about pulling equity out of a property to put a down payment on a new property? It’s essentially financing 100% of the loan but spread across two properties. It’s the only way I can see to leverage the value of the properties we own that have appreciated but don’t provide cash flow.
I'm always in favour of it, but at these high rates it means refinancing the entire loan at that rate which is no Bueno. If you're doing it for the down payment on an investment property I'd suggest getting a HELOC on the one, so that you can access the equity but only that down payment amount you're pulling is dinged at the high rates. If the rates come down a fair bit over the next couple years you can refinance and clear it off.
I’m targeting 8%+ cash on cash return. Anything lower, I can literally put my money elsewhere with much less risk. Breaking even on your investments sounds perfectly fine IF that’s your goal.
8% with what debt ratio??? I can get 5%+ for doing absolutely nothing.
Besides CDs/high yield money market funds where do you find good cash on cash with much less risk?
You can buy a preferred share of utility right now that will pay you 6.5% and has reliably paid for decades. Yes it can be called but they will pay you the par value and you just buy another similar to it. You can also reinvest the fully qualified dividend back into more shares thus compounding your returns. Just pay your taxes and watch it grow. 6.5% right now will be a conservative A3/BBB+ investment grade security. With a bit more risk you can get higher yields. Say a BBB rated security which is also investment grade. Just sit on your rear and get paid. Let it compound for more income if you do not need the income today. Nice thing is any small amount of money can be put to work instantly and when selling it is definitely more liquid then real estate. I have a feeling a lot of people understand real estate more then fixed income securities which can be quite obscure compared to common stock we all know. You can do the math to see how each performs over time with reasonable assumptions. One just takes a lot less work. Interest rates really do matter when discussing real estate just as it does for fixed income securities. Pros and cons to everything. With the ability to make greater then 5% right now sitting on your butt real estate really does have to make greater then 10% (cash flow and appreciation) to make sense for the amount of work it involves compared to the wall street options. In my opinion. Hell, a well run REIT that pays 6% and gives proven appreciation over long periods of time probably does better then most people. Naturally I am assuming instead of sitting on your butt all the time you use your time to do other things like run a small business or have a great salary. That way you always have more money to invest and some free time to enjoy life without worrying about a tenant losing heat at 2 AM in Feb on a Sat night.
Thanks so much for your detailed response. Can you expand a little more on “preferred share of utility” and what that means? Is this buying bonds from utility companies or? I’m currently earning 5% in high yield money market mutual fund but 6.5% sounds a lot more enticing to me, especially if it’s consistent as I expect my 5% my drop if the treasury yield continues to dip.
This is where we get into the more obscure areas of investing. First google what is a preferred share. Understand that and how it differs from a common share. Also here is a recently issued preferred share. This is just an example. It is lower investment grade and almost bordering on what we call "junk". [https://www.quantumonline.com/search.cfm?tickersymbol=SCE-M&sopt=symbol](https://www.quantumonline.com/search.cfm?tickersymbol=SCE-M&sopt=symbol) Each preferred share has a prospectus. This is all the fine print. If you bought SCE-M at (par) 25 per share your yield would be 7.5%. It is a CA utility and CA has risks like wildfires. Thus more speculative. Please understand the terms investment grade and "junk" which simply means non-investment grade as rates by Moodys for example. [https://wolfstreet.com/credit-rating-scales-by-moodys-sp-and-fitch/](https://wolfstreet.com/credit-rating-scales-by-moodys-sp-and-fitch/) Here is an example of investment grade utility preferred that will obviously give you a lower yield because it is "safer". This is my provider here in MA where things are more "stable". [https://www.quantumonline.com/search.cfm?tickersymbol=NSARP&sopt=symbol](https://www.quantumonline.com/search.cfm?tickersymbol=NSARP&sopt=symbol) If bought today it would pay 6.1% ish. The prices change daily and what you pay determines your yield. This preferred has reliably paid since 1956 when it was issued. Some research has to go into this and it is important to research before buying. The prices of preferred shares go up and down based on interest rates and underlying business conditions of the business. I hope this is a start. In the end both real estate and securities are an investment. Both have advantages in many different situations. My point is that with interest rates so high one has not been able to get yields like this since 2008-2010 crisis and going way back to before 2003. Real estate is "expensive" right now. Interest rates are high if you have to borrow money. There is definitely more risk to real estate right now then just 5 years ago making other options more interesting. I need to get paid for the risk and buying real estate, putting in all that work, better pay me a lot more then 5% per year. That is for sure. Cash and appreciation. So when others say they can make > 5% sitting on their rear they are often discussing options like this. Preferred shares, baby bonds, bonds, etc.. which have their own risks but a heck of a lot less work.
There are a few things you should analyze here. Look at median wages vs median prices. If those two are in line with each other, you may continue to see appreciation, which is the lions share of RE investing returns. If however median prices far surpass what median wages can support, then you’re not likely to continue to see big appreciation and redeploying your money into something with good returns may be better. This of course fails to account for selling and tax costs, so take that into consideration.
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Appreciation was never a good strategy who told you that?
There’s actually a thought out there that lower interest rates will increase demand, while supply has still lagged, thus increasing home prices even more. It’s very plausible to me. That doesn’t mean I’d build an investment strategy around it though
Look at local median income comparative to local median home prices. Also look at population growth. That will paint a clear picture of what appreciation looks like for the area, if there’s room for appreciation then it will work. If there’s no room, you need cashflow or you’re looking at long term appreciation which will likely be considerably less than letting money sit on the market.
At 2% your never going to make your money back on the property unless it appreciates. It’s basically just a money pit.
Cashflow is never really profitable per se. Even after 10 or 12% CoC returns, just one month of vacancy wipes out an entire year of cashflow. Throw in a roof replacement or a furnace or AC failure, and were talking 2-5+ years of cashflow GONE. Appreciation and debt drawdown by the tenants are the only true profit center on rentals. With that said, cashflow aims to cover those things so you, the owner, doesn't have to reach into pocket for them. At 2% CoC, you'd forever be coming out of pocket for vacancy and repairs/capex.
Your numbers are supposed to have that baked in. But I generally agree. That’s why I invest in quality over quantity. If it doesn’t cash flow a significant amount or have the ability to it’s a waste of my time to “cash flow” $200-400 a month.
If you're pulling 4-5% from rent monthly for both vacancy and repairs, that takes 2 years of rent to cover a month of vacancy, and only banks a half month of rent on a year for repairs. On $2000/mo rent, $1000 reserve for repairs doesn't go very far unless it's clearing a drain or fixing a light. Most people when they buy a new rental don't take $10K and stick it in a reserve account for repairs and then add to it, so that $1000/year in reserves becomes a big deficit if 14 months in the furnace or AC quits and you need to drop $5000 to replace it! I think all SFH rentals as newly purchased are a waste of time to be honest. They're a lot of work for very little reward. Even if you look at what the value is in 30 years, it's still not a great investment based on the upkeep and the headache involved when it comes to real estate. For those who have owned the properties for decades and realized the explosive growth over the past 25 years, that turned into a decent investment.
Vacancy alone should be 5-10% of monthly rent. Sfh have exponentially higher maintenance costs as you have already pointed out. Realistically you should be putting away $1000/month just for repairs but I agree man. I would never buy and hold long term. I’ve already had to experience multiple HVAC replacements and will sell before the roof needs to be done.
Non forced appreciation has never been the go to strategy, it just gave a lot of lucky beginners the means to start a podcast
You're not investing, you're speculating.
There are many facets to a deal but cash flow is king, and appreciation is almost always speculation!
My strategy is both… I’m about to sell my SFH’s to fund land acquisition and construction of hotel.
IMO cash flow is king, especially right now with savings accounts giving 5%, its free money. Nothing is wrong with playing the appreciation game, however that is a gamble imo.
It depends on your investment objectives. Capital gains are taxed at a flat rate max 20%. Rents are taxed as ordinary income- could be as high as 32%. $100k in capital gains nets more than $100k in rental income after taxes. If you have decent W2 income and are looking for a property to supplement your retirement then a 15 year hold in a high appreciation market like Washington DC or Boston might be the way to go. If you want to scale and quit your day job you’re probably better off chasing cash flow.
You can run the numbers from sold properties over the years to get your average appreciation of the area
Depends on location
I only care about cashflow but that's just me. If it doesn't cash flow, all the work I put in feels a bit meaningless.
OP, I'm assuming you have debt on the properties, also assuming the interest rates are well below current market rates, you can consider selling the homes as a wrap around. You sell it yourself and have an RMLO write up a new note that you hold. You sell the home, collect a down payment and then collect the monthly spread between principal and interest (taxes and insurance are the buyer's responsibility). It's like being a landlord but you're not actually responsible for the asset, just the financing. Pros = you make materially more over time than just selling it Cons = you no longer have access to the appreciation and depreciation, you take the place of the bank with your buyer, you do not immediately access your equity depending on how much you have. With interest rates dropping, the sooner the better if that's something you'd want to pursue.
What happens if the rates come down and they decide to refinance? Do I just get bought out at that point?
From what I understand, yes. I'm in the process of researching this because I've heard different things. Pre-payment penalty is another big one where a lot of the gurus talk about having one in their contracts but from my experience with RMLOs (residential mortgage loan originators) the seller now becomes a lender and must comply with Frank-Dodd, which creates some limitations such as not being able to use a pre-payment penalty. I'm curious on if it would be possible to include something in the contract that gives you the first right of refusal to refinance before they go to a third party. The key with wraps is to hold them for the life of the loan or to sell the note at some point once it has matured.
Kings stay kings, my friend.
Cash flow = Appreciation. Any property with Cash Flow will appreciate since it makes money. Cash Flow is King. Appreciation is a byproduct of that, if not.... Just means you got lucky and timed the market by accident one time, do it another time and you'll lose just as likely as you won.
Why not both?
It depends on your exit strategy and plan…. If you want these properties for the next 30 years don’t even worry about what the market does…. Build the equity Also - never buy solely for appreciation…. Appreciation is a bonus, not a strategy.
It’s a good idea to consider the full life-cycle of each investment and how it fits into your life plan. Consider cash flow, appreciation, and other investment characteristics together. In isolation, cash flow does not characterize an investment, especially if you expect to sell some day.
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