Investing for Cash Flow or Appreciation?

If you are new to investment real estate, you may not know that there are a lot of different opinions and strategies.  Ever since the real estate bubble burst, there has been a trend of people saying that you should never buy an investment property for appreciation because you can't depend on it.  While they are right, you can't guarantee appreciation, you can look historically over the most housing markets and see that house values have gone up over the long haul.  

Lets explore investing in both types of properties:

Investing for Cash Flow

When investing for cash flow, your main concern is how much the property can produce for you after expenses.  You will want to factor in items such as repairs, HOA's, possible special assessments (condo's), and vacancies.  You will want your purchase price to be low and the rents to be high to make the numbers work out the best. 

For the most part, this means the properties you will be purchasing will be under the median house price.  For example in Harrisonburg, you may buy a town house for $100,000-$120,000 while the median house price is $190,000.

Pros to Investing for Cash Flow

• Less Capital:  Since the houses are usually cheaper, you do not need to put as much money down. 
• Better Ratios: In general, you will receive better cash flow and cash on cash ratios

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Cons to Investing for Cash Flow

• Lower Rates of Appreciation:  Generally, the houses purchased for cash flow have lower rates of appreciation.   They are often town houses, condo's, low-income, and student housing.  
• More turn-overs, evictions, and vacancies:  Lower income housing generally comes with more turn over and evictions.  
• More maintenance:  If you have more evictions the chances are also higher that the property will become damaged more frequently.  Also, if you look at repair expense ratios, a toilet costs the same to fix in a $100,000 as a $1,000,000.  Therefore, the repair ratio is worse in a cheaper house. 

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Investing for Appreciation

When investing for appreciation, I don't mean that you will need to contribute to the rent you receive to cover debt service and other expenses.  The property still needs to cash flow.  

In this scenario, you are not only looking for a property that cash flow's after expenses but a property type that will grow in value also taking into account the location.   

Pros to Investing for Appreciation

• Higher income tenants 
• Less Turn-over/property destruction
• More wealth accumulation through higher debt pay down and higher appreciation

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Cons to Investing for Appreciation

• Less efficient cash on cash return
• Appreciation is bound to the  market so no guarantees of when you can sell at the optimal price
• Requires more money down

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Overall, it's more important that you are actively investing than finding the perfect strategy or the perfect deal.  Every investor you talk to will have slightly different strategies and goals as to how they invest.  The more you invest, the earlier you get started,  and the longer you hold will help determine how well you do. 

If you have any questions about how to find good rentals or great deals, call me at (540) 246-9067 to set up a meeting.