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Rental Property: Buy for cash flow, or for appreciation?
Old 04-19-2006, 07:34 PM   #1
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Rental Property: Buy for cash flow, or for appreciation?

In running cash flow analyses on new rental property prospects, we are realizing just how lucky we were to have bought properties right before the prices started going up, and more importantly, right before the interest rate hikes. Now, the hard part is finding properties where the numbers aren't working out as "easily". We are very conservative (others might call us stupid), but we are running the numbers based on a 20% down, 30 yr mortgage versus interest only (we are 2 years away from being FIRE - if we play our cards right) and prefer to have the security in the properties.

We are considering the following:

1) Apartment building in Atlanta area - positive cash flow (not much); however, we don't live in the area and latest analyst talking about Atlanta as a rental market stated that it was "a wild card"

2) Multiple single family homes (we're doing a 1031) in a rural part of Virginia, 2 hours from Washington DC. Negative cashflow, but we know the area well and are pretty confident that there will be appreciation (clearly not as high as it has been)

So - the question is: Would you invest for cash flow, even if it's small, or go for the appreciation and eat up the difference?

Thanks!
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-19-2006, 08:32 PM   #2
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Re: Rental Property: Buy for cash flow, or for appreciation?

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Originally Posted by bearkeley
So - the question is:* Would you invest for cash flow, even if it's small, or go for the appreciation and eat up the difference?
If I was bringing home a paycheck, I might settle for a negative cashflow.

Without a paycheck I wouldn't touch anything that doesn't immediately cashflow. And in Hawaii the best cash-on-cash returns are only about 5-6%.
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-19-2006, 08:38 PM   #3
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Re: Rental Property: Buy for cash flow, or for appreciation?

I don't know how you can predict appreciation. The only property I'll buy for appreciation is waterfront, since you're pretty much assured that demand will exceed supply. Other than that, I'd stick with positive cash flow.
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-19-2006, 09:26 PM   #4
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Re: Rental Property: Buy for cash flow, or for appreciation?

My rules for rental properties:
1. Never buy properties that don't cashflow from day one. Even if I have to put money into it to fix it up.

2. Always make money when you buy. This normally means buying properties that need some work but nothing major.

Observe these two rules and you'll make money everytime.

If you run across properties that are cheap compared to the comps but wouldn't cashflow as rentals consider flipping it instead.
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-20-2006, 03:20 AM   #5
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Re: Rental Property: Buy for cash flow, or for appreciation?

rentals should be based only on cash flow...period......
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-20-2006, 09:54 AM   #6
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Re: Rental Property: Buy for cash flow, or for appreciation?

I'ld rather be a seller in this market (and have been for the last 6 years) ... especially in DC. So I'ld pay the capitol gains and sit. Better to pay the taxes and reinvest the wad than to accept a negative cash watch the $$/appreciation drip away.

Much better buying opportunities are in the future ... but only for those who position themselves, IMHO.
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-20-2006, 01:08 PM   #7
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Re: Rental Property: Buy for cash flow, or for appreciation?

Quote:
Originally Posted by bearkeley

We are considering the following:

1) Apartment building in Atlanta area - positive cash flow (not much); however, we don't live in the area and latest analyst talking about Atlanta as a rental market stated that it was "a wild card"

2) Multiple single family homes (we're doing a 1031) in a rural part of Virginia, 2 hours from Washington DC. Negative cashflow, but we know the area well and are pretty confident that there will be appreciation (clearly not as high as it has been)

So - the question is: Would you invest for cash flow, even if it's small, or go for the appreciation and eat up the difference?

Thanks!

I would stay away from the neg cash flow SFRs.

Atlanta could be a good place to buy an apt bldg but do some homework first. Find number of building permits for multi-family and compare to recent years. Good time to buy is when you're buying into an overbuilt market that has future growth and trend of building permits is decreasing.
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-20-2006, 02:20 PM   #8
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Re: Rental Property: Buy for cash flow, or for appreciation?

I'm with tryan on this one. My rental has good positive cash flow and I'm still selling it. No. Cal. property has gone up SOOOO much... I may not get everything I possibly could out of that investment, but I have "enough."

Why buy at all right now?

Then again, I'm a financial weenie... you can't go by me, I'm hiding under the bed half the time...

Caroline
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Re: Rental Property: Buy for cash flow, or for appreciation?
Old 04-20-2006, 03:23 PM   #9
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Re: Rental Property: Buy for cash flow, or for appreciation?

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Originally Posted by Caroline
I may not get everything I possibly could out of that investment, but I have "enough."
Then again, I'm a financial weenie...* you can't go by me
"I sold too soon."
-- Bernard Baruch, responding to a question on how he became rich.
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