In the world of real estate investing there is a lot of talk about cash flow vs. appreciation and what you should focus on when you are growing your portfolio. Everybody's got an opinion that’s legitimate and their own, so today I wanted to break it down and talk to you about what I'm doing and where I stand on cash flow versus appreciation.
I wish that there was a short answer to give you as to which way I think you should go, but unfortunately, like so many other things, there is no straight and easy answer. It truly is dependent on your specific situation and where you are at in your investing career.
There are different stages of your investing career. When you're younger, you are probably looking to be a bit more risky with your investments, and you have more time to grow them, which is the number one best asset in your investing arsenal.
When you're young, I don't think you need to be looking at cash flow as much as you should be looking to leverage as much as you can and buy as many properties as possible (within reason), so that later in your investing cycle, when you're looking to retire or quit your job, you are able to consolidate those properties, sell off the ones that are not performing as well, and keep the ones that are. You would then hold onto as many properties as you need in order to have enough cash flow to cover your expenses.
When I'm looking for an investment property, I'm never looking for a property that is cash flow negative. This is a very important point. You never want to invest in a property that is not bringing in money and in fact is coming out of pocket every month.
That being said, I'm not investing solely on cash flow at this point in my real estate investing career. I am working full time and as long as I'm able-bodied, and still working, I'm not really looking at having my real estate portfolio fund my life at this point.
I'm looking for my properties to grow my wealth and my net worth at this point in my life. If I'm making let's say $200 or $300 cash flow on each of my properties, I don't spend any of that money. I use that to either reinvest, or I put it into a fund to have backup savings in case anything goes wrong with the properties that I currently have.
Also, when it comes to taxes, any income that I get from cash flow is considered taxable income. Any appreciation that I make on a property is only realized when I sell the property, and then you get a lot of tax benefits on capital gains, more than you do on your income tax.
Really whether you should invest for cash flow or appreciation is personally up to you, but I think you really need to look at where you are in your investing life cycle. Do you you have a job that you love? Are you looking to quit your job? If you're looking to quit your job and have real estate be your full time income, then you may be in a different position, and you may want to focus on cash flow more than appreciation.
Something else to consider, I'm looking at buying properties at this point in really good locations that I know have a ton of potential for growth (ie price increases). I'm looking for A+ properties with a professional working class demographic as my rental pool. Properties like this are going to typically appreciate more and cash flow less.
When you look for places that maybe have more appreciation potential, chances are that you will get less cash flow. At this point in time, I'm looking for properties that have the potential for appreciation, but they're still giving me a little bit of cash flow, so I'm not out of pocket every month, but I am also not using the money as income. I am looking to grow my net worth instead of replacing my income.
You can be anywhere along that spectrum, but I really think that you have to look at your own specific goals, where you're at in your investing career, where you're at in your other business endeavours, in order to decide what is best for you personally.
I also recommend that anyone getting into real estate investing have a long term mentality. I am not investing in real estate to get rich quick or make money quickly and get out. I am investing for the long term, so as long as I am buying properties that are cash flow positive AND in areas with the strong likelihood of appreciating, I am happy.
When you're looking for an investment property, look for a location with potential for strong appreciation and cash flow. Below is my free checklist for what to look for in a property, a location, and a neighbourhood.