Should you invest for cash flow or appreciation? The era of high interest rates makes us re-evaluate

For real estate investors, the question of cash flow versus appreciation is an age-old one. However,in a era high interest RateBuy property for cash flow not easy. That doesn’t mean investing should be ruled out, as there are many advantages to owning a rental beyond direct cash flow – appreciation and tax advantages being the most obvious.

Continue to buy or stay Things off the field come down to a few concrete decisions. Let’s dig a little deeper.

The higher the cash flow, the bigger the headache

The cheaper the property, the greater the cash flow. Anyway, that’s the theory. Rents in low-income neighborhoods may be lower, but tenants also have lower incomes and cannot afford the financial barriers that life brings exist them. Therefore, the potential cash flow figure rarely achieved Due to vacancies, repairs and evictions.

Purchasing multiple doors in a C or D+ neighborhood can become a major hassle. this During the pandemic, when most tenants are seeking a moratorium on rent payments and Eviction moratorium from low income areas. The landlords most affected are smaller mom-and-pop store owners who default on their mortgages, ruining their days of choosing to invest.

Section 8 Warning

Some may support Section 8 rentals, but the hurdles of dealing with Section 8 inspectors and expecting tenants to maintain your property often make it difficult for investors who enter the real estate industry to alleviate, rather than add to, the stress of life.

However, since interest rates are higher than they have For years, the only cash flow may be from cheap properties in low-income neighborhoods. Many successful landlords are in these areas, but no A Passive Start a business. Stabilizing a building and maintaining repairs and rent is a full-time, labor-intensive job.

Store cash to gain appreciation and tax benefits

Not needing cash flow is an enviable position that many investors want to achieve because it means you have achieved financial freedom. Nationwide, according to CoreLogic’s U.S. Home Price Insights, Prices increased 5.5% annual growth as of December 2023. this This coincides with a healthy job market, wage growth and falling inflation.

Using the 5% metric, if you own an investment property worth $200,000, your home will appreciate in value go through About $10,000 a year. This equates to a monthly cash flow of just under $1,000. That’s a tough ask in the current interest rate environment.

If you own $2 million worth of real estate, your net worth will increase by $100,000. Added to this is Tax incentives of depreciationrepairs, and operating expenses associated with real estate, which means that even if you have no cash flow, you are still building wealth. Refinance When interest rates eventually fall, cash flow is added to the equation.

Better communities equal lower cash flow

The problem with investing in high appreciation areas is that they usually don’t want cash flow Excellent Because they are more expensive. However, when considering tenant issues in lower-income neighborhoods, it may be possible to retain prime assets in more upscale neighborhoods become Appreciation is more beneficial, even if it just recoups the cost. Cash flow also increases once assets are liquidated paid in full and rent Increase.

Cash flow case

many Syndicate Use the strategy of forcing appreciation by increasing cash flow through value-added improvements to attract investors who would otherwise be unwilling to invest.

“We never invest to appreciate, Because it’s out of our control,” Tyler Cauble Cowble GroupOne commercial real estate investor and consultant told bestevercre.com. “Our team selects projects that create value and force appreciation through value addition or development from scratch. Any compliment is just the icing on the cake.

Jonathan Barr JB2 InvestmentOne multifamily syndicate member agreed: “I would say: always invest for cash flow, but inevitably increase positive cash flow followed Through appreciation.

Grant Cardone is one of the most active proponents of cash flow modeling. exist CCTVhe raised the question of cash flow and appreciation and answered this:

“Whenever someone asks me whether cash flow or appreciation is better when investing in real estate, I Give them a dumbfounded look Because they should already know the answer. Cash flow investing provides a stable source of income. In contrast, value-added investments have the potential to earn a greater return if the investment sells for more than it was purchased for. It is possible to get rich through real estate investing. you must Focus on cash flow and market fluctuations won’t affect you too much.

Is it possible to achieve cash flow without handing over money to a syndicate?

Despite what most syndicate salespeople may claim, handing them your cash should first require understanding their financing details. Without this knowledge, you are taking a leap of faith. In an era of volatile interest rates, only obtaining long-term financing before interest rates rise can save operators from financial hardship.

If you want to maintain autonomy and cash flow from your investment property, take these steps:

• Buy low-priced properties that need repairs, complete them and raise the rent.
• make one big down payment Securing home cash flow and refinancing when interest rates come down.
• Increase cash flow by adding bedrooms via loft conversion and larger rooms.
• Increase rental income by renting out rooms.
• use your property as short term rentalif possible. According to AirDNA, STR will generate Revenue increased by 61% Than regular rental. STR Market Continuous growth AirDNA said falling inflation has increased travel despite rising interest rates.
• Obtain non-institutional financing from family members at lower interest rates.
• enter a Subject to agreement Work with the current owners to keep their current mortgage and refinance them from the property if interest rates drop.
• Liquidate other assets, buy the home for cash at a discount, and refinance when interest rates drop.

final thoughts

Interest rates are the differentiating factor in the cash flow versus appreciation debate. While many syndicators and pundits may preach that “cash flow is king” and interest rates are unlikely to fall significantly in a strong economy, a more nuanced approach may help if you can afford it.

If you’re not in a hurry to quit your job and can afford high interest rates, buying for the appreciation and tax benefits while waiting for the cash flow to refinance later may be a smart choice. There is no doubt that as interest rates fall, prices will soar.

However, if you don’t have cash reserves and must find cash flow investments, you’ll need to make a risk versus reward decision. Hitchhiking your financial wagon to syndication without the necessary research is risk. It is possible to implement some of the strategies mentioned here. Additionally, it may be prudent to wait until you are in a better financial position before investing.

As an experienced investor who enjoys what I do (I write for BiggerPockets!), I’ve made the somewhat uncomfortable move of hoarding real estate in solid B/B+ communities in a way that I wouldn’t necessarily recommend to others The way to leverage yourself is to take tax breaks on your cash flow and wait for interest rates to fall. This is a long-term approach that I’ve seen other investors use successfully. It’s not for everyone, but after going through previous bankruptcies, I’ve come to realize the value of holding fixed assets in prime areas. Cash flow is great, but I’ve found that expecting it to happen overnight is often wishful thinking.

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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.