This is a topic that gets constant debate, and usually goes something like this, “Cash is king. Anything else is speculation. Sorry, I can’t hear what you’re saying because I’m repeating this too loud.” While that is true, it may also not be wise depending on your strategy. Is true wealth built by cash flow? Sure. If that cash flow is reinvested it can outpace high appreciation, but different goals should utilize different strategies. Am I a cash flow investor? Mostly. But here’s the thing: your end goal should dictate your current plan and direction.
One of my goals is to change my life today. I want to be able to work less hours and spend more time with my family. To do this I need to be able to supplement or replace income today. If your goal is to quit your job while young and relax on the beach then you can plan and accomplish that by investing in income property. It is as close to guaranteed as it gets. If you try to do that while investing for appreciation, you are at the whim of the market cycle because you rely on selling at a higher price, and if the market is down you are out of luck.
Is cash flow the only path to real wealth? Not even remotely, but investing for appreciation is a tricky one. What you have to understand is that cash flow is still important. I do not advise investing in a property that cannot cover its own costs. That means that your rent should cover your payment, vacancy, repairs, management, capex, etc. Side note: Capex stands for Capital Expenditures. These are expenses that are above and beyond day to day running of the property such as the roof, furnace, water heater, etc. What you tend to find is that the better neighborhoods and nicer properties cost more, but do not command proportionally higher rent. That means your cash on cash return is low, but these are the properties that tend to appreciate more quickly, constantly command higher resale values, and tend to have tenants that take better care of the property.
If you can predict the revitalization, gentrification, or expansion of an area then why would you disregard it? Knowledge is power, unless you do nothing with it. As the Real Estate Guys love to say, “Buy in the path of progress.” Here’s an example: if you purchase a $200k, 75% leveraged property that cash flows $0/month and it doubles in value after 10 years (7% yearly appreciation) that means that you have a $400k property – $150k debt = $250k/$50k (your down payment) = 500% ROI! Yes, the numbers are very rough, but you get what I’m saying. If the property pays for itself and you have done your research do you think the 15% cash on cash with 2% appreciation was the smartest move? Maybe, maybe not. We’ll discuss that later. On top of that, the better class of tenant that you attract and the lower maintenance costs (better class tenants tend to be nicer to your properties) are better for you in the better properties with better schools, less crime, etc.
As I said, your investing should be all about your end goal. Do you need the cash flow today to change your life, are you happy with today and want insurance on tomorrow, are you diversifying out of cash, etc.? There is no easily defined line here, we’re basically trying to compare apples to applesauce. Or maybe apples to apple cider. Yum. Very similar things, but different enough that they are hard to compare side by side. Perhaps I’ll talk about some of those consideration later. For now, best of luck and happy investing!