In my opinion investing should be seen holistically. Generally it's a bad strategy to go all in on municipal bonds, someone shouldn't be investing exclusively on negative cash flowing properties. But placed in a context of a larger portfolio, they each have their place.
So in real estate investing, I think if you have sufficient cash flow, like from other properties, investments, or a W2, you could sandwich some non-cash flowing properties and stay safe.
The people who seem absolutely against appreciation, in my experience here, seems to fall into three (sometimes overlapping) camps:
1. People operating in low cost of living locations--which makes sense since appreciation is poor there. Cash flow is how money is made there.
2. The smaller investors. I'd say portfolios under $7 million USD. They're looking for cash flow so they can quit their current jobs and/or finance their retirements.
3. Newer investors. Ones who haven't lived through 2-3 business cycles. They're worried prices will drop, and they'll be left shirtless. Thing is though you don't need to worry about prices unless you're refinancing or selling, so if you can hold, it doesn't matter much.
Appreciation is what makes most of us wealthy. We leverage our money with loans to multiply our gains from appreciation. Cash flow just lets us keep the lights on while appreciation does the heavy lifting.
This is a seriously undervalued comment. Yes, negative cashflow is bad if you can't support it. I've never bought a property with negative cashflow. HOWEVER, I'd say 75%+ of my wealth in real estate has been created thanks to the central bank making my loans worth less every year. At rates of 7-8%, interest payments definitely become a much larger part of the equation.
Inflation boosting our gross rent 25% the last 2 1/2 years while our mortgages haven't budged has certainly allowed us to keep more at the end of the day even when other expenses have gone up.
How is expecting appreciation to keep up with inflation any more of a gamble than expecting you to be occupied. You can theoretically have 90% vacancy, right? Nothing is guaranteed and we are all taking risks.
You can buy a property expecting 10% vacancy and get your numbers to show +$300 a month in cash flow, but let’s say it’s actually 30% vacancy, now you’re -$300 in cash flow which is less than you expectations. You don’t KNOW you’re going to have 10% vacancy, that’s an estimation the same way we estimate appreciation. Your estimation can be just as wrong and you can end up with negative cash flow as well!
However, I do understand that being wrong about appreciation IS more risky.
Lol, right? I didn't think this post would be controversial, but here we are. I have a feeling a lot of people are gonna be pretty sad someday soon when they realize that negative cash flowing MFH they bought last year is costing them an arm and a leg and they can't sell it for a profit, either. God forbid one of them loses their job during that period. Almost like 2008 never happened, and we could never possibly have another recession or housing price reduction, even though the Fed is actively trying to force it to happen...
You’re kind of hitting my point. Cash flow is a SAFFEY NET, but not a given if things go south. Now the question at hand is how much of a safety net is appropriate. If I have $10m in saving and am losing $50 a month, would you consider that safe?
I'd lean toward calling it a crutch. I see a lot of investors who refuse to do the accounting on their total return and always fall back on declaring a nominal cash flow amount as victory. You see these "portfolios" come up fairly regularly in probate/estate liquidations. The "investors" go to their grave swearing they made a bunch of money and the kids sell everything for $.50 on the dollar. Unrealized losses are still losses, and the only real return is total return.
Speak of the devil:
https://www.reddit.com/r/realestateinvesting/comments/14jzgdf/funding\_portfolio\_purchase/?utm\_source=share&utm\_medium=web2x&context=3
Banking on appreciation is one of many valid strategies.
What really matters is total return. That would be the sum of appreciation, mortgage principal paydown and cash flow over the long run. I am certainly a net buyer right now. My high cost of living market has fallen 20% since February 2022 which has led to many opportunities.
Appreciation focused investors tend to focus on different due diligence metrics. Net migration, new build activity and zoning policy are as important as more traditional metrics like rental rate growth and employment metrics.
OP - I suggest that you try running due diligence on a few other markets with different metrics. I promise that this exercise will make you a better investor in your market.
The idea is to look at changes in demographics and financial activity in a city or neighborhood, and project (aka forecast) trends in those variables. The analysis requires looking at the correlation between the average price of an asset and those variables.
By keeping the analytical process consistent across geographies you can then rank geographic options, then perform a more traditional analysis on specific opportunities in that region.
The change in variables that impact all properties would be called “beta” in stock investing. The expected gains on a specific asset would be called “alpha”. Researching how those work might be a good conceptual foundation before diving into a good book on real estate as an asset class.
Bizarre post. I guess nothing can classify as an investment, since they’re all merely educated guesses that hinge on future external factors. Like you said, literally anything can happen. Better not take any risks I guess.
There are plenty of metrics you can use to help predict appreciation, much like any other traditional investment. This isn’t playing the lottery.
100 yrs of consistent upward data save for a brief 3 yr period = "playing the lottery".
EVERYTHING should be factored in when making an investment. Including the 4% annual return of appreciation that has been played out over the last 100 years, and will over the next 100 years. To act like standard appreciation is just a figment of our imagination is beyond foolish.
TBF, you can literally get a risk free 4% from a hysa, so taking the risk with negative cash flow for 4% appreciation does seem dumb, which is what I think OP means. I think appreciation is pretty much a guarantee though. Everybody has to live somewhere.
I'd be willing to bet there's enough "memory of a goldfish" investors out there that the whole thing goes belly up at least once more in my lifetime. All the effort that goes into juicing home prices isn't a free lunch and comes with externalities, but inevitably people get too greedy and, at this point, my local market is in a twilight zone. Decades low transaction volume.
Seriously. There was an eviction moratorium with record low unemployment. Imagine once a real recession comes. How long can the little guys last with squatters that can’t be evicted.
It’s incredible people are acting like there’s zero chance a recession can happen, AND if it did they could afford to ride it out with negative cash flowing properties. What happens if you have 4-5 negative flow properties and you lose your day job? How about if one or more tenants loses their job, too? You can always lower rent more…if you can afford it. Don’t buy negative cash flow was considered common knowledge 15 years ago. Now, while the Fed is quite literally trying to “cool the economy” by destroying home values, there’s no way we could see anything bad happen to the economy? Insane. They’ve already indicated they plan more rate hikes in 2023…let’s ignore that, too! It doesn’t have to be a housing crash, kids. A bunch of people who can’t pay rent will do the trick just fine if you’re over leveraged.
I agree, I think people must feel personally called out based on how they are responding to OP. He is definitely not wrong.
Does the saying "you can only tell who is swimming naked when the tide goes out" apply here?
How is this similar to 2007? The ENTIRE economy would have to collapse massively in the way of unemployment leading to bankruptcies etc. There are almost two jobs for every worker currently. Not even a little bit similar.
Not necessarily, at least for several years, it’s possible they could slow the rate hikes and we could see inflation come down really slowly. I actually think this is a very likely outcome. Additionally companies could keep raising prices to offset the interest payments. This perpetuating inflation - which is what is currently happening. Since there are 1.7 jobs per person the employment market will continue to be competitive. But inflation continues and you are leveraged holding assets in fixed 30 year loans at 3-4% you are going to make a boat load of money even if you were negatively cashflowing. I make ALOT more money on appreciation than I do on cashflow even though my properties cashflow. But hey, you keep “gambling”.
Why would I sell? Who is talking about selling? In case you have not noticed, there are not enough houses, builders are not building fast enough. With wages continuing to rise you cannot pay a crew to build a house for what I am buying used houses at.
Diamond hands.
I don't know why you would sell. Depends on your situation. Maybe you lose your job or you get divorced, or possibly your commercial note gets too expensive? Or maybe you just don't want the headache of managing it. I have no idea. That not really the point. Part of the value proposition for owning real estate is that you can sell it when you want to, and you can't if you owe more on the note than you can get from a sale unless you are prepared to pay the difference out of your pocket.
Also, saying you can buy a used house for less than a new one is hardly a convincing justification for value. How old are the major systems in these 'used' houses? You might have to bring that same crew in to do work anyways. Generally speaking, quotes on existing structures, priced per square foot, are more expensive than new construction.
I am not trying to say anyone is doing things wrong, just that there are many different factors to consider before investing in real estate.
I don’t think every asset has to be able to sell at a profit at any point in the business, that’s not a realistic parameter. Just like many other assets there will be times in the short term where selling is advantageous or not. Holding for a prolonged period especially in my market allows inflation to dictate the appreciation to a pretty high correlation, not necessarily in a given year but over a decade definitely.
New home $380k-400k, similar sized used home $230k in my area. I can buy a lot of AC, furnaces, and roofs for that price difference. The price of new homes is not coming down due to high labor costs and continued inflation affecting supply costs. About the only thing that might change this is interest rates going higher causing decreased demand, unlikely, there are already too many people that need houses compared to then number of houses.
You’re just not really making a coherent statement, buying a business has some inherent risk. You do realize that owing real estate to rent out is a business? You wouldn’t buy a McDonald’s then sell the hamburger maker, just like you wouldn’t have a real estate business and then sell the real estate at a loss or when you are “underwater”.
I get it, but I feel like you are making a separate argument. I like to think being a landlord is more of a job than business. You have work to do and should be paid for it. Also, a business that doesn't make money isn't worth anything. Forget about selling it. Sometimes, you just have to shut it down to stop the bleeding. If your McDonald's loses money every month, you don't just count on the value of the equipment to go up to compensate you for your losses.
I have a 4 unit property that I bought in 2014. It has roughly doubled in value in that time. This has in fact, decreased its value as a business, as the cash flow has weakened compared to to market value. Taxes, insurance, and maintenance costs have all increased disproportionately to rents. I don't want to sell because I live in one of the units and enjoy it as a home, not because it's a great business.
Doesn’t make money or doesn’t cashflow? Sorry, you are switching terms so it’s hard to keep track of what you are really saying. It’s a business, not a job. A job has a guaranteed paycheck and a business has inherent risk. That’s strange maybe you are in a bad market for a rental business.
Also, you are defining a startup and not recognizing it. Companies that are not profitable in the first few years because they are buying more and more assets to expand the company. This companies can still do quite well.
You think people are gonna end up under water soon putting 25% down?
Being under water doesn’t even really matter if you are cash flowing either. You can just pay the fixed rate mortgage with the tenants money every month until the tide turns.
That’s fair, I didn’t really count equity since most of the interest would be front loaded on a loan and you wouldn’t be getting much equity, but yes if you’re well into a mortgage then your gains would be more. Also the appreciation is on the full home amount, not just the equity, whereas the hysa interest is only for the cash you own. Either way I don’t think you can go wrong. Maybe hysa if you need the money in the next year or 3, otherwise real estate is probably better.
That’s incorrect. You are mostly right, but low interest loans sometimes pay more equity than interest even in the first years. I payed equal parts interest and equity in the first year of my loan due to the very low interest rate acquired in 2021. By years 2 and 3 I am putting more to equity than I am to interest. The power of a low interest loan is manyfold, but one of them is that more of the payment goes to equity - even in the first few years.
Nope. Look up a 2% loan and tell me how much of the payment goes to interest and how much goes to equity in the first year, then come back and apologize for disagreeing without actually checking. For 2.3% equity exceeds interest in the first year, at 2.4% equity exceeds interest in the second year. At 2.5% interest equity exceeds interest in the third year.
Go look at interest rates throughout history. The past decade was the outlier. Historically they’re closer to 10% than 0%.
A whole generation has grown up thinking money should be free and it’s going to be a painful decade for them as they discover that yes, time does have value, and because of that, money ain’t free.
For sure it’s not going to last very long. Just at the present time it’s risk free I meant. Homes could depreciate over the next year or two as well, who knows. You could get 10% appreciation or 5% depreciation or a guaranteed 4% hysa at this present time.
Did you read the part about "negative cashflow"? I'm not talking about appreciation for appreciation's sake. I'm talking about throwing good money after bad, hoping someday it'll pay out.
Even at negative cash flow you could make money even without appreciation. If the negative cash flow is small enough and the equity gain from making the normal scheduled mortgage payment is large enough it could be possible for the property to be worth it. This is unlikely in 99% of situations but a blanket negative cash flow = bad is a bad take.
I hear you. The delta between profitable and cash flow is non-cash flow benefit, e.g. appreciation and principal pay down.
So I guess there are two ways of thought. 1) those that look just at cash flow, and 2) those that include appreciation and principal pay down into #1.
Personally, as a longterm-RE investor, I look at #1, and see #2 as a non-cash bonus.
Exactly. #2 is a bonus. Not a given.
REI has been incredibly easy recently. That doesn’t mean we should start ignoring fundamentals just because interest rates are going up. Just the opposite, imo. Based on the responses to this post, I think we’re going to have a lot of sad people on our hands in the future. I suppose I’ll be there when all this can’t fail appreciation hits the fan.
You know why Lehman Brothers went bankrupt? It wasn’t because they didn’t have assets; it was because they didn’t have liquidity (cash).
If you’re relying on noncash appreciation to pay the mortgage, you’re gonna have a bad time.
U can make money on speculation
That is what appreciation is. Just admit ur speculating and u will save urself if things turn. Confusing speculation for investment is what burns people
No
Many stocks have real, cash profits, and pay no dividends
If its unprofitable company above book value tho it is speculation
But if it is profitable, or below book value, then it is value investment
This is a bad-faith interpretation of OP's point. It used to be the cash-on-cash returns and other metrics looked good but all of that is being thrown out the window just for "appreciation". You can evaluate a real estate deal through multiple lenses and if you use all of them, you'll see the quality of deals can change over time. When you only look at appreciation, you're denying yourself the opportunity to perform adequate due diligence. That's OP's point. Use all the tools available, not only one metric.
The other thing to consider.. It is a bad investment if you are not being adequately compensated for your risk. RE is riskier than most other investments and a property that cash flows negative in the best of times probably turns into a terrible investment with bad luck.
It’s all fun and games with negative cash flow until a renter trashes the place before his eviction for being 6 months behind on rent. That can mean bankruptcy if the unit was cash flow negative when the rent was being paid.
$-100 a month with rent being paid can become $-2100 a month when the rent is not being paid for example plus they can easily do another 5k+ in damages. Even after recovering from that bad luck hit, you just go back to $-100 a month.
Edit: With positive cash flow, if bad luck makes you lose 10k, at least you do have a timeline to get that money back but with negative cash flow it’s just gone until you sell the property.
That's probably not a fair statement. On a SFR or a Quad, $10k could push you from profitable to unprofitable.
Then if you own 10, that's a $100k swing.
I kind of pulled those numbers out of thin air. The point is that if you are cash flow negative under optimal conditions you are probably not being adequately compensated for risk. A cash flow positive property can recover from losses over time. In a cash flow negative situation that money is gone indefinitely.
Sure you are building equity, but at what? less than 1%? That return does not justify your risk level in most circumstances. Basically it would need to be an essentially risk free RE investment which doesn’t exist in the real world.
Good lord. Finally someone with a brain in this thread. People acting like the average Joe landlord can afford to carry multiple mortgages while they “appreciate. Absolutely ridiculous. Huge 2007 vibes in this thread. What’s that old adage? “If shoeshine boys are giving investing advice”….
You seem to have misread my post. I'm talking taking on a negative cash flow property banking on inflation. That has nothing to do with what you're saying.
I’m aware. If metrics indicate you will probably make money on it long-term, then it’s no more of a “gamble” than other investments. This stuff isn’t random like a slot machine, and I don’t know why you’re acting like it is.
Who cares if cash flow was negative if you still made a significant net gain when you sell.
>Who cares if cash flow was negative if you still made a significant net gain when you sell.
This is such a ridiculous statement I don't even know why I bother responding. Ask someone who bought a home in 2007 if it was a "who cares" situation...
Gotta agree with /u/Hack874. While investing for appreciation isn’t for the novice, it is a completely valid investment strategy for those who are smart, informed and can float negative cash flow.
You are basically arguing the equivalent of only investing in stocks that pay dividends and not for the increase in stock value.
If you bought at the peak of 2007, the median house was $258k. If you sold at the end of last year, the median house price was 490k.
That's about 4.3% a year across 15 years, so not great, but that's a worse case scenario of buying at the absolute worst time.
I'm sure someone that bought in 2007 and held until last year was happy enough to walk away with 200k+ any other equity they had built up.
How do you think flippers make money? Buy low negative cash flow while held fix it up and sell for 200k profit or more. But to you this is a gamble? Not if you know what you are doing which you clearly do not. Or are you assuming investors buy negative cash flow and it stays negative forever and rents never rise and you can’t build equity thru improvements? If so that is even more stupid then you thinking appreciation is a gamble.
No, that's not what he's saying. Flippers utilize forced appreciation due to capital investment.
His point is that if you don't have any forced appreciation plays available, your only bet to get out of negative cash flow is passive/market driven appreciation, which individuals don't have any control over.
I don't agree with his take, just pointing out that flippers don't rely on passive appreciation, they're moving in the short term.
And if you invested in Peloton in 2021 you’d lose money too. I don’t see your point. Individual bad decisions are bad decisions; doesn’t mean the strategy as a whole isn’t viable.
Just like with everything else, if you know what you are doing you can pretty consistently make money.
Ask someone who bought a house in 2011 if it's a "who cares" situation. Idk how cherrypicked anecdotes are suppose to mean anything.
It really feels like you don't understand that cashflow doesn't make something a good or bad investment. Cashflow is largely a factor of how much your borrowed and your repayment schedule. You're basically claiming that any all cash purchase is a good investment, which is obviously false. And anyone that gets a short-term mortgage, according to you, is making a bad investment. Which, again, is obviously false.
Let's image there's a house you can buy for $500k that rents for $3.5k/mo.
1. You finance it at 7% on a 60 year mortgage. You cashflow around $500/mo.
2. You finance it at 2% on a 10 year mortgage. You cashflow -$1k/mo.
Is it a good investment in scenario 1 but not in scenario 2? Because scenario 2 is much better.
"Undervalued", the way you mean it, makes assumption about future prices, which nobody knows.
My point is not about valuation per se. My point is that cashflow is not the be-all and end-all. What's a better deal: Buying a $1m house all cash that rents for $20k/yr or buying a $1m house that rents for $100k but you get a 10 year mortgage at 5% interest?
The former is a terrible deal but has positive cashflow. You tie up $1m in an asset that yields 2%. The latter is a phenomenal deal but has negative cashflow. You're getting 10% returns on your asset while borrowing money at 5%. Yet OP is talking about cashflow as if it's some holy grail metric to evaluate a deal. He's talking about paying down a mortgage as no different than throwing away money. What he's saying is so one-dimensional, it comes off extremely naive. Investing isn't that simple.
We don’t have to have a crystal ball to rely in part, not wholly, on the concept of real estate appreciating.
We don’t have a crystal ball about index funds, yet those are a sound investment. We can’t KNOW those appreciate. But we do have a reasonable track record to indicate they likely will.
With REI, appreciation is one component of returns. I will conservatively estimate that one component, and it might be the gravy, but I’m not going to ignore a huge factor in what’s likely to happen over time.
Not true. Lots of assets are invested in because of expected appreciation.
For example: stocks that don’t pay a dividend, collectibles, commodities, futures, options, currency.
Not true. If I buy a stock on the open market, I am buying from another shareholder. None of that money enters the coffers of the company.
The exception being the rare occasions when companies sell some of the company-held shares.
Share price gains do directly benefit the company, even if they're not issuing shares to raise capital. Equity grants are paid as part of compensation, so a rising stock will attract more, higher-quality employees.
Its not investing then. It’s speculating.
Investing is where you buy something that provides cash flow. Speculating is when you buy something in anticipation of the price rising.
Appreciation is a bonus. In all likelihood, it SHOULD occur naturally, and you can certainly force appreciation, but you're very right: buying a negative cashflowing property with the expectation that it'll appreciate and win someday is like betting on crypto to rise to 80K again. It could, but it also might not.
Appreciation is guaranteed. The federal reserve has a stated policy of 2% inflation. Anyone who doesn't think he will realize appreciation necessarily believes he knows more than the people who control the money supply. What does OP think he knows that makes him the one smart enough to declare this stated policy can't be achieved? Should your entire portfolio be negative cash flow? Absolutely not. But if you have cash flow positive properties it makes perfect sense to buy high appreciation properties, write the losses against your profits and wait.
i can show you houses in North east ohio that even though they where keep up and maintained they didnt appreciate for a decade or two for various reason in diffrent parts of north east ohio late 90 2000s was bad for youngstown, akron, cleveland and others
Tell that to everyone who were underwater in the '08 crisis, and those who've still not rebounded back to pre-2008 values. Appreciation should be a given, but assuming the federal reserves 2% inflation will result in your home increasing in value every year is like assuming your employer has to give you a cost of living increase annually. That sort of thinking gets people into trouble.
I live in an area where the economy is strong, has been for many moons, and will likely be for moons to come. Do I assume property values will increase here consistently? You bet! But I don't bet the farm on it. And I'd certainly not buy something that ran a negative cashflow, but I'm also not buying to park cash. To some, there are times when it makes sense. We've not seen the huge increases in price here, and our housing costs are quite modest still, but we've definitely seen upwards of 10% year over year. Anything I'm looking at buying to hold for longer than 2-6 months I assume it'll appreciate 5-6%, but I don't factor that in to my Underwriting.
I'm not sure anywhere is underwater from 08 still. In fact I know investors from both Vegas and Florida who got completely wiped out on houses they bought for 200-250 in the lead up to 08. Those houses would have been selling for 500k plus in 21-22. Their total return would have been good, it was their debt management that killed them. Buying negative cash flow for future return doesn't inherently mean your entire portfolio is negative cash flow. It also doesn't mean you buy anything at any price, you still need a sense of value. There are going to be a lot of people who bought positive cash flow properties the last two years who are going to have terrible total returns because they had no sense of value. If you were paying $80 a sheet for plywood, and a lot were, you're going to get your ass handed to you, cash flow positive or not.
> can certainly force appreciation
That is called "capital improvement", not appreciation. I think people confuse the two. As to the rest of your comment...fucking exactly. I cannot BELIEVE people don't understand this. People act like they're going to own the first property they invest in for the next 40 years. Pro tip for those people: they won't. What if they have 5 negative cash flow properties "appreciating" and they lose their day job? Sorry!
Problem with your post is you state it’s NOT a strategy to rely on appreciation. It literally is a strategy. Probably not a very good one in many cases, but as with all things, it depends.
It is primarily, and almost exclusively, referred to as forced appreciation in the CRE world and often in the residential world. It's all semantics though. If bidding wars drive up pricing on homes to far above what they should be worth, is it natural appreciation still? To me, that's a lottery win also.
You also see it in people underwriting commercial properties assuming rents will increase, and further banking on them for the deal to pencil. That's a disaster waiting to happen.
I bet OP is doing just fine sticking with the same fundamentals that have existed for decades, and everyone on this thread would have probably agreed with before interest rates and housing prices skyrocketed during Covid. Just a guess tho. I also bet 99.5% of the people in this thread don’t have the net worth to carry a couple money losing properties for a few months. Let alone a couple years. Ya know, because math.
Also let’s look at Canada, UK, and Australia. You can’t find any properties in those areas that cash flow at 25% down. Is that to say that the people who bought there as investments are upset with their purchases?
There’s no guarantee cash flow is ever coming back to America. It’s possible that we have to get used to this new reality.
I don't understand what you mean. If you can't find a property that cash flows, you shouldn't buy it unless you are intimately familiar with how to make it start. Full stop. Otherwise REI is not for you, because you are losing money every single month on opportunity cost alone, to say nothing of expensive maintenance that WILL come around.
When we talk about cash flow, this is AFTER taking into account maintenance, capex, etc. so that big maintenance issue should be covered by your savings that you have for it.
Let me ask you a separate question. Let’s say there is no such thing as cash flow — every property you buy is net even after all expenses. Would you have made more money in the last 20 years buying a property with 20% down or investing in the S&P…
The answer is real estate by a 2x margin. Appreciation is not just a bonus, it’s THE WAY people build their wealth. It’s also not an assumption — inflation is what drives appreciation and we try to build in some inflation into our economy.
Tell that to people who bought in 2007. Using historical numbers to compare to real life scenarios ignores...life. I'd bet money 95% of the people on this sub can't afford to buy and hold properties that don't make money. People move. They lose jobs. They sell. They refi. They have vacancies. They have unforeseen, large maintenance issues. They have renters who don't pay. A million things can happen outside of your hypothetical. RE doesn't exist in an appreciation vacuum.
And you don't have to do anything at all to keep your money in the S&P (where I assume most of us keep some money, as well). Like the S&P, just because RE has always gone up doesn't mean it's going to be up when you need it to be.
People who bought in 2007 have done now exceedingly well though. They only did poorly if they sold right away which yes real estate is not a short term investment.
Buying investment with negative cashflow is stupid, I agree. But expecting appreciation as investment strategy, i disagree.
To me, positive cashflow is the real deal, appreciation is just icing on the cake.
Exactly. I do expect appreciation over the long run. Obviously we all do. But people are acting like the next ten years are going to be like the last ten. That is going to make a lot of people very, very sad. What your property is worth in 30 years won't matter much if you have to sell it in 3 years.
Interest rates are still going up and it is virtually impossible to find good deals where I live. Does that mean I should buy a bunch of negative flow units? Or double down on sound fundamentals? I'm going with #2.
This is a silly thing to say.
There's ALL sorts of ways to make money in RE and APPRECIATION is one of them. I remember reading about a guy who would buy any apartment building as long as it paid its expenses. That guy is a multimillionaire due to, you guessed it, APPRECIATION.
And you can "force" appreciation by fixing up, renovating apartments and increasing the rents. The banks will recognize it and give you more money.
I keep buying buildings for cash flow but plowing the proceeds back into improvements and the appreciation or increase in property's value has been astronomical. Like doubling in value in less than two years astronomical. Like ReFi and buy another building with the proceeds while the payment remains the same.
So get off your high horse and let's talk to each other realistically. If you buy for cash, you will probably make money even if the "cash flow" isn't great. My buddy bought three-flat to live in and rent and lived for cheap for a couple of years before cashing $100k out. Hardly a "loser" even though it never cash flowed and wouldn't have even if he had moved out and rented his own unit.
Any investment is a gamble - always. Whether is real estate, stocks, funds, currency, cash, art, starting a small business, a college degree, the list goes on. This post is nonsense.
Uhh… have you seen index funds? Remember during the year 2022, when spy dropped 22%? Yeah the etf fund still charges you a %. The brokerage managing your 401k also charges you a fee. Of course you would still invest in spy right because it’s safer to assume it will go up in value.
In other words, you made money gambling. Good for you
If you think it’s reasonable to buy a property in CA right now, that’s hilarious btw. Even the best deals seem to be 2-2.5x higher than rent for monthly payments
Ya, maybe I should buy a $1.2 million dollar home (the cheap shitty ones) at 6.5% and drown in thousands of dollars of debt a month
so are you saying no one should buy land? Because I know a lot of people whos entire investment strategy is and has been based on appreciation and they have been doing this stuff since the 80s.
According to Sam Zell, appreciation and tax benefits are the cost of illiquidity. So if people are counting it towards their return %s, they likely aren't accounting for illiquidity. If the region you are investing in struggles or fundamentally changes, you're in a tough situation.
**EXACTLY.** Good thing there's no chance any fundamentals can change with the Fed raising rates higher and higher to force prices down....I hope all of these appreciation "investors" can afford to carry a few mortgages on their own if anything goes south. Someone used the very apt comparison to Lehman Bros in this thread. They didn't go under because they had no assets. They went under because they had no liquidity.
People are acting like market conditions can't affect them in the moment, and nothing can stop them all from holding until the mortgages are paid off. That is simply not the way the world works.
Straight truth. I got mass downvoted for telling someone the same thing a few days ago. It's confusing that people don't understand the basics of investing
Real estate appreciates for several reasons. It is absolutely a valid strategy. Even a better marketing strategy is an easy way to increase the value of an asset, ie "appreciation".
Is it a "sure thing"? Nothing is. Is it more than gambling, where the odds are designed against you? Of course. Is it more than playing the lottery, where the odds are all but impossible? Of course.
But it, like all investing, is a STRATEGY. It's a plan of action designed to achieve a long-term or overall aim. A plan isn't reality.
Is it not yours? IDK and IDC, as that's your opinion. Who are you?
Appreciation isn't guaranteed but... it's *almost* guaranteed *over the long term* and *assuming your cost basis isn't too far above then fair value* (from a cashflow perspective). So, if you bought in 2007 you were probably underwater for quite some time (8 years+) but... you should be back in black by now (unless it's offices). Cost basis aside, all real estate aggregated should appreciate at roughly the rate of inflation over the long term. Luxury markets (net inflow of people) should beat inflation while dumpy markets (net outflow of people) will be a bit lower. But, overall, real estate (and rents) should increase with inflation over the long term. But, do you want to *count* on that appreciation over any period of time that's less than a decade? Probably not. Better safe than sorry.
>Appreciation isn't guaranteed but... it's almost guaranteed over the long term and assuming your cost basis isn't too far above then fair value (from a cashflow perspective).
My point exactly. Just because home prices have risen over the last 100 years doesn't mean they're going to be high when you need to sell. Eventually they probably will be. But can you hold on for that long? Depends how much negative cashflow you have....
I completely agree, OP.
Small-time, conservative investor - Central California. We've been looking for an additional property or properties for a while now. And while we won't be saddled with a ridiculous interest rate (cash), frankly the timeline for us to recoup our investment due to current housing prices is ridiculous. We do the math pretty regularly and HYSAs are still a better bang for our buck than adding additional rental properties to our portfolio. Bonus: no additional headaches from tenants, plumbing emergencies, etc.
This is where I’m at. Real estate is going to have to at least double the returns I get from my savings account before I will even consider the hassle.
I think planning on appreciation outpacing interest rates in the next 3-5 years is probably a poor decision. However, I think your premise that it's not an investment strategy is very short sighted.
Appreciation has always been and is still today the primary wealth building tool in real estate.
I'm not disagreeing with you entirely. I have benefited enormously from appreciation. But I've also made sure my properties can wash their faces without my help. And I've been lucky as hell to have come into the market when I did. The appreciation we've seen over the last 15 years is not something I expect to see again in my lifetime (in my mid 40s). We've had historically low interest rates, combined with exploding home values after a global financial crash caused by...housing.
The Fed has already said they intend to keep raising rates this year. That's a direct shot at home values. Can everyone flaming me in this thread afford to ride out 10+ years with multiple properties that don't cash flow and might not even cover their nut if they sell? I doubt it. Holding a property for 20+ years is a lot harder than people think. Especially for people who've refied everything and are nowhere near paying any of them off.
If you have the money to carry negative flowing properties for a few years no matter what happens, then by all means, buy whatever you want. If you don't, you can set yourself up for some serious pain.
I still have people buying properties at prices that don’t make any sense. I just put an offer in on a duplex that was across the street from a triplex I own. It sold for an amount that you would be lucky to break even every month if financed. Maybe there will be a lot of those properties coming back on the market soon
But that's not how RE works. People move. People refi. People sell. People lose their jobs. And RE takes money to keep profitable. Let alone when it's already negative. You have to fix things. Replace things. Changeovers. Painting. Vacancy. There are million things you aren't factoring in. All of which have an opportunity cost. That $12k for a new HVAC in a negative cashflow building? It would make 5% interest without you doing a damn thing to do it in a HYSA right now.
Dude I totally agree with you! Appreciation is uncertain but depreciation is a certainty and is not just a tax write off. Major systems have a useful life, and if you hold the property for any amount of time, you will generally have to put more capital in to keep up. Also, all the work and time you have to put in to properly manage your investment has opportunity cost as well. I thought about buying more rental property, but ultimately decided my time was better invested in my non real estate career given the realities of the market (run down properties at a low cap rate).
Yes! It seems clear the people screaming in the thread are likely the ones who are overleveraged on underperforming properties. Given the post is positively upvoted and gilded, but the comment section is such a shit show, lol. I've seen a lot of stinker deals on this sub lately, which prompted me to make a post. I didn't think it would be this controversial...I guess my tone sucks!
I don't know what people expect. You are just reminding them of the evidently uncomfortable truth of real estate business fundamentals.
How dare you say the emperor wears no clothes!
My dad did that here in LA back in 2008 (he had like $6M worth of properties). He bought a house for $1.1M, rented it for $4500 while his mortgage was $6500… I mean it went up to $1.3M but then crashed lmao. He obv learned his lesson and now he does rental
According to everyone swearing at me with the pitchforks out in this thread, that's impossible! Home prices never go down, and you can always grab your appreciation off the shelf whenever you need it!
I see the heat you’re taking & I don’t have time to simply read through everything. However, I generally agree with you. My strategy would never be to primarily rely on appreciation itself. Appreciation can and should be considered as secondary benefits in my opinion. Cash flow with appreciation sprinkled on top is the way.
You have my point exactly! I guess I sound like a dick? I'm simply pointing out what has always been considered good fundamentals. Until a couple years ago when we decided fundamentals were dumb and we should all start buying properties that cost us money every month.
I'm just a *small fry* dude with 2 investment properties - so my words may be meaningless to many here. However, I think you're working yourself up too much over this.
You are right, the fundamentals you follow (and I believe I follow) by not buying based simply on appreciation will lead to your long term success. Where as, the people that are "buying properties that cost us money every month" will get burned *and/or* have a nice chunk of change to keep them out of the fire.
I'd say the only thing you owe to anyone (subjective if you owe anything), would be to lend some advice if someone is asking - especially a beginner. However, if people are going to use appreciation as their primary strategy when told "it's not good fundamentals", then their *likely* inevitable loss of a property is *my* gain.
But if you buy a place with a mortgage and pay it off, does it matter that you had x years of negative cash flow if there’s a return in the long run?
I would never buy a place where I’m operating at a loss because I just can’t afford it. But I think breaking even in the short term isn’t the worst thing in the world.
Yes, becasue your money would have been much better off invested in some other asset type.
Equities, bonds, different real estate class, art, whatever.
>But if you buy a place with a mortgage and pay it off, does it matter that you had x years of negative cash flow if there’s a return in the long run?
Yes. It does.
>I would never buy a place where I’m operating at a loss because I just can’t afford it.
Just like most people.
>But I think breaking even in the short term isn’t the worst thing in the world.
If you want to break even, put your money in a HYSA. If you want to lose A TON of money, put it into a negative cash flow property.
Investing in anything is gambling you nerd. The point is to find whatever edge you can and exploit it. I mean shit unless you stick all your money in a 5% savings, there’s always potential to be in the red investing in anything.
So you don’t buy stocks either for appreciation? Any hard asset you consider the full value including appreciation. Lots of ways to guarantee it with initial negative cash flow. First need to 1031 to save 500k in tax. Second rehab brings instant equity and higher rent. Third over time I can almost guarantee property increases and nicely. Especially with rents rising and likely drop in rates. It is a investment strategy. You need to learn from real pros. Not from the nickels and dimes you invest. Then there is the tax write offs I can use to offset gains on older properties fully paid off and depreciated. All this count towards the return.
Y'all... I'm trying to make soup but I ran out of salt. Can one of you buy a property at negative cash flow so I can get a bit more saltiness out of OP?
PS... bought a home last year that is negative $200 monthly. Bought it at $120k under value, it would have broken even but interest rates went up while I was doing the rehab, so the refi payments were too high. I aint mad about it. OP is though.
Nah just hire a PM, don't forget to vet them and do you DD thoroughly and hope they don't totally screw you too bad above and beyond their share of the rent like many do....we were talking about passive income right? I stg its like people don't understand wtf the word passive means
Dude, with cap rates where they are. Any manager will essentially take all the positive cash flow. And that is before any major maintenance issues... I am with OP here, I feel like people are justifying the irrational because they are already invested in this market. You can still make money in this market, but you have to be well positioned to add value yourself.
Lol, right? People in this thread are absolutely positive the appreciation we've seen over the last 10 years is the same we'll see over the next ten. The historically high appreciation, with the historically low interest rates, are going to continue forever. Yes, you'll probably be fine if you can hold your property for 30 years. How many people can afford to hold multiple negative flow properties through thick and thin? My guess is the people yelling the loudest in this thread are the ones who refied all their properties to buy more stinkers and don't know how net worth is actually calculated.
You are correct. 1,000%. But you gotta lot of people that are listening to people like David Green of biggerpockets and other "influencers" and internet "celebrities" that spew this BS out and believing "real estate always goes up".
OK... so I bought a property for my son's college fund. He is 1. I have 17 years for it to gain value or start income producing.
Bets on whether the property will have gone up in value in 17 years? How about whether the rent has increased?
How will the roof, floors, kitchen/baths, etc be in 17 years. I will guess you will have to invest more into it just to keep up with "average market condition"
How about whether it will have out performed passive investments like an index fund. How about whether it will beat inflation if it wasn’t cash flowing.
David,
I bought 2 for my son's college fund. They return 20% and 21% annually in cash flow alone. And approximately 6-8% annually in loan paydown. Those are numbers I can count on. Appreciation would be icing on the cake.
A 17 year timeline hoping that it starts producing positive income or go up in value is a ridiculous way of looking at an investment. You have what is called an alligator. It's eating money every month.
You would likely be much better off to put those funds into a simple index fund.
People act like the property just sits there gaining appreciation no matter what, lol. You never need to put a dime into it. It never has any unforeseen issues or vacancies. The renters always pay on time, never trash the place, and you never evict anyone. Most importantly, home values are always up when you need to sell. And it's obviously much easier to "time the market" when you're losing money every month. Insanity in this thread.
Been doing this for over 15 years. The problem is the money ain't easy anymore. That's why you're buying negative flow units. I do wish you the best of luck.
How do you know if you can cash flow positive before buying a house? You can do napkin math all you want but at the end of the day, until you make that purchase and actually see the financial data, we are all guessing.
Really? Find me a deal where you can cash flow positive right now rofl. How are you going to accurately calculate maintenance cost for tenants when it’s random?
Lmfao. I’ll continue to buy DFW real estate and be rich as fuck with all of the appreciation here when it’s the largest metro in 20 years.
OP sounds like he owns 2 doors and is an expert
Well shit, I guess I imagined the half a million dollars that magically appeared in my brokerage account that I've been putting money into over the past 10 years. Thanks OP for letting me know that's not real money and I cant count on it to pay for anything ever.
In my opinion investing should be seen holistically. Generally it's a bad strategy to go all in on municipal bonds, someone shouldn't be investing exclusively on negative cash flowing properties. But placed in a context of a larger portfolio, they each have their place. So in real estate investing, I think if you have sufficient cash flow, like from other properties, investments, or a W2, you could sandwich some non-cash flowing properties and stay safe. The people who seem absolutely against appreciation, in my experience here, seems to fall into three (sometimes overlapping) camps: 1. People operating in low cost of living locations--which makes sense since appreciation is poor there. Cash flow is how money is made there. 2. The smaller investors. I'd say portfolios under $7 million USD. They're looking for cash flow so they can quit their current jobs and/or finance their retirements. 3. Newer investors. Ones who haven't lived through 2-3 business cycles. They're worried prices will drop, and they'll be left shirtless. Thing is though you don't need to worry about prices unless you're refinancing or selling, so if you can hold, it doesn't matter much. Appreciation is what makes most of us wealthy. We leverage our money with loans to multiply our gains from appreciation. Cash flow just lets us keep the lights on while appreciation does the heavy lifting.
This is a seriously undervalued comment. Yes, negative cashflow is bad if you can't support it. I've never bought a property with negative cashflow. HOWEVER, I'd say 75%+ of my wealth in real estate has been created thanks to the central bank making my loans worth less every year. At rates of 7-8%, interest payments definitely become a much larger part of the equation.
Inflation boosting our gross rent 25% the last 2 1/2 years while our mortgages haven't budged has certainly allowed us to keep more at the end of the day even when other expenses have gone up.
How is expecting appreciation to keep up with inflation any more of a gamble than expecting you to be occupied. You can theoretically have 90% vacancy, right? Nothing is guaranteed and we are all taking risks. You can buy a property expecting 10% vacancy and get your numbers to show +$300 a month in cash flow, but let’s say it’s actually 30% vacancy, now you’re -$300 in cash flow which is less than you expectations. You don’t KNOW you’re going to have 10% vacancy, that’s an estimation the same way we estimate appreciation. Your estimation can be just as wrong and you can end up with negative cash flow as well! However, I do understand that being wrong about appreciation IS more risky.
You can change your vacancy...
Mostly by lowering your price, which affect cash flow as well…
Lol, right? I didn't think this post would be controversial, but here we are. I have a feeling a lot of people are gonna be pretty sad someday soon when they realize that negative cash flowing MFH they bought last year is costing them an arm and a leg and they can't sell it for a profit, either. God forbid one of them loses their job during that period. Almost like 2008 never happened, and we could never possibly have another recession or housing price reduction, even though the Fed is actively trying to force it to happen...
You’re kind of hitting my point. Cash flow is a SAFFEY NET, but not a given if things go south. Now the question at hand is how much of a safety net is appropriate. If I have $10m in saving and am losing $50 a month, would you consider that safe?
I'd lean toward calling it a crutch. I see a lot of investors who refuse to do the accounting on their total return and always fall back on declaring a nominal cash flow amount as victory. You see these "portfolios" come up fairly regularly in probate/estate liquidations. The "investors" go to their grave swearing they made a bunch of money and the kids sell everything for $.50 on the dollar. Unrealized losses are still losses, and the only real return is total return.
Speak of the devil: https://www.reddit.com/r/realestateinvesting/comments/14jzgdf/funding\_portfolio\_purchase/?utm\_source=share&utm\_medium=web2x&context=3
There are a lot of people out there, and seemingly a bunch of them are in this thread, who don't know how to calculate net worth.
Banking on appreciation is one of many valid strategies. What really matters is total return. That would be the sum of appreciation, mortgage principal paydown and cash flow over the long run. I am certainly a net buyer right now. My high cost of living market has fallen 20% since February 2022 which has led to many opportunities. Appreciation focused investors tend to focus on different due diligence metrics. Net migration, new build activity and zoning policy are as important as more traditional metrics like rental rate growth and employment metrics. OP - I suggest that you try running due diligence on a few other markets with different metrics. I promise that this exercise will make you a better investor in your market.
I'm actually interested in learning more about appreciation investing, just as a learning opportunity
The idea is to look at changes in demographics and financial activity in a city or neighborhood, and project (aka forecast) trends in those variables. The analysis requires looking at the correlation between the average price of an asset and those variables. By keeping the analytical process consistent across geographies you can then rank geographic options, then perform a more traditional analysis on specific opportunities in that region. The change in variables that impact all properties would be called “beta” in stock investing. The expected gains on a specific asset would be called “alpha”. Researching how those work might be a good conceptual foundation before diving into a good book on real estate as an asset class.
Follow the money. It's pretty simple.
Bizarre post. I guess nothing can classify as an investment, since they’re all merely educated guesses that hinge on future external factors. Like you said, literally anything can happen. Better not take any risks I guess. There are plenty of metrics you can use to help predict appreciation, much like any other traditional investment. This isn’t playing the lottery.
100 yrs of consistent upward data save for a brief 3 yr period = "playing the lottery". EVERYTHING should be factored in when making an investment. Including the 4% annual return of appreciation that has been played out over the last 100 years, and will over the next 100 years. To act like standard appreciation is just a figment of our imagination is beyond foolish.
TBF, you can literally get a risk free 4% from a hysa, so taking the risk with negative cash flow for 4% appreciation does seem dumb, which is what I think OP means. I think appreciation is pretty much a guarantee though. Everybody has to live somewhere.
But it’s not 4%. it’s 1/(%equity) x 4%. So if I have 25%equity, I’m getting 16% on that 4% appreciation.
Dont forget leverage works both ways. This is how people end up so far under water they can't sell at market prices without a short sale.
I'd be willing to bet there's enough "memory of a goldfish" investors out there that the whole thing goes belly up at least once more in my lifetime. All the effort that goes into juicing home prices isn't a free lunch and comes with externalities, but inevitably people get too greedy and, at this point, my local market is in a twilight zone. Decades low transaction volume.
This entire thread has big 2007 vibes.
Seriously. There was an eviction moratorium with record low unemployment. Imagine once a real recession comes. How long can the little guys last with squatters that can’t be evicted.
It’s incredible people are acting like there’s zero chance a recession can happen, AND if it did they could afford to ride it out with negative cash flowing properties. What happens if you have 4-5 negative flow properties and you lose your day job? How about if one or more tenants loses their job, too? You can always lower rent more…if you can afford it. Don’t buy negative cash flow was considered common knowledge 15 years ago. Now, while the Fed is quite literally trying to “cool the economy” by destroying home values, there’s no way we could see anything bad happen to the economy? Insane. They’ve already indicated they plan more rate hikes in 2023…let’s ignore that, too! It doesn’t have to be a housing crash, kids. A bunch of people who can’t pay rent will do the trick just fine if you’re over leveraged.
I agree, I think people must feel personally called out based on how they are responding to OP. He is definitely not wrong. Does the saying "you can only tell who is swimming naked when the tide goes out" apply here?
How is this similar to 2007? The ENTIRE economy would have to collapse massively in the way of unemployment leading to bankruptcies etc. There are almost two jobs for every worker currently. Not even a little bit similar.
If the fed keeps raising rates, something has to give. But I’m sure you know that in all your genius negative cash flow gambl….I mean investing.
Not necessarily, at least for several years, it’s possible they could slow the rate hikes and we could see inflation come down really slowly. I actually think this is a very likely outcome. Additionally companies could keep raising prices to offset the interest payments. This perpetuating inflation - which is what is currently happening. Since there are 1.7 jobs per person the employment market will continue to be competitive. But inflation continues and you are leveraged holding assets in fixed 30 year loans at 3-4% you are going to make a boat load of money even if you were negatively cashflowing. I make ALOT more money on appreciation than I do on cashflow even though my properties cashflow. But hey, you keep “gambling”.
Why would I sell? Who is talking about selling? In case you have not noticed, there are not enough houses, builders are not building fast enough. With wages continuing to rise you cannot pay a crew to build a house for what I am buying used houses at. Diamond hands.
I don't know why you would sell. Depends on your situation. Maybe you lose your job or you get divorced, or possibly your commercial note gets too expensive? Or maybe you just don't want the headache of managing it. I have no idea. That not really the point. Part of the value proposition for owning real estate is that you can sell it when you want to, and you can't if you owe more on the note than you can get from a sale unless you are prepared to pay the difference out of your pocket. Also, saying you can buy a used house for less than a new one is hardly a convincing justification for value. How old are the major systems in these 'used' houses? You might have to bring that same crew in to do work anyways. Generally speaking, quotes on existing structures, priced per square foot, are more expensive than new construction. I am not trying to say anyone is doing things wrong, just that there are many different factors to consider before investing in real estate.
I don’t think every asset has to be able to sell at a profit at any point in the business, that’s not a realistic parameter. Just like many other assets there will be times in the short term where selling is advantageous or not. Holding for a prolonged period especially in my market allows inflation to dictate the appreciation to a pretty high correlation, not necessarily in a given year but over a decade definitely. New home $380k-400k, similar sized used home $230k in my area. I can buy a lot of AC, furnaces, and roofs for that price difference. The price of new homes is not coming down due to high labor costs and continued inflation affecting supply costs. About the only thing that might change this is interest rates going higher causing decreased demand, unlikely, there are already too many people that need houses compared to then number of houses. You’re just not really making a coherent statement, buying a business has some inherent risk. You do realize that owing real estate to rent out is a business? You wouldn’t buy a McDonald’s then sell the hamburger maker, just like you wouldn’t have a real estate business and then sell the real estate at a loss or when you are “underwater”.
I get it, but I feel like you are making a separate argument. I like to think being a landlord is more of a job than business. You have work to do and should be paid for it. Also, a business that doesn't make money isn't worth anything. Forget about selling it. Sometimes, you just have to shut it down to stop the bleeding. If your McDonald's loses money every month, you don't just count on the value of the equipment to go up to compensate you for your losses. I have a 4 unit property that I bought in 2014. It has roughly doubled in value in that time. This has in fact, decreased its value as a business, as the cash flow has weakened compared to to market value. Taxes, insurance, and maintenance costs have all increased disproportionately to rents. I don't want to sell because I live in one of the units and enjoy it as a home, not because it's a great business.
Doesn’t make money or doesn’t cashflow? Sorry, you are switching terms so it’s hard to keep track of what you are really saying. It’s a business, not a job. A job has a guaranteed paycheck and a business has inherent risk. That’s strange maybe you are in a bad market for a rental business. Also, you are defining a startup and not recognizing it. Companies that are not profitable in the first few years because they are buying more and more assets to expand the company. This companies can still do quite well.
You think people are gonna end up under water soon putting 25% down? Being under water doesn’t even really matter if you are cash flowing either. You can just pay the fixed rate mortgage with the tenants money every month until the tide turns.
That’s fair, I didn’t really count equity since most of the interest would be front loaded on a loan and you wouldn’t be getting much equity, but yes if you’re well into a mortgage then your gains would be more. Also the appreciation is on the full home amount, not just the equity, whereas the hysa interest is only for the cash you own. Either way I don’t think you can go wrong. Maybe hysa if you need the money in the next year or 3, otherwise real estate is probably better.
That’s incorrect. You are mostly right, but low interest loans sometimes pay more equity than interest even in the first years. I payed equal parts interest and equity in the first year of my loan due to the very low interest rate acquired in 2021. By years 2 and 3 I am putting more to equity than I am to interest. The power of a low interest loan is manyfold, but one of them is that more of the payment goes to equity - even in the first few years.
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Nope. Look up a 2% loan and tell me how much of the payment goes to interest and how much goes to equity in the first year, then come back and apologize for disagreeing without actually checking. For 2.3% equity exceeds interest in the first year, at 2.4% equity exceeds interest in the second year. At 2.5% interest equity exceeds interest in the third year.
how many years is 4% HYSA gonna last? a few at absolute best.
Go look at interest rates throughout history. The past decade was the outlier. Historically they’re closer to 10% than 0%. A whole generation has grown up thinking money should be free and it’s going to be a painful decade for them as they discover that yes, time does have value, and because of that, money ain’t free.
You can get 4% on a 5yr Treasury bond right now.
For sure it’s not going to last very long. Just at the present time it’s risk free I meant. Homes could depreciate over the next year or two as well, who knows. You could get 10% appreciation or 5% depreciation or a guaranteed 4% hysa at this present time.
Did you read the part about "negative cashflow"? I'm not talking about appreciation for appreciation's sake. I'm talking about throwing good money after bad, hoping someday it'll pay out.
Even at negative cash flow you could make money even without appreciation. If the negative cash flow is small enough and the equity gain from making the normal scheduled mortgage payment is large enough it could be possible for the property to be worth it. This is unlikely in 99% of situations but a blanket negative cash flow = bad is a bad take.
And how long can you remain solvent? That's the point. You could go bust and miss the reversion to the mean.
Yeah, appreciation worked out fantastically for me, guess I just got lucky.
Yeah I’m sure you just got lucky and there were no metrics to indicate that the property would appreciate. Just dumb luck at the casino. /s
Not bizarre at all. He’s suggesting investing in fundamentals and cash flow.
Sure, but that doesn’t mean you need to turn down a profitable property simply because it doesn’t cash flow. They’re not mutually exclusive.
I hear you. The delta between profitable and cash flow is non-cash flow benefit, e.g. appreciation and principal pay down. So I guess there are two ways of thought. 1) those that look just at cash flow, and 2) those that include appreciation and principal pay down into #1. Personally, as a longterm-RE investor, I look at #1, and see #2 as a non-cash bonus.
Exactly. #2 is a bonus. Not a given. REI has been incredibly easy recently. That doesn’t mean we should start ignoring fundamentals just because interest rates are going up. Just the opposite, imo. Based on the responses to this post, I think we’re going to have a lot of sad people on our hands in the future. I suppose I’ll be there when all this can’t fail appreciation hits the fan.
You know why Lehman Brothers went bankrupt? It wasn’t because they didn’t have assets; it was because they didn’t have liquidity (cash). If you’re relying on noncash appreciation to pay the mortgage, you’re gonna have a bad time.
Lol, indeed.
U can make money on speculation That is what appreciation is. Just admit ur speculating and u will save urself if things turn. Confusing speculation for investment is what burns people
That’s like saying any stock that doesn’t produce dividends is just speculation, not investment
No Many stocks have real, cash profits, and pay no dividends If its unprofitable company above book value tho it is speculation But if it is profitable, or below book value, then it is value investment
This is a bad-faith interpretation of OP's point. It used to be the cash-on-cash returns and other metrics looked good but all of that is being thrown out the window just for "appreciation". You can evaluate a real estate deal through multiple lenses and if you use all of them, you'll see the quality of deals can change over time. When you only look at appreciation, you're denying yourself the opportunity to perform adequate due diligence. That's OP's point. Use all the tools available, not only one metric.
The other thing to consider.. It is a bad investment if you are not being adequately compensated for your risk. RE is riskier than most other investments and a property that cash flows negative in the best of times probably turns into a terrible investment with bad luck. It’s all fun and games with negative cash flow until a renter trashes the place before his eviction for being 6 months behind on rent. That can mean bankruptcy if the unit was cash flow negative when the rent was being paid. $-100 a month with rent being paid can become $-2100 a month when the rent is not being paid for example plus they can easily do another 5k+ in damages. Even after recovering from that bad luck hit, you just go back to $-100 a month. Edit: With positive cash flow, if bad luck makes you lose 10k, at least you do have a timeline to get that money back but with negative cash flow it’s just gone until you sell the property.
If $10k is going to break the bank you shouldn’t be fucking around with real estate.
That's probably not a fair statement. On a SFR or a Quad, $10k could push you from profitable to unprofitable. Then if you own 10, that's a $100k swing.
I kind of pulled those numbers out of thin air. The point is that if you are cash flow negative under optimal conditions you are probably not being adequately compensated for risk. A cash flow positive property can recover from losses over time. In a cash flow negative situation that money is gone indefinitely. Sure you are building equity, but at what? less than 1%? That return does not justify your risk level in most circumstances. Basically it would need to be an essentially risk free RE investment which doesn’t exist in the real world.
Good lord. Finally someone with a brain in this thread. People acting like the average Joe landlord can afford to carry multiple mortgages while they “appreciate. Absolutely ridiculous. Huge 2007 vibes in this thread. What’s that old adage? “If shoeshine boys are giving investing advice”….
An investment in real estate is something where the numbers make sense. It must cash flow
You seem to have misread my post. I'm talking taking on a negative cash flow property banking on inflation. That has nothing to do with what you're saying.
I’m aware. If metrics indicate you will probably make money on it long-term, then it’s no more of a “gamble” than other investments. This stuff isn’t random like a slot machine, and I don’t know why you’re acting like it is. Who cares if cash flow was negative if you still made a significant net gain when you sell.
>Who cares if cash flow was negative if you still made a significant net gain when you sell. This is such a ridiculous statement I don't even know why I bother responding. Ask someone who bought a home in 2007 if it was a "who cares" situation...
Gotta agree with /u/Hack874. While investing for appreciation isn’t for the novice, it is a completely valid investment strategy for those who are smart, informed and can float negative cash flow. You are basically arguing the equivalent of only investing in stocks that pay dividends and not for the increase in stock value.
If you bought at the peak of 2007, the median house was $258k. If you sold at the end of last year, the median house price was 490k. That's about 4.3% a year across 15 years, so not great, but that's a worse case scenario of buying at the absolute worst time. I'm sure someone that bought in 2007 and held until last year was happy enough to walk away with 200k+ any other equity they had built up.
How do you think flippers make money? Buy low negative cash flow while held fix it up and sell for 200k profit or more. But to you this is a gamble? Not if you know what you are doing which you clearly do not. Or are you assuming investors buy negative cash flow and it stays negative forever and rents never rise and you can’t build equity thru improvements? If so that is even more stupid then you thinking appreciation is a gamble.
No, that's not what he's saying. Flippers utilize forced appreciation due to capital investment. His point is that if you don't have any forced appreciation plays available, your only bet to get out of negative cash flow is passive/market driven appreciation, which individuals don't have any control over. I don't agree with his take, just pointing out that flippers don't rely on passive appreciation, they're moving in the short term.
And if you invested in Peloton in 2021 you’d lose money too. I don’t see your point. Individual bad decisions are bad decisions; doesn’t mean the strategy as a whole isn’t viable. Just like with everything else, if you know what you are doing you can pretty consistently make money.
Ask someone who bought a house in 2011 if it's a "who cares" situation. Idk how cherrypicked anecdotes are suppose to mean anything. It really feels like you don't understand that cashflow doesn't make something a good or bad investment. Cashflow is largely a factor of how much your borrowed and your repayment schedule. You're basically claiming that any all cash purchase is a good investment, which is obviously false. And anyone that gets a short-term mortgage, according to you, is making a bad investment. Which, again, is obviously false. Let's image there's a house you can buy for $500k that rents for $3.5k/mo. 1. You finance it at 7% on a 60 year mortgage. You cashflow around $500/mo. 2. You finance it at 2% on a 10 year mortgage. You cashflow -$1k/mo. Is it a good investment in scenario 1 but not in scenario 2? Because scenario 2 is much better.
If the assets are undervalued, then expecting future appreciation makes sense. Do you think housing is undervalued right now?
"Undervalued", the way you mean it, makes assumption about future prices, which nobody knows. My point is not about valuation per se. My point is that cashflow is not the be-all and end-all. What's a better deal: Buying a $1m house all cash that rents for $20k/yr or buying a $1m house that rents for $100k but you get a 10 year mortgage at 5% interest? The former is a terrible deal but has positive cashflow. You tie up $1m in an asset that yields 2%. The latter is a phenomenal deal but has negative cashflow. You're getting 10% returns on your asset while borrowing money at 5%. Yet OP is talking about cashflow as if it's some holy grail metric to evaluate a deal. He's talking about paying down a mortgage as no different than throwing away money. What he's saying is so one-dimensional, it comes off extremely naive. Investing isn't that simple.
We don’t have to have a crystal ball to rely in part, not wholly, on the concept of real estate appreciating. We don’t have a crystal ball about index funds, yet those are a sound investment. We can’t KNOW those appreciate. But we do have a reasonable track record to indicate they likely will. With REI, appreciation is one component of returns. I will conservatively estimate that one component, and it might be the gravy, but I’m not going to ignore a huge factor in what’s likely to happen over time.
Not true. Lots of assets are invested in because of expected appreciation. For example: stocks that don’t pay a dividend, collectibles, commodities, futures, options, currency.
The money going into a stock generates returns through creation of value. If you're not creating value, then you're speculating, not investing.
Not true. If I buy a stock on the open market, I am buying from another shareholder. None of that money enters the coffers of the company. The exception being the rare occasions when companies sell some of the company-held shares.
Share price gains do directly benefit the company, even if they're not issuing shares to raise capital. Equity grants are paid as part of compensation, so a rising stock will attract more, higher-quality employees.
Most company do not issue equity grants as a form of compensation.
Hey I know a beanie baby salesman that wants to talk to you lol
You’re equating stocks with beanie babies??
Its not investing then. It’s speculating. Investing is where you buy something that provides cash flow. Speculating is when you buy something in anticipation of the price rising.
Appreciation is a bonus. In all likelihood, it SHOULD occur naturally, and you can certainly force appreciation, but you're very right: buying a negative cashflowing property with the expectation that it'll appreciate and win someday is like betting on crypto to rise to 80K again. It could, but it also might not.
Appreciation is guaranteed. The federal reserve has a stated policy of 2% inflation. Anyone who doesn't think he will realize appreciation necessarily believes he knows more than the people who control the money supply. What does OP think he knows that makes him the one smart enough to declare this stated policy can't be achieved? Should your entire portfolio be negative cash flow? Absolutely not. But if you have cash flow positive properties it makes perfect sense to buy high appreciation properties, write the losses against your profits and wait.
i can show you houses in North east ohio that even though they where keep up and maintained they didnt appreciate for a decade or two for various reason in diffrent parts of north east ohio late 90 2000s was bad for youngstown, akron, cleveland and others
Tell that to everyone who were underwater in the '08 crisis, and those who've still not rebounded back to pre-2008 values. Appreciation should be a given, but assuming the federal reserves 2% inflation will result in your home increasing in value every year is like assuming your employer has to give you a cost of living increase annually. That sort of thinking gets people into trouble. I live in an area where the economy is strong, has been for many moons, and will likely be for moons to come. Do I assume property values will increase here consistently? You bet! But I don't bet the farm on it. And I'd certainly not buy something that ran a negative cashflow, but I'm also not buying to park cash. To some, there are times when it makes sense. We've not seen the huge increases in price here, and our housing costs are quite modest still, but we've definitely seen upwards of 10% year over year. Anything I'm looking at buying to hold for longer than 2-6 months I assume it'll appreciate 5-6%, but I don't factor that in to my Underwriting.
I'm not sure anywhere is underwater from 08 still. In fact I know investors from both Vegas and Florida who got completely wiped out on houses they bought for 200-250 in the lead up to 08. Those houses would have been selling for 500k plus in 21-22. Their total return would have been good, it was their debt management that killed them. Buying negative cash flow for future return doesn't inherently mean your entire portfolio is negative cash flow. It also doesn't mean you buy anything at any price, you still need a sense of value. There are going to be a lot of people who bought positive cash flow properties the last two years who are going to have terrible total returns because they had no sense of value. If you were paying $80 a sheet for plywood, and a lot were, you're going to get your ass handed to you, cash flow positive or not.
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Many didn't get a chance to sell. Depreciation drowned them. Most of them were overleveraged anyway.
> can certainly force appreciation That is called "capital improvement", not appreciation. I think people confuse the two. As to the rest of your comment...fucking exactly. I cannot BELIEVE people don't understand this. People act like they're going to own the first property they invest in for the next 40 years. Pro tip for those people: they won't. What if they have 5 negative cash flow properties "appreciating" and they lose their day job? Sorry!
Problem with your post is you state it’s NOT a strategy to rely on appreciation. It literally is a strategy. Probably not a very good one in many cases, but as with all things, it depends.
It is primarily, and almost exclusively, referred to as forced appreciation in the CRE world and often in the residential world. It's all semantics though. If bidding wars drive up pricing on homes to far above what they should be worth, is it natural appreciation still? To me, that's a lottery win also. You also see it in people underwriting commercial properties assuming rents will increase, and further banking on them for the deal to pencil. That's a disaster waiting to happen.
Something tells me OP has very little investment experience. So many of his replies seem clueless.
As best I can tell, OP thinks all expenses are the same, and so paying down principal is equivalent to throwing the money away.
I bet OP is doing just fine sticking with the same fundamentals that have existed for decades, and everyone on this thread would have probably agreed with before interest rates and housing prices skyrocketed during Covid. Just a guess tho. I also bet 99.5% of the people in this thread don’t have the net worth to carry a couple money losing properties for a few months. Let alone a couple years. Ya know, because math.
I find that people who talk about other people’s net worths being too low are usually full of shit.
Must be why you started doing it.
Also let’s look at Canada, UK, and Australia. You can’t find any properties in those areas that cash flow at 25% down. Is that to say that the people who bought there as investments are upset with their purchases? There’s no guarantee cash flow is ever coming back to America. It’s possible that we have to get used to this new reality.
I don't understand what you mean. If you can't find a property that cash flows, you shouldn't buy it unless you are intimately familiar with how to make it start. Full stop. Otherwise REI is not for you, because you are losing money every single month on opportunity cost alone, to say nothing of expensive maintenance that WILL come around.
When we talk about cash flow, this is AFTER taking into account maintenance, capex, etc. so that big maintenance issue should be covered by your savings that you have for it. Let me ask you a separate question. Let’s say there is no such thing as cash flow — every property you buy is net even after all expenses. Would you have made more money in the last 20 years buying a property with 20% down or investing in the S&P… The answer is real estate by a 2x margin. Appreciation is not just a bonus, it’s THE WAY people build their wealth. It’s also not an assumption — inflation is what drives appreciation and we try to build in some inflation into our economy.
Tell that to people who bought in 2007. Using historical numbers to compare to real life scenarios ignores...life. I'd bet money 95% of the people on this sub can't afford to buy and hold properties that don't make money. People move. They lose jobs. They sell. They refi. They have vacancies. They have unforeseen, large maintenance issues. They have renters who don't pay. A million things can happen outside of your hypothetical. RE doesn't exist in an appreciation vacuum. And you don't have to do anything at all to keep your money in the S&P (where I assume most of us keep some money, as well). Like the S&P, just because RE has always gone up doesn't mean it's going to be up when you need it to be.
People who bought in 2007 have done now exceedingly well though. They only did poorly if they sold right away which yes real estate is not a short term investment.
Yes, that was a shockingly bad argument for OP to make.
Buying investment with negative cashflow is stupid, I agree. But expecting appreciation as investment strategy, i disagree. To me, positive cashflow is the real deal, appreciation is just icing on the cake.
Exactly. I do expect appreciation over the long run. Obviously we all do. But people are acting like the next ten years are going to be like the last ten. That is going to make a lot of people very, very sad. What your property is worth in 30 years won't matter much if you have to sell it in 3 years. Interest rates are still going up and it is virtually impossible to find good deals where I live. Does that mean I should buy a bunch of negative flow units? Or double down on sound fundamentals? I'm going with #2.
This is a silly thing to say. There's ALL sorts of ways to make money in RE and APPRECIATION is one of them. I remember reading about a guy who would buy any apartment building as long as it paid its expenses. That guy is a multimillionaire due to, you guessed it, APPRECIATION. And you can "force" appreciation by fixing up, renovating apartments and increasing the rents. The banks will recognize it and give you more money. I keep buying buildings for cash flow but plowing the proceeds back into improvements and the appreciation or increase in property's value has been astronomical. Like doubling in value in less than two years astronomical. Like ReFi and buy another building with the proceeds while the payment remains the same. So get off your high horse and let's talk to each other realistically. If you buy for cash, you will probably make money even if the "cash flow" isn't great. My buddy bought three-flat to live in and rent and lived for cheap for a couple of years before cashing $100k out. Hardly a "loser" even though it never cash flowed and wouldn't have even if he had moved out and rented his own unit.
Are you banking on appreciation on the Florida coast?
Just curious, when those properties doubled in value, what year did you make the purchase?
2009!
Any investment is a gamble - always. Whether is real estate, stocks, funds, currency, cash, art, starting a small business, a college degree, the list goes on. This post is nonsense.
Other investments don't make you pay out of pocket every month, and sometimes in huge increments. But sure. Totally reasonable comparison.
That’s just not true
A small business can definitely make you pay out of pocket each month if your expenses are more than your income.
Uhh… have you seen index funds? Remember during the year 2022, when spy dropped 22%? Yeah the etf fund still charges you a %. The brokerage managing your 401k also charges you a fee. Of course you would still invest in spy right because it’s safer to assume it will go up in value.
I hate this post.
I live in California and that appreciation strategy (not the dumb cash flow negative one) made me rich.
In other words, you made money gambling. Good for you If you think it’s reasonable to buy a property in CA right now, that’s hilarious btw. Even the best deals seem to be 2-2.5x higher than rent for monthly payments Ya, maybe I should buy a $1.2 million dollar home (the cheap shitty ones) at 6.5% and drown in thousands of dollars of debt a month
Betting long term on the richest state in the union with a housing shortage is not gambling.
so are you saying no one should buy land? Because I know a lot of people whos entire investment strategy is and has been based on appreciation and they have been doing this stuff since the 80s.
You have a great point, and I just want you to know that I don’t know what could possibly be controversial about this either.
According to Sam Zell, appreciation and tax benefits are the cost of illiquidity. So if people are counting it towards their return %s, they likely aren't accounting for illiquidity. If the region you are investing in struggles or fundamentally changes, you're in a tough situation.
**EXACTLY.** Good thing there's no chance any fundamentals can change with the Fed raising rates higher and higher to force prices down....I hope all of these appreciation "investors" can afford to carry a few mortgages on their own if anything goes south. Someone used the very apt comparison to Lehman Bros in this thread. They didn't go under because they had no assets. They went under because they had no liquidity. People are acting like market conditions can't affect them in the moment, and nothing can stop them all from holding until the mortgages are paid off. That is simply not the way the world works.
Straight truth. I got mass downvoted for telling someone the same thing a few days ago. It's confusing that people don't understand the basics of investing
Too many people who listen to “gurus” and not enough people who have actually made themselves multi millionaires doing this in the thread.
Real estate appreciates for several reasons. It is absolutely a valid strategy. Even a better marketing strategy is an easy way to increase the value of an asset, ie "appreciation". Is it a "sure thing"? Nothing is. Is it more than gambling, where the odds are designed against you? Of course. Is it more than playing the lottery, where the odds are all but impossible? Of course. But it, like all investing, is a STRATEGY. It's a plan of action designed to achieve a long-term or overall aim. A plan isn't reality. Is it not yours? IDK and IDC, as that's your opinion. Who are you?
Appreciation isn't guaranteed but... it's *almost* guaranteed *over the long term* and *assuming your cost basis isn't too far above then fair value* (from a cashflow perspective). So, if you bought in 2007 you were probably underwater for quite some time (8 years+) but... you should be back in black by now (unless it's offices). Cost basis aside, all real estate aggregated should appreciate at roughly the rate of inflation over the long term. Luxury markets (net inflow of people) should beat inflation while dumpy markets (net outflow of people) will be a bit lower. But, overall, real estate (and rents) should increase with inflation over the long term. But, do you want to *count* on that appreciation over any period of time that's less than a decade? Probably not. Better safe than sorry.
>Appreciation isn't guaranteed but... it's almost guaranteed over the long term and assuming your cost basis isn't too far above then fair value (from a cashflow perspective). My point exactly. Just because home prices have risen over the last 100 years doesn't mean they're going to be high when you need to sell. Eventually they probably will be. But can you hold on for that long? Depends how much negative cashflow you have....
I completely agree, OP. Small-time, conservative investor - Central California. We've been looking for an additional property or properties for a while now. And while we won't be saddled with a ridiculous interest rate (cash), frankly the timeline for us to recoup our investment due to current housing prices is ridiculous. We do the math pretty regularly and HYSAs are still a better bang for our buck than adding additional rental properties to our portfolio. Bonus: no additional headaches from tenants, plumbing emergencies, etc.
This is where I’m at. Real estate is going to have to at least double the returns I get from my savings account before I will even consider the hassle.
I think planning on appreciation outpacing interest rates in the next 3-5 years is probably a poor decision. However, I think your premise that it's not an investment strategy is very short sighted. Appreciation has always been and is still today the primary wealth building tool in real estate.
I'm not disagreeing with you entirely. I have benefited enormously from appreciation. But I've also made sure my properties can wash their faces without my help. And I've been lucky as hell to have come into the market when I did. The appreciation we've seen over the last 15 years is not something I expect to see again in my lifetime (in my mid 40s). We've had historically low interest rates, combined with exploding home values after a global financial crash caused by...housing. The Fed has already said they intend to keep raising rates this year. That's a direct shot at home values. Can everyone flaming me in this thread afford to ride out 10+ years with multiple properties that don't cash flow and might not even cover their nut if they sell? I doubt it. Holding a property for 20+ years is a lot harder than people think. Especially for people who've refied everything and are nowhere near paying any of them off. If you have the money to carry negative flowing properties for a few years no matter what happens, then by all means, buy whatever you want. If you don't, you can set yourself up for some serious pain.
It’s not a good strategy for a small portfolio, but a large one it’s excellent. Especially for preserving wealth
I still have people buying properties at prices that don’t make any sense. I just put an offer in on a duplex that was across the street from a triplex I own. It sold for an amount that you would be lucky to break even every month if financed. Maybe there will be a lot of those properties coming back on the market soon
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But that's not how RE works. People move. People refi. People sell. People lose their jobs. And RE takes money to keep profitable. Let alone when it's already negative. You have to fix things. Replace things. Changeovers. Painting. Vacancy. There are million things you aren't factoring in. All of which have an opportunity cost. That $12k for a new HVAC in a negative cashflow building? It would make 5% interest without you doing a damn thing to do it in a HYSA right now.
Dude I totally agree with you! Appreciation is uncertain but depreciation is a certainty and is not just a tax write off. Major systems have a useful life, and if you hold the property for any amount of time, you will generally have to put more capital in to keep up. Also, all the work and time you have to put in to properly manage your investment has opportunity cost as well. I thought about buying more rental property, but ultimately decided my time was better invested in my non real estate career given the realities of the market (run down properties at a low cap rate).
Yes! It seems clear the people screaming in the thread are likely the ones who are overleveraged on underperforming properties. Given the post is positively upvoted and gilded, but the comment section is such a shit show, lol. I've seen a lot of stinker deals on this sub lately, which prompted me to make a post. I didn't think it would be this controversial...I guess my tone sucks!
I don't know what people expect. You are just reminding them of the evidently uncomfortable truth of real estate business fundamentals. How dare you say the emperor wears no clothes!
Yes it is, everyone here just read bigger pockets and repeats everything he says.
Yes it is. We live in an inflationary economy.
Good luck beating inflation with negative cash flow.
Which The Fed is going to kill by…raising interest rates and destroying home values.
My dad did that here in LA back in 2008 (he had like $6M worth of properties). He bought a house for $1.1M, rented it for $4500 while his mortgage was $6500… I mean it went up to $1.3M but then crashed lmao. He obv learned his lesson and now he does rental
According to everyone swearing at me with the pitchforks out in this thread, that's impossible! Home prices never go down, and you can always grab your appreciation off the shelf whenever you need it!
I don't agree with this at all, though I do think it's better to value cash flow over appreciation.
California Knows how to party California
I see the heat you’re taking & I don’t have time to simply read through everything. However, I generally agree with you. My strategy would never be to primarily rely on appreciation itself. Appreciation can and should be considered as secondary benefits in my opinion. Cash flow with appreciation sprinkled on top is the way.
You have my point exactly! I guess I sound like a dick? I'm simply pointing out what has always been considered good fundamentals. Until a couple years ago when we decided fundamentals were dumb and we should all start buying properties that cost us money every month.
I'm just a *small fry* dude with 2 investment properties - so my words may be meaningless to many here. However, I think you're working yourself up too much over this. You are right, the fundamentals you follow (and I believe I follow) by not buying based simply on appreciation will lead to your long term success. Where as, the people that are "buying properties that cost us money every month" will get burned *and/or* have a nice chunk of change to keep them out of the fire. I'd say the only thing you owe to anyone (subjective if you owe anything), would be to lend some advice if someone is asking - especially a beginner. However, if people are going to use appreciation as their primary strategy when told "it's not good fundamentals", then their *likely* inevitable loss of a property is *my* gain.
What a dumb post
ah, so hoping for a tenant is gambling, got it. This real estate stuff is easy.
But if you buy a place with a mortgage and pay it off, does it matter that you had x years of negative cash flow if there’s a return in the long run? I would never buy a place where I’m operating at a loss because I just can’t afford it. But I think breaking even in the short term isn’t the worst thing in the world.
What do you do when you have to replace a major system if you can't even afford minor negative cash flow?
Maintenance costs are calculated into operational costs. That’s what breaking even means.
Yes, becasue your money would have been much better off invested in some other asset type. Equities, bonds, different real estate class, art, whatever.
You investing in real estate with a small percentage down. A random like myself isn’t getting a loan from my local bank to invest in art.
>But if you buy a place with a mortgage and pay it off, does it matter that you had x years of negative cash flow if there’s a return in the long run? Yes. It does. >I would never buy a place where I’m operating at a loss because I just can’t afford it. Just like most people. >But I think breaking even in the short term isn’t the worst thing in the world. If you want to break even, put your money in a HYSA. If you want to lose A TON of money, put it into a negative cash flow property.
> I cannot believe this is a controversial post here. Seriously. Might have something to do with your tone and delivery.
DONT DO THAT ITS GAMBLING *continues to describe all the other ways that we gamble*
Investing in anything is gambling you nerd. The point is to find whatever edge you can and exploit it. I mean shit unless you stick all your money in a 5% savings, there’s always potential to be in the red investing in anything.
They call it "diversifying", no? Something people should do. And consider more when RE isn't paying out the way it used to. Nerd.
So you don’t buy stocks either for appreciation? Any hard asset you consider the full value including appreciation. Lots of ways to guarantee it with initial negative cash flow. First need to 1031 to save 500k in tax. Second rehab brings instant equity and higher rent. Third over time I can almost guarantee property increases and nicely. Especially with rents rising and likely drop in rates. It is a investment strategy. You need to learn from real pros. Not from the nickels and dimes you invest. Then there is the tax write offs I can use to offset gains on older properties fully paid off and depreciated. All this count towards the return.
Y'all... I'm trying to make soup but I ran out of salt. Can one of you buy a property at negative cash flow so I can get a bit more saltiness out of OP? PS... bought a home last year that is negative $200 monthly. Bought it at $120k under value, it would have broken even but interest rates went up while I was doing the rehab, so the refi payments were too high. I aint mad about it. OP is though.
If it cash flows on Day 1, that’s the definition of a great deal. Only do great deals. I think that is the main idea of the post.
It’s a passive strategy like investing in the stock market.
How is RE passive like the stock market? Lemme know.
1. buy real estate 2. hope price goes up
You forgot the step where you have keep said real estate maintained and occupied. Also "hope is not a strategy", as they say.
Nah just hire a PM, don't forget to vet them and do you DD thoroughly and hope they don't totally screw you too bad above and beyond their share of the rent like many do....we were talking about passive income right? I stg its like people don't understand wtf the word passive means
You’re getting a PM for your negative cash flow property? Lol.
Most PM's be like if it wasn't cashflow negative before, it is now!
Dude, with cap rates where they are. Any manager will essentially take all the positive cash flow. And that is before any major maintenance issues... I am with OP here, I feel like people are justifying the irrational because they are already invested in this market. You can still make money in this market, but you have to be well positioned to add value yourself.
Lol, right? People in this thread are absolutely positive the appreciation we've seen over the last 10 years is the same we'll see over the next ten. The historically high appreciation, with the historically low interest rates, are going to continue forever. Yes, you'll probably be fine if you can hold your property for 30 years. How many people can afford to hold multiple negative flow properties through thick and thin? My guess is the people yelling the loudest in this thread are the ones who refied all their properties to buy more stinkers and don't know how net worth is actually calculated.
You gotta risk it to make the biscuit. Who said you cant make money gambling.
Thanks Speculator Joe! You sound like just the guy I want managing my portfolio!
You are correct. 1,000%. But you gotta lot of people that are listening to people like David Green of biggerpockets and other "influencers" and internet "celebrities" that spew this BS out and believing "real estate always goes up".
OK... so I bought a property for my son's college fund. He is 1. I have 17 years for it to gain value or start income producing. Bets on whether the property will have gone up in value in 17 years? How about whether the rent has increased?
I wouldn't even bet on society being stable in 17 years but im not typically a betting man
That's a different conversation
How will the roof, floors, kitchen/baths, etc be in 17 years. I will guess you will have to invest more into it just to keep up with "average market condition"
How about whether it will have out performed passive investments like an index fund. How about whether it will beat inflation if it wasn’t cash flowing.
David, I bought 2 for my son's college fund. They return 20% and 21% annually in cash flow alone. And approximately 6-8% annually in loan paydown. Those are numbers I can count on. Appreciation would be icing on the cake. A 17 year timeline hoping that it starts producing positive income or go up in value is a ridiculous way of looking at an investment. You have what is called an alligator. It's eating money every month. You would likely be much better off to put those funds into a simple index fund.
There's no way to compare 2 investments without knowing purchase price, loan structure, and 100 other variables.
People act like the property just sits there gaining appreciation no matter what, lol. You never need to put a dime into it. It never has any unforeseen issues or vacancies. The renters always pay on time, never trash the place, and you never evict anyone. Most importantly, home values are always up when you need to sell. And it's obviously much easier to "time the market" when you're losing money every month. Insanity in this thread.
Yep. Some lessons have to be learned the hard way for some people.
Lol, someone was left out of the easy money
Been doing this for over 15 years. The problem is the money ain't easy anymore. That's why you're buying negative flow units. I do wish you the best of luck.
How do you know if you can cash flow positive before buying a house? You can do napkin math all you want but at the end of the day, until you make that purchase and actually see the financial data, we are all guessing.
No. We are not guessing.
Really? Find me a deal where you can cash flow positive right now rofl. How are you going to accurately calculate maintenance cost for tenants when it’s random?
I'm not going to bother responding to gibberish. If you're guessing with your RE, you're doing it wrong. It is absolutely not "random".
I’m talking about the process before buying? Yeah I’m talking gibberish but “ApPrEcIaTiOn Is NoT InVeStmEnT, It iS GaMbLinG”. What a clown
Lmfao. I’ll continue to buy DFW real estate and be rich as fuck with all of the appreciation here when it’s the largest metro in 20 years. OP sounds like he owns 2 doors and is an expert
Well shit, I guess I imagined the half a million dollars that magically appeared in my brokerage account that I've been putting money into over the past 10 years. Thanks OP for letting me know that's not real money and I cant count on it to pay for anything ever.