034: Why you Should Buy for Cash Flow and Not Appreciation

I have been rethinking my rental property strategy due to the increasing property values in Colorado. I have been talking to many investors and it constantly surprises me how many people sacrifice cash flow for possible future appreciation. In this episode of the InvestFourMore Real Estate Podcast I discuss why cash flow is so important. Why appreciation is nice, but you cannot rely on just appreciation and I talk about my rentals and possible new strategies.

Why should you invest for cash flow and not appreciation?

Investing for cash flow is not easy. There are many markets where it is very tough or impossible to find cash flowing rentals when using financing. Many of the most popular places to live in the United States have the highest prices. When housing prices are high, it is usually tough to cash flow on rentals. Because prices have increased so much in Colorado, I am thinking of investing in other areas with more cash flow.

I could sit tight where I am at and hope prices keep going up, but there is no guarantee housing prices will always rise. Even when housing prices rise, you do not realize any actual gains with appreciation unless you sell your property or refinance it. Selling costs and refinance costs can add up very quickly if you want to take advantage of appreciation. With cash flow you have money coming in every month as long as you own the property. While appreciation looks great on paper, cash flow is much more usable.

What is my plan for my rental properties?

After giving some advice to a couple of my coaching students about selling their rentals, because they have so much equity tied up in their rentals. They aren’t making a lot of money with cash flow, but they have a lot of cash tied up in the properties. I realized I should look at my own properties to see what my current situation looks like. I discovered that I have about 1.3 million dollars of equity in my rentals after selling costs. I am making about $7,500 on my rentals in cash flow (excluding my turn key rental), which is about a 7 percent return on my money.

I am thinking about selling some of my properties here, because prices are so high and reinvesting in another area that has more opportunity for cash flow. In the past I was able to buy homes from $80,000 to $120,000 that needed $10,000 to $15,000 in work and rent those from $1,100 to $1,400. Today, I can buy those same houses for$155,000 to $185,000, put $10,000 in work into them and rent them for $1,400 to $1,600. Those are not great numbers, especially compared to what I used to be able get. I may be investing in new markets with lower prices and better cash flow.