Investing for Cash Flow vs Appreciation in Real Estate
In this module, we will cover cash flow versus appreciation. The purpose of this module is to provide an overview on the differences and why you would invest for appreciation over cash flow. Investing for cash flow has pros and cons.
Ariel Herrera 0:00
In this module, we will cover cash flow versus appreciation. The purpose of this module is to provide an overview on the differences and why you would invest for appreciation over cash flow. Investing for cash flow has pros and cons. Let's start with the pros. First, the tenant pays your expenses. Therefore, you're not coming out of pocket to pay money on a monthly basis to own the property. Second, you can reinvest rental income, if you're making say $300 a month on cash flow. That means over the course of a year, you make $3,600. And you can put that towards your next property. Cash Flow provides multiple streams of income. If you were to lose your job, for example, by relying on cash flow, you would have some sustainability in the short or long term. as well. Investing for cash flow provides more financing options, as there are lenders who will actually not look at your credit score, but look to see if a property would cashflow positively and still lend you a loan. For cons, it can be difficult to find high cash flowing properties. If you're looking on the strict basis of I want to beat the market. So the stock market by investing in real estate, it can be hard to find a property that is cash flowing over 10% Without any work needed to be done. Additionally, high cash flow could mean bad areas attracting bad tenants. For example, in less desirable areas, you'll see that properties are listed for a lower price than an areas that people want to be in. However, whether it's a section eight tenant or not, the tenants in areas that are less desirable, are less desirable themselves. They could be bad tenants and not pay you on time. Therefore you actually lose money monthly instead of gain as you saw in your spreadsheet. Now what about appreciation, we haven't touched this as of yet. But appreciation is when your house value increases as inflation is moving up. It's about two to 3% a year and also really is dependent on your area. So appreciation pros include buy and hold investing. If you're looking to hold a property say for 30 years, you will naturally see a lot of appreciation over that period of time. as well. When a property is high appreciation, you can pull out more money for a cash out refinance, which would allow you to purchase even more properties, recycling the same money or just not having to come out of pocket as well. If a property does not cashflow positively, but has high appreciation, you could look at alternative strategies. For example, short term rentals like Airbnb. A lot of these times, these beach rentals right off the water are not cashflow positive as a rental throughout 12 months. But as short term for less than 30 days they are as well appreciation allows you to defer capital gains tax. And some of the cons here is that you have to cover those losses every month. So if you are still renting as a long term rental, and the cashflow is negative $50, you have to be prepared to cover that. But there can be unexpected expenses as well. So if there's an unexpected repair that needs to be done, maybe the roof has a leak, you need to come with that out of pocket yourself. Since you are not making income from the tenants as well. There could be an unexpected market crash in property value. So if you're looking for appreciation in a short period of time, this is a high risk. However, over a 30 year timeframe of buy and hold, you have less of a risk because the market will ultimately be balanced. And you'll still see appreciation, the ultimate question that we have, should you invest in a property with negative cash flow? And the answer is it depends. You have to ask certain questions. One, what does year over year appreciation look like in the area not just median across the United States? As you know, a market in major cities is very different from markets that are in rural areas. So how do you get this data of year over year appreciation? Well in the real estate Data Analytics course that is the main focus we're able to extract data, such as median sale and median list price all the way down to the zip code level. So you could really get a good idea of which areas have historically higher appreciation than others. The next question to ask is, is the property turnkey? This means once I purchased the property, can I basically turn the key to the front door and the house is ready? If so, you're not going to have or incur that many costs in the first several years. Therefore, it could be worth getting a property that has slightly negative cashflow. Because there are no major expenses up front, you have a better chance of waiting for rent to rise over that five year timeframe, and cashflow ending up being positive without having to do any major repairs in that window of time. Next, can you set a property emergency fund, irregardless of whether it's cash flowing or not, you should have a fund available, or a savings account of some sort towards each property or to a set of properties that you own. In case there's a hurricane, another natural disaster or something just unforeseen. That's going to be an expense out of pocket. If you are breaking even at $0, I highly suggest to not go for appreciation, and instead go for cash flow. And the last thing to think about here is is there another strategy that can help you break even, maybe you can't actually be cashflow positive by having a 12 month lease. What if you were to look into medium rentals. This can target nurses, for example that are in your area, you can maybe rent by the bedroom and make more money. Yes, up front. This is going to mean more property management on your end. But it can allow you to be cashflow positive, you do it for say maybe two to three years. And then if you see a break even for cash flow, you could decide at that point if you want to make the property a 12 month lease rental. Great. So we've covered all the basics of real estate 101 and investing for cash flow. Now we're going to dive into creating our application with Python that will allow us to automate for any on and off market property at single family home to get cash flow. See you there. Investors are tired of using spreadsheets to evaluate a real estate deal, but now they don't have to be with the property cash flow app, you can enter in a property address. And within seconds have all the data at your fingertips. You get relevant metrics like cash flow, cash on cash return, and expenses. parameters. You can toggle live to change your deal potential graphics to see where income and expenses are flowing, and much more property details. What are you waiting for? Sign up for an API key and get started evaluating deals today. Or take the course to build your own property cashflow app using Python.
Transcribed by https://otter.ai