For real estate investors, the question of cash flow versus appreciation is as old as time. However, in an era of high interest rates, buying properties for cash flow isn’t easy. That doesn’t mean investing should be off the table, as there are many advantages of owning rentals other than immediate cash flow—appreciation and tax advantages being the most obvious. Below are some of our opinions that may be helpful as you navigate through your real estate investing journey.
Balancing Act: The Interplay of Cash Flow and Challenges
The less expensive the property, the greater the cash flow. That’s the theory, anyway. Rentals in low-income neighborhoods might cost less, but tenants also earn less and cannot withstand the financial hurdles that life throws at them. Thus, potential cash flow numbers are rarely achieved due to vacancies, repairs, and evictions.
Exploring Alternatives: The Complexities of Section 8 Rentals
Some might champion Section 8 rentals, but the hurdles of dealing with Section 8 inspectors and hoping your tenants maintain your property often make the experience hard for investors who got into real estate to lessen life’s stresses rather than add to them.
Wealth Building Strategies: Leveraging Appreciation and Tax Benefits
Not needing cash flow is the enviable position many investors want to get to because it means you are already financially free. According to CoreLogic’s U.S. Home Price Insights, nationwide, prices increased by 5.5% year over year as of December 2023. This coincides with a somewhat healthy job market, wage growth, and lowered inflation. Again, just one source but you could find other sources that say differently.
The Argument for Stability: Evaluating the Role of Cash Flow
The problem with investing in highly appreciating areas is that they generally do not cash flow well because they are more expensive. However, when factored against tenant issues in lower-income neighborhoods, holding on to a good asset in a more upscale neighborhood is likely to be more beneficial in appreciation, even if it only pays for itself. The cash flow will also increase once the assets are paid down and the rents increase.
Maintaining Independence: Strategies Amidst Syndication
Many syndicators utilize the strategy of forcing appreciation through value-added improvements that increase cash flow to attract investors who would otherwise be unwilling to invest.
A Nuanced Approach: Adapting to the Shifting Investment Landscape
Despite what most syndicator salespeople might claim, handing your cash over to them should require first knowing the details of their financing. Without this knowledge, you are taking a leap of faith. In an era of fluctuating interest rates, only long-term financing attained before the rise in rates can insulate an operator against financial difficulties.
In Summary: Strategic Insights for Real Estate Investment
Interest rates are the differentiator in the cash flow versus appreciation argument. Although many syndicators and gurus might preach that “cash flow is king,” with rates unlikely to drop substantially in a robust economy, a more nuanced approach could be beneficial—if you can afford it.
If you are not in a rush to quit your job and can afford to ride out high rates, buying for appreciation and tax advantages while waiting for a refinance to cash flow later could be wise. There’s little doubt that prices will soar as rates drop. If you are in need of private money capital, reach out to Jordan at 561-235-0999 or email him at [email protected]
