As you look to begin your real estate investing journey, it is likely that you will encounter a question that could affect the type of investment that you decide to pursue: Is it better to invest for cash flow or appreciation? To provide some insights into how best answer this question, let us first start with some basic definitions:
According to the Corporate Finance Institute, appreciation refers to the increase in the value of a real estate asset over a given period of time and this increase in price can be driven by several factors such as location, physical condition of the asset, market drivers, and supply and demand, among others. Cash flow, on the other hand, is the money that you have left over from rental income after all expenses and obligations have been met (the net amount).
To be clear, these two factors are not mutually exclusive i.e., you can have both, but what you typically see is that as you focus more on cash flow, the less appreciation you see, and vice versa. So, which should you choose? Long story short, it depends on your investment strategy, your overall goals, and whether you are an active or passive investor. For those of you that decide to take advantage of the arbitrage concept (i.e., buy low and sell high), it is important that you understand the difference between natural appreciation and forced appreciation.
According to Tyler Deveraux at MF Capital Partners (2020), natural appreciation is the increase in the value of an asset due to changes in the property market while forced appreciation is an increase in the value of an asset due to the action that an investor takes. Thus, while you can control forced appreciation, you cannot control natural appreciation given that it is driven by the market. Additionally, while you can control forced appreciation, to execute this investment strategy, please make sure that you are working with an experienced real estate investor that has a track record. When deciding between either natural or forced appreciation, individuals often prefer to have control.
Given that there are so many factors at play with appreciation, many investors often resort to investing for cash flow. Joe Fairless, a leader in the real estate investing realm, details that one of his immutable laws to real estate investing is to “buy for cash flow,” as opposed to acquiring an asset and betting on natural appreciation (2018). Joe outlines that investors should be acquiring assets for cash flow given that “when you buy for cash flow (and as long as you have a large supply of renters), you don’t care what the market is doing. In fact, if the market takes a dip, the demand for rentals will likely increase” (2018).
This information presented on this site is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the company or any related or associated company and is not a recommendation to pursue a specific investment opportunity. Any such offer or solicitation will be made only by means of the company’s confidential Offering Memorandum and in accordance with the terms of all applicable securities laws and other laws.
1. “Price Appreciation” Corporate Finance Institute: https://corporatefinanceinstitute.com/resources/knowledge/valuation/price-appreciation/
2. “Forced Appreciation vs. Natural Appreciation” by Tyler Deveraux (MF Capital Partners, 2020): https://mfcapitalpartners.com/forced-appreciation-vs-natural-appreciation/
3. “The Three Immutable Laws of Real Estate Investing” by Joe Fairless (Joe Fairless, 2018): https://joefairless.com/three-immutable-laws-real-estate-investing/#:~:text=To%20maximize%20your%20chances%20of,evaluate%20a%20market%20before%20investing.&text=These%20Three%20Immutable%20Laws%20of,3)%20have%20adequate%20cas
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