How to Prioritize Appreciation Over Cash Flow in Real Estate

In my nearly two decades of owning hundreds upon hundreds of rental properties, I've learned one critical lesson the hard way: appreciation beats cash flow.

This is a statement that might ruffle some feathers, especially among the adherents of popular financial philosophies.

I can almost hear the chorus of objections:

"Matt, you're wrong!"

"Matt, didn't you read Rich Dad Poor Dad?"

"Matt, you've lost it!"

"Matt, you don't know what you're talking about!"

I understand the hype around cash flow in the single-family home world, but my experience tells a different story.

Here's why.

The Reality of Cash Flow

1. It's Not Passive: Despite what many believe, managing rental properties is far from a passive income source. It demands time, energy, and constant attention.
2. It's Not Consistent: Pro-forma statements, those promising projections of rental income and expenses, are often misleading. Rarely do they align with reality. Unexpected expenses always arise, eating into the anticipated cash flow.
   • Turnover Costs: The cost of preparing a property for new tenants usually exceeds the security deposit, especially in recent years.
   • Maintenance Expenses: Maintenance costs have tripled or even quadrupled in the past few years. Tenants, particularly millennials, often lack basic home maintenance skills and will call for help frequently, further diminishing monthly cash flow.
   • Insurance Costs: These have doubled unexpectedly, again reducing the already thin cash flow margins.

I'm not advocating for buying properties that don't cash flow.

Cash flow should be a priority, but it should be the second priority.

So, what should be the first?

The Primacy of Appreciation

When evaluating a rental property, the primary question should be: will this property appreciate in value over time?

Key Considerations for Appreciation

• Area Potential: Is the property located in a neighborhood that is likely to see property value increases?
• House Type: Does the type of house support appreciation trends in the area?

If a property doesn’t meet these criteria, it's better to pass or wholesale it to someone else.

Reflecting on my extensive experience, the properties that yielded the best returns were those that appreciated the most.

Balancing Act: Appreciation and Cash Flow

"But Matt," you might say, "the houses that are likely to appreciate the most don’t cash flow."

In such cases, it’s wise not to buy them outright.

Instead, wholesale those properties and continue your search.

Your goal should be to find properties that offer both appreciation potential and positive cash flow.

The Uncertainty of Cash Flow

The harsh truth is that nothing is guaranteed, including cash flow.

When cash flow disappears, equity is your safety net.

Appreciated value becomes the lifeline that can sustain your investment during tough times.

If you’re looking for properties that offer a trifecta of equity, appreciation potential, and cash flow potential, feel free to click HERE.

My team, equipped with top-notch data and excellent cold callers, can help you identify the best opportunities out there.

Don't let the allure of immediate returns blind you to the more significant gains down the road.

Invest wisely, prioritize appreciation, and watch your investments grow over time.