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Which Strategy Is Better for Investors:

Cash Flow or Appreciation?

by Emily Koelsch
Cash flow or appreciation

Which Strategy Is Better for Investors: Cash Flow or Appreciation? 

Two major benefits of real estate investing are cash flow and appreciation. Ideally, investors have properties that both generate positive cash flow and steadily appreciate. 

That said, some properties offer better monthly cash flow while others promise better long-term appreciation. As a result, a common question we get from investors analyzing new deals is: Should I focus on cash flow or appreciation? 

To help you answer that question, here’s a look at each strategy and its pros and cons. 

Understanding Cash Flow & Appreciation 

Cash Flow 

Cash flow refers to the cash investors make – or lose – each month. Positive cash flow is monthly income that exceeds the property’s monthly expenses. If a property’s expenses exceed monthly rental income, then it has a negative cash flow; if they equal monthly expenses, there’s no cash flow.  

To calculate monthly cash flow, start with anticipated monthly rent. Next, subtract all operating expenses. When calculating operating expenses make sure you include: mortgage payments, insurance, taxes, and maintenance expenses. 

For example, if your monthly rent is $2,000 and all operating expenses and fees are $1,500 per month, your monthly cash flow would be $500. This property would generate $500 of positive cash flow each month. 

Benefits of a Cash Flow Strategy 

Positive cash flow offers some distinct advantages for investors. Here are a few to consider: 

  • Passive income: If a rental property is generating positive cash flow from day one, you will get steady passive income from the property. 
  • Increased financing options: When you’re considering purchasing a property and can show that it will generate positive cash flow, you’ll have more borrowing options. 
  • Financial security: The risks of investing in a rental property that generates positive cash flow are low. 
  • Reinvestment: Cash-flowing properties offer a strategy for growing your portfolio. Each month’s positive cash flow can be saved and reinvested. This provides a good long-term strategy for growing your real estate portfolio.

There are some clear benefits to investing in properties that offer steady cash flow. That said, there are some challenges to keep in mind when analyzing properties: 

  • Miscalculation of monthly expenses or unforeseen expenses can lead to negative cash flow. 
  • In some markets, it’s hard to find properties that generate positive cash flow from day 1. 

Appreciation

In contrast, appreciation is the change in value of a property from the purchase price to the current value. For example, if you purchase a property for $100,000 and three years later its market value is $125,000, it has appreciated by $25,000. 

In this situation, you have gained $25,000 in equity. To get a return from this strategy, you have to sell or refinance the property. 

While real estate markets can go up and down, they have consistently gone up over time. Federal Reserve data shows that the median home price in the United States has increased by over 250% since 1990. 

Appreciation is a long-term strategy. As a property appreciates over time, you develop equity and generate wealth. 

Benefits of an Appreciation Strategy

For investors utilizing a buy-and-hold strategy, appreciation is a great metric to focus on. Focusing on appreciating offers investors: 

  • A steady increase in value over time. While there are some ups and downs in the market, history has shown that real estate steadily increases over time. While appreciation levels vary, the average level of appreciation has been around 5% per year. 
  • Generational wealth. A property that steadily appreciates can generate a significant amount of wealth in the long term. These properties can be passed down to future generations and are an effective way to build generational wealth. 
  • An opportunity to defer taxes. To get a return from appreciating properties you have to either sell or refinance the property. However, investors who want to sell and buy another property can utilize a 1031 Exchange. This is a tax strategy that lets investors defer capital gains taxes on the sale of a property if another investment property is purchased within 180 days. 
  • Cash-out refinance. Investors can pull out the equity accumulated in a property to fund another deal. This offers a good way to scale your real estate portfolio. 

Appreciation is one of the best ways to build wealth through real estate. That said, it works best with a long-term buy-and-hold strategy. Market volatility can lead to losses in the short term, but it’s a reliable metric to focus on for long-term investing. 

Picking the Right Real Estate Investing Strategy 

The takeaway for investors should be that cash flow and appreciation both offer clear benefits and there’s no right answer on which to prioritize when buying an investment property. 

And, the good news is that most investors benefit from both cash flow and appreciation, especially in the long-term. When trying to decide which to focus on when analyzing a new deal consider: 

  1. Your investment goals. Do you need monthly cash flow or can you focus on long-term returns? 
  2. The market you’re investing in. Is it reasonable to purchase a property that generates good cash flow from the start or do you need to prioritize appreciation? 
  3. Your cash reserves. Do you have adequate cash to cover expenses if the property does not generate cash flow in the first couple of years? 

Thinking through these questions and the benefits of each strategy should help you decide which one to focus on when analyzing new real estate deals. 

Visit ezLandlordForms.com for Real Estate Investing & Property Management Support 

The reality is that most real estate investors don’t have to choose between cash flow and appreciation. If you’re a buy-and-hold investor, your properties should do both over the long term. 

In the short term, focus on a strategy that works for you and try to move forward with a deal that will help you meet your goals. Once you’ve found an investment property, ezLandlordForms can help you get the most out of it. 

Visit ezLandlordForms.com for Tenant Screening services, state-specific Lease Agreements, and property management forms. Plus, our team is available to answer any questions you have about real estate investing and property management. Create a free account today to join our real estate investing community.

 


Emily Koelsch, ezLandlordForms Contributing Writer

Emily Koelsch WriterEmily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.

 


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