Appreciation or Cash Flow? My take💸

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I’ll get write out in front of it…

I am by no means a foremost real estate expert.

I’ve now been a realtor since mid-2021; a real estate investor since around the same time. By the end of this month our portfolio will be sitting at 11 units across 5 properties. We will finally be across the $10k / month in top line after this purchase, but bottom line is likely around 20-25% of that. So at this stage in my career I’m still learning a “WOW” “MISSED THAT” lesson about every month. So take what I say next with a grain of salt.

Let’s start with an example:

Let’s say you purchase this property right here on the MLS in Indianapolis today:

810 N Eucluid Ave, Duplex — Helped the seller buy it earlier in 2023. Now they’re selling it after some light value adds.

Here’s the numbers on this guy:

  • Purchase Price: $200,000
  • Downpayment / Closing Costs: ~$48,000
  • Mortgage Principle, Interest, Taxes, Insurance: $1352
  • Rents: $1100 per side; $2200 / month
  • Vacancy Budget 4%: $88
  • Maintenance / CapEx Budget 15%: $330
  • Income Yearly: $26,400
  • Expenses Yearly: $21,120
  • Pure Cash Flow: $5280 or $440 per month

Now, this is actually a pretty solid cash flowing deal.

(Yes, I hear all of you whining behind me about how it’s impossible to find a cash flowing property in 2023; it is not — you just may have to play with other factors like condition, location, or be creative on rental strategy.)

Now, let’s take the appreciation rate of this neighborhood — the Near Eastside of Indianapolis.

We will play it safe and call it 3% although it’s trending better.

Here’s the appreciation numbers (I call it value compounding)

I call appreciation / amortization value gain Value Compounding because that’s what it is. The equity continues to go up based on a year-over-year percentage — Compound Effect. Cash flow does sort of compound, because rent does the same, but to a much less greater degree.

Here’s the numbers:

  • Purchase Price: $200,000
  • 10 Year Value 3% Growth Factor: $268,783.28
  • Mortgage Balance in 10 Years: $152,111.77
  • Value Created Over Time: $116,671.51

Now if you sell you’d have to pay closing costs / realtor fees as we know.

Let’s compare Cash Flow to Value Compounding (Appreciation):

  • 10 Year Cash Flows: $52,800
  • 10 Year Value Compounding / Equity Created: $116,671.51

Now let’s keep in mind:

  1. This was actually a solid cash flowing deal compared to 99% on the market.
  2. This area won’t appreciate nearly as quickly as Downtown, Broad Ripple, Northside markets which will have multiple years hitting 10% in the next 10 years based on population / migration trends.

What’s my takeaway?

There’s a couple…

  1. Cash flow should be used as a gauge for investment performance, not the goal in and of itself. Shocker: You won’t be quitting your job after getting 2 rentals bud, it’s going to take double-digit and likely 50+ units to get into that territory…
  2. Value Compounding (appreciation) will always create more wealth than cash flows. If you buy right. Meaning…
  3. Stop buying in the hood. Stop buying ugly properties. Stop buying based on a number on your spreadsheet. Stop taking your realtor’s or property manager’s advise before learning this stuff intuitively.
  4. Start taking a bit more of a wholistic approach. Would you live in the property? Is the area attractive & growing? Is it gentrifying / developing or stagnating? What’s the reputation? These questions determine Value Compounding which by ratio will produce 2-5x the value your cash flows will. This is where an intelligent realtor or property manager will help.

I’ll say it again, cash flow exists to show you if the investment is working. It’s a performance gauge.

Also, it’s fuel to buy the next one. Or reinvest in the current one.

So far I’ve let every penny of cash flow in my portfolio accumulate. In 2023, I had to spend the bulk of it on tenant turns and value add updates. It kind of sucked, I’ll be honest. But then I did the equity gain math and looked out longer…

$250,000 in equity becomes $700,000 in 5 years with a normal appreciation rate. Do the math.

Here’s what real estate is in a nutshell, I’m learning:

Buy for value.

Make sure it pencils out month to month.

Then wait. A long time.

This is real estate.

By the end of December (the month of my writing) I and my team will have helped over 150 investors buy property in Indianapolis. We see successful ones, in the game for a long time. And we see the ones who start wide-eyed, trip, and get their face broke early. And usually it’s because they aren’t thinking long-term / wholistically enough.

He who has the longest timeline, wins. — Naval Ravikant

Thank you for reading and supporting what we are trying to build with Roots Realty Co.

Our goal is to help people plant roots — physically by owning their home and financially by investing for the long run.

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