Cash flow or Appreciation

[afshinrein]

Hi everyone,

I am debating on the fact that small positive cash flow (lets say $50/month) with higher 5 years appreciation (4%/year) is better than higher positive cash flow ($400) and lower appreciation (1%/year). Which one would you take? I know it might boils down to someones investment plan but which one is a better investment strategy?

 

[WadeFenner]

QUOTE (afshinrein @ Nov 7 2010, 08:49 PM) Hi everyone,

I am debating on the fact that small positive cash flow (lets say $50/month) with higher 5 years appreciation (4%/year) is better than higher positive cash flow ($400) and lower appreciation (1%/year). Which one would you take? I know it might boils down to someones investment plan but which one is a better investment strategy?



You can`t eat or pay your bills with appreciation.

Its a nice bonus but its desert not the main course.

 

[eddyb1978]

Seconded by Wade...

 

[Thomas Beyer]

QUOTE (afshinrein @ Nov 7 2010, 09:49 PM)
Hi everyone,



I am debating on the fact that small positive cash flow (lets say $50/month) with higher 5 years appreciation (4%/year) is better than higher positive cash flow ($400) and lower appreciation (1%/year). Which one would you take? I know it might boils down to someones investment plan but which one is a better investment strategy?


You always want both in real estate: cash-flow AND equity growth (and mortgage paydown, btw .. to compete the 3 course meal)



How do you know it is 1% or 4% appreciation at the start? You know it only AT THE END .. not before !



Higher appreciation usually makes you more money over a 5-6 year horizon using levered investments .. but it is unknown when you start. Appreciation may be depreciation !



if you buy a house for $200,000 with 25% down and make $50/month that is $600/year or $3000 in five year. With a 4% (per year presumably) appreciation (8,000/year) you make $43,000 on a $50,000 investment in 5 years .. well over 80% which is fantastic. If one the other hand you make $400/month over 60 months that is $24,000 plus 1%/year i.e. another $10,000 that is $34,000 in total. What is better: $34,000 or $43,000 ?



Since you do not know the appreciation, I'd go for the one with $400. Unclear to me though is why that is ! Different market ? Different asset class ?



Your question is too theoretic. Please give us two specific examples in 2 markets that you consider, one with 1% and one with 4% and an explanation why you think it is 1% in one and 4% in the other !



related posts:

5 ways to make money http://myreinspace.com/public_forums/General_Discussion/61-3347-5_ways_to_make_money.html



Do what you love: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-16722-Love_what_you_do_-_Do_what_you_love_.html



How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



How did I get started: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-15422-Is_my_goal_of_200K_annual_income_feasible.html



Are you too levered ?

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10823-When_are_you_too_levered_.html

 

[gwasser]

QUOTE (WadeFenner @ Nov 7 2010, 09:03 PM) You can`t eat or pay your bills with appreciation.

Its a nice bonus but its desert not the main course.

I don`t agree with this Wade. It is too much of a generalization. Thomas` answer is closer to the ball. Positive cash flow is important, but you have to look at the total ROI which also includes appreciation and mortgage paydown.

I have heard many times on this forum that appreciation is speculative and that cash flow isn`t. That is B.S. - sorry no other word for it.

Appreciation on the short term is volatile, but over the long term it is often predictable. Cash flow also has a seculative element. Today`s positive cash flow can tomorrow turn negative. Why for example do we try to do stress tests for higher interest rates? Does your rent stay always the same? Or can it go up or down over time? What about the unexpected renovation after your tenant trashes the place? What about rising utility costs or porperty taxes? Do I have to go on?

All forms of investing have a speculative element and all profit sources - appreciation, dividends, interest income or rental income have a speculative elements.

Cash flow will help you survive better unexpected operational expenses than no cash flow, but the overall attractiveness of an investment is measured by the total return on investment ROI when adjusted for risk. ROI is the rate my equity in an investment will increase over the years and it is the ultimate bottomline.

 

[housingrental]

Hi Godfried
I think the bigger issue is the question when written in its current form doesn`t make a lot of sense - You can`t know the appreciation of one area will be 1% and another area will be 4% in advance....

 

[gwasser]

QUOTE (housingrental @ Nov 8 2010, 08:52 AM) Hi Godfried
I think the bigger issue is the question when written in its current form doesn`t make a lot of sense - You can`t know the appreciation of one area will be 1% and another area will be 4% in advance....

I agree and as Thomas pointed out, we need a real example not made-up numbers in a hypothetical case.

 

[trev]

I heard an interesting response to that question once

"If I`m getting 20K / month cashflow (or 30K or 40K, whatever your goal is) I don`t care if it EVER appreciates"

Hmmmm?

 

[bizaro86]

QUOTE (trev @ Nov 8 2010, 09:00 AM) I heard an interesting response to that question once

"If I`m getting 20K / month cashflow (or 30K or 40K, whatever your goal is) I don`t care if it EVER appreciates"

Hmmmm?

This is a great point, especially when combined with mortgage paydown. My personal opinion is that a bunch of paid off properties is a great retirement plan, and if that takes 25 years+, then so be it. I wouldn`t turn down an appreciation bump to my returns, and on a true long term hold certainly expect some, but I don`t like to count on it.

That`s not because appreciation is somehow "wrong," but it`s hard to predict the future, and I`d rather my investments be a little too conservative, and leave money on the table, than be a little too aggressive and face foreclosure/bankruptcy.

Michael

 

[Thomas Beyer]

QUOTE (gwasser @ Nov 8 2010, 09:34 AM) ..

Cash flow will help you survive better unexpected operational expenses than no cash flow, but the overall attractiveness of an investment is measured by the total return on investment ROI when adjusted for risk. ROI is the rate my equity in an investment will increase over the years and it is the ultimate bottomline.
Well said Godfried !!

cash-flow may fluctuate too as rents may drop or vacancies go up or expenses ..

Always look at: mortgage paydown PLUS net cash-flow (after re-investment of some or all cash-flow into property upgrades !!) PLUS appreciation .. divided over the total cash invested !

Like a good meal, all three elements have to be considered over a 5 or 10 year period !

 

[cmerino]

QUOTE (afshinrein @ Nov 7 2010, 10:49 PM) Hi everyone,
I am debating on the fact that small positive cash flow (lets say $50/month) with higher 5 years appreciation (4%/year) is better than higher positive cash flow ($400) and lower appreciation (1%/year). Which one would you take? I know it might boils down to someones investment plan but which one is a better investment strategy?


BOTH!!!. it all depends on what is your situation, do you need the cash? or you have other sources of income and you are more looking to invest for the future (5-10 years).

In our case for example, at the begining of our Investment carreer, our Strategic Plan called for cash. All our properties should not only pay for themselves, but also give us an excess of cash. This is why we invested in areas with lower apreciation, or in student houses (guys, there is a LOT of cash there if we do it right). Our short term plan was to get enough cash out of our investments so one of us could leave our job and become a full time investor. I am happy to say that that goal was achieved about 6 months ago!

. My wife Sonia quit her job!!! and we went to celebrate our 25 Wedding anniversary to Europe (all courtesy of our lovely tenants!!)

Now, we are balancing the scale, we invest in some properties that generate cash, and other that will provide handsome appreciation down the road (newer, more expensive properties).

I would say that it is really worth to invest a few hours (or days) defining a Strategic Plan (in Don`s terms, your Belize, but more important HOW are you going to get there...), where do you want to be in 12 months? where in 60? which are your strenghts? where do you need help? how involved you want to be? how involved CAN you be?. The answer to your original question will come out of this plan...after that, it is just a matter to implement.

With Sonia we review our plan every 6 months (as a matter of fact, we did the review in Italy, so I would asume we could consider that a business trip...

) and we adjust what is required. We review the performance of every property, define new aquisitions, sale of existing units, etc.

 

[Rickson9]

QUOTE (afshinrein @ Nov 7 2010, 10:49 PM) Hi everyone,

I am debating on the fact that small positive cash flow (lets say $50/month) with higher 5 years appreciation (4%/year) is better than higher positive cash flow ($400) and lower appreciation (1%/year). Which one would you take? I know it might boils down to someones investment plan but which one is a better investment strategy?

It depends on the individual. No one answer is right for everyone.

Speaking for myself, I use stocks for appreciation and RE for cash flow.

 

[bizaro86]

QUOTE (Rickson9 @ Nov 8 2010, 06:03 PM) It depends on the individual. No one answer is right for everyone.

Speaking for myself, I use stocks for appreciation and RE for cash flow.

This is a great example of how strategies differ. I have usually used stocks (and preferred shares, debentures, trusts, LP, REITs, etc) for current income, and real estate (low downpayment levered to provide significant ROI through mortgage paydown) for capital growth.

I find it hard to predict the future (growth) of a company, but am confident that I can analyze financial statements to determine whether it is probable it can meet its obligations for interest/preferred share/dividend payments.

Regards,

Michael

 

[ekisielewski]

QUOTE (bizaro86 @ Nov 8 2010, 08:13 PM) This is a great example of how strategies differ. I have usually used stocks (and preferred shares, debentures, trusts, LP, REITs, etc) for current income, and real estate (low downpayment levered to provide significant ROI through mortgage paydown) for capital growth.

I find it hard to predict the future (growth) of a company, but am confident that I can analyze financial statements to determine whether it is probable it can meet its obligations for interest/preferred share/dividend payments.

Regards,

Michael


Very interesting....would you mind sharing what kind of returns you have seen from your stock investments in the last 5 years?

Thanks
Elisabet Kisielewski

 

[bizaro86]

QUOTE (ekisielewski @ Nov 9 2010, 06:05 AM) Very interesting....would you mind sharing what kind of returns you have seen from your stock investments in the last 5 years?

Thanks
Elisabet Kisielewski

I wouldn`t mind, but I can`t, since I only got back into the stock market at the end of October 2008, before which my paper assets were 100% cash. I`ve never experienced a more exciting time than that crash, and I learned from it and will do better than this the next time we have a crash of that magnitude.

My annual internal rate of return from then to the second quarter of 2010 (the last update I`ve done on my spreadsheet) is 45.88%, correctly calculated with compounding. I should comment that this time period was an extremely good one for investors, with the stock market going up nearly 20% per year.

Some of my better investments in that time period (which I no longer own and don`t recommend, as they`ve recovered their value) are:

http://www.google.ca/finance?q=AMEX:IPB

http://www.google.ca/finance?q=NYSE:BEE-A

I`m not seeing values in fixed income funds and preferred shares like these anymore, so I fully expect my future returns will not reach the same levels. I`ve taken a significant amount of those capital gains and re-invested them in Calgary real estate.

Best regards,

Michael

 

[gwasser]

QUOTE (ekisielewski @ Nov 9 2010, 06:05 AM) Very interesting....would you mind sharing what kind of returns you have seen from your stock investments in the last 5 years?

Thanks
Elisabet Kisielewski


Considering that over the last five years we experienced one of the worst bear markets since the often quoted Great Depression, or at least since Canada`s 1982 recession, this is hardly a relevant question. Stock market investing is long term: 10 - 20 years although holding periods of invidual stocks can be shorter for various reasons.

But to satisfy my curiosity, I checked my portfolio`s last 5 year performance and was shocked to learn that it was 12.23% per year. Not that I trust that number but since all my statements are reconciled monthly it is the best quality number I can give you (until Quicken is debugged). This does not include my real estate portfolio which is even more difficult to measure.



P.S. to be really masochositc, I checked my stock portfolio return from August 2007 until today (that is from the beginning of the credit crisis), my return was +2.15% Compare that with current interest rates on an after tax basis!

 

[bizaro86]

I should probably add that it hasn`t been all roses and sunshine. I bought this:

http://www.google.ca/finance?q=TSE%3ACFX.UN

in November 2008, but sold it in the spring of 2009 to access cash for Real Estate. That was a loss of ~50%. Of course, it has since gone up over 1000% since I sold

.

The lessons I learned from that:

1) Have strength in your convictions. I shouldn`t have allowed the markets continual decline to bully me into selling this position.

2) Stick to your strengths. I understand real estate, oil and gas, and fixed income. Investing in a pulp mill was unwise, not because it was a bad investment, but because I didn`t know enough about it to have the courage to stick to my guns (and buy more!) when the price declined.

Regards,

Michael

 

[bizaro86]

QUOTE (gwasser @ Nov 9 2010, 08:46 AM) Considering that over the last five years we experienced one of the worst bear markets since the often quoted Great Depression, or at least since Canada`s 1982 recession, this is hardly a relevant question. Stock market investing is long term: 10 - 20 years although holding periods of invidual stocks can be shorter for various reasons.

But to satisfy my curiosity, I checked my portfolio`s last 5 year performance and was shocked to learn that it was 12.23% per year. Not that I trust that number but since all my statements are reconciled monthly it is the best quality number I can give you (until Quicken is debugged). This does not include my real estate portfolio which is even more difficult to measure.


P.S. to be really masochositc, I checked my stock portfolio return from August 2007 until today (that is from the beginning of the credit crisis), my return was +2.15% Compare that with current interest rates on an after tax basis!

At the beginning of November 2005, the TSX was at ~10700. As I type this, its at 13,090. That`s an annual return over the last five year period of approximately 4%, which isn`t great, but well onto the positive side of the ledger. Someone dollar cost averaging would have likely done better, as adding new funds during the low was an extremely profitable endeavor, with essentially no risk.

Regards,

Michael

 

[Rickson9]

QUOTE (ekisielewski @ Nov 9 2010, 08:05 AM) Very interesting....would you mind sharing what kind of returns you have seen from your stock investments in the last 5 years?

Thanks
Elisabet Kisielewski

This is interesting. I`ve never thought of investments with such short time frames. Looking back over the last 5 years, including the bloodbath of 2008, my average annual rate of return has been 12%.

In keeping with the theme of short timeframes, and another example of how luck plays a part in my results, is the fact that the TFSA was introduced right smack in the middle of the carnage in early 2009. Although the amounts were tiny ($5k in 2009 and 2010) I dumped the entire amount into stock at rock-bottom prices. This initial $10k grubstake has tripled to $30k YTD 2010.

As a disclaimer I use stocks for tax deferred capital appreciation and I use real estate for grocery money.

 

[afshinrein]

QUOTE (cmerino @ Nov 8 2010, 05:14 PM) BOTH!!!. it all depends on what is your situation, do you need the cash? or you have other sources of income and you are more looking to invest for the future (5-10 years).

In our case for example, at the begining of our Investment carreer, our Strategic Plan called for cash. All our properties should not only pay for themselves, but also give us an excess of cash. This is why we invested in areas with lower apreciation, or in student houses (guys, there is a LOT of cash there if we do it right). Our short term plan was to get enough cash out of our investments so one of us could leave our job and become a full time investor. I am happy to say that that goal was achieved about 6 months ago!

. My wife Sonia quit her job!!! and we went to celebrate our 25 Wedding anniversary to Europe (all courtesy of our lovely tenants!!)

Now, we are balancing the scale, we invest in some properties that generate cash, and other that will provide handsome appreciation down the road (newer, more expensive properties).

I would say that it is really worth to invest a few hours (or days) defining a Strategic Plan (in Don`s terms, your Belize, but more important HOW are you going to get there...), where do you want to be in 12 months? where in 60? which are your strenghts? where do you need help? how involved you want to be? how involved CAN you be?. The answer to your original question will come out of this plan...after that, it is just a matter to implement.

With Sonia we review our plan every 6 months (as a matter of fact, we did the review in Italy, so I would asume we could consider that a business trip...

) and we adjust what is required. We review the performance of every property, define new aquisitions, sale of existing units, etc.

I think all the above answers are reflecting a collective wise answer: Your plan and your Belize. Thanks