Author Topic: Has anyone here invested (or is investing) for appreciation?  (Read 5226 times)

1tolivesimply

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Has anyone here invested (or is investing) for appreciation?
« on: December 29, 2016, 08:33:34 PM »
Would you share some examples?
If your plan is to cash out your equity, how do you determine the best time to do it?
Thanks!
« Last Edit: December 29, 2016, 09:15:53 PM by 1tolivesimply »

Miss Piggy

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #1 on: December 29, 2016, 08:39:47 PM »
Not really sure what you're asking. Can you explain a bit more?

marty998

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #2 on: December 29, 2016, 08:43:12 PM »
This describes 95% of Australian investors.

I am prepared to wear a cash loss of $2k-$5k per year, if I can get capital gains of $10k-$75k per year.

Granted there will be periods of nil capital growth, but hold long enough and you do see some large gains, provided you've bought in the right areas.

In July 2014 I purchased a 2 bed apartment for $450,000. The rent was $390 a week at the time, (now at $415/week).

I managed to borrow everything (nil cash deposit). The rent does not cover the interest, and my cash loss after depreciation and tax benefit runs to about $3k per year.

The apartment is worth between $580-$620k today.

It fails every 1%, 2%, whatever rule you guys have, but I'm up $100k+ in 2 years so I don't really care...

Sure there's a risk of prices going down, in which case I'll buy a couple more. The urge to buy property amongst the general population is too high and too ingrained for prices to crash and stay low forever.
« Last Edit: December 29, 2016, 08:46:56 PM by marty998 »

1tolivesimply

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #3 on: December 29, 2016, 09:03:24 PM »
Not really sure what you're asking. Can you explain a bit more?

Low/No/Negative cash flow but appreciation potential.

Another Reader

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #4 on: December 29, 2016, 09:14:34 PM »
Love to see these posts.  Confirms my belief that the dumb money is now getting in and there will be big opportunities to pick up properties cheap in another few years.

Villanelle

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #5 on: December 29, 2016, 09:18:45 PM »
When we moved out of the States in 2010, our property was down roughly 20%  from what we paid (and we didn't even buy at the height of the market).  Our place was fairly modest (>2000sqft townhouse) in a very high COL area.  We were afraid that if we sold, when we returned to the States (either the same area, or not) we could be priced out and unable to afford something comparable.  So we kept it, even though there was a negative cash flow (about $150, not including major maintenance escrow). 

We've ended up staying away far longer than expected, and now the cash flow is slightly positive (due to paying down the mortgage and refinancing, and due to increasing rents.  But far more importantly, it has appreciated about $175k, and is now again worth more than we paid.  So it certainly turned out to be a solid decision.

I don't think we would have done it if we hadn't already owned the property, and if we didn't think we might return and live in it again. (We've since decided that even if we return to that city, we wouldn't move back in to that house.) 

1tolivesimply

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #6 on: December 29, 2016, 09:29:10 PM »
Love to see these posts.  Confirms my belief that the dumb money is now getting in and there will be big opportunities to pick up properties cheap in another few years.

I agree... I'm actually trying to decide if it makes sense to sell one of my properties. It cash flows, but not as much as I'd like it to, however, I believe there's a lot of appreciation potential (on top of the $120K+ it's already appreciated since I bought it).

totoro

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #7 on: December 29, 2016, 11:02:18 PM »
Love to see these posts.  Confirms my belief that the dumb money is now getting in and there will be big opportunities to pick up properties cheap in another few years.

Time will tell.  In many markets appreciation has outpaced inflation for more than 30 years now.  Even in the US if you look at some of the desirable East Coast and West Coast areas and Hawaii you will likely find the same.  Where I live the average annual gain has been an inflation adjusted 4% for 30 plus years.  That is a lot of appreciation on leveraged capital and we have a primary residence tax exemption for capital gains. 

Of course there are entirely different markets where the 1% and 2% rule work and appreciation is at or lower than inflation.  And things can change, but to me it appears like markets are local and the really desirable spots generally become more desirable over time as densification occurs.

NoNonsenseLandlord

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #8 on: December 30, 2016, 08:41:08 AM »
ALWAYS invest in rental, i.e. buy and hold real estate for POSITIVE cash flow.  If it appreciates, that's a bonus.

SeattleCPA

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #9 on: December 30, 2016, 08:49:12 AM »
Would you share some examples?
If your plan is to cash out your equity, how do you determine the best time to do it?
Thanks!

The property rate of return equals the income capitalization rate plus the appreciation rate. E.g., if the cap rate equals 3% and the appreciation rate equals 3%, your property rate of return equals 6%.

This doesn't answer your question... it's a textbook type comment. But if you mull the formula over, you have to assume that if the appreciation rate is high, the cap rate is low--and vice versa.

BTW, this formula provides a useful way to look at what happened in US and many other real estate markets in the bubbles before the "great recession" or whatever you want to call it: As appreciation become a bigger and bigger component in the rate of return, appreciation had to then become an EVEN BIGGER component in the rate of return since the appreciation was compounding on itself.

Cwadda

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #10 on: December 30, 2016, 09:01:02 AM »
I only consider properties that are cash flowing. The appreciation is a bonus, but never bank on it.

Nick_Miller

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #11 on: December 30, 2016, 09:53:57 AM »
I don't understand how many properties actually have a positive cash flow, assuming a mortgage on the property. I mean, why would a person pay more to rent a house than they would to just buy one? And if the answer is "people who such bad credit that they can't get approved," then I would think that segment of the population would overlap with the segment that treats properties roughly and doesn't tend to follow through on fulfilling contractual agreements.

I always assumed that most landlords just used rents to pay the majority of the mortgage and that the main benefit of being a landlord was that someone else was paying your mortgage for you, and in 15 or 20 years you'd have a paid off property that you didn't make payments on.


ketchup

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #12 on: December 30, 2016, 10:08:49 AM »
I don't understand how many properties actually have a positive cash flow, assuming a mortgage on the property. I mean, why would a person pay more to rent a house than they would to just buy one? And if the answer is "people who such bad credit that they can't get approved," then I would think that segment of the population would overlap with the segment that treats properties roughly and doesn't tend to follow through on fulfilling contractual agreements.
Lots of people don't want to own a house.  Lots of people don't want to deal with maintenance/etc on a house.  Many can't or "can't" save up a down payment.  Some people move every few years.  And yes, some have trash credit.

There are lots of reasons one could choose to rent over buy.  I say this as a homeowner.
I always assumed that most landlords just used rents to pay the majority of the mortgage and that the main benefit of being a landlord was that someone else was paying your mortgage for you, and in 15 or 20 years you'd have a paid off property that you didn't make payments on.
And those landlords would have a ton of cash parked in a high-maintenance higher-risk illiquid investment that only gets any real returns via insane fluke appreciation.

Non-cashflowing rental properties can maybe maybe make sense (buying a non-performing apartment building in a HCOL area and turning it around maybe?), but you have to really know what you're doing or else you're at worst getting yourself in real trouble, and at best wind up with a shitty investment that's a lot of work relative to just throwing the cash at VTSAX.
« Last Edit: December 30, 2016, 10:14:22 AM by ketchup »

Nick_Miller

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #13 on: December 30, 2016, 10:24:31 AM »
I don't understand how many properties actually have a positive cash flow, assuming a mortgage on the property. I mean, why would a person pay more to rent a house than they would to just buy one? And if the answer is "people who such bad credit that they can't get approved," then I would think that segment of the population would overlap with the segment that treats properties roughly and doesn't tend to follow through on fulfilling contractual agreements.
Lots of people don't want to own a house.  Lots of people don't want to deal with maintenance/etc on a house.  Many can't or "can't" save up a down payment.  Some people move every few years.  And yes, some have trash credit.

There are lots of reasons one could choose to rent over buy.  I say this as a homeowner.
I always assumed that most landlords just used rents to pay the majority of the mortgage and that the main benefit of being a landlord was that someone else was paying your mortgage for you, and in 15 or 20 years you'd have a paid off property that you didn't make payments on.
And those landlords would have a ton of cash parked in a high-maintenance higher-risk illiquid investment that only gets any real returns via insane fluke appreciation.

Non-cashflowing rental properties can maybe maybe make sense (buying a non-performing apartment building in a HCOL area and turning it around maybe?), but you have to really know what you're doing or else you're at worst getting yourself in real trouble, and at best wind up with a shitty investment that's a lot of work relative to just throwing the cash at VTSAX.

I get the sense that you know what you're talking about.  :)

And, to me, this all just seems like a giant pain in the ass, trying to make a monthly profit after accounting for: vacancies, flaky tenants who don't pay/slow pay, eviction process and associated expenses, and then the inevitable repairs/maintenance.

It must take a special breed to do this.

Sonos

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #14 on: December 30, 2016, 02:49:02 PM »
I have invested for cash flow (we have a duplex and house hack), the appreciation is a bonus. If you want to hold for appreciation, be prepared to hold for a long time, lose money in the short term and be ready to sell when market conditions are right. I consider holding real estate for appreciation like I do holding stocks, it's a long game.

Granted, a lot of folks have been getting lucky lately in our hometown. Prices have been skyrocketing over the past few years. We bought get our house almost 3 years ago and right now we could sell just the lot for a 40% profit. I'm keeping my eye out for a less expensive lot in our neighborhood, moving our house there and selling our lot (we'd come out ahead and probably lower our monthly P&I and taxes). It's a wild time, but I know it could end in an instant.
« Last Edit: December 30, 2016, 03:01:15 PM by Firette2020 »

totoro

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #15 on: December 30, 2016, 04:35:15 PM »
Agree with firette2020

mr_orange

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #16 on: December 30, 2016, 04:43:42 PM »
A lot depends on your personal circumstances, tolerance for risk, liquidity, etc.  I personally think banking on appreciation is a fool's strategy.  Nobody can predict interest rates, but they've been at emergency levels for close to a decade now.  Asset prices are pretty frothy already.  It is hard to imagine that rates won't go up so banking on appreciation sounds like a poor strategy to me. 

As Another Reader said I have seen a rush of dumb money into the market recently.  We stopped buying spec projects in March of 2015 and are exiting our last 8 units right now.  There is a natural cycle in property and it is a poor time to buy in most major submarkets right now IMO. 

NoNonsenseLandlord

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #17 on: December 31, 2016, 04:59:56 AM »
I don't understand how many properties actually have a positive cash flow, assuming a mortgage on the property. I mean, why would a person pay more to rent a house than they would to just buy one? And if the answer is "people who such bad credit that they can't get approved," then I would think that segment of the population would overlap with the segment that treats properties roughly and doesn't tend to follow through on fulfilling contractual agreements.

I always assumed that most landlords just used rents to pay the majority of the mortgage and that the main benefit of being a landlord was that someone else was paying your mortgage for you, and in 15 or 20 years you'd have a paid off property that you didn't make payments on.

I purchased properties that returned 15%+ AFTER paying the mortgage.  If I included principle in the calculation, it would even be higher.

A person rents because they either have to, or want to.  Many people do not have a down-payment.  They rent.  Bad credit, rent.

A younger person may want to move in a few years to another place.  They are buying an option to move with their rent.  They may have many amenities that they would not have in a house.  Pool, workout room, etc.  They in effect have a maintenance person 'on staff', whether they use them or not.  That costs money.

Renting is CHEAPER than buying, mostly.  You rent only the space you need.  If you need a 1BR, you rent a 1BR.  Later you can move to a 2BR, 3BR then a 4BR.  You only buy what you need at the time you are buying it.  A true Mustachian philosophy.

As a renter, you skip buying lawnmowers, rakes, shovels and other equipment.  You skip buying trees and flowers to plant. 

You rent close to where you work.  Eliminate miles and save time.  Use that time to work harder and get promotions, or do a side hustle.

Do not believe the hype that renting is more expensive than owning.  The true cost of owning and the benefits of renting are never in the calculation.

Berubeland

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #18 on: December 31, 2016, 07:13:25 PM »
I'm in Toronto, Canada. We're one of the frothiest cities in the world, if you don't want to specuvest for appreciation, you don't buy real estate and you haven't for 15 years.

It's easy to say don't invest in a bull market, but these market last for decades and for some people, real estate is where it's at. Generally people have affinity for different types of investments.

I've spoken out about this a lot, but you're right and broke, and the people who are "wrong" are banking large.

Here's a story from last year.

Student from Vancouver buys a house in Markham, no frills, basic builder, doesn't even have appliances. Pays $600K gets me to rent it, there's a lot to rent in the subdivision I get him $2400, the tenant just sold his house and filed for bankruptcy and so he pays the whole year's rent up front. At the end of the year, the landlord tells me he needs to sell the house because he's been floating the entire thing with his Line Of Credit on the house. The rent shortfall is $600 per month, the guy tries to get the tenant to pay $3000 per month, the tenant refuses.

The house gets put on the market, and sells for $1,100,000 a profit of $400,000.

Who would ever in their right mind tell someone to do such a thing, and this guy basically made a half of a million $$$.

Rinse and repeat, over and over. It's easy to say, don't participate, save your money.

So after seeing hundreds of these heroes,

Single Family homes are appreciating the most.

Buy for affordability, and the money follows.

Look for pockets of affordability, buy there and the leveling drift will increase the area.

Buy good neighborhoods.

Buy transit or commuter towns and look for transit extensions or proposed transit extensions.

When looking for appreciation, you cannot chase yield on income.

The other point is that there is such a thing as fake return, maybe you get high rents, but you also have high turn over & risky tenants this translates to real money over time, as you pay back those high yields in damages, rent arrears, vacancy and renovations.

My favorite investment is a condo townhouse, all landscaping and maintenance is taken care of, it's pretty affordable without being low income housing. These are very stable investments and families can stay for a long time.

As a property manager, I like those 1 bedroom condos, very high quality tenants and I rerent regularly every 18 months, so it keeps me in work, but there is quite a turn over, and that translates to real money over time.

Other strategies to increase money are, buy a one plus den and make sure the bedroom is big enough for a room and turn it into a room. I went from $1600 to $2000 per month on one of these in the downtown.


Another Reader

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #19 on: December 31, 2016, 08:08:54 PM »
The runup in prices in the Toronto area has lasted longer than most. It's possible your market was structurally undervalued and as more people moved there with money and/or income, the market followed.   However, the value of real estate in Toronto will not rise to infinity.  Eventually markets change, buyers change or disappear, mortgage money becomes more expensive, government steps in, etc.  How far the Toronto market drops depends on the depth of demand in a different economy.


pumpkinlantern

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #20 on: January 01, 2017, 07:03:43 PM »
I'm in Toronto, Canada. We're one of the frothiest cities in the world, if you don't want to specuvest for appreciation, you don't buy real estate and you haven't for 15 years.

It's easy to say don't invest in a bull market, but these market last for decades and for some people, real estate is where it's at. Generally people have affinity for different types of investments.


Toronto hasn't been frothy for 15 years.  It was quite undervalued/fairly valued for most of the late 1990s and 2000s.  It has been 5 or so years since it's been frothy.

SeattleCPA

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #21 on: January 02, 2017, 09:40:51 AM »
...I personally think banking on appreciation is a fool's strategy...

But don't you have to recognize price level changes? I.e., your project IRR equals the cap rate plus the appreciation rate (or depreciation rate)...

BTW, I think it's fine to say one expects zero appreciation. But that's a forecast and an important one to make. Means your return will be your cap rate.

And then the situation where actually you ought to forecast a decline in value... a "depreciation" rate.

I'm fine with someone saying "I want to be conservative and not count on steady appreciation." But it seems important to recognize that real estate, as an essential feature, doesn't just pay an income stream. It's not a bond where the redemption value is set.

totoro

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #22 on: January 02, 2017, 10:37:47 AM »
I'm fine with someone saying "I want to be conservative and not count on steady appreciation." But it seems important to recognize that real estate, as an essential feature, doesn't just pay an income stream. It's not a bond where the redemption value is set.

Agree.  You also need to factor in all expenses including the projected capital gains and other taxes and expenses if you'd like to know what your current position is. 

My take on RE is that you need to be able to hold through a downturn in an appreciation market because the losses can be so large.  Markets do not behave the same way.  Some markets do not keep up with inflation but have good rental returns.  Others have lousy rental returns and great appreciation.  You don't usually get both as far as I can tell.

Analyze past performance in your market going back 30 years.  Take the worst time to buy and sell and see what you are facing.  See how long recoveries have taken.  Consider your holding period.

I use 4% returns as a projection in my market which is an appreciation market.  It has actually returned 7% over the last 30 years.  I use 4% knowing we can hold through a downturn and can still pay the mortgage or pay off the mortgage if rates increase.

Another Reader

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #23 on: January 02, 2017, 10:51:12 AM »
I'm fine with someone saying "I want to be conservative and not count on steady appreciation." But it seems important to recognize that real estate, as an essential feature, doesn't just pay an income stream. It's not a bond where the redemption value is set.

Agree.  You also need to factor in all expenses including the projected capital gains and other taxes and expenses if you'd like to know what your current position is. 

My take on RE is that you need to be able to hold through a downturn in an appreciation market because the losses can be so large.  Markets do not behave the same way.  Some markets do not keep up with inflation but have good rental returns.  Others have lousy rental returns and great appreciation.  You don't usually get both as far as I can tell.

Analyze past performance in your market going back 30 years.  Take the worst time to buy and sell and see what you are facing.  See how long recoveries have taken.  Consider your holding period.

I use 4% returns as a projection in my market which is an appreciation market.  It has actually returned 7% over the last 30 years.  I use 4% knowing we can hold through a downturn and can still pay the mortgage or pay off the mortgage if rates increase.

How long is 7 percent sustainable?  Is income growth keeping up?  How much of the appreciation is fueled by overseas buyers?  What happens if those governments pull the plug on overseas investments?

totoro

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #24 on: January 02, 2017, 01:24:43 PM »
I don't think 7% is useful for projection purposes.  I use 4% for very long-term - more than ten years.

Not much of our market is foreign buyers - there are stats kept on this starting in the summer of 2016 - and what there is seems to be very high end. 

Vancouver had a high percent of foreign buyers and drastically cut the rate by implementing a 15% tax on the transaction for foreign buyers which was quite effective.  It would be implemented in our market in Victoria if this becomes a significant issue.

Long-term appreciation markets tend to build on themselves at rates that exceed inflation kind of like the magic of compound interest but with negative consequences for first time buyers.  These are desirable places that generally also experience gentrification and densification. Hard to get into but once you are in there is equity to move up or sideways or whatever and inter-generational wealth transfer from housing.  They can crash but generally recover over time.

Here is a chart of our market since 1960: https://househuntvictoria.ca/2016/03/17/a-brief-history-of-prices/?s=#

Another Reader

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #25 on: January 02, 2017, 01:54:46 PM »
I'm in Silly Valley and grew up in the Bay Area.  My 1989 purchase has also tracked close to 7 percent.  Market rent on my house is less than 0.3 percent per month.  In the short term you cannot cash flow and you risk a downturn (or a major earthquake) that can take you out if you are not properly capitalized.  I also think the wage growth and foreign buyers are not sustainable.  Real estate is cyclical, and despite structural adjustments in undervalued markets, the cycle will eventually turn.

On the other hand, real estate is limited in supply while people seem not to be.  The number of wealthy people worldwide continues to increase.  As long as North America presents a bastion of safety, the more desirable real estate likely will be bid up over time.

totoro

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #26 on: January 02, 2017, 02:12:22 PM »
I believe there is a fundamental disconnect in some markets from income-based affordability that has been going on for decades if you average the increases.  Accumulate equity and increasing density continues to fuel the system at rates higher than inflation.

Even in the case of an earthquake prices seem to recover in these markets although it may take a long time.  https://www.quora.com/What-happened-to-home-prices-in-the-SF-Bay-Area-after-the-Loma-Prieta-earthquake

Banking on appreciation is much higher risk than rental returns, but given that you are leveraging a lot of capital in the market many people have made a lot more this way.   If you cash out at a high point you can retire to a low cost area years earlier.

I am not saying that appreciation markets are the way to go.  I just happen to live in one and own rental property here and this is how it has worked over my lifetime and going back further to my grandparents' lifetimes as they also owned here.  The market did crash here in the 80s and interest rates were pretty high.  This could happen again but the long-term trend is interesting if you can hold.

Another Reader

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #27 on: January 02, 2017, 02:27:37 PM »
I had a house in escrow here in Silly Valley that was supposed to close the day after that earthquake.  Values were declining and had been since the spring and we were on escrow #3.  My new house had no damage other than a few hairline cracks in the sheetrock.  Same for the house I was selling.  I figured the buyers would back out.  I figured wrong and escrow closed the second day after the earthquake. 

The earthquake was really only relevant where there was serious damage.  Values in the Bay Area continued to decline because of the economy and only picked up several years later when the internet started to take off.

If you are trying to run a business that produces income, especially from the beginning, you need to buy for cash flow.  If you are buying for income twenty years out and with your children and grandchildren in mind, then buy when values are down in markets that depend on appreciation.

totoro

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #28 on: January 02, 2017, 02:46:42 PM »
If you are trying to run a business that produces income, especially from the beginning, you need to buy for cash flow.  If you are buying for income twenty years out and with your children and grandchildren in mind, then buy when values are down in markets that depend on appreciation.

I'd agree with this generally.  It would be ideal to find both but that happens rarely and hard to predict and there is risk in any investment which is exacerbated by the cyclical nature of the RE market and the use of leverage.

I don't think you need to wait twenty years though - you can do it for yourself and your retirement.  If you buy for $500,000 today with $100,000 down (70,000 down and 30k renovations and transaction costs) and the market appreciates 7% it will be worth $1,042,590.22 in 20 years and the net profit will be $742,000 or so (tax free in Canada) on your $100,000 down assuming your costs of ownership are the same as rent otherwise over this period. 

If you took the same 100k (unleveraged) and put it into the stock market it would turn into $196,715.14 at 7% per year after 10 years.

mr_orange

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #29 on: January 02, 2017, 04:56:06 PM »
...I personally think banking on appreciation is a fool's strategy...

But don't you have to recognize price level changes? I.e., your project IRR equals the cap rate plus the appreciation rate (or depreciation rate)...

BTW, I think it's fine to say one expects zero appreciation. But that's a forecast and an important one to make. Means your return will be your cap rate.

And then the situation where actually you ought to forecast a decline in value... a "depreciation" rate.

I'm fine with someone saying "I want to be conservative and not count on steady appreciation." But it seems important to recognize that real estate, as an essential feature, doesn't just pay an income stream. It's not a bond where the redemption value is set.

There is no reversion cash flow on a project if you hold it indefinitely.  Most investors exchange the property for another larger one and the reversion cash flow is never really "realized". 

There are probably 100,000 posts (literally) on BiggerPockets debating cash flow versus appreciation.  There will be no consensus in this thread.  If anyone wants to know more about the various arguments my suggestion would be to go there and read about it for days and days and days. 

SwordGuy

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #30 on: January 02, 2017, 05:09:19 PM »
I've invested for appreciation in value, but not the way the OP does it.

I buy a house for 3/8ths to 1/2 of its After Repair Value (ARV) and then fix it up to be rentable.  By the time I pay for the repairs my total cost is 50 to 60% of ARV.  That seems like a pretty safe way to invest for market appreciation.   (But I also make sure it cash flows well so I don't have to wait for "the market" to decide that the whole neighborhood is now worth more money. )

Now, if I knew something about a property or a neighborhood that would naturally cause it to appreciate in value at a rapid clip, that might be different.  But if I'm just counting on everyone else to pay more, meh, I'll pass.   I don't believe in following "The Greater Fool" theory.  (That's where you buy a property for an exhorbitant price but believe that someone else will come along and pay an even more extravagant price.)

aasdfadsf

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #31 on: January 02, 2017, 08:21:56 PM »
Investing in real estate purely for appreciation is akin to picking individual stocks. You're basically gambling, and it's generally ill-advised because chances are that you aren't any better at picking them than a monkey.

For the most part, real estate investors should not be speculators. You want to do what you can to increase the chances of appreciation, but you should accept the possibility that prices may remain flat or even tank over the next several years. If it's producing income, you can hold it for as long as you need. But if the cash flow is negative, you have a potential disaster on your hands.

SeattleCPA

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #32 on: January 03, 2017, 12:32:17 PM »
Investing in real estate purely for appreciation is akin to picking individual stocks. You're basically gambling, and it's generally ill-advised because chances are that you aren't any better at picking them than a monkey.

For the most part, real estate investors should not be speculators. You want to do what you can to increase the chances of appreciation, but you should accept the possibility that prices may remain flat or even tank over the next several years. If it's producing income, you can hold it for as long as you need. But if the cash flow is negative, you have a potential disaster on your hands.

My last comment in this thread... I am not saying invest for appreciation, I am saying you ought to measure your IRR and that your IRR should include price level changes (either appreciation or zero appreciation or depreciation) in order for accuracy.

1tolivesimply

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #33 on: January 04, 2017, 12:18:30 PM »
Thanks, everyone.

It seems to me that most of you thought that I wanted to buy a new property. This is an existing property and I'm just trying to decide if I should keep it or sell it.

Anyway, I'm leaning towards selling. It made sense to buy it when I did, but things have changed, I wouldn't buy it now (mostly because of the inflated prices).

Thanks again

arebelspy

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Re: Has anyone here invested (or is investing) for appreciation?
« Reply #34 on: January 26, 2017, 05:00:35 PM »
Some good thoughts in this thread.

Following!

My favorite comment was this:
If you are trying to run a business that produces income, especially from the beginning, you need to buy for cash flow.  If you are buying for income twenty years out and with your children and grandchildren in mind, then buy when values are down in markets that depend on appreciation.

Well said.

If I'm advising someone on real estate for early retirement, cash flow is the name of the game.  I don't want to gamble on appreciation over 5 or 10 years.

If I want to have a long term investment for the kids... no, I'll still go for cash flow, and take the appreciation that happens, not gamble on something with no cash flow and appreciation bailing it out (which it will, on a long enough time line, but will under-perform the asset giving cash flow AND appreciation).  Appreciation WILL happen.  Might as well take the cash flow in the meantime, too, and use that as a separate compounding investment.  :)

But this: "If you are trying to run a business that produces income, especially from the beginning, you need to buy for cash flow."

So much that, for ER folks.  :)
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