Real estate investors often debate whether it's more beneficial to focus on cash flow or appreciation when putting together an investment strategy. Investing is to make money, but how you make money matters.
For rental property management, an investor should understand that both strategies are valid and can be combined when evaluating a trade. So let's have the insight to determine the real estate cash flow rate and the property appreciation rate.
What are Appreciation and Rental Property Cash Flow?
First up, a look at appreciation, the term appreciation in real estate means the increase of the value over some time. This means an increase in equity with the rise in appreciation. You can increase the value of your property by looking for a property that needs repairs or renovation. Ideally, appreciation is an important part of investing because as time ticks on, appreciation will increase. Thus, investing for appreciation is more of a long-term strategy.
Next up, is cash flow. Often cash flow is considered more significant when it comes to Rental Properties. It is the amount of profit a landlord brings in each month after the collection of all the incomes. After setting aside all the cash for future reserves, and paying all operating expenses an investor gets his profit. Therefore, cash flow is the primary lever to increase income.
Reason to Opt for Appreciation
It is a conventional method in Rental Property Management to make money as an investor. If you put your investments right you can sell them for a good profit. Here are some points to make you opt for appreciation.
- Tax write-off: there could be some tax benefits if you are buying an appreciative property. It will help you to sell and roll the profits into another investment. A person can defer taxes on real estate sales by having a 1031 exchange giving a tax break come tax time.
- Faster Profit: an investor can make a quick profit with this. Case in point if a person decides to go with a fix and flip then there is a possible way to make a great profit in less time. However, it is a more risky strategy than cash flow so do your research thoroughly.
Also Read: Top Tenant Complaints and How to Solve Them
Reasons to should Opt for Cash Flow
There are several different aspects that an investor should consider when it comes to cash flow. Here are a few reasons why cash flow is considered king.
- Passive income: cash flow helps to cover your expenses as well as an extra source of income when done right. You will generate more monthly income if you have more properties. Hence, the more the merrier.
- Security: in case of economic downturns it will serve you as money security. Thus, by investing in a cash flow property you will get money security as well.
- Loans: another advantage to investing in cash flow is it often makes it easier to get a bank loan.
