Generally any investor decides to invest in real estate for one single reason: TO MAKE PROFITS. There are two basic ways in which your income property can make money for you: 1) through regular (monthly) cash flow or 2) through long-term appreciation. Let’s look at these two sources of profits:
1. Cash Flow
When you decide to invest in real estate, you will most probably rent out your property – or at least that’s what you should be doing. This means that your property will be generating some income for you from the monthly rent (monthly rental income). Meanwhile, your property will also be requiring some money, i.e., you will have monthly expenses. These include the mortgage payments (unless you were lucky enough to be able to afford paying all in cash), property tax, insurance, property management, maintenance, utilities, and others. Note that some of these costs you will only need to pay once a year (such as the property tax), so make sure to divide them by 12 when calculating the monthly expenses. You need to do some basic investment property analysis to see what cash flow you will have at the end of the month:
Cash flow = monthly rental income – monthly expenses
Now, this number can be positive, negative, or zero. If your expected cash flow is positive, you will be making immediate profits from your real estate property. If your expected cash flow is zero, in the short run you will be just breaking even. If, on the other hand, you estimate the cash flow to be negative, it means that your rental property will be generating losses for you.
Remember that when you do the analysis, you can always rely on Mashvisor to provide you with evidence-based, realistic estimates of all vital indicators such as rent, recurrent expenses, vacancy rates, and others on thousands of actual properties available throughout the US. Moreover, Mashvisor will supply all these numbers for both traditional renting and Airbnb.
In addition to having some additional source of income every month, there is another reason for which people invest in real estate – the long-term appreciation. Because of population dynamics, demographic shifts, economic growth, limited land resources, and all sorts of other reasons, real estate property prices are set to keep going up in the future. True, they might drop from one year to another, but in the long run (10-20-30 years), they are (almost) guaranteed to go up. This means that if you buy a property for let’s say $150,000 now, you may be able to sell it for $300,000 in 15 years.
There are many factors on which real estate appreciation depends – land, location, development plans, physical structure, the general economy, interest rates, and others – and you should be careful to select a property within a location which will appreciate a lot.
Now, let’s go back to our question: IS IT OK TO INVEST IN REAL ESTATE JUST FOR APPRECIATION?
As we initially said, it depends on your motivation.
Short Term versus Long Term Goals
Making Money in the Short Run
If you want to invest in real estate with the main objective of making money in the short term, then IT IS NOT OK to invest just for appreciation. You should make sure to buy a property that will provide you with positive, considerable cash flow. This will allow you to increase your monthly income or to save up money for a down payment on another investment property.
Making Money in the Long Run
If, however, you are investing today because you want to reap your profits in the future, then IT IS OK to invest in real estate just for appreciation. There is a big attraction to invest in real estate for appreciation – namely, that your profit will come in one single, large package which will make it really, really eye-catching. Once you receive this bulk of money, you can decide to invest it in another, bigger investment property or in two small ones. Investing for cash flow, on the other hand, will deliver your profits in small amounts over a long period of time, and you might actually end of spending them without even noticing them.
But there is a trick. Investing only for appreciation is risky because there is no way to be absolutely certain that for some odd reason the prices in your real estate market will not drop in a few years. Structural changes occur in the nationwide real estate market all the time, and you can fall victim to them. So, even if you are not looking forward to realizing immediate gains from your income property, it is still better to not rely solely on appreciation. It is always recommended to aim for positive cash flow when deciding whether to invest in real estate or not. Nonetheless, if you still choose to buy an investment property with the aim of selling it for more money in the future, make sure it will not bring about a negative cash flow. Regardless of your goals, that’s a big NO because it will mean that you are losing money instead of making money from your rental property. And no investment should ever do that.
So, to make a long story short, while it could be OK to invest in real estate just for appreciation, it is better to try to have a positive cash flow. In your search for real estate properties with positive cash flows and expected high appreciation, don’t forget to check out Mashvisor, which will provide you with analytics and predictive figures on properties in various cities and states in the US.