There have always been a lot of questions raised when in the real estate industry. One of such question is the best to opt for between cash flow and appreciation. There is no straight and easy answer to this question since most real estate investors will provide answers to this question based on their preferences.
Yet, there are some factors which real estate investors should put into consideration before making his decision of the better of the two.
Both appreciation and cash flow have a different market in which they operate best. For instance, cash flow works perfectly in a market with low barriers to homeownership, residents with lower incomes as well as volatile employment. While appreciation, on the other hand, works perfectly in a location with high barriers, limited housing supply and also, highly concentrated employment drive, which leads to a higher rental rate.
Therefore, the location of your real estate investment is a crucial factor in deciding the best to opt for between cash flow and appreciation.
Stage of your career
Everything has a stage, and this is the same for real estate investors in the real estate industry. As a young real estate investor, investing in a lot of properties to boost your appreciation rate would be your top priority because there is still more time to grow. But, for a real estate investors who is about to quit or he’s old and couldn’t go through much stress, having a cash flow would be the best option.
This means, whatever stage you are in your real estate career can influence and conclude on the one that is better between cash flow and appreciation
Capitalization rate (CAP Rate)
The capitalization rate is the most popular and effective real estate investment evaluating tools. It is determined by dividing your net operating income by its current value. It should be noted that the cap rate is mainly meant for the measure of return on a property without debt (Un-levered property.
Knowing the cap rate of your real estate investment will not only serve as a proxy for measuring your real estate investment but also help in the investment decision of every real estate investors.
Motive for investing
This may sound somehow, but it sure has a lot of impact on your decision. Although the main aim of every real estate investors is to make a profit. However, the question is, how soon the profit will start rolling in? Cash flow is known to be the best to give return within a short time while appreciation is meant for investing in a property and waiting for it to increase in value over time which in most cases, a long period.
Thus, an investor who wants to have an immediate return on his investment will likely want to opt for cash flow while an investor who is willing to invest in a property that the value is bound to increase overtime will definitely opt for appreciation.
These and many more are the factors you have to consider before deciding on which s better between cash flow and appreciation. But no matter what your decision is, be sure to choose the one that will work best for you.
ACORB connects investors with passive real estate investment options in the U.S., including commercial property, apartment buildings, and groups of houses.
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