August RIA Roundup: Cash Flow vs Appreciation, $1M Starter Homes, & Playing the Long Game
Greetings, investors! Welcome to the August roundup.
This month, our lead story addresses a long-simmering debate that has cleaved the real estate investing community in two: Cash Flow vs Appreciation. It won’t surprise you to learn what side of the argument I come down on, but I bet you’ve never seen a discussion of the topic that uses as much data & analysis as mine does. (I like numbers more than opinions.)
You’ll also find a summary of all the important real estate & economic news from August, my monthly portfolio report, and my picks from around the web. My final thoughts essay is about playing the long game — both inside and outside of investing.
Enjoy!
Lead Story: Cash Flow vs Appreciation
You probably know that I’m a cash flow investor. (If you don’t, you must have just subscribed — welcome! ;-) Still, I expect to make a lot of money from home price appreciation as well, thanks in part to the power of leverage.
But which will make you MORE money? And which should you be focused on as in investor? I’ve always help the position that it’s smart to focused on cash flow, and allow appreciation to be the icing on the cake. I’ve argued the same to all my coaching clients.
But do the numbers support that position? Or is appreciation the best and fastest path to rental property riches?
In my latest long-form blog post, I tackle these questions. And as usual, I can’t help but to dive DEEP into the numbers to see what they tell us about this topic. I even share the final numbers from my NYC condo rentals, “appreciation plays” that I bought in my pre-cash-flow days.
Gotta say, this article’s a BANGER, you don’t want to miss it.
Also on the RIA blog this month:
Portfolio Reports: After a tough month in June, I bounced back a bit in July. My properties produced $7,985 in cash flow, but there are storm clouds on the horizon for August — in fact, it’s been one of the more difficult stretches in my portfolio since I became a real estate investor. Check out all the details in the July Monthly Portfolio Report.
A new “Property Spotlight”: On my continuing journey to document all the older properties in my portfolio, I published my Spotlight on Property #5, which is a handsome townhome in a pretty nice area. It’s been one of the top performers in my portfolio to date. Check out all the details.
An oldie but a goodie: I mentioned that my Cash Flow vs Appreciation article contains some insights into the performance of my old NYC condo rental properties. They didn’t cash flow, of course, but even in cash flow markets, it’s important to ask this question: Do Condos Make Good Rental Properties?
My picks from around the web this month:
Katie Gatti Tassin had several pieces of content this month that were outstanding – this girl is killing it:
The News that Makes Money Feel Worthless: how a medical scare can make all our financial scheming feel small.
On her podcast, she discussed the birth rate panic and what demographics means for our future economies.
An essay on mimetic desire, and what really drives our desire for consumer products.
Conor Dougherty zoomed in on Kalamazoo, MI to explore the increasing cost of homes and its impact on communities.
Zooming out on the same topic, Matt Stoller wrote about the consolidation of the homebuilding industry, and how homebuilding giants rake in cash without actually building the homes.
Check out this mind-bending video about the creation of a 3-D Printed Neighborhood in Texas.
And now this!
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In Other News…
Photo Quiz!
Why were these three images in the news recently? Keep reading for the answers…
Real Estate & Business, Domestic News
Mortgage rates fall, and refinancings surge. Rates fell to their lowest level since early 2023, and borrowers quickly moved to take advantage with refinancings: since early July, the US Mortgage Refinance Index has risen from 532 to 754.
Renter households growing faster than homeowners. Americans are increasingly likely to be renters, though it’s unclear if this is mostly to do with the cost of purchasing a home, or due to changing preferences.
Starter homes cost $1M+ in over 100 markets. In a related story, home prices in many places in the US, even for “starter homes”, are out of reach for first-time homebuyers.
New rules for real estate commissions go into effect. As a result of the NAR’s settlement agreement of multiple lawsuits earlier this year, the so-called “cooperate compensation” rule is no more. This means that buyers will likely have to pay their agents directly, instead of both agents being paid by the seller. How the changes will shake out in practice is still a matter of some debate.
Manhattan office building sells at 97.5% discount. Not a typo! This remarkable story is a microcosm of the slow-moving reckoning for office real estate, which has been significantly impacted by work-from-home trends that started during the pandemic.
Home prices rose 4.9% in Q2. The National Association of Realtors released its Q2 report showing that home prices rose 4.9% in Q2 compared to the same period in 2023. Nearly 90% of markets showed price increases. Check out the full list of price changes by market.
DOJ files antitrust case accusing RealPage of colluding to raise rents. Through its rent-recommendation algorithmic engine, the software maker allegedly colluded with landlords to raise rents higher than what a competitive market could achieve.
Inflation cools further. The August report was the first time the CPI was measured below 3% since 2021, and cemented the case for the Fed to begin cutting interest rates at their September meeting.
Stocks go down, stocks go back up. Remember when we freaked out in early August about the stock market “crash”? Yeah, me neither — stocks have already regained all their losses, and then some.
Record number of Americans have $1M+ in their 401(k). Thanks to the recent run-up in stock valuations, nearly half a million people are 401(k) millionaires. The average 401(k) balance is $127K.
Medicare lowers prices for 10 common drugs by up to 80%. The price reductions were the result of Medicare’s first direct negotiations with drug companies, which had been prohibited by law until the passage of the 2022 Inflation Reduction Act. See the full list of drugs affected.
Harris makes proposals to lower housing costs. Her proposals took aim at the root cause of housing inaffordability – the persistent housing shortage, which I’ve written about before – by proposing 3 million new housing units in her first term, incentives for builders who construct starter homes, and down-payment assistance for first-time homebuyers. The proposal seems well-targeted, as housing starts just hit a new 4-year low.
International News, Science & Technology
Google loses landmark anti-trust case. The government prevailed against Google in a case originally brought in 2020, as a judge found that they have maintained an illegal monopoly in search. The specific ramifications and remedies for Google have not yet been determined by the judge.
Ukraine takes Russian territory (B). Ukraine attempted to turn the table on Russia by invading and capturing a significant swath of Russian territory. The surprise operation was a closely held secret until a few days before.
Arts & Culture, Sports, and All the Rest
Paris Olympics conclude (A). The US topped the medal count with 40 gold and 126 overall medals. An image of Brazilian surfer Gabriel Medina became the viral photo of the Games. Even blasé Parisians seems to have enjoyed the festivities.
Google builds a ping pong robot. Alongside their apparently monopolistic search business, the tech giant has also been working on a ping pong robot. The robot’s play is described as “solidly amateur”. I don’t really know what that means, but it’s pretty cool to watch.
Smoking rates decline to record low level (C). Cigarettes just aren’t cool anymore, say 89% of Americans.
Final Thoughts: Playing the Long Game
As I mentioned above, it’s been a very rough stretch in my portfolio. Leaks and other plumbing issues, flooring replacements, trees falling on houses…it’s all happening recently. This is never pleasant, but it’s during the bumpy patches that it’s most important to remember one of the foundational tenets of rental property investing: it’s a LONG game.
There will inevitably be ups and downs. But to get to the juiciest long-term returns, you must be able to navigate successfully through the turbulence. If you pull the plug at the first sign of trouble, you’ll never get there.
The numbers support this idea. Cash-on-cash returns are a commonly used metric in rental properties, but this is not fixed over the life of a property. When you hear this metric quoted, it’s nearly always referring to the Year 1 pro-forma. But looking at an actual property in my portfolio (Property #21), and using the multi-year model in the RIA Property Analyzer, we can see that between Year 1 and Year 30:
Annual cash flow grows from $1,700 to $11,000
Annual total returns grow from $5,700 to $24,000
The rate of total returns on invested cash grows from 15% to 65%.
Over the course of those 30 years, my total returns are $399,000.
So how do you stick it out when everything goes sideways? Take a deep breath, spend what’s needed on your properties to fix the problem, and move forward, keeping your focus on the long-term horizon. (Rinse and repeat as necessary.)
After all, the most valuable assets are those you’ve invested in over the long term. Time makes many good investments into great ones. (Just ask Warren Buffett.)
This concept holds true outside of investing, as well. In the June Roundup, I wrote about my move from New York City to Northern Virginia – the good reasons for it, but also the bittersweetness of leaving New York behind, a place I will always consider my hometown.
The move is now complete. We’ve been busy setting up our new place, getting oriented in our new town, and answering all the prosaic questions that come with moving: where is the best coffee place? Where will I get my hair cut? How do I get a new driver’s license and register to vote? And more.
But amidst the chaos of unpacking and settling in, larger patterns are starting to take shape. The basic goal of the move was to see a small group of people more often who all live in the DC metro area: my brother and his family, and three siblings from another family with whom we’re very close. We all grew up together as kids, so these are already important long-term relationships, but I wanted to invest more into them to make them that much richer – now and into the future.
So far so good: I’m seeing my brother’s family all the time, and we have plans to hang out regularly with the other three. I’m really happy about all of it, which is why I’m confident the move to Virginia will pay big long-term dividends.
In an era increasingly fixated on short-term returns and immediate gratification, it’s tempting to look for a get-rich-quick approach to investing. I speak to aspiring investors all the time who think real estate can provide them a quick pathway from rags to riches. But investing fundamentals (such as the power of compounding) stubbornly refuse to reward short-term thinking; instead, those who play the long game nearly always win.
I suspect the same is true with relationships – not to mention careers, skills, hobbies, projects, and more.
There seems to be a common truth in all these areas: if you want rich rewards, you have to put in the time.
Happy investing,
Eric
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
Free Rental Property Analyzer
You probably know that a well-designed rental property calculator is the most important tool a real estate investor has. It allows you to quickly calculate key metrics and understand your cash returns on a target property. You can also answer questions like:
How much do your cash-on-cash returns improve if you use a mortgage vs. paying in cash?
What will your average monthly cash flow be?
How will your returns change in future years?
Those questions can be easily answered with side-by-side comparisons in the RIA Property Analyzer. I guarantee this is the best free rental property calculator out there today, and many of my readers have told me the same. It’s both powerful and very simple and intuitive to use. Check it out!
