Regarding real estate investing, there are numerous ways an investor can profit from their investment: two popular approaches include cash flow and properties that are in markets poised for appreciation. Of course, making money from your investment property is the goal, but you also want to make the most return on your investment. So you may wonder which provides better buy, cash flow, or appreciation.
Like most options in the investing process, choosing depends on your personal investment goals and strategies. IPRG helps you create real estate strategies that drive superior outcomes through cash flow or appreciation type of investments.
Understanding Your Investment in Cash Flow Properties
With rental properties such as multifamily or mixed-use buildings, cash flow is the money left over at the end of each period that you collect rent and pay bills. You will see a positive cash flow if your building is 100% occupied with little vacancy and running smoothly. However, you could see a negative cash flow if you are between tenants or a repair on the building comes up.
Even though a negative cash flow is possible, there are many advantages to investing in a cash flow investment. Your IPRG broker will help outline these advantages and help you when it comes to calculating your cash flow to get the most return on your investment.
Advantages of Investing in Cash Flow Properties
Cash flow presents several opportunities for your investment goals. For example, owning a rental property allows you to use the cash collected from renters to pay for operating expenses. You could also pay toward a capital expense account you may have set up. Another option is to use cash flow to improve your building. These improvements will allow you to increase the rent. Or you could use the cash flow to make extra payments on your loan to increase the equity faster.
Other advantages include additional income streams and more financing options for a property with cash flow. Assuming you have positive cash flow from your property, it can create income streams to help you earn passive income. In addition, lenders see cash flow as a positive thing that could help determine loan terms, interest rates, and more.
There are many advantages to investing in a cash flow property. However, it could be challenging to find these properties depending on the market you’re buying and selling in. As a result, you could find yourself with little to no cash flow, which is why some investors choose to invest in buildings with appreciation.
How Appreciation Works in Real Estate Investments
While appreciation won’t give you cash as quickly as cash flow, it is another option investors can choose to make money on their investment. Appreciation is the increase in the value of your property over time. This increase can occur due to higher demand for the area your property is in or as a change in inflation or interest rates. Either way, the value of your property is worth more over the years.
Since appreciation is the equity earned since purchasing the property, the initial value, future value, and how long the property will appreciate are critical factors in calculating your investment appreciation. Your IPRG broker can assist you in ensuring you are getting the most value for your property and highlighting the advantages of investing in appreciation properties.
Advantages of Investing in Properties with Appreciation
Just like cash flow provides several advantages for investors, so does the appreciation investment. Investors utilizing the buy and hold strategy where they buy and hold properties over the long term will earn the best return over time since, historically, prices have increased. Owners of buildings with appreciation can also do a cash-out refinance where the equity is pulled out of the property and turned into cash. That cash can then be used to reinvest in another property. Another advantage is that you can defer capital gains and not have a big chunk of your appreciation be taxed. Both cash flow and appreciation have benefits, so how do you choose?
How to Choose Cash Flow or Appreciation
When choosing to invest in a property that will give you cash flow or appreciation, your best course of action is to work with the experts at IPRG. They will advise you on how to get the most out of your investment. Ultimately, it all comes down to your investment goals and strategy, but you may not have to choose. You could gain cash flow and appreciation on your property depending on how long you own it. Contact IPRG for our investment property expertise and read our depreciation article.