For real estate investors, the question of cash flow versus appreciation is as old as time. However, in an era of high interest rates, buying properties for cash flow isn’t easy. That doesn’t mean investing should be off the table, as there are many advantages of owning rentals other than immediate cash flow—appreciation and tax advantages being the most obvious. 

Whether to keep buying or stay on the sidelines comes down to some specific decisions. Let’s dig deeper.

The Higher the Cash Flow, the Greater the Headaches

The less expensive the property, the greater the cash flow. That’s the theory, anyway. Rentals in low-income neighborhoods might cost less, but tenants also earn less and cannot withstand the financial hurdles that life throws at them. Thus, potential cash flow numbers are rarely achieved due to vacancies, repairs, and evictions. 

Buying multiple doors in C or D+ neighborhoods has the potential to turn into one big headache. This was exposed during the pandemic when most tenants seeking a pause in rental payments and an eviction moratorium were from lower-income areas. The landlords greatest affected were smaller mom-and-pop owners who fell behind on mortgage payments, ruing the day they chose to invest where they did. 

The Section 8 Caveat

Some might champion Section 8 rentals, but the hurdles of dealing with Section 8 inspectors and hoping your tenants maintain your property often make the experience hard for investors who got into real estate to lessen life’s stresses rather than add to them. 

However, with interest rates higher than they have been in years, the only places to cash flow are likely cheaper properties in lower-income neighborhoods. Many successful landlords are in these areas, but it is not a passive venture. Stabilizing buildings and maintaining repairs and rents is a full-time, labor-intensive endeavor.

Parking Your Cash for Appreciation and Tax Benefits

Not needing cash flow is the enviable position many investors want to get to because it means you are already financially free. According to CoreLogic’s U.S. Home Price Insights, nationwide, prices increased by 5.5% year over year as of December 2023. This coincides with a healthy job market, wage growth, and lowered inflation.

Using a 5% metric, if you own an investment property valued at $200,000, your home would have appreciated by around $10,000 in one year. That’s the equivalent of cash flowing just under $1,000/month. In the current interest rate climate, that’s a tough ask.

If you own $2 million worth of real estate, you would have increased your net worth by $100,000. Added to this are the tax benefits of depreciation, repair, and operating expenses associated with real estate, which means even if you are not cash-flowing, you are still building wealth. Refinancing will add cash flow to the equation when rates eventually drop. 

Better Neighborhoods Equals Lower Cash Flow

The problem with investing in highly appreciating areas is that they generally do not cash flow well because they are more expensive. However, when factored against tenant issues in lower-income neighborhoods, holding on to a good asset in a more upscale neighborhood is likely to be more beneficial in appreciation, even if it only pays for itself. The cash flow will also increase once the asset is paid down and the rents increase.

The Case for Cash Flow

Many syndicators utilize the strategy of forcing appreciation through value-added improvements that increase cash flow to attract investors who would otherwise be unwilling to invest.

“We never invest for appreciation, since that is out of our control,” Tyler Cauble of The Cauble Group, a commercial real estate investor and consultant, told “Our team selects projects where we can create value and force appreciation through value-add or development from scratch. Any appreciation is just icing on top.”

Jonathan Barr of JB2 Investments, a multifamily syndicator, concurred: “I would say: Always invest for cash flow—but inevitably, increased positive cash flow is followed by appreciation.”

Grant Cardone is one of the most voluble proponents of the cash flow model. On, he poses the cash flow versus appreciation question—and answers it this way:

“Whenever someone asks me if cash flow or appreciation is better when investing in real estate, I give them a dumbfounded look because they should already know the answer. Cash flow investments provide a regular stream of income. In contrast, appreciation investments offer the potential for a more significant return if the investment is sold at a higher price than the purchase price. Getting wealthy from real estate investments is possible. You have to focus on cash flow, and the market fluctuation won’t affect you as much.”

Is It Possible to Cash Flow Without Giving Your Money to a Syndicator?

Despite what most syndicator salespeople might claim, handing your cash over to them should require first knowing the details of their financing. Without this knowledge, you are taking a leap of faith. In an era of fluctuating interest rates, only long-term financing attained before the rise in rates can insulate an operator against financial difficulties. 

If you want to maintain autonomy and cash flow on your investment properties, here are some steps to take:

  • Buy under-market properties that need work, complete the work, and increase rents.
  • Make a large down payment to ensure the home cash flows, and refinance once rates drop.
  • Add bedrooms by converting attics and larger rooms to increase cash flow.
  • Rent by the room to add rental income.
  • Use your property as a short-term rental, if possible. According to AirDNA, STRs generate 61% more income than regular rentals. The STR market continues to grow despite higher interest rates, as lower inflation has increased travel, AirDNA says.
  • Secure noninstitutional financing from a family member at a lower rate.
  • Enter into a subject-to-agreement with the current owner, keep the current mortgage in place, and refinance them out of the property when rates drop.
  • Liquidate other assets to buy the home for cash at a discounted price and refinance when rates drop.

Final Thoughts

Interest rates are the differentiator in the cash flow versus appreciation argument. Although many syndicators and gurus might preach that “cash flow is king,” with rates unlikely to drop substantially in a robust economy, a more nuanced approach could be beneficial—if you can afford it. 

If you are not in a rush to quit your job and can afford to ride out high rates, buying for appreciation and tax advantages while waiting for a refinance to cash flow later could be wise. There’s little doubt that prices will soar as rates drop. 

However, if you don’t have cash reserves and must find a cash-flowing investment, you’ll need to make a risk-versus-reward decision. Hitching your financial wagon to a syndicator without the requisite research is a risk. Implementing some of the strategies mentioned here could work. Also, waiting until you are in a better financial position to invest could be prudent.

As an experienced investor who enjoys their job (I write for BiggerPockets!), I have taken the somewhat uncomfortable move of stocking up on real estate in solid B/B+ neighborhoods, leveraging myself in a way that I wouldn’t necessarily advise others, taking the tax breaks over cash flow, and waiting for rates to fall. It’s a long-term approach that I have watched other investors successfully employ. It’s not for everyone, but having endured wipeouts previously, I’ve come to appreciate the value of holding solid assets in good areas. Cash flow is wonderful, but to expect it overnight is, I’ve discovered, often wishful thinking.

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