Investing in Real Estate: Appreciation vs. Cash Flow
September 25, 2017 | Jonna Weber


Cash flow and appreciation are critical to consider prior to investing in a rental property.  In Boise, there are certain areas in which one will matter much more than the other.  That said…you will want to look closely at both prior to making a purchase.
 
APPRECIATION:  Increase in value of an asset over time
Two Kinds of Appreciation
  • Natural Appreciation: Tendency for prices to naturally rise over time. Can be tied to inflation, scarcity, etc.
  • Forced Appreciation: Improving a property so the value becomes greater.  For example, adding a second bedroom to a home.
 
You can maximize appreciation by intentionally buying in the path of progress: areas of new business, great schools, gentrification.  Boise has seen high appreciation over the last few years, but like any market, there will always be ups and downs.

Another way to force appreciation is to do relatively inexpensive updates to your rental property.  Not long ago, we added new counter tops, tile backsplash, paint, and new carpet to a rental property.  We garnered $200 more per month than what others could rent similar sized homes in the same neighborhood for, because they were not updated.  Not only that, but we attracted a highly qualified long-term tenant immediately.
 
 
CASH FLOW:  Monthly dollar amount; the amount of money left in business after all expenses are paid.  
For example, mortgage, taxes, utilities, repairs, insurance, etc.

Cash flow is different in every area of the country, of course.  Some areas, like parts of the mid-west and south, are abundant in cash flow.   That is awesome, but you will also see that many of these areas do not appreciate very much, if at all.  There are trade-offs.   Other areas offer an extremely low rent to value ratio, but have seen huge appreciation on their properties year after year. (Silicon Valley is a perfect example).

In Boise, our returns are really a blend of the two.  As of Fall 2017, our median home sales price in Ada County was around $278,000.  When we find a great deal on a single-family home in a strong location, we could hope to get that property for approximately $200,000.  

To give you an idea of rents, the goal would be to rent that home out for about $1,500.  This would be a gross rental return of about .75% of purchase price on annual basis.

That may not sound hugely enticing, but combine that rent ratio with buying in an area that is growing rapidly, in high demand, and is buzzing with possibility, and things can get really exciting.
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