There is no one-size-fits-all answer. However, Andrew Shader, a successful entrepreneur and real estate investor, has some thoughts on the matter. In this blog post, we’ll try to answer this common question about the two approaches by looking at his insights.
Table of Contents
What are Cash Flow and Appreciation in the Real Estate Market?
Before we get into Shader’s insights, let’s quickly review what cash flow and appreciation are in real estate investing. Cash flow refers to the money left over after all expenses are paid. For rental properties, expenses include:
- Mortgage payments
- Insurance
- Taxes
- Repairs
- Vacancy costs
If your goal is to invest for cash flow, you’ll want to find properties that generate positive monthly cash flow.
Appreciation is an increment in the value of a property with time. In the real estate market, this can happen for several reasons, including:
- Population growth
- Inflation
- Gentrification
If your goal is to invest for appreciation, you’ll want to find properties in markets that are appreciating rapidly.
Now that we’ve reviewed the basics, let’s look at what Shader says about cash flow vs. appreciation.
How Do You Know Which Is Suitable for You?
According to Shader, the answer to this question depends on your goals as an investor. To help you come to a conclusion, he offers the following three questions as a guide:
What Are Your Financial Goals?
Cash flow is likely the better option if you’re looking to get income from your investments. On the other hand, appreciation should be your focus if you want to build wealth over time.
What’s Your Timeline?
Appreciation will probably make more sense if you’re investing for a long time. However, cash flow is better if you’re looking for immediate income.
What’s Your Risk Tolerance?
If you’re predisposed to take on more risk for the chance of higher rewards, appreciation should be your focus. However, cash flow is probably better if you prefer a steadier return with less volatility.
Answering these questions will position you to better understand what you’re looking for in an investment and whether cash flow or appreciation is more important to you.
Some Tips to Get Started in Either Case
Now that you know a little more about each approach, let’s look at some tips to get started.
If you’re interested in investing for cash flow:
- Look for properties with a high rental yield. This yield is the percentage of the rent that accrues after expenses
- Consider using leverage to buy more properties and increase your cash flow
- Be prepared for vacancy costs and repair bills
When you’re interested in investing for appreciation:
- Do your research to find markets that are growing rapidly
- Consider the potential for gentrification when looking at properties
- Be willing to hold onto your property for the long term
Ultimately, cash flow and appreciation have pros and cons, and your best approach depends on your individual goals.
So is it better to invest in real estate for cash flow or appreciation? As Andrew Shader says, it comes down to your goals as an investor. Cash flow is the better bet if you’re looking for immediate income. However, appreciation should be your focus if you’re looking to build wealth over time.
About Andrew Shader
Andrew Shader is a real estate investor, developer, and entrepreneur based out of Fort Lauderdale. Shader started as an entrepreneur in the insurance industry before discovering his real estate passion: finding scalability in any vertical.
