Cash Flow vs. Appreciation: What Should Beginners Focus on? (Rookie Reply)

Ashley Kehr:You’ve read the books, you’ve listened to a couple hundred episodes of this show. You’ve run so many deals through the calculator that you see cap rates when you close your eyes, and you still own zero rental properties.

Tony Robinson:Today we’re pulling three real questions from the BiggerPockets forums, all from rookies stuck in that exact gap. And together they map the whole path from frozen second analysis paralysis to actually closing on your first.

Ashley Kehr:This is the Real Estate Rookie Podcast. I’m Ashley Care.

Tony Robinson:And I’m Tony J. Robinson. And with that, let’s jump into today’s first question. So the question says, “I’ve been working in real estate as a property manager for quite some time, close to a decade. I want to pull the trigger and finally acquire some rentals of my own. I know enough about managing real estate. I’m just not as experienced or well practiced at deal analysis and market analysis. That’s a muscle I’ve not really had to use much thus far. What do you recommend that I do to really train up on market and deal analysis?” Another question might be in hindsight for you, when did you know you were ready? Or how would you advise someone when they’re looking to get started? If you were coaching someone who was starting out, how would you as the coach know that they are ready to actually analyze and acquire their own deal?What skills should that person have? Is it just a matter of simulating, analyzing deals, or is there a set of criteria a person should meet for them to quote, “Know enough?” This is a great question. And partially because Ash, I think it mimics your own kind of genesis as a real estate investor. But second, because I think there’s a lot of rookie investors who are asking the same question of when am I ready? And I’ll give my context first just on when am I ready? How do I know if I’m ready to actually buy the deal? I think first, there are logistical questions you have to answer. Do you have the capital that’s necessary or at least access to the capital via partnerships, other people’s money, whatever it may be, but do you have the capital that’s required to actually purchase the deal? If you can cover a down payment, holding costs, funding your reserves, if you’re doing a short-term rental, mid-term rental furnishing, setting up, whatever it may be, if you’re flipping, covering your holding costs, if you have the capital, that is one gate.The other gate is, can you get approved for a mortgage? If you have already gotten pre-approved and lender says, hey, you can spend a million bucks or half a million, whatever it is. If you’ve gotten pre-approved and you know that you can actually get a mortgage, that’s the second gate. So logistically, those are the two big things that I would say make sure that those things actually are in place. Aside from that, getting to the point of quote unquote knowing enough. I think if you’re listening to podcasts and you’re listening to me and Ashley talk, you’re listening to our guests speak, and as folks are kind of sharing their stories or talking about their strategies, you’re able to kind of nod your head and say, “I’ve heard that before. I know that. Yeah, I’ve seen that before.” If 80 to 90% of what we’re talking about, you’ve probably heard already on a different podcast, read a different book, or seen a different Facebook group, then there’s a good chance that from a knowledge perspective, you’ve kind of reached that point of being able to actually jump into your first deal.But if I say things like cash on cash return or reserves or principal interest taxes and insurance, and you’re not sure what those terms mean, well, then you’ve probably still got some foundational things you need to go knock out. But if you’re listening and you’re absorbing and most of it sounds familiar, that is typically the sound that you’ve listened enough, you’ve learned enough, and you’ve got to transition into action.

Ashley Kehr:So I actually started out as a property manager and I had no sense of real estate investing. I didn’t even know I was being hired to be a property manager. I thought I was being an assistant. So it definitely was a big transition for me and a big shift. So I saw what this investor was doing. And while you’re working in property management, you actually have access to so much and you already have so much knowledge and experience ahead of anyone else because you’re around the day-to-day, which is a big deal. Even though you’re not the investor yourself, you’re actually seeing what happens, the boots on the ground, the day-to-day. So making that transition, just think about how you are already a step ahead of a lot of other people who have never ever collected rent, have never ever seen a lease agreement, have never went through an eviction, have never even walked an apartment before.So start thinking about that and all of the information that you already have and how you’re already one step ahead of everyone else that doesn’t have that knowledge, doesn’t have that insight. One thing that was a really big deal for me, and I don’t know if this would work in your capacity, but I also had a lot of resources and people in my network because of where I was working. So the first loan I ever ended up getting on a property, I got it from the bank that I worked with for the investor that I was working for when I would refinance his deals or do purchase loans for his deals that he was doing. I already had that established relationship talking to that bank from doing his deals that they already knew who I was. They already knew I was on top of things.They already knew I knew what information to send and that everything was accurate and that I knew how to manage those properties. So why wouldn’t I know how to manage my own properties? So just think about how you have an advantage and use that as an opportunity to get your first deal as an investor. Okay. So say you decide you are ready. The very next thing that freezes people is one word. After the break, a soon-to-be veteran with a VA loan in a serious case of analysis paralysis ask how a rookie picks a market.All right, welcome back. Our second question comes from Silas in the BiggerPockets Forums. This question is, “I’m almost about to get out of the military and I’m looking forward to start house hacking with my VA loan. I’ve been analyzing different markets and I think it’s causing me to go into analysis paralysis. I’m very worried about getting a bad deal that I won’t be able to get out of for one year. What’s a good multifamily market or state for a rookie investor?” Okay, great questions and serious concerns. So looking at different markets, that is one of the hardest decisions I think to make is to deciding on what market. For me, it was easy. I didn’t even know you could invest anywhere else. I just though you had to live near your rentals, and that’s the only place I looked starting out. Tony was different. Tony, you went almost all the way across the country to invest, but you did have your mom in that area at the time.So you still had somewhat relation. And I think that’s a great starting point of looking at markets where you have some kind of advantage, whether that be an agent, a boots on the ground person, or maybe you’ve lived in the area before, so you have some knowledge of the market. Second thing, after you have looked at those markets and compiled your list, the next list is going to look at what do you want to get out of real estate investing? What kind of strategy do you want to do? And what kind of asset class do you want to invest in? And then go on social media, go in BiggerPockets forums, go over and see where other people are doing the exact same thing that you want to do and pull those markets and make a list of them. And just because these markets work for these people doesn’t mean they’re going to work for you.This is just a starting point. Okay? Then you’re going to take those two a list and compare them. Are there any of those that actually overlap at all? And then you’re going to narrow down your list. Then you’re going to go ahead and start doing your market analysis on the ones you end up with, which ones look like good markets. So if you go to biggerpockets.com/marketfinder, there’s actually a tool on there where you can go in and you can get all the data. Also, all of your AI tools, you can go ahead and get information. It really does cut down a lot on market analysis, but make sure you are fact checking and verifying. There are still really good county websites. I actually really like to use Bright Investor and I think it’s Neighborhood Scout. And those are two websites that have a lot of data for investors to go in and really hone in on a zip code, a specific neighborhood even, and telling you what the different data is for that specific area too.I definitely have noticed some errors with AI, like pulling data and things like that for markets where it’s old, it’s not accurate. It was pulled from some kind of headline or report that had no data statistics or facts actually behind it. So be very careful still when using AI. Make sure you’re still fact checking and pulling reputable websites for your data too.

Tony Robinson:All great points, Asha. I think the only other thing I’d add, and this is more like a strategic or maybe mindset or theoretical level, but for all the rookies that are listening, there are 20,000 cities in the United States. It is impossible to, I think, uncover all of the absolute best cities for you to invest into because the truth is that there aren’t five or 10 best markets for you to invest into. There were 500 or 1000 or 2000 markets that would make a lot of sense for you to invest into. So I don’t think the goal should be, how do I uncover that Goldilocks city that is the absolute best one for Tony to invest into or Ashley to invest into? The goal is simply to find a city that matches and meets my specific investment criteria. If I’m an investor who’s really focused on long-term appreciation, well then I need to go make sure that I find a market that gives me the ability to.A market that I can afford to buy in, that still gives me long-term appreciation. If my focus is cashflow and a purchase price of 300K or less, well, then I need to go find markets that allow me to cash flow really well at a 300K price point or less. So it’s your goal to become the harness or the guardrails for the type of market you invest into. And once you find one or two cities that match with your investment criteria, stop the search. Because I think that’s where so many people get stuck is they find cities that work, but then like, well, what if there’s another city? What if there’s a better city? What if there’s another city? What if there’s another city? And that’s how you end up spinning your wheels. So you can build. And again, a lot of people start with familiarity or proximity when they think about buying markets.What are cities that I know or places that I live? And that’s where they start, and that’s fine. And if those markets work, by all means, go invest there. But the markets that do check those boxes that you know or that you live close to, if they don’t support your investment goals, then go look anywhere else. You can build that familiarity by talking to an agent that knows that market really well. You can build that familiarity by booking a trip and spending a few days out there and driving around and talking to property managers and talking to contractors, making trips out there, being friends and making relationships with other investors in that market. You can build familiarity. So getting off my pedestal, the point here is as long as the market matches and supports your investment goals, that should be the ultimate trigger or deciding factor of whether or not you invest in that specific city.All right guys, we’re going to take a quick break while we’re gone. If you’re not yet subscribed to our YouTube channel, go check us out there. You can search @realestaterookie and you guys can hang out with us on YouTube as well as on audio. We’ll be right back after a quick word from our show sponsors. All right guys, welcome back. We are here with our final question. And our final question today says, Zillow just reported a record 242 cities now have starter homes going for $1 million or more. Meanwhile, the typical starter home nationwide is still under 200K. The gap between expensive markets at appreciate and cheap markets at cashflow has never been wider, which makes right now a perfect time to settle the oldest argument in real estate. So here it is. If you were buying rental number one today and could only optimize for one thing, would you pick A, the pricey appreciation market with thin or potentially negative cash flow, but you’re betting on long-term equity and rent growth?Or B, the affordable cashflow market, money in your pocket every month, slower appreciation, and easier to sleep at night? No quote unquote, it depends allowed. Pick a side and tell me why. So not necessarily a question from a rookie, but just one, I guess we’re kind of posing to the audience. And if you’re watching on YouTube, I’d love to get your take down below as well in the comments. I’ll tell you how I would approach this if I were a new investor. If I were starting today and I had to make this decision, here are the things that I would focus on. Number one is why am I investing?If I’m a high income earning W-2 employee, I generally enjoy what I do and I’m fine working there for the next 20 years, then I’m probably not super concerned with cashflow today. I’m more so concerned about can I get the tax benefits associated with investing in real estate? Can I get the long-term appreciation? And when I do plan to retire in 20 years, can I have a really nice nest egg of properties that are close to being paid off that I can then use to kind of fund my retirement? If I’m someone who works a job where maybe I wouldn’t consider myself high income earning, and maybe I’m not necessarily thrilled with that job and I want to go find alternative means of income, then I’m probably focusing more so on cashflow. So I think the answer to that question really depends on where you at in your life, what are your goals, and what are you trying to accomplish through real estate?So the answer I think is very much specific to the individual person who’s answering that question.

Ashley Kehr:For me, I’m going with B. I am going with go for cashflow, not appreciation as your first investment. Even if you have a high income W-2 and you can afford to cover a loss every month. I mean, I really do look at it as people put money into the stock market, they’re taking money every month and it’s just sitting there. A lot of times you’re not seeing an immediate dividend paid out to you every month, like you’re seeing like cashflow. So it is very common to actually invest in something and not actually see immediate gratification of cashflow. But I personally think that you should choose option B. You should go with an affordable cashflow market, money in your pocket every month. You do have slower appreciation, but you are learning how to run a business. Okay? So maybe you run the numbers inaccurately and you’re negative a lot more cashflow.Maybe on day one, you need a new HVAC system and now you’re really negative cashflow. With all of these happening, if you have cashflow coming in, you can help build up your reserves again if you had that big HVAC you needed to pay for. So I think the fact that you’re learning something new, I like to have less risk. So I’m going with that option B. But one mistake I made that I would do differently is even though I did find the affordable cashflow markets, I went for really low affordable properties. I went for $20,000 duplexes where I could pull money off a line of credit. I could do seller financing. I could get private money for. What I would’ve done differently is I would’ve went a little more middle of the road. So I wouldn’t have went for a super high appreciating, really nice property, really nice neighborhood.But I definitely wouldn’t have went into these cash flowing properties that saw very little appreciation except for timing the market perfectly and selling during COVID. But if I were to do it again, I would’ve saved more money and I would’ve waited to get into higher priced properties making my 20% down payment or even if it was a 10% down payment, I was scared to invest at a higher level of property. And I think that’s where I made my mistake where when I finally did that after several years investing, I’m getting great cashflow and great appreciation from kind of those middle of the road properties. And I wish I would’ve slowly built instead of just stacking up all of these $20,000 duplexes in a short period of time. So that’s what I would have done differently, is not as bought as money and saved up to actually buy these properties that actually became more valuable.Well, thank you guys so much for joining us today. I’m Ashley, he’s Tony, and we’ll see you guys on the next episode, Real Estate Rookie. If you’re not already, make sure you are subscribed to our YouTube channel @realestaterookie and make sure to follow us along at BiggerPockets or at Tony J. Robinson or at Wealth Firm Rentals. We’ll see you guys next time. Bye