276: Ask Bill! Cash Flow vs. Appreciation, Teaching Kids Finance, Is it a Good Time to Buy?

SHOW NOTES FOR EPISODE 276: ASK BILL! CASH FLOW VS. APPRECIATION, TEACHING KIDS FINANCE, IS IT A GOOD TIME TO BUY?

This is our monthly Fun Fact Friday “Ask Bill!” episode, where Bill answers specific real estate investing questions received during the month from e-mails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.

One of our goals here at the Old Dawg’s REI Network is to help to educate/enlighten fellow real estate investors, to share what little knowledge we have by answering your questions, and to help other investors to broaden their understanding of real estate investing and to, hopefully, avoid some of the mistakes that can cost you later.

In this month’s “Ask Bill!” episode, Bill answers questions on which is better – buying for cash flow/net income or buying for appreciation.  He also shares great ways to teach your kids about finance and real estate investing and finally he looks at whether or not now is a good time to invest in real estate.

Question #1

When getting started in real estate investing should you focus on net income or price appreciation from a rental property?

Answer to Question #1

I think you can do both! Although I consider myself a “cash flow” investor who seeks to create a steady stream of passive monthly income, I also look for properties in markets where there is a good opportunity for appreciation, in what author and real estate investor Dave Lindahl calls “Emerging Markets.”  An emerging market is a market were rents, income and property value are poised to increase for years to come. There are many emerging markets throughout the country that are characterized by low unemployment, rapidly growing population, high availability of job opportunities, increasing rental demand and strong, growing local economy. Real estate markets are fairly predictable if you observe the patterns over a long period of time. It is a series of bell curves that have peaks and valleys but are always moving upward. If you buy at the bottom of the bell curve, in a “buyer’s market,” you can expect to see rising rents AND property appreciation. Over time, as the market becomes a seller’s market, that is the time to sell or leverage your properties in anticipation of the next buyer’s market. It’s a way to benefit both in net income and price appreciation.

I interviewed a very successful real estate investor who has used this approach to grow a multi-million dollar investment portfolio in a relatively short period of time. If you would like to hear the podcast interview, just click here: 095: How to Find Hot Emerging Markets for the Best Deals.

You see, you don’t necessarily have to choose net income over appreciation. If you buy in the right market, you can enjoy the benefit of both!

Question #2

Is playing Monopoly with my children a great way to teach them about the fundamentals of real estate investing?

Answer to Question #2

Depending on their age, it could give them a very basic idea of real estate but much better games are Robert Kiyosaki’s Cash Flow 101 or Cashflow for Kids. These games are a blast and I have played them with my kids with great results (my 18 year old son Elijah total understands cash flow, what “real assets” are  and is now a real estate investor looking for his first multifamily property).

With Cash Flow for Kids, your kids will learn core principles of cashflow, capital gains, assets and liabilities in a fun, easy-to-understand game.

Question #3

Is it a good idea to invest in real estate right now with rumors of a recession? (2018)

Answer to Question #3

Yes, it’s always a good time to invest in real estate! However, I say that with a very strong caveat. It depends on what type of real estate you are buying (raw land, fix ’n flips, wholesale properties, rental properties, commercial properties, single family homes, deeds, liens, syndications, and the list goes on and on) and where you are buying. Two very critical factors for real estate investment. It’s also important to know why you are investing. If you’re buying for cash flow, the market is less critical. If you are buying for appreciation, then it’s all about the market. It’s really just a matter of why and how you buy.

Yes, a market correction/recession is certainly on the horizon but when and how severe it will be is, at best, a matter of speculation. If you track property value cycles over the last hundred years (or the last 40 years as reflected in the chart below) it looks like a roller coaster or road you might drive through the foothills on the way up to the Rockies. Its a rather uniform series of hills and valley, ups and downs, that moves progressively upward, demonstrating the consistently increasing value of real estate over the long term.

As a buy and hold investor, I believe the best time to buy is when everyone else is selling or, when you look at the price bell curve, in the deepest valleys after prices have gone down for a while, bottomed out, and are just starting to slowly increase. It’s at this point that you can find the best deals and even find creative finance deals. Values are going up and so are rents!

So, when a recession hits, it likely means we are near or at the top of the curve and prices will soon be taking a dive.

However, although the chart above shows the U.S. national trend, there really isn’t a national real estate economy. In fact, U.S. real estate is really more just a series of many little regional markets, around major MSAs, that may be reacting differently than national trends. So, that’s why I say it also depends on where you are buying. There may be a regional real estate market that has already bottomed out and is poised for a local housing boom.

That’s why it is extremely important to know your potential markets investment markets before you do anything.

I recently had a guest on my podcast that addressed this buying strategy very well as it pertains to multifamily property investment. To listen, click here: 249: Multifamily Acquisition Strategies for Today’s Economy

And here’s another podcast that addresses the current economy and where it’s heading. To listen, just click here: 239: Where is the Economy Headed?

So, to summarize, yes, it’s always a good time to invest in real estate IF you buy smart and IF you buy in the right markets. Is it better to wait until prices drop? Of course, that’s where you’ll find the big bargains, but it’s not mandatory. I hope this information helps answer your questions.

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