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Beyond Cash Flow: Focusing on Long-Term Real Estate Value

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Beyond Cash Flow: Focusing on Long-Term Real Estate Value

There’s an overemphasis on cash flow in today’s real estate investor community. While positive monthly cash flow is important, over-focusing on it can severely limit investors’ opportunities and long-term returns. Investors must balance desires for immediate returns with planning for impactful long-term growth and stability.

Understanding drivers of long-term property appreciation, rent appreciation, mortgage principal paydown, depreciation tax benefits, and equity growth through both natural appreciation and borrowed equity is key. While positive cash flow provides immediate returns, it’s the long-term value and steady benefit of monthly rental revenue that best secure a consistently profitable real estate investment over time.

REINation CEO Kent Clothier Sr. said, “Cash flow is a snapshot, a moment in time. Appreciation and the accumulation of true wealth happen over years, even decades with rental properties. Don’t let a myopic view limit your success.”

Why the Cash Flow Focus Can Mislead

There’s an intense focus on achieving immediate positive monthly cash flow, even on first investments. This cash flow focused mentality certainly has merits in some cases, but over-focusing on it can skew judgment.

Cash flow projections typically present simplified, straight-line projections over short 1-3-year periods. The aim for many new investors shopping turnkey properties is simple: they want immediate positive monthly cash flow, even on their first purchase.

This desire is understandable, but over-focusing on short-term cash flow often leads investors to gloss over a property’s long-term profit potential. When we zoom out and evaluate the comprehensive, long-term value – driven by appreciation and consistent rental income – we gain a much clearer picture of an asset’s quality.

Prioritizing Areas with Strong Appreciation

When building or evaluating a rental property portfolio, investors should shift focus away from solely cash flow, and towards neighborhoods and markets with strong long-term appreciation potential – in both property values and rents.

“Identifying and investing in these high-trajectory appreciation areas earlier in market cycles is the key to maximizing overall profits. While cash flow is important, it’s long-term appreciation that can truly drive incredible returns given long enough hold periods. Appreciation and rent growth together are an unstoppable wealth-compounding duo over long periods of time,” Clothier said.

Rather than taking an overly conservative approach focused solely on cash flow, investors can strategically utilize leverage to acquire higher-quality, higher-growth assets. In neighborhoods and markets with strong, long-term appreciation trajectories, leverage amplifies overall returns without necessarily increasing risk over 5+ year hold periods.

Turnkey Providers Emphasizing Cash Flow

Historically, the rub against turnkey real estate providers has been that they overly emphasize cash flow as a main value proposition and driver of returns. This approach can unintentionally mislead new investors into two issues.  One, they severely overvalue long-term rent growth, and long-term appreciation for a market by selling high cash flow properties in challenged areas of cities.  A way to juice cash flow is to focus on low-cost properties.  These are located in the last areas of a city to grow.  Two, they undervalue the incredible long-term appreciation potential of median-priced and upper-median-priced homes. 

When reviewing the opportunities from a turnkey real estate company, dig deeper to understand exactly what assumptions were made and what market data the projections are based upon. Carefully determine if appreciation projections are realistic and if rental revenue is sustainable, consistent, and strategically positioned to grow steadily over 5, 10, or 20-year hold periods.  

Then, review the areas where the properties themselves are located.  What is the long-term trend of an area?  Long-term means decades, not simply a few years.  Many successful investors will tell you that appreciation is the super fuel of an investment portfolio and only one thing can lead to appreciation: time.

Turnkey companies that stress time as an investment strategy rather than cash flow are the companies focusing on strong growth areas of cities and stable rental rates.  These two things lead to long-term returns and cash flow over time.

Steady Rental Income Over Long Periods

In addition to long-term appreciation, investors must remember the immense value provided by consistent rental income over long hold periods. While appreciation drives growth, steady rent checks provide stability and security for investors over months, years, and decades.

When evaluating a potential rental property, scrutinize the sustainability of projected rental rates over 5, 10 or 20 year periods. Make conservative assumptions around vacancy rates and ensure rates align with current market data for the neighborhood. Confirm rents are realistically positioned to appreciate steadily in the long-run.  

Investors also need to pay attention to long-term trends of rental properties and the performance of the management company taking care of their properties.  The ability for a property to not only provide long-term income, but also for the income to grow however incrementally, leads to high opportunities for cash flow after owning a property.

Focus on Long-Term Value

When building or analyzing a rental property portfolio, investors should look far beyond simply short-term cash flow metrics. While an income focus is important, over-focusing on cash flow can severely limit profit potential and mislead decision-making.

Instead, apply a long-term, wealth-building mindset. One grounded in steady, consistent rental income and long-term appreciation. Scrutinize income projections over 5, 10 or 20 years. Carefully evaluate asset appreciation potential and confirm market data supports projected growth.

Sustainable rental income plus long-term asset appreciation secure highly profitable investments over extended hold periods. 

Editor-in-Chief since 2011.

Global Banking & Finance Review


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