Real estate provides multiple opportunities for investors to earn a profit, but many property owners find it challenging to generate enough revenue without goals. What should investors consider when planning goals and finding properties and strategies to meet those goals? Our Baltimore property management experts can help you prioritize cash flow vs. appreciation and walk through why planning to meet both of those goals can often lead to disappointment and low returns. Here’s what owners need to know!
Why Investment Strategy Matters
Setting goals can help define the best strategies to ensure your long-term success. Without goals, property owners often prioritize the wrong strategy and can feel like their properties aren’t “working” the way they should.
With real estate investing, investors must consider short-term vs. long-term goals and cash flow vs. appreciation. In most cases, “short-term” goals lead investors to prioritize more cash flow every month while working toward more long-term goals can mean keeping your eyes on strategies that boost appreciation.
Understanding Your Goals
So, how can property owners understand cash flow vs. appreciation? Residential property managers recommend starting by running the numbers.
- Cash flow is calculated by subtracting property expenses from income.
- Appreciation is calculated by subtracting the proceeds (or potential proceeds) received from the sale of property from the purchase cost.
Both goals produce profits, but appreciation requires investors to hold the property longer before seeing the maximum financial benefits. Appreciation also comes with more risk because of the potential for negative factors hurting market values when it’s time to sell.
What About ROI?
To calculate the potential ROI on a real estate investment, an investor must analyze income vs. expenses. Work with a property manager to determine the best answer to "how much can I rent my house for?" and plug that rent price into the formula, along with ongoing property expenses. However, when setting goals, remember that aiming for high ROIs, cash flow, and appreciation can be quite challenging.
What’s the Best Goal?
While achieving a healthy cash flow when investing toward appreciation goals is possible, most property management companies will tell you that working toward high marks for both strategies can leave you short on both goals. In most markets, rental income doesn’t increase as quickly as appreciation. At a specific purchase price, rental rates can either help you build better cash flow or contribute to long-term appreciation. While good ROIs for either strategy can be considered a success, property owners are often more satisfied with their returns when finding the balance between good cash flow and long-term appreciation.
Investing for Appreciation
Investing in real estate with the long-term goal of appreciation means planning to hold onto rental properties for several years (or longer). Unlike earning profits from short-term cash returns, appreciation accumulates over a period of time, and ROI is realized when the property is sold at a profit. As a result, such investments typically attract investors who are willing to take on more risk and who are able to cover any expenses and holding costs, which may erase any profit. For example, an investor who purchases undeveloped land will be responsible for paying property taxes while they own it. Then, if development picks up in the area, the undeveloped land could increase sharply in value.
However, residential properties purchased with the intent of profiting from appreciation as an investment typically have a bad price-to-rent ratio. That ratio compares the cost of purchasing property with the potential income received from renting the property. Investors best suited for ROI from appreciation understand they must cover property expenses, and there is a risk that the property may not appreciate.
Investing for Cash Flow
If you plan to invest with the short-term goal of cash flow, working with a Baltimore, MD property manager can help you find the ideal rental rate and minimize costs to boost immediate returns. Cash flow is realized after all property expenses are paid, so real estate that requires expensive maintenance or repairs can wipe out the monthly cash flow.
A cash flow investment also requires a realistic evaluation of rental rates in the market. If the property's rental income is limited, it may not produce much cash flow. For example, a property owner who purchases a rental property expecting to collect $2,000 a month in rent may not earn a profit if rental rates in the market are closer to $1,000 a month.
Real estate purchased for cash flow typically has a good price-to-rent ratio. Therefore, areas best suited for cash flow investing are typically markets that allow rentals and are ideal locations to attract good renters.
A Baltimore Property Management Company Helps Investors Meet ROI Goals!
Successfully investing in real estate for short-term cash flow vs. long-term appreciation requires careful planning and established goals. If you’re not sure how to run the numbers or analyze a property based on its best potential to meet your goals, reach out to one of our reliable Baltimore property management experts who can help you make that decision. Rentwell delivers residential property management services to help real estate investors meet their goals!
Learn more about investment returns with our free tool to Calculate Your Rental Property ROI!