What is Appreciation?

Appreciation is the gain in value of a property that is realized when the property is sold.

There are a lot of factors that may contribute to a property appreciating in value. Zoning, the local economy, local property values and sales, improvements (or neglect) of the surrounding area all affect appreciation.

Keep in mind however that one of the major contributors to property appreciation is actually the decline in value of the local currency. That's one of the reasons that real estate and precious metals are hedges against inflation--they appreciate in value as the value of the currency goes down.

Cash Flow vs Appreciation

Here's a simple fact to consider. Appreciation is a feel-good speculative number. It is what might be...maybe...if you can sell at the right time to the right buyer. But you just never know until you collect your check from the title company or attorney how much "appreciation" you really got when you sold your property.

Unfortunately too many speculators and flippers discovered that appreciation can be a negative number as well and can eat your financial statement alive.

Cash flow, on the other hand is money in the bank. Another way to put this is "Cash flow is what is, not what might be"

Just food for thought...

Financing and Management Determine Cash Flow

Of the two financing is probably the most important. With bad financing it's easy to create a situation where the property will never cash flow until it has been paid off (which may be sometime after you have gone bankrupt and/or lost the property to someone else).

On the other hand, with good financing virtually any property can be made to cash flow.

Often there is a trade off between properties which are most likely to cash flow and those most likely to appreciate in value. Never speculate on appreciation. Make your business model to only buy properties for cash flow and let appreciation be the icing on the cake when you sell.