Appreciation: An unhealthy addiction

Appreciation as an addiction. Interesting concept.

I heard my Realtor say something interesting the other day:

Appreciation is like the dessert of real estate investing. A nice to have, but it won’t keep your investment healthy in the long run.

The more I thought of it, I started to draw parallels to nutrition, as my wife is a Naturopath and Nutritionist.

We’ve all heard that we should cover half our plate with green veggies, only prepare a piece of meat the size of the palm of our hand (lean chicken, or fish preferred) and a half cup or so of grains.

But how many of us do this?

Too few unfortunately.

For most, what is the most exciting part of dinner they can’t wait to dig into? Yep, that double chocolate cake, or ice cream, or cookies. The sugar is what a lot of people crave, what they focus on with sometimes disastrous effects on their health.

So, you may be asking how does this relate to real estate investing?

What does the media focus on most times when talking about how the real estate market is doing locally, or nationally?

Yep, appreciation.

Home price are up. Home prices are down. There’s no talk of fundamentals. No talk of how rents are tracking.

What does this cause?

The perception that home prices will always go up which, for a lot of people who learned the hard way in 2008, just isn’t true.

In real estate investing, we need to focus on green veggies, and lean chicken = Cash Flow and Debt Reduction.

real-estate-investing-appreciation

So what does this all mean?

When I analyze deals I’m looking at, including my most recent purchase of a 3 bedrooms townhouse, if it doesn’t cash flow positive every month with very conservative assumptions (5% management, 5% maintenance, 5% vacancy, 2% rent increase, 3% expense increase etc.) then it’s a non-starter. The debt reduction will always be there when you have a tenant paying for your mortgage every month.

Appreciation, whether it happens or not is a nice to have. If you buy in areas with strong economic fundamentals, with increased jobs, you’ll set yourself to be benefit from appreciation long term, but don’t focus on that as your only source of return.

Of course, I’m talking about buy-and-hold investing here. If you are into flips, then it’s a whole other ball game where appreciation from a low purchase price, smart improvements and a quick sale is where the money is at. But that thinking doesn’t apply to the buy-and-hold world.

What do you think about the addiction to appreciation? Sound off in the comments below.

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