When you invest in real estate, you need to pick a strategy. There are 2 major strategies that have been time-tested, and they are: Cashflow and Appreciation. We will go into the pros and cons on each of these 2 strategies.

Cashflow

The definition of investing for cashflow is you look at the numbers and you only invest in properties that may produce a positive cashflow. This means when you take all the income generated from this property, subtract all the fixed and variable expenses, and you should have a positive number. That is (positive) cashflow that you get as a result of this investment.

Some people think it is “acceptable” to be neutral or even $100 to $200 negative cashflow. We want to make it clear that if you were to deploy the cashflow strategy, it is a definitive criteria that the property needs to produce a positive cashflow. It may be $50, it may be $100, it may be $200+, but it needs to be positive.

Typically, when you invest for positive cashflow, you are less concerned about its appreciation potential. This means you should not feel bad if you see your friend investing in an area with a property value growth of 20% last year, while your investment is stuck at 0%. Appreciation is simply not in play here. In fact, when you think about it, in the extreme situation, your property can depreciate to a $0 value but you should still be making your positive cashflow every month! That is the beauty of this strategy.

Appreciation

Investing for appreciation is another strategy. It has worked for many local markets throughout the U.S., though it is not a strategy that we at DoorInvestor like to deploy often. When you invest for appreciation, you are more or less speculating, because nobody has the crystal ball to say whether the house prices will go up or down; but you will be investing in “hopes” that the property value will go up, hence you can pull out the equity and enjoy the appreciation of property value.

There is nothing wrong with this strategy, but you just need to set proper expectation, especially not to factor in too much of an appreciation rate and need to be very conservative. Obviously, you should structure your investment play so that in the event that the appreciate does not happen, or does not happen at the rate that you wish, you will not be under immediate financial stress. In simple terms, you should never over leverage when you invest for appreciation.

On the other hands, there are some good things about investing for appreciation. For one, you are riding the wave with the macro market, and therefore if you can read the market correctly, you can enjoy the appreciation naturally, without having to deal with the daily operations of running a rental business like when you invest for cashflow. You are essentially “printing money” if you pick the right side at the right time at the right place.

Learn More

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