Do “Cash Flow Markets” Really Make You Rich?

0:00Austin, Phoenix, Nashville, Tampa. These are the hot markets we've heard so much about over the last couple of years. Prices, they shot up rapidly, and some investors, with the right timing, got incredible deals. But as the housing market has shifted, some of the property values we saw previously don't look as good today. Meanwhile, less flashy markets in the Northeast and Midwest have provided more modest depreciation, but arguably stronger total returns. So today we're breaking down these dynamics. Is FOMO sometimes a good thing or is slow and steady the route to long-term wealth? This is On The Market.

0:38Let's get started.

0:44Hey everyone, I'm Dave Meyer joined by Kathy Fecky who has invested in many different markets, some trendy and some not. Kathy, how are you doing? I'm doing great and this is one of my favorite topics. This is going to be a great show. This episode, just to give people some context, was inspired by a post on the BiggerPockets forums that has generated more than 200 replies. So this has been a very hot topic on the BP forums. It was posted by an investor in Indianapolis named Mike D. And the title of the post is, quote, why markets with low appreciation grow your net worth twice as fast. And Mike's basic argument is that properties in quickly appreciate markets like Austin or Nashville usually have lower cash flow and lower return on equity than steadier markets like Cleveland or Memphis.

1:36And he added a few examples of how even rapid appreciation in a popular market might not be enough to make up for that lower return on equity. So basically, Mike thinks you'd grow more wealth in places that have slower appreciation. But a lot of people strongly disagree. There are literally 11 pages of responses, and I'm sure you have a lot to say about this, Kathy. But let's start with your experience. You've done both trendy and lower appreciated markets, right? Oh, yeah. What is your favorite? Do you have a strong opinion on it? Well, I was born and raised in California. And if you can afford to buy in California, and I don't mean at the peak, but every sort sort of flashy market, will have down markets too.

2:22Yes. Just like if you talk about San Francisco in 2001, prices went down. Prices went way down in 2008. And if you bought in 2009 in California, wow, you've quintupled your money in just 10 years. You made a lot of money if you timed it right. So I'll just use that caveat that if you're going to be in a high-priced growth market, get in when it's low, not when it's high. Yes. Now, in the what we call linear markets, the markets that don't really do that, they don't go up and down very much. They're just steady, slow and steady. You don't have to time it as well. You can project a little bit better, but you do have to look at other things.

3:03And a lot of those other things were left out of the conversation, at least in the beginning on that post. Yeah, like what? Just can you share with us like what he cited? Maybe give us some background. I could read it, but if you remember, just tell us what we did. Yeah, just basically comparing the cash flow of a linear market like Cleveland. Let's use Cleveland compared to, let's say, Tampa, where you would see more fluctuation. Basically, his thesis was because of the steadiness of it, you're still going to see some appreciation in those non-appreciating markets. You know, it's a little, hopefully, not always.

3:36Some areas, you know, if there's people leaving, like let's say Detroit at certain times in Detroit's history, people are leaving and prices go down. So you're not always going to see appreciation. It's never a guarantee. But that was a thesis. And I just was like, whoa, whoa, whoa, whoa. Like everything sounds so good in theory until you've done it. And I have done it. I've done, I've been in markets where the values went down. Yeah. You invest in like Pittsburgh too, right? Like the total opposite of California, right? Which Pittsburgh has its merits, but like, I think like cashflow appreciation kind of on two ends of the spectrum and where you fall in that spectrum, it's kind of up to you and your goals.

4:12but like where you live in California and Pittsburgh are basically polar opposites. Yes. However, Pittsburgh was having quite a transformation and a renovation just like Cleveland. So I'll tell you my favorite type of investing later, but to give you, you know, kind of an example, we saw that in Pittsburgh, there were a lot of businesses moving there. You've got a lot of universities. It was rated one of the best places to be single. If you've been there in the summer, you might not realize how very fun it is to be in Pittsburgh. That's a good job market. Great job market. So we could see the growth.

4:43And we bought a duplex 10, 15 years ago, just outside of Pittsburgh, very much a blue collar area in Pittsburgh, but in one of the suburbs. We paid, I don't know,$55 ,000 for it. This was obviously right after the downturn, put about$30 ,000 in. So I think we were about$80 ,000 into this. We were renting it for about$1 ,200 to the same people. The father and son rented it. Amazing cash flow. Amazing. But Pittsburgh has some things that people don't realize, and it's other expenses. For one, if I'm going to be buying a property for$55 ,000, that is very, very old. 1800s? Yeah. So it's scary. Because when you go look at it, it's like, oh, man, this foundation.

5:23This is old. I don't know about this. But the cash flow was phenomenal. Rich and I decided as good as the cash flow is and as steady as it was, there was some deferred maintenance. I mean, the same guys were there for 10 years. So they weren't worried about fixing things. You know, they were probably not there very much. And I'm just like, ah, these deferred maintenance is going to drive me crazy. I'm at a stage in my life where I don't need surprises. So we went to sell it. We were in it for$80 ,000. What do you think we sold it for? I have no idea. So we netted$80 ,000. Yeah. Okay. Yeah. So it didn't move.

5:57No, because the deferred maintenance, of course, the buyer sees that and they're going to take that on. So we didn't have to. How long did you hold on to it for? It was like 10 or 15 years. We had it a long time. Oh, okay. So the opportunity cost there is big, right? You could have put that money somewhere else. It's like, look, we've made a ton of money on cash flow here, but we haven't fixed a thing. Yeah, right. So like this is going to be a big mess, but somebody else's opportunity. So that's just kind of an example of what was left out of the equation. Then, you know, we could talk about Cleveland, another city we're bullish on.

6:32I love Cleveland. There's a massive healthcare industry there. But you know what they have in Cleveland that will drive you insane? It is. Cleveland has a rental registration program that includes regular inspections of residential rental units. And you know what? If they don't like something, you got to fix it. Yeah, I'm dealing with that. It's tough. Tough. And I get it. Renters have rights and they should have a safe place to live. We had an older home, again in Cleveland, bought it again in the downturn, paid$50 ,000. It was probably worth$100 ,000. by the time, you know, we had this issue.

7:08And there was a plumbing thing. And we were happy to fix the plumbing issue. But the tenant called the city, the city came in, they wanted us to redo everything all the way to the street, it cost us$26 ,000. Okay, and it's because, you know, the city wanted a safe place. I get it, I get it hard to be an investor. Now, we still were able to sell that property, get all our money back, because we bought it so cheaply. But these are the things that, you know, people aren't accounting for when they're making these generalizations. How old is the property? What's the deferred maintenance? What are all the other costs, the taxes, the insurance?

7:42Until you have all those numbers, you know, you don't have anything. That is sort of what I think is missed in this calculation by this investor is that if you're just looking at cash flow, assuming that your cash flow is steady all the time, and I think there are some assumptions in this that are a little bit off, then yeah, if you have this motivation to prove this point and you cherry pick some of the stats, You can paint a rosy picture of these cash flow markets, but I invest in both. I do both also, and I just straight up disagree with this. And the key point here is not what's better cash flow or appreciation, because there are merits to both, but the title of this and the gist of the forum post is growing your total net worth.

8:26Not what's better for cash flow, not what's better for people who are about to retire, which I think you can make the argument that cash flow is better. I think that is true. total net worth, just do the math. Appreciation is a better way to go. And no one can guarantee appreciation. But if you just look historically, you build your net worth more in an appreciation market that is breakeven cash flow than you will getting a 10 % cash on cash return that just gets average appreciation of 3.5%. I could sort of break down his argument mathematically, but that's just been my experience. I study this for a living and I could just tell you there's a clear answer here.

9:02I don't know if that's going too far for you. I'll just, again, I said I would tell you what I love the most. And I think what works after almost 30 years of investing, what I've seen build a net worth. For sure, if you live in California and you can afford to own a home, Rich and I have always house hacked. We still do. We still rent out units on our property. And every year, the values of the property go up. And we're just living here. So it's not really an investment. So in high-priced markets that are in high demand, there's something unique about it. You can just make a killing, really, just so much money.

9:40Absolutely. But if you're just talking pure investment, I want both. I'm greedy. I want cash flow and I want appreciation. And you can do that in any market. That's right. Right? You find that part of a market. Like, I think Indianapolis was brought up on that thread. Yeah, that's where this investor was. Yeah. Yeah, yeah. I started investing in Indianapolis in 2006. I mean, I've been very bullish on that market. I know that it's a biotech industry. I have all the data on why we could see that that was going to be a steady, quote unquote, growth market, like cash flow, but with enough growth. But not all of Indianapolis.

10:22And that's where people get confused. What you have to find out is where is that growth? What is the city planning? And you have to be within 10 to 20 miles of that. 10 miles is best. So people might, I've done this, you know, like I invested, we bought an apartment in Anderson. It's just outside of Indianapolis and people might consider it part of Indianapolis, which it absolutely is not. But it didn't have any of the same dynamics. So when you see the Case Shiller report, you see these headline news, it means nothing. You have to dive in, find out exactly where those jobs are going, where people are living.

11:00And that is where you want to be, not in the part of the town that's dying. And there's always a part of town that's not doing as well as the other. Well, I do want to talk about sort of the difference between cash flowing markets, the difference between market appreciation and the difference between forced appreciation, because I think that's a really big, important distinction for investors when crafting your strategy. We've got to take a quick break. We'll be right back. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress.

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14:18Welcome back to On the Market. I'm here with Kathy Fecky talking about low appreciation markets versus high appreciation markets. I've shared my opinion that I just don't think that this is true. And I invest in some high cash flow markets, but I do it for cash flow, not because I think it's going to grow my overall net worth. But I want to make a distinction here between high appreciation markets. And curious, your opinion here, Kathy. But to me, I think when we talk about quote unquote, high appreciation, like what we're talking about is what I would call market appreciation. This is where just macroeconomic forces, supply and demand work in a way that just push up prices that are really out of your control.

15:00Like you as the investor are not doing anything to do that. There's another thing, some people call it value add. That's what we normally call it on the show. Some people call it forced appreciation. It's the same idea where it's basically you're buying an asset that is not up to its highest and best use, and you bring it up to its highest and best use. So I just want to call out that I personally think that investing for market appreciation alone doesn't make sense. And I know that probably is confusing to people where I just said, I think that appreciation grows your net worth. The way I like to structure deals are that they work on cashflow, forced appreciation, and amortization and tax benefits, like the stuff that I can control.

15:44And then you hope that you get that market appreciation bump. But I would personally not buy a place where the numbers don't work on those other four criteria. But I'm curious if you see it the same way, Kathy. The image that came to mind is surfing because it's been an amazing surf week. I know. You're just in bliss over there. So there are times when a wave is coming and everybody's going for it and you're fighting for this wave. And if you're in the wrong, kind of like the wrong place, you have to work a lot harder to catch that wave. Like you are giving it your best shot. And then if you time it right, and I'm not as strong as the other, it's all men out there and I'm not as strong as they are.

16:23So I have to position myself better and I don't have to work as hard. I just get myself in the right place. The wave comes, I catch it and I have a great ride. So you can do it either way. You can work hard or not. You know what I mean? So forced appreciation is harder work. If you are an out-of-state investor like I am, or busy, like, no, I want it easy. So for me, I have, and I've been criticized for 30 years, and I don't care because it's worked out. So I would sometimes buy retail in an area where I know this area is very strong. I know there's businesses coming in. I know this is where people want to live.

17:04There's good schools. It's just a little better than breakeven. In some cases, years ago, it was better than breakeven. And we were making$300 to$400 a month in cash flow. But today, you know, it might be$50 cash flow. It's nothing. It's not for the cash flow. It's just enough to be able to catch that wave without a lot of work. And, you know, if it's a newer home or fully renovated, then you just know in 10 years, you kind of can forecast what you're getting because, you know, it's newer or already renovated or if it's not already renovated, you know what's going to need to be renovated so that you can calculate that in the pro forma of what you're gonna have to be spending money, like the Pittsburgh property.

17:43Like, whoa, we're gonna be spending a lot of money to fix this. Let's get rid of it. So I just know my strategy is long-term wealth. I want something fairly easy, an easy lift for me. Therefore, because of that, I have to be good at positioning and I have to be in an area where I know something great is about to happen. So it just, it all depends on your strategy. But if you're buying older homes, you're paddling harder. That's all I can say. Things break. It's like buying an old car versus a new car. You're going to have things break more and you need to calculate that in there. It's going to be a little bit more of a paddle.

18:17Do you think it's just because they're older homes? I've bought older homes retail in the neighborhoods that you've described, like a place where I know things are going to get better. And I was willing to take on additional work or to take on mediocre cash flow, break-even cash flow, because I felt really strong about the appreciation. So I was more interested in those situations in the land. Like, it was just such a good location. Even though the asset was old, I was willing even to invest more into the asset because I felt so strongly about the location. Oh, 100%. But so you're choosing the location first.

18:55then you're finding the property that is that has an upside whether you know that in this case it needs some work you're going to fix it up you've calculated what that's going to cost i know you yeah you didn't just buy an older property in a in an up-and-coming neighborhood and think wow today's cash flow is good no no you calculated what it's going to cost to repair things and some people don't do that that's that's all i'm saying it's not an apples to apples thing to say I'm going to buy in a cash flow market versus appreciation. What are you buying? Let's go apples to apple. If you were buying a brand new property in a cash flow market versus a brand new property in a growth market, now you can sort of compare.

19:36Yeah, that's a good way to do it. If you're buying an older property in cash flow versus appreciation, you can also compare a little bit. But trying to compare an old one with a new one and not giving, it's not enough information. If I was to buy in a neighborhood where I felt extremely confident that there was going to be appreciation, I would take break-even cash flow. And I know, like, I think you're probably the same way, Kathy, but people disagree with me all the time on that. I actually think the best deal I've ever done was one of those deals. The equity, I think, literally tripled in four years, like, you know, on an expensive home, like, made a lot of money and break-even cash flow, and it was fine.

20:18But if I were to go in a deal where I felt like there was no appreciation, then you need to adjust your calculus and say, like, then I need a 15 % cash on cash return to like make up for that. Or most often what I buy is somewhere in the middle where I can get four or 5 % cash flow. To me, that's great. That's what you can get a savings account. It's more than keeping pace with inflation, right? But you're in an area that Kathy said, like, you don't know when it will come. You don't really know if it will come, but you're placing a good bet that if the tide comes and raises all ships, you're in a good position to take advantage of that.

20:54And because you have some cash flow, you're also defensive. You're not like really putting yourself at risk because you're still probably doing as well or better than you can do in the stock market or the bond market. So like that to me is kind of like the win-win formula. Yeah, but it's not really a guessing game. It's so easy for me. I'll drive through a neighborhood and all I have to do is look around. You know, there's this little area called Bernie, Texas and giving away some secrets here. But you drive around there and you will not believe the amount of money pouring into there. When you see an area where there's construction everywhere, and I don't mean just of homes, I mean of businesses and new roads and widening roads and freeways and all that, you know, A-class schools, you are not the only one making the bet.

21:41I would rather have a billionaire make that bet for me because I know that they spent a lot more in research than I ever could. So if I see a Starbucks going in, Whole Foods is a great example of if Whole Foods is going to put in a store, you have a clue. And it's a pretty strong clue. Again, with Sherman, Texas, you will drive for miles and miles and miles and miles on the freeway and it's nothing but expansion. There is a new airport being like it's crazy. So you don't have to do a lot of guesswork. But if you're in an area where it's dilapidated, people are moving out of that area, you're going to be fighting hard for the wave.

22:20And you might not ever catch it. And that's the worst, when you're working super hard and then you get no benefit. Coming back to the surf description, anyone who's tried and paddled their heart out for a wave and watches everybody else go and have a good time and you didn't catch it, no fun. Well, I think you're going to probably disagree with me about this, which is totally fine. But I am a little bit nervous about the appreciation prospects of the housing market in general, not just this year, but like going forward for the next few years. And that's a broad general statement. I still don't think there's going to be a crash, but I think we're going to be fighting uphill to get above inflation numbers for appreciation.

22:59So curious if you agree with that. Second of all, how would you adjust this strategy if I'm correct? And even if you disagree, I'm just curious what you think about this. Well, you know, starting with your first question, are we not going to see appreciation? You and I both know there's just no such thing as a housing market. You have to dive in so deep into the market to understand it. So that is first and foremost. I have invested in all kinds of markets, but my favorite is the one where people say things like you just said, because that means less people are going to be diving in because it's not as easy, right?

23:32If you see an area where just prices are going up every month, it's like, Of course, everyone's going to dive into that. But if you kind of have the secret information on what's happening in a certain area and nobody knows about it, then dive in. And so it does not matter what's happening nationally. What I know for sure is there's going to be pockets of America that boom. And that's where you want to be. If you don't want to work that hard, that's okay. Just go do kind of answer to your second question, linear markets. That is a little bit more easy to gauge because it's like, hey, let's just put in a 2 % appreciation rate.

24:10And if the property still works at 2%, great. You're not expecting more than that. For sure. And I want to reiterate that I do think cash flow markets have their purposes for people. It really depends who you are and where you are in your investing journey. I invest in some not pure cash flow markets, but I'd say more balanced markets because I've gone through what I would call like the growth stage of my investing career. And I still want to grow, but like I've done the like hustle effort part. And I want to start moving from what was a really appreciation focused portfolio for 15 years into one that's just a little bit more balanced.