IS Cash Flow The Only Thing...
O.K., I am a complete newbie and so far have gotten a great deal of info from this forum--thanks to all. Here is my question.
I am working with a investor friend who says that I have to make a decision right off...what he calls the "Arizona or Texas" question. Here is the scenario. He says that he can find me some 5-10 unit places in my price range in Arizona for a cap rate of roughly 7-9% (and a small but positive cash flow), but he also says that "appreciation" in this area is high (roughly 20%). That means (he says) that I can build up equity relatively quickly. I would then use this equity to leverage up to a larger property in 2-3 years.
Or...
He can find me some 8-15 unit places in Texas with a cap rate of 10-12% or higher (and a much larger cash flow), but "appreciation" there is only about 3-5%. Building equity will take much more time here (he says). I might not be able to buy a new property for some time.
But I have another investor friend who says that there is no such thing as "appreciation" away from rent increases. How much a property (above 5 units) is worth is directly tied to NOI.
So what is the right answer to the "Arizona or Texas" question given that I want to move up to a larger property quickly? If my first friend is correct and Arizona is "appreciating" more quickly, then living with the small cash flow there is worth the great "equity" increase.
But if my second friend is correct, I should buy WHEREVER the cash flow is greatest, regardless of predictions of "appreciation."
So everyone...Arizona or Texas?
[ Edited by venator64 on Date 01/30/2005 ]
I think I would pick Arizona, Because you say that you want to move up to larger properties and you could very easily leverage into bigger and better properites with a high appreciation like that and with the arizona properties you could always do renovations and raise rents to give you a better monthly cash flow
Are you looking to build equity, or generate a nice monthly income?
BTW... There is no wrong answer to he question!
[ Edited by EBikas on Date 01/30/2005 ]
[quote]
Are you looking to build equity, or generate a nice monthly income?
Quote:
Well, I GUESS I want to build up equity, but I am not exactly how to do that best in this situation. The basic question comes down to "On commercial properties, IS equity ONLY related to NOI?"
If so, then cash flow IS the only thing, and I should not be concerned with what local appreciation is. Texas would look good then. And the cap rates there would make my investment relatively safe.
On the other hand, if appreciation in the local SFH DOES drive up commercial properties in addition to rent increases, then I should go to Arizona. But here I would take the chance of negative cash flow. And if appreciation does not meet expectations, it would all be for naught.
Does local residential appreciation greatly impact commercial property?
<font size=-1>[ Edited by EBikas on Date 01/30/2005 ]</font>
The simple answer to your question is YES cashflow is everything...whether you get it monthly or out of appreciation it is all cashflow. A better question is this... Where do you want to visit when you check on your properties? The beaches of Texas or the desert of Phoenix. I have been plagued with that question myself so I bought in Houston and in Phoenix. Consequently my Houston property is performing better in appreciation than my Phoenix one due to the upside potential when I purchased and the quality of manager/maintenance staff. There are plenty of variables linked to your question.
Remember you can find better CAP rates in the lower economic areas of any metro city but the Tylenol expense category always goes up. Good luck and happy investing.[ Edited by skooter on Date 04/30/2005 ]
I think although appreciation is tied to NOI, in the area where the overall market is going up, rent tend to go up too first in the single family houses and then in aprtment too . hence arizona may still be good. in addition if youever consider condo conversion the appreciation market will definitle help. But in texas, it is the bird in the hand, compared to the bird in the bush(future) in Arizona.
Thanks everyone...even though I posted this several months ago, I still watch for your advice! Keep it comming!
If you are buying commercial properties then the underwriters will be looking at cash flow and expenses to determine ability to repay, so to answer your question we will need to know if its 1-4 family which may appreciate according to the other sales in the area or commercial property 5 family or more which the lender is concerned with the cash flows. The amount of rental increases and the ability to reduce expenses will be your appreciation.
Good Luck,
Robert
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