When it comes to long-term real estate investments, there are two different types of return you can focus on: cash flow and appreciation. Everything about your investment, from market to price point, will depend on which of these you prioritize, so it’s important to understand the distinction.
Cash Flow: This is the monthly income you receive from a rental property after accounting for all your expenses, like mortgage payments and property management fees. Cash flow is a tangible, ‘in your wallet’ return.
Appreciation: This is the increase in value of your property over time. Appreciation, unlike cash flow, exists only on paper until you sell your property. It produces no reliable income and is almost entirely out of your control.
While diversification across different types of investments is rarely a bad thing, focusing on cash flow investments is a lower-risk strategy for most investors. Cash flow properties may still experience appreciation over time, but buying a property in a high-end market in hopes of seeing values continue to skyrocket means you’re unlikely to have much (if any) positive monthly income.
The United States is a big place, so if you’ve been looking in the wrong markets you may think profitable real estate investments are hard to come by. In fact, there are several markets, primarily in the South and Midwest, where you can get a lot of bang for your buck. The key is to focus on places where the numbers work, not just on cities you’re familiar with.
Below is a quick comparison of some average numbers for single-family properties in two very different markets**:
|Washington D.C.||Birmingham, AL|
|Average Price:||$545,000||Average Price:||$104,000|
|Average Rent:||$3,000||Average Rent:||$1,000|
|Rent/Value Ratio:||0.55%||Rent/Value Ratio:||0.96%|
|Average Cash Flow:||–$416/month||Average Cash Flow:||+$190/month|
If you’re considering an investment in real estate, you’ve probably come across articles saying things like ‘Fed Raises Interest Rates’ or ‘Will Rate Hikes Hurt Investors?’. Interest rates are definitely an important consideration, but there’s one crucial thing these headlines fail to address: historical context.
While it is true that the Federal Reserve has increased interest rates over the last few years, it’s important to remember that we have been seeing historically low rates since 2009. In fact, even prior to the Great Recession, the Fed Rate and average mortgage rates have been in decline since the 80’s.
Despite recent increases, interest rates are still near all-time lows, meaning it’s more likely for rates to continue to rise than for them to dip back down. So what does this mean for your investments? Rather than seeing recent increases as a reason to put off investing, we see it as a sign to lock in financing now to avoid even higher rates down the road.
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Ambo International Investing was founded by Mary Pearce and Maureen Mccann, two women with a singular goal: to reinvent the investment process for U.S. Diplomats and their families.
Pairing Mary’s insider knowledge of the Ambo community with Maureen’s broad industry experience, Ambo International Investing is a company built to address the unique investment challenges faced by U.S. Diplomats stationed abroad.
All information provided by Ambo International Investing, including its owners, employees, affiliates, and agents, is for educational purposes only and does not constitute legal, tax, financial, or investment advice. All content on this site is of a general nature and may or may not apply to your specific situation or circumstances. While everyone at Ambo strives to provide the most accurate and up-to-date data possible, Ambo and the authors of content provided thereby cannot be held liable for errors or changes in data over time. All investments involve risk.