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Cash Flow vs. Appreciation

Updated: Nov 16, 2023

You will hear that Austin is an appreciation market, not a cash flow market. What does that mean?


Cash flow is the profit an investor brings in each month after collecting rent and paying operating expenses (mortgage, insurance, property taxes, property management).


Appreciation is the increase over time in the market value of the property.


So, what has Austin's appreciation been historically?

What I have found in Austin MSA tends to be an appreciation market, which means we don’t see a lot of cash flow, but the prices have trended up over time.


For a glimpse into Austin’s historical appreciation, reference this link for Texas A&M. The average home price for Austin from 2002 to 2023 went from $195,500 to $625,000, an average of 5.7% increase every year. This is not something I would ever expect to repeat itself.


An investor's financial goals, age, and investment timelines would determine if they wanted to purchase a property with cash flow or a property that is likely to appreciate.


A younger person with a significant income from their primary career may be happy with a property with negative cash flow in an area they expect to increase in value over the next 20 years.


Someone in their 60s may be more interested in a property that will pay them an income in the short term, so they look for higher cash flow and may put down a larger down payment or pay cash to secure that return.


Why is Austin an appreciation market, and why don’t we see as much cash flow?

From my background in the financial markets as a trader, I have learned that you have to listen to the market to see what the market is telling you. Markets are efficient, and they give you information.


For Example:

In the fall spring of 2020, we started noticing that homes that would make good rentals, under $400,000, were selling to cash buyers at prices that would mean the buyer would get approximately a 2.5 - 3% yield on their investment. This went on for almost a year.


Why would someone do that? What was the market telling us? Money was cheap then; interest rates were so low that your cash could get only 0.6 % in US treasuries in the summer of 2020. Less than 1%! It wasn’t until Spring of 2022 that the 10-year treasury was above 2%. So, for the entire time frame between the summer of 2020 and the Spring of 2022, an investor could, in theory, make more cash flow by buying an investment property than buying a US Treasury. So they bought a LOT of homes. By some counts, investor purchases in Austin in 2021 were 40% of the transactions versus a pre-pandemic 20%.


What is the marketing telling us when it’s hard to get cash flow in Austin? My theory is that the market is assuming future appreciation growth in Austin. No one knows for sure, of course. Our crystal balls are still in the shop after March 2020, but I believe this is why prices continue to be high enough that investors can’t expect cash flow when they first purchase if they only put down 25% for their down payment.


Always happy to do the research and be your data nerd, so you don't have to!

Jen



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