Appreciation is NOT the Play. It WAS, IS and will ALWAYS BE about the Cash Flow.

There are a lot of blogs by real estate agents on the net. It seems that now that houses are not selling themselves the good agents are moving heaven and earth to sell houses and the contract writers have time to blog.

I’m not casting dispersions at all real estate agents, just the bad ones, just the ones who don’t understand market forces.

In other words, the clueless ones.

I get a lot of inquiries from real estate agents. In the past they wanted to list properties, now they are trying to move them. One is particularly inept in their approach. Then spend a fortune on a direct mail piece and send it about twice each month. The pitch is always the same.

Great opportunity for an investor! This is a great appreciation play!

They just don’t understand.

As an investor if I were going to go for an appreciation play I would only buy stocks. Historically, as in since the crash of 1929, stocks have appreciated an average of between 9% and 10% each year. Real estate has only barely kept up with inflation averaging just over 3% for the same period. You do the math.

It’s about the cash flow series the property represents.

When an investor buys a property they typically put some amount of money into it. That is a negative cash flow payment. They may even do some repairs or a complete rehab of the property. More negative cash flow.

Then they either sell it and receive a (hopefully) large positive cash flow or they rent it for some period of time with corresponding positive and negative cash flows and ultimately sell it for a large positive cash flow.

That creates a cash flow series and as an investor it is the only thing of interest to me. If that series gives an acceptable rate of return over the time period under consideration factoring in the time value of money, I am interested.

In the current market I am very near term focused. In previous markets I have evaluated properties over a projected five or ten years. Now, I am more concerned about the next two to three because of the current market dynamics.

With the correction under way, if the two to three year numbers work, the longer term projection will take care of itself because we are not in a fast moving market. I may post more about this later but there are historically only a few times this extreme short term focus has been appropriate for long term investors. I still expect to hold the properties for the long term.

I think basic finance and economics should be added to the required real estate agent training. If they really understood the commodity they sold and how it priced by investors they wouldn’t blather on about a property being a great appreciation play.