Do “Cash Flow Markets” Really Make You Rich?

Is chasing hot markets like Austin and Nashville actually hurting your long-term wealth building? In this episode, Dave Meyer and Kathy Fettke dive deep into a heated BiggerPockets forums debate about whether low-appreciation, high-cashflow markets like Cleveland and Memphis can grow your net worth faster than trendy appreciation markets. They reveal why the “slow and steady” approach might not be the wealth-building winner you think it is, sharing real examples from Kathy’s 30 years of investing across both market types. Dave and Kathy discuss the hidden costs of cashflow markets, why timing matters more than market type, and how to find the perfect hybrid markets that offer both appreciation potential and solid returns in today’s challenging housing market conditions.Austin, 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 appreciation, 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 too long-term wealth? This is on the market. Let’s get started. Hey everyone, I’m Dave Meyer, joined by Kathy Fettke, 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 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 cashflow and lower return on equity. Then steadier markets like Cleveland or Memphis. And 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 appreciating 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 of flashy market will have down markets too. 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 Quin toppled your money in just 10 years. You made a lot of money if you timed it. 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. Now 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 and a lot of those other things were left out of the conversation, at least in the beginning on that post.What just, can you share with us 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 cashflow 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. It’s a little, hopefully not always. Some areas, if there’s people leaving, 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. Everything sounds so good in theory until you’ve done it. And I have done it. I’ve been in markets where the values went down.You invest in Pittsburgh too, right? The total opposite of California, which Pittsburgh has its merits, but I think 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. But 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 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 this summer, you might not realize how very fun it is to be in Pittsburgh.That’s a good job market too.Great job market. So we could see the growth. And 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 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 cashflow. 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,18 hundreds.Yeah. So it’s scary because when you go look at it, it’s like, oh man, this foundation, this is old. I don’t know about this, but the cash flow was phenomenal, rich and I decided as good as the cashflow 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. 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 and 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? OhMy god, I have no idea.80,000. So we netted 80,000.Yeah. Okay, so it didn’t move. Yeah,No, 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 onto 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 cashflow here, but we haven’t fixed a thing, so 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 we could talk about Cleveland, another city we’re bullish on. I 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. Yeah, it’s tough.It’s tough, and I get it. Renters have rights and they should have a clean, 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 a hundred by the time we had this issue and 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 and it’s because 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 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? Until you have all those numbers, 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 cashflow, assuming that your cashflow is steady all the time, and I think there are some assumptions in this that are a little bit off, then 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 cashflow 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 cashflow appreciation. There are merits to both,
But the title of this and the gist of the forum post is growing your total net worth. Not what’s better for cashflow, not what’s better for people who are about to retire, which I think you can make the argument that cashflow 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 break even cashflow 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. I 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 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 better.Absolutely.But if you’re just talking pure investment, I want both. I’m greedy. I want cashflow and I want appreciation. And you can do that in any market,Right?Right. You find that part of a market. I think Indianapolis was brought up on that threat.Yeah, that’s where this investor was.Yeah.Yeah.I started investing in Indianapolis in 2006. I mean, I’ve beenGood for you,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 growth market like cashflow, but with enough growth, but not all of Indianapolis. And 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 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 K 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, and 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. But we got to take a quick break. We’ll be right back. Welcome back to On the Market. I’m here with Kathy Fettke 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 cashflow markets, but I do it for cashflow, 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 high appreciation, 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. 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. And 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. It’s been an amazing surf week. I know you’reJust 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 the place, you have to work a lot harder to catch that wave. 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. So 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, no, I want it easy 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. There’s good schools. It’s just a little better than break. Even in some cases, years ago it was better than breakeven and we were making three to 400
A month in cashflow, but today it might be 50 bucks cashflow. It’s nothing. It’s not for the cashflow. It’s just enough to be able to catch that wave without a lot of work. And 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 it’s newer or already renovated. Or if it’s not already renovated, what’s going to need to be renovated so that you can calculate that in the proforma of what you’re going to have to be spending money like the Pittsburgh property. Like, whoa, we’re going to 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 lift for me. Therefore, because of that, I have to be good at positioningAndI have to be in an area where I know something great is about to happen. So 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. Interesting.Do 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 willing to take on additional work or to take on mediocre cashflow, break even cashflow because I felt really strong about the appreciation. So I was more interested in those situations in the land. 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, then you’re finding the property that has an upside, whether 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 didn’t just buy an older property in an up and coming neighborhood and think, wow, today’s cashflow is good.No,No, you calculated what it’s going to cost to repair things. And some people don’t do that. That’s all I’m saying. It’s not an apples to apples thing to say, I’m going to buy in a cashflow market versus appreciation. What are you buying? Let’s go apples to apple. If you were buying a brand new property in a cashflow market versus a brand new property in a growth market, now you can sort of compare.Yeah, that’s a good way to do it.If you’re buying an older property in cashflow versus appreciation, you can also compare a little bit. But trying to compare an old one with a new one and not giving,That’s hard.It’s not enoughInformation. If I was to buy in a neighborhood where I felt extremely confident that there was going to be appreciation, I would take breakeven cashflow. And I know I think you’re probably the same way, Kathy, but people disagree with me all the time onThat.I actually think the best deal I’ve ever done was one of those deals. The equity, I think literally tripled in four years on an expensive home, made a lot of money and break even cashflow and it was fine. But 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, then I need a 15% cash on cash return to make up for that.
Or most often what I buy is somewhere in the middle where I can get four or 5% cashflow. To me, what you can get a savings account, it’s more than keeping pace with inflation. But you’re in an area that Kathy said 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. And because you have some cashflow, you are also defensive. You’re not really putting yourself at risk because you’re still probably doing as well or better than you could do in the stock market of the bond market. So that to me is the win-win formula.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. There’s this little area called Bernie, Texas and given 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 a businesses and new roads and widening roads and freeways and all that. A class schools, you are not the only one making the bet.
I 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 it’s, 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 are going to be fighting hard for the wave.Yeah, for sure.And 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 like 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 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. So 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, 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. Not as easy. If 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 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 beIfYou don’t want to work that hard. 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 and if the property still works at 2%, great, you’re not expecting more than thatFor sure. I want to reiterate that I do think cashflow 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 cashflow markets, but I’d say more balanced markets because I’ve gone through what I would call the growth stage of my investing career, and I still want to grow, but I’ve done the 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. And I think this is a common approach for a lot of people that as they get a little bit more advanced further along in their investing career, that you don’t want to just do pure appreciation play, you move in balance. And I expect that a certain point in my career.
I’m in my late thirties, but I expect as I get older, I’ll probably move more and more towards cashflow just because at some point I’ll probably want to stop working even though that’s probably decades away. At some point I’ll probably make that transition. So I do just want to call that out. But just the whole point of this conversation was that this poster said that it would grow your overall net worth. And I think moving towards those pure cashflow markets might be right for you at a certain point in your investing career, but it will probably slow down your overall net worth growth. And that’s okay for some people. Alright, so that’s my take. But Kathy, let’s talk about how to go about finding some of these ideal perfect hybrid markets that we’ve been talking about. We got to take a quick break. We’ll be right back.
Welcome back to On the Market. I’m Dave Meyer here with Kathy Fettke talking about this age old debate that never goes away, but it’s still fun to have appreciation verse cashflow, different ways of approaching things. I think you and I both agree that there’s this hybrid approach where you don’t have to choose. I think for me, there are parts of high appreciation cities that are more cashflow focused. There are parts of linear cities that are more appreciation focused, and that’s kind of the job of the investor. Go out and find the best area a submarket within your market that is aligned with your strategy. For me, I really do like these hybrid markets where I can sort of have the best of both worlds. Sounds like you agree, Kathy. How do you find them?Well, again, following jobs, following population growth because population generally follows jobs, although we do have a massive wave of baby boomers retiring who may not need a job. So they’re going to be looking for probably no state income, tax states, warmer weather and soForth. That’s true.So I just spoke with a demographer who said the largest group of baby boomers will be retiring over the next few years and moving to the southeast. So southeast is still on my radar as one of the hottest places to hottest best places to invest because of that wave of baby boomers that will probably be heading in that direction. And yet there’s more inventory. So it’s a great opportunity. Anytime you can negotiate a deal, it’s going to be better for you whether you’re looking for cashflow or appreciation, but you’ll get more of both if you could get a better deal on the buy. And so the way you get a better deal on the buy is being in a market where there’s not as much competition, which means that there’s still a secret. There’s a secret. People don’t know about this thing that’s happening or they’re just scared. And another thing that’s just kind of natural today is that it just out of range. For most people, there would be more competition if interest rates were lower. So knowing that it’s like, okay, well interest rates are higher. That’s a bummer, but that means less competition. So I might be able to negotiate a better deal on the buy. But if you’re in a linear market, my goodness, you better be getting a great discount
Because you’re not able to count on that appreciation. So coming back to how do you find it, follow where jobs are going, follow where there is infrastructure growth. I’ve already said a bunch of these things. If you’re seeing new schools, hospitals, new roads, a lot of what the current administration is doing and trying to reshore companies, I think Apple said that they’re going to be reshoring some things, pay attention to that. It’s going to be years before a lot of that happens, but it doesn’t matter because people like me hear it and they jump in. And then you become part of that wave of people who are like, we think this is going to happen, so we’re going to dive in and buy properties around. So in Sherman, have those buildings been built yet? No, but we know that there’s billions of dollars slated to come in there. I know Phoenix, there’s been talk about a lot of reshoring happening there. I have not been a big fan of investing in Phoenix ever.Me neither.Simply because I need both. I need cashflow and appreciation. Austin, I could have invested in Austin 30 years ago. It was on my radar, but Dallas is a pretty darn good city too, and we could get higher cashflow and pretty darn good appreciation. So why not choose that? To me, it was just a safer bet.Yeah, it’s the risk mitigationPoint. Yeah,Appreciation has great rewards, but there’s risk in these markets. The volatility and the lack of cashflow, to me, if you can get at least that breakeven cashflow, that’s the risk mitigation that allows you to comfortably hold assets and hope to be a part of that wave, and you’re still earning a good return, even break even cashflow. If you could break even with tax benefits and amortization, a lot of times you’re doing okay. Not in every circumstances, but in some circumstances that might be worth it to some people. So I totally agree. I want to just provide one last point before we get out of here. Everything Kathy said about finding this stuff is true, but just from a data perspective, I think one of the challenges if you Google things is that a lot of times the stats that you see are at what’s called an MSA level.
It’s the metropolitan statistical area, and these areas are massive. And so you look at, let’s just use Denver as an example, that’s Denver, but that’s also Boulder. It’s Arvada. It’s Aurora. These markets totally different from one another. I think New York City is an amazing example of this. People were saying that they were leaving New York or New York City, but when you looked at it, a lot of them were leaving New York and just going to New Jersey, which is just across the river, or they were going to Long Island, which is another county. And there’s just really different dynamics. So if you pick a market or if you’re considering a market, spend some time looking at local dynamics. San Francisco is another good example, right? People were leaving downtown. The suburbs around San Francisco were booming during that time because people say, oh, they’re leaving San Francisco. They’re not really leaving. They’re not going that far for the most part. Most of the stuff that you hear in the media about people leaving this market or not, it’s like they’re just moving to a different county.
And that intrastate migration is actually much more common than interstate migration. And so paying attention to that kind of stuff is super important. You can invest. I invest in Michigan. It’s a state that has declining population. A lot of people will say, now, I’m not going for that. But there are cities in Michigan that are absolutely growing because a lot of people from around the state are moving to be near the economic opportunities that are in those few select cities. And within those few select cities, there are neighborhoods that are doing really, really well. That’s the job of the investor. So I just want to suggest to people, don’t get hung up on these high level numbers. Dig a level deeper, look at the zip code data, look at the city data, look at the neighborhood data. Talk to a great agent who’s going to be able to point to you to these things because that really helps you sort of differentiate between these broad trends and what actually is going to impact your portfolio and the performance of your deals.Yeah, that’s why I want to emphasize you can really make money in any market as long as you understand that market’s dynamics.You’dMentioned Denver, Denver’s expensive young people are growing up, it became expensive because it was a cool city. It’s a cool city to live in. When it becomes too expensive, it’s not cool anymore. And then the cool people go where it’s affordable, and guess what? That becomes cool. I’ve followed it over so many years when the yuppies, the young professionals, when they go into a neighborhood, they’re not as scared to go fix up an area because they’re young. Maybe you don’t have kids yet. They don’t mind living in areas where maybe you wouldn’t want to raise kids. And then that area gentrifies. Then this is always, it’s never not like this. So you just have to figure out when an area becomes too expensive, where are people moving? Where are businesses moving within that metro area? And follow that.Absolutely. That’s very good advice. And yeah, just speaking of Denver, rents are going down there. People are freaking out. There’s an oversupply problem in Denver, but one of the issues there is that Denver is a lot of millennials. It’s like people my age and a lot of them are just moving to the suburbs because they’re getting to the age where they wantTo. They’re growing upOr they’re having kids. And so those markets are actually doing well. I was talking to my agent the other day. He was like, the suburbs west of Denver are everything’s flying off the market two days bidding over asking, he had a client who missed out on six offers for single family homes. This isn’t a market that’s experiencing one of the biggest corrections in the country. So it just shows you there are certain areas, this is what you have to learn as an investor,Job growth, and then population growth. These are the two most important things.Great advice. Well, thank you so much, Kathy for being here. We really appreciate it.Always so happy to be here. Thank you.And thank you all for listening to this episode on the market. We’ll see you next time.