Appreciation is SMOKE!
45sThe speaker's blunt dismissal of appreciation as 'smoke' challenges common real estate wisdom and sparks curiosity.
▶ Play ClipAI Summary
In this interview, a seasoned real estate investor with 25 years of experience explains why he deliberately excludes appreciation from his investment calculations. He emphasizes that appreciation is 'smoke'—not real until the property is sold—and instead focuses on cash flow and value-add strategies that directly increase rent.
[00:00]
Appreciation Excluded Intentionally
The investor confirms that he intentionally does not include appreciation or value-add in his yield calculations, explaining that his 25 years of experience, including witnessing the crash, have shaped this approach.
[00:16]
Crash Experience Shapes Strategy
He recalls seeing people with $10 million balance sheets go bankrupt, divorce, and leave the game during the crash, reinforcing his belief that wealth requires holding for 10 years.
[00:31]
Appreciation is Smoke
He states that appreciation is 'just smoke' and not real until the day you sell, aligning with his long-term buy-and-hold philosophy.
[00:49]
Value-Add Only If It Increases Rent
He will include value-add improvements only if they increase rent, such as converting a two-bedroom to a three-bedroom, which can raise rent from $900 to $1450, but only if the square footage works.
[01:01]
Plan Required for Value-Add
He emphasizes that he must have a plan; cosmetic upgrades like a new kitchen and bath don't generate rent, so he dismisses them as irrelevant.
The investor's core takeaway is that real estate wealth is built on cash flow and rent-increasing improvements, not speculative appreciation, which he considers unreliable and risky based on his experience.
Study Flashcards (5)
Why does the investor exclude appreciation from his yield calculations?
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Why does the investor exclude appreciation from his yield calculations?
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Because he has seen crashes and believes appreciation is not real until the property is sold.
00:16
What is the investor's wealth formula?
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What is the investor's wealth formula?
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Hold for 10 years.
00:31
What type of value-add does the investor include?
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What type of value-add does the investor include?
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Only improvements that increase rent, like converting a two-bedroom to a three-bedroom.
00:49
What rent increase does converting a two-bedroom to a three-bedroom yield?
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What rent increase does converting a two-bedroom to a three-bedroom yield?
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From $900 to $1450.
00:49
Why does the investor dismiss cosmetic upgrades like a new kitchen and bath?
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Why does the investor dismiss cosmetic upgrades like a new kitchen and bath?
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Because they don't generate rent.
01:01
💡 Key Takeaways
💡
Crash Experience
Provides a concrete example of the risks of relying on appreciation.
00:16
💬
Appreciation is Smoke
A memorable quote that encapsulates the investor's philosophy.
00:31
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Rent-Increasing Value-Add
Offers a practical example of a value-add strategy that aligns with cash flow focus.
00:49Full Transcript
[00:00] appreciation smoke. You said earlier, when you were talking about figuring out your yield, when you were talking about what's a good deal in your market, you specifically did not mention appreciation or any type of value add. So I take that that's intentional. And can you explain to
[00:16] us why? Again, you got to remember what I've seen over 25 years. I've seen the crash up close and personal. I saw people with $10 million balance sheets go bankrupt, divorce, and leave the game. And as I said in my wealth formula, the whole idea of getting wealthy is you have to hold for 10 years.
[00:31] And appreciation is smoke. It's just smoke. It's not real until the day you sell. And I'm a long-term buy and hold investor. I will include value add if it increases rent. Like, for example, one of my greatest things is to buy a two-bedroom but convert it to a three, assuming the square footage works.
[00:49] So I will do the math, including make ready of adding a door, a closet, and that. and then I'll have the rent go from, you know, a two bedroom might be 900 to a three bedroom being 1450. I'll do that.
[01:01] Like that will be included, but I have to have the plan. I'm not, oh, it's got a new kitchen and bath. That doesn't give me rent. Are you kidding me?
