Dave:

Hey, what’s up everyone? Welcome to On the Market. I’m your host Dave Meyer. If you listened last week, we talked about some of the top cashflow markets in the country. These are markets that despite other types of metrics, are seeing the best potential for cashflow. And as promised today, we’re going to offer the counter to that discussion and talk about the biggest or hottest appreciation markets in the country. So joining me today for this conversation are Henry Washington, Kathy Fettke, and James Danard.

So as we get into this conversation, I just want everyone to know what appreciation means. There’s actually two kinds of appreciation that people in real estate talk about. One is market appreciation, which is where macroeconomic forces like inflation, supply and demand increase the value of property over time. They can also decrease the value of property over time. But in the United States over long periods of time, housing prices have always gone up, and that is called market appreciation. That’s what we’re going to be talking about today.

There is another type of appreciation, some people call it forced appreciation, and there is also, I think James regularly calls it value add. That’s where you buy something, you add value to it, and you force the value of that property to go up. That’s a very valid, very useful tool in your real estate investing toolkit. But that’s not what we’re talking about today. So just keep that in mind. In today’s discussion, we’re talking about market appreciation. Henry, let’s start with you. How do you think about appreciation and its importance in your portfolio?

Henry:

It’s interesting when you are starting out in your real estate investing journey, a lot of people are most concerned about cashflow, because a lot of people were like, “How do I replace my income?” They’re most concerned about that immediate money to replace your income. But as you get into real estate investing, you realize a couple of things. And I think the first thing you realize is that cashflow is kind of a myth because big maintenance items can eradicate cashflow pretty quickly on any property. And the second thing you realize is that true wealth is really built through your appreciation, how much your property appreciates over the time you hold it. It’s called buy and hold, right? And then the and of buy and hold is a long period of time. And in that long period of time, you get appreciation and debt paydown hopefully by your tenants paying down the mortgage on that property. And that’s where the real wealth is built.

So appreciation is hugely important. If you talk to old real estate investors, what do they always tell you? “I wish I’d have never sold anything. I should have kept it all.” Because they know the values of those properties are just crazy now compared to when they bought it. So I think appreciation is hugely important. I’m not saying cashflow is not important, but if you can do the and part of buy and hold right, then we’re all going to be in a great place come 10, 15, 20 years down the road.

Dave:

Kathy, I know you’ve long been a proponent of looking for appreciation and have been successful at finding it. What are some of the things that you look for when trying to identify properties or markets that are going to appreciate?

Kathy:

Oh my goodness. Appreciation is my thing because I grew up in California just outside of San Francisco and I watched us live in a house that my dad paid $99,000 for in Atherton. And by the time, I don’t know, seven years later, it was worth a million. He was so excited he sold it and a few years later it was worth 4 million. Now, he was not so happy after that. Of course the Silicon Valley came into existence, so that was a unique situation, but you can become very, very wealthy in an appreciating market, and those tend to be the big flashy cities like New York, San Francisco, LA, Miami, where the big money goes and where the big money wants to be. So following that, where does the big money want to go can make you very wealthy if you can get in front of that.

So that’s what we did back in 2005 when I had Robert Kiyosaki on my radio show at the time, and he kind of explained this pattern of following jobs, following population growth and buying where it’s still affordable so you get in before the pop. If you buy when prices are already high and the appreciation’s already happen, it’s going to be hard to hold that property because it’s just expensive and it might be negative cashflow, which is what people experience in California. It’s negative cashflow. It’s hard to hold that unless you’re living in it or unless you’re doing something creative with it, maybe adding an an ADU or something. There’s several components to it, but my thing and answer to your question is getting there before the appreciation happens and knowing what to look for. And like I said, the things to look for is where’s the money going, where are the high paid jobs going? And if you can get in front of that, you can really benefit.

Dave:

James, you’ve invested in one of the fastest appreciating markets over the last 20 years. Kathy just mentioned her dad buying in Silicon Valley, which was a big tech pop. Seattle probably I would guess is sort of the second-biggest tech pop we’ve ever seen in terms of real estate prices. Could you have foreseen the amount of appreciation coming in Seattle when you first started?

James:

I think since 2008 we always thought we were the little kid to San Francisco. And I think as things became less and less affordable, the income tax differences made a huge runway for us in the Pacific Northwest. The Pacific Northwest right now, I mean if you look at Washington or Seattle versus San Francisco, we have no income tax. And that’s really why this appreciation is forcing through our market. And it’s because these tech companies, as it’s gotten more and more competitive with hiring, they can automatically pay people more by just employing them in Washington. People are walking with 13% more and that’s why we’ve seen so much runway. I’ve always thoroughly believed in the Seattle market, it was very inexpensive compared to San Francisco with lots of growth and with the Amazon, Microsoft factor locally, I think it’s going to continue to go. I’m a product of my environment. I’m a big appreciation guy because it has made a massive difference in our portfolio.

Dave:

Well, so earlier, just a couple of minutes ago, I mentioned that there’s two different types of appreciation, forced appreciation, market appreciation, and you are known, you’re always talking about on the show that you do a lot of forced appreciation. But how do you think about balancing the need to have the more controllable type of appreciation, which is forced appreciation or value add, and balance that with sort of these market forces that are a little bit outside of your control but can add huge benefit to your portfolio?

James:

I think it depends on what market you’re in because when you’re in a more expensive market, you have to kind of force the depreciation to, A, keep your basis lower on the property because you don’t want to pay full market to just get those equity gains. But the balance is, it depends on where you want to go and who you are as an investor. You can get into markets and buy on the fringe. I call it path to progress where you can get steady appreciation and not have to go with that force. It’s heavy force appreciation because you can get into the cheaper sectors, but it’s not just about…

I am a person that will always create value, always will create equity because I want to get to financial freedom faster and that’s just my investment strategy. But you can get into these markets and really forecast based on job growth, quality of living and park your money in those markets and anticipate higher growth. And I think it always comes down to what is the economy doing? What is the potential? Is the population rising and is there high quality of living? And that has been the biggest factor we’ve seen since the pandemic. People want to live where they want to live and they want to enjoy it. And that’s where we’re seeing a lot of appreciation and it can work in both ways. If I would’ve bought in Seattle, well, I was buying in Seattle 10 years ago, less value add, we saw massive appreciation. So you don’t have to go into the heavy deep construction, you just want to really look at the market, see the growth potential and then invest there.

Dave:

Yeah, that’s a great point. I’m curious if you guys also heard this. When I was first getting started in real estate, I always heard that you should never underwrite for appreciation. That if you get it that it’s a benefit, but you need to underwrite your deals presuming that you’re going to get zero market appreciation. Henry, is that something you do?

Henry:

No. So I don’t underwrite appreciation into my deals, but I am thinking about appreciation when I’m buying a deal. It’s a consideration factor for sure. And so what I mean by that is appreciation is important, and you said it earlier, in the United States, it’s typically something that we will get eventually over time. But when I’m underwriting a deal, I want to make sure I am always buying value. And so that’s what I underwrite for because that’s the most important factor to me that I’m buying something for less than its current value. I want to walk into equity from day one.

Now, that doesn’t necessarily mean I’m going to walk into cashflow from day one because value, equity and cashflow are different things. If I’m walking into equity on day one and that property is expected to appreciate over time, then I feel good about that purchase as long as I can do what Kathy said, which is actually hold onto that property during that time. That’s the important part. So, no, I don’t underwrite for equity, I expect it in most cases and I’m thinking about it as I’m buying it. In other words, I may pay more for a property that’s in a more desirable area of my market because I know that what’s coming in that area and that that appreciation is probably going to blow up at some point. And so I may pay more for a property because of that expectation, but I’m not underwriting the equity end of the deal.

Dave:

So in other words, you think of it as upside, right? You’d pay more because there’s more upside to that deal.

Henry:

Correct.

Dave:

You’re not necessarily counting on it. It would still be probably a solid deal. You’re like me, I kind of sometimes think appreciation could take a deal that’s a single or a double and turn it into a home run, but at worst you still have a single or a double, you still have a positive outcome from your deal. You just could get that huge upside. Kathy, since you self-declared that appreciation is your thing, do you underwrite for appreciation?

Kathy:

I do, but I’m very conservative in those numbers. Let’s face it, appreciation, there’s no guarantee. You don’t know what the future will bring. But if you do see big things happening, example is north Texas, we’re seeing billions and billions and billions of dollars being invested in that north Texas area. So there’s a really good chance there’s going to be appreciation there, but we still underwrite it to the average of the last 20 years, which I think on ours was like 3% or something. I think it’ll be a lot higher. So we put it in there, but we’re superconservative. We also anticipate in our heads, like Henry said, that it’ll be much higher than that.

James:

I love what Kathy and Henry said. For me as an investor, you don’t want to speculate. When we buy a property, we are buying on today’s pricing. The benefit of buying in, if you think there’s going to be appreciation, then you adjust your buy box and your expected margin’s lower. If you think it’s a healthier market and there’s runway, you’ll buy it on a tighter deal. But I’ve seen over the years when people factor in the appreciation, especially during the pandemic, I’d get deals from wholesalers and they’re like, “Oh, this market’s going up 3% a month.” That is not a smart thing to do because you can’t forecast that. And for the last 18 years, we’ve never ever factored in appreciation. We will drop our expected returns and go, we are willing to buy a skinnier deal in this market because we see growth, but, in my opinion, you do not want to factor those numbers in. That’s how you can get yourself in a heap of trouble.

Dave:

Yeah, actually you guys know I wrote a book with Jay Scott and he and I were working on a little bonus that we were giving out and it was like a spreadsheet and he sent me his and his spreadsheet didn’t even have appreciation into it. And I was like, “The spreadsheet is broken.” And Jay was like, “No, that’s how this spreadsheet works.” I was like, “You don’t even have a line for it, you can’t even add it?” He was like, “No.” That’s how I keep discipline in it. I don’t even allow myself to put any appreciation into his spreadsheets, into his underwriting. I do underwrite a little bit about the pace of inflation personally, but I always remember that. It was a good lesson to learn from Jay.

Kathy:

I remember in 2005 when people were making such dumb, dumb decisions and paying full price and over-asking price saying, “Well, it always appreciates in California. Prices always go up,” which over time that is true. That is true. But a few years later it wasn’t true. So if you were forced to sell a few years later, the property you bought could have been worth a half or a fourth of what you paid. It took 10 years for values in California to come back to what they were. So you had to hold it at least 10 years to just sell it for what you paid. Again, you just have to be careful with appreciation and not expect it.

Dave:

All right, well, this is a great conversation and hopefully frames the rest of our conversation, which is about the top four markets that have appreciated over the last five years. So there are a million different ways that you can measure appreciation. We could talk about the last year, pre-pandemic, last 20 years. We decided to use five years because we wanted to look past the pandemic because we all know things went crazy during the pandemic. We saw these outrageous appreciation rates. So we didn’t want to look back one year or two years because we’ve kind of been correcting for that. So instead we wanted to just look where we were in 2019 to where we are today. And after we come back from this break, we’re going to share with you the four markets that have grown the most in the last five years.

All right, welcome back to the show. Again, in this part we’re going to be talking about the four markets that have grown the most in the last five years. And just to remember everyone, we are not recommending these markets, we are not saying they are the best investor markets, we’re just sharing some data with you. And these objectively are four markets that have appreciated the most over the last five years. So each one of us on the show is going to cover one of them and as we discuss them, Kathy, James, Henry, I’d love to hear from you if you would invest in these markets or what you think about them because again, just because we’re mentioning them doesn’t mean that we’re recommending these markets. James, let’s start with you. What is number four?

James:

Number four is Mountain Home, Idaho, which honestly I never even heard of it.

Dave:

Me neither. But it’s very literal. You know the name of the town. You already know what it looks like. There’s mountain homes there.

James:

It sounds amazing, right? I mean you get your mountain home and it also sounds like a short-term rental mecca. We’ve seen this market, I was a little surprised. I had to dig in a little bit on Mountain home, Idaho though. So in the beginning of 2019, the average home was just under 200,000 and now we have a median home price of 350,000.

So we’ve seen a lot of growth in this market and I think we’ve seen it because it was one of those pandemic cities where people were really, they wanted to optimize the secondary home purchases where they could get really low rates. They didn’t have to go into their office, they wanted to commute and they wanted to live in a great environment and live in nature because we were all trying to get outside during the pandemic, and this is definitely one of those towns that spiked majorly during that time because when you look at the average kind of appreciation from 2019 to ’20, it was fairly flat and then it jolted right at the beginning of 2021 where they saw almost a jump of about $100,000 in median home price, which is about a 35% increase just in that 12 months.

For me, when I look at these markets that are kind of these spiky markets where people were going, they optimized the cheap financing, they were able to buy short-term rentals, they were able to buy their secondary home, these markets are going to cool down and I would not anticipate this kind of appreciation for the next five to 10 years. But that doesn’t mean that that’s a bad market to invest in as far as a cashflow investor. The overall metrics on the market are very affordable. When you look into the median home price at 315 and the average rents are around 1,400 a month.

There’s some really good metrics behind the pricing and what the rent growth is. And I think if you’re that investor, that is, if you’re looking for those equity bumps, which I always am, I’m not really going to bank it in this specific location, but I think you could see some steady growth. You have low unemployment, you have cheaper median home price, you have higher rents, and so you can buy properties and rent them out and do fairly well and get some steady gains. So I do think it’s a good market for long-term. I just would not factor in this high appreciation. I would take that metrics right out of this market.

Dave:

Yeah, I’m kind of surprised at the median home price here. I think a lot of the markets where you see fast appreciation generally speaking are higher-priced markets and even at 350, that’s still below the median home price in the US. So that is a relatively affordable place. I’m just guessing, we don’t have this number in front of us, but these mountain towns also tend to have very low inventory. So I’m wondering if you can even find anything to buy right now. All right, so that is our first market, Mountain Home, Idaho. Kathy, what’s our second market?

Kathy:

My market is Kalispell, Montana. And this has been on the radar maybe because of Yellowstone’s popularity, if you guys watch that show, a lot of people wanting to move to the country and buy ranches. This whole area is growing rapidly with wealthy people, again, wanting to go out there, have some land, be a cowboy when they can and get their kids out in the fresh air. It’s a very small population. When you see population growth, you got to look at what is the overall population because it’s going to make a big difference. Is it 25,000 or is it 250,000 or 2 million? Because it’s going to make a big difference if there’s 2% growth, you’ve got a lot more people coming in, obviously in a larger market.

So this is a growing market for obviously people wanting to get to Glacier National Park. It’s beautiful. We have a project, actually, I don’t know if you guys know this, but we have a subdivision we’re building in Bozeman, Montana, and we got there years before Yellowstone was on the map because we could see that a lot of these baby boomers retiring or just wealthy people would want to have more land out in nature. This is a great market, probably more for second homes or short-term rental or shared rental because it’s pretty expensive with a higher median home price of 600,000 around there. We haven’t seen price growth there this past year, but over the past five years there has been growth.

So kind of like James said, you don’t know if this is going to continue. There was a lot of people moving out to nature during COVID, some of them are moving back to cities. So it’s one of those markets you’d want to be really careful moving forward. You don’t know if it’s going to have the same kind of action that it had the last five years, but over the last five years it’s definitely been on the map.

Dave:

Yeah, I think this is really sort of the important thing to look at appreciation data and rent growth data to be honest over the last couple of years is that we just saw this anomalous period where not only did we have super low interest rates and constricted supply, but we also saw big shifts in migration patterns that we don’t know if they’re going to continue. A lot of them are already slowing down, some of them are speeding up, and so we just don’t really know if some of the trends that started to evolve during the pandemic are going to continue. And I think these first two markets that we’ve been talking about, Mountain Home and Kalispell are perfect examples of that.

So as Kathy said, and as we sort of talked about at the top of the show, you want to underwrite these deals. If you’re going to look at these markets based on things other than just population growth that you don’t know if it’s going to continue, you also have to ask yourself, is the economy growing or is it just rich people moving in but they’re not actually creating any new jobs? You have to go one step deeper if you’re going to look into these markets, particularly one like Kalispell where the median home price is 600 grand, it’s pretty expensive.

James:

Who doesn’t want to be John Dutton though? I mean that’s got its own appreciation factor, all the tech guys that want to be their own personal cowboy. It’s like when you’re a little boy, you want to become a cowboy and that’s how you can get out there.

The only thing I do like about this market for appreciation is we’ve seen, I think the wealth gap has been extensively expanded the last three to four years and people with money have money and they want to live where they want to live and they want to own property where they want to own. And I think the demographic of people with capital will buy still in these areas. And I would say in the upper echelon, I actually think that the appreciation could be a little higher here, the kind of base hit properties because it is kind of unaffordable, but you can still get a good house like a three bed, two and a half bath, 2000 square feet for 510. That’s not that bad on pricing. That’s around what, 250 bucks a square foot roughly. And so when you can still buy around replacement costs, you could still see some growth.

Kathy:

And just like any place, it just depends on what you’re trying to do. Like I said, about five years ago, my partner came to me and said, “I’ve got my daughter going to school in Bozeman, Montana, and I couldn’t find a place for her to live because it’s growing so fast.” And I was like, “What?” I hadn’t obviously watched Yellowstone yet, but I’m like, “Why are people moving to Bozeman? What’s going on there?” And then he looked around and saw that there weren’t really any other builders either. So that’s when we bought some farmland and brought on new supply and we were kind of expecting those homes to sell for around 350 and they’re selling for twice that. It’s been one of our most successful projects. One of the nice things about these small towns is when you do have a lot of wealthy people moving to those areas, but there’s no competition, there’s no other national builders, nobody there, you don’t have the competition, but you got the demand. That’s been super successful for us.

Henry:

Yeah, I actually went to Kalispell, Montana about, I don’t know, six to eight months ago.

Dave:

Oh, yeah, you recorded an episode of this show from there. I remember that.

Henry:

Yes, I did. I did record an episode of this show from there. It is absolutely a beautiful place, but there were some things that I noticed that if you were going to invest there, it’s kind of like what Kathy was talking about, especially if you’re wealthy, if you’re going to invest in one of these smaller towns that have high price points and they get great appreciation, you might have to get up and go out there. Because what I saw when I was out there would lead me to believe that if I had the money and I was a pure appreciation investor, this might be an okay place to invest because I saw the airport was under construction. Anytime they’re throwing millions and millions to billions of dollars at an airport, it’s because they expect demand to be increasing for travel. They want to make travel easier. That is a great sign if you can get in early.

I saw tons of new development housing tracks all across there and in these new development housing tracks, they were offering houses on big plots of land. So it was kind of giving people what they want without giving them what they don’t know they want, if that makes sense. Everybody thinks they want to be a rancher until they own a ranch and that crap is work. What they really want is a house on five to 10 acres that somebody else maintains. But they were building these houses on these big five to 10 acre plots and selling these new construction big old houses to the people who are wanting to have their second homes there or the people who are wanting to relocate there. So all of those things indicate to me that the expectation is money is going to move there, which is going to continue to drive the appreciation up. But I would not have known those things just from doing some Google searches. I had to go get on a plane and go out there.

Dave:

All right, so far we’ve talked about Mountain Home, Idaho and Kalispell, Montana to mountainy types of places in the west for third market. Henry, where are we going?

Henry:

All right, I have the market of Sevierville, Tennessee. Sevierville.

Kathy:

Sevierville.

Henry:

Sevierville?

Dave:

Sevierville. There’s a lot of vowels in there.

Henry:

The Verve, wasn’t that a band, The Verve?

Dave:

Yeah. And The Verve Pipe. They’re both bands.

Henry:

So we’ve got Sevierville, Tennessee. What this market has going for it is it’s close to the Smoky Mountains and we know a lot of people like to go to the Smoky Mountains in vacation. It was a great huge Airbnb boom destination a couple of years back. So you’ve got about 12 to 15 million people visiting this part of the country every year. One of the stats that I saw here that was kind of mind-blowing is the shopping, one of the best shopping destinations in Tennessee. They’re slated to do over 2 billion in sales. That’s crazy. So people are going there and they’re spending money there, and if that’s happening, well, you can expect some appreciation.

As I was continuing to research this market, one of the things that I saw that would give me some pause is this city does have relatively high vacancy rates, so you’ve got around 20% vacancy rate. And why that’s important is because of what Kathy’s been saying this whole time about investing in appreciation is you’ve got to be able to hold it, and if you’re going to hold it, you got to rent it out. And if you’re going to rent it out, you got to be able to do as much rent as possible to cover the amount of money that you’ve got to actually put into the deal. And with 20% vacancy rates, what that tells me is the people who are paying to rent there have options. They can pick and choose what they want, which means you’re going to have to be competitive with what you offer.

Now this may be because there’s a lot of short-term rentals there and short-term rentals typically have higher vacancy because you’re not renting for long periods at a time, but that is absolutely something to think about. But in terms of appreciation, over the last decade, this market has seen about 150% increase in appreciation. So the values are there if you can hold onto the property, and people are definitely going here and spending some money.

Kathy:

Oh, yeah, I know this town well, I know it for good reasons and bad reasons. This area, first of all, if people don’t know Pigeon Forge or Gatlinburg, it is the Christian Vegas. There’s lots of fun things to do for family that feels like Vegas, lots of bright lights and massive tourism there. If you don’t know about it, you got to find out this is where the south goes because Dolly Parton, this is where she performed and there’s the, what is it? The Dolly-

Dave:

Dollywood.

Kathy:

Yeah, Dollywood. So when I discovered this and found out that it’s driving distance to many large cities as a vacation destination, and Sevierville is kind of the gateway to it, plus it’s really close to Knoxville and Knoxville’s growing massively. So I saw this, you guys, I’m embarrassed to say, but like 20 years ago, the problem I made then, and it’s in my book, if you want to read some of my mistakes, and I’ve made so many, we got construction loans, we were building three homes in Sevierville, and then the mortgage crisis happened and you could only have 10 loans after that. And we had more than 10 loans. We had a construction loan, couldn’t refinance out of it, couldn’t hold it, lost it.

So back to this theme, when you find a really super hot market, you better be able to hold your property. And that you could say was a little bit out of my control where who knew that there would be a mortgage meltdown and all of a sudden the banks would limit you to just 10 investor loans. Before that, it was unlimited, but you have to know if you’re in a short-term loan, anything can happen and there might be something that happens that makes it difficult to come out of that. That’s why I’m cautious about balloon loans. So anyway, super hot market. It’s a lot more expensive now than it was when I was buying, and that’s coming back to that you got to make sure you can make the numbers work. Plus a lot of short-term rental people have gone there, so my guess is that it is way oversupplied.

Dave:

Every short-term rental person is there. You’re not even a short-term rental investor if you don’t own a property in the Smokey Valleys or Smokey Mountains, whatever they’re called. But I think you made a great point, Kathy, in that appreciation’s sort of like the concept of compounding, you have to hold onto it for a long time for it to really make value. If you’re trying to buy a property and get appreciation in two years, that is a real gamble. If you’re trying to buy a property and get appreciation in 15 years, you’re probably going to get it. That’s a pretty low-risk bet. So you have to really think about your time horizon when you’re considering appreciation. So far we’ve talked about Mountain Home, Idaho, Kalispell, Montana, and Sevierville, Tennessee. We’re going to take a quick break before we get into our fourth and final top appreciation market.

Welcome back to the show everyone. For our last market, I will be bringing you Steamboat Springs, Colorado, which is not too far from where I own a short-term rental and is an absolutely beautiful mountain town. I guess this is the theme, right? All four of these markets are mountain towns, relatively small.

Kathy:

I think it shows what people were wanting over the last four years is to get out of town and quit their job or work remote.

Dave:

Get away from people.

Kathy:

Get away from people.

Dave:

Yeah. Well, Steamboat Springs is a population of only 13,000. It’s about a three-hour drive from Denver and it has massive appreciation of 87% over the last five years. Now that’s very exciting, but there are some downsides to Steamboat Springs. One is that the median home price is over $1 million, which is pretty crazy because you see expensive homes in a lot of mountain towns, but oftentimes they’re balanced out by more affordable homes. But having a median home price of over a million bucks is pretty rare, even for an expensive mountain town. And the rent to price ratio is just 0.28%. So you’re not likely to be getting any cash flow in Steamboat Springs, Colorado.

But I think a lot of what applies here to Steamboat has already been said. It’s an area where people with money tend to want to go. It’s sort of this wonderful area for outdoor recreation and during the pandemic that is what people wanted, so people moved there. Because we’ve sort of talked about these markets and there’s a lot in common here, rather than jumping into Steamboat, guys, I’d love to hear just from each of you quickly, what are some of the themes or some of the lessons you think that people should take away from these four markets? James, let’s start with you.

James:

I think if there’s ever remote work, again, go buy property in desirable areas. I think it just shows the trend of what we saw the last two years. Because if you look at the last five is what we’re evaluating on the appreciation, but really the hockey stick was the last two to three. And when there’s cheap money in the market, people will spend it. And I think going forward, I would be very concerned about factoring the same appreciation schedule in, but it does show that any type of investment asset class can grow at different times. There’s no one right asset class. Seattle grew with the economy growing, the tech boom. Pandemic grew lifestyle and living in short-term rentals. And no matter what asset class you’re in, if you stay with the trends, you can kind of get more appreciation out of it. So it’s really just track human behavior and go try to buy there. But I would say these are seasonal cities and they have their purpose, but they might not be the most appreciating over the next five years.

Dave:

All right. Good tip. Henry, what’s your quick lesson from these four markets?

Henry:

Well, these four markets in particular, the lesson for me is, man, you really, really have to understand that market in depth if you’re going to make an appreciation bet because they’re niche markets. It’s not like the markets that were mentioned at the open of the show when we talked about investing in the Miamis or the New Yorks or the LAs, right? Those are places people understand more where you can probably “bank” on that appreciation over time. But these niche places, you really need, like I said earlier, to go get on a plane and get out there and see with your own eyes, are people coming there? Are there amenities for the people coming there? See if what you see matches what you’re hearing about these markets. Because if you take a bet on a market like yours, Dave, and buy a million dollar plus property banking and appreciation and things don’t go that way, that is a big, big loss to take.

Dave:

Good call. Very good advice. All right, Kathy, appreciation’s your game. What’s your advice?

Kathy:

These kind of markets are the first to go to do the opposite, to depreciate, to lose value during hard times because they tend to be second home markets, or it’s where people will get rid of these homes when they need more cash. So I can tell you that from personal experience with our Park City properties there, it’s volatile and you have to have other reasons to be there. So, for example, if you want to use that property, you want to have family memories there and you want to make a little extra money by renting it out, that could work. Or if you carve it up, you rent by the room or have some other plan.

The very first million dollars I made was the first property we bought, because I didn’t know anything about real estate, but I knew we were in a growing market where it was hard to get property and I was able to find this house that was like six bedrooms that we turned into a fourplex and it made $100,000 every year for 10 years. We made a million dollars just living there, renting out, carving it up. Again, you’d have to be able to hold it. And ideally, I would say most of these markets are places where they’ve gone up in value because people have bought second homes. This isn’t necessarily an investor market.

Dave:

Awesome. Great advice. Well, I’ll leave you all with two different things, two different thoughts. One is all of these markets have something I look for when trying to predict appreciation, which is supply constraints. I like to look for areas that are geographically limited to how many homes that you can build in those areas. Seattle has that because there’s so much water there. San Francisco has that. New York City has that, and that is also very common in these mountain towns. There’re bigger lots. There’s literally mountains that you can’t build on, and so it constrains supply in high-demand areas that pushes prices up.

The second thing I’ll just remind everyone of is a really good stat that I like is that during the pandemic demand for second homes grew 90%, it was almost double what it was before pandemic, and now it is below where it was before the pandemic. So just if you want to forecast where these markets might go over the next few years, that is something you definitely want to consider is are people still buying at the same pace that they were over the last couple of years?

All right, well, thank you all so much for sharing. Before we go, I’m going to ask you guys to vote really quickly. I’m going to give you a hypothetical here. If you had to pick between great cashflow and modest appreciation, which would you take? Henry?

Henry:

Modest appreciation.

Dave:

Kathy?

Kathy:

I’m not sure I understand the question. Are you saying modest appreciation with cashflow or just-

Dave:

No. Here are your choices. You either get a 15% cash on cash return or 5% a year appreciation.

Kathy:

I’ll take the cashflow.

Dave:

All right. James?

James:

I’m going appreciation because if you get 5% on the median home price, that’s $21,000 a year.

Henry:

That 5% is compounding.

James:

Compound it and then roll it and get your cash flow later.

Dave:

Totally. At this point in my career, I take the appreciation, but later in my career… It’s pretty hard to get a 15% cash on cash return.

Kathy:

Yeah. Maybe I’m just old.

Dave:

Maybe you just take that because you could probably get 5% appreciation somewhere else. But I asked that question because I just want to demonstrate before we go that this debate about cash flow and appreciation is all relative, right? We were all just talking about how great appreciation is, but if you had an amazing cashflow deal, you’d take that. So you have to think about everything holistically, and you have to think about the right context. There is no right answer. That’s why you listen to shows like this, so you can understand some of the things that you should be thinking about when deciding between cashflow and appreciation or a mixture of the two.

Thank you all, Henry, Kathy, and James for joining me. And thank you all for listening. We’ll see you for the next episode of On The Market.

On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content. And we want to extend a big thank you to everyone at BiggerPockets for making this show possible.