If you ask a lot of real estate investors, they will tell you that when it comes to cash flow and appreciation, you can't really have both. Markets that cash flow really well, like the midwest, don't really see that much year over year appreciation. And markets where the appreciation is high, like Santa Barbara, traditionally don't see much cash flow.
New technologies, trends and legislation have changed the calculus, though. Rather than asking the question "do I want cash flow or appreciation?" We like to ask the question "how do I create cash flow in this high appreciation market?"
Here are a few strategies that have worked for us:
1. Short Term Rentals
In a vacation destination, short term rentals can be an extremely lucrative way to generate cash flow while also benefitting from the huge appreciation we’re seeing locally. Now you need to keep in mind things like local regulations and guidelines, of which there are many in Santa Barbara, but if done correctly, an STR can bring in 3-5x as much revenue as a long term rental. Short Term Rentals are not nearly as passive as traditional long term rentals, but if you're willing to put in the work, you can generate some serious cash flow. As an example, one of the short term rentals that we own in Santa Barbara generated over $300,000 in 2021, and is on track to generate closer to $350,000 in 2022.
2. House Hacking
House Hacking is when you buy a home with multiple units, and you live in one while renting out the others. This lets you take advantage of much better financing options (because it’s your primary residence) while still being able to generate rental income. By improving your debt to income ratio through renting out the other units, you’ll improve your buying power dramatically. Another added bonus: by renting out portions of your primary residence, your tenants are effectively paying most (if not all) of your mortgage for you. And now with California's new ADU laws, you can even House Hack in a single family residence if it has an ADU on the property!
3. The BRRRR Strategy
This stands for Buy, Renovate, Rent, Refinance, Repeat. It is really a way to scale a property portfolio without putting up all the capital yourself. By renovating the property and improving the after renovation value (ARV), you can then go and refinance the home at 70-75% LTV. As an example, if you buy a house for $1 million with $200k down, then put $150k into a remodel, you'll be out of pocket $350k. If you then go and refinance the property (which is now worth $1.5m thanks to your smart renovations) at 75% LTV, you can cash out $325,000, leaving only $25,000 of your own capital in the deal. The goal is to get most, if not all of your initial down payment back out of the house, while still having some cash flow left over.
To learn more about any of these strategies, head to the Investment Strategies section of our website!