Forget About Appraised Value

Copyright (c) 2012 Nexus Property Management

Since the bottom fell out of the real estate market in 2008 we always hear about home values and the dreaded decline in value. The news tells us that values fell 10% 20% 30% or whatever number they find. I purchased my first home at the worst possible time during the peak of the market in 2005 and then two more investment properties in 2006. All those properties are doing well and I'm here to tell that if you invest correctly you should forget about appraised value all together.

I hear many people saying "my house is worth...." "I won't take anything less than.. " "I could sell for..." but the real truth about value is very simple. Anything of value is worth only what someone else is willing to pay for it. Simply put this means appraised value is irrelevant, and the only value that really matters is the price the buyer agrees to and is paid at the closing table. So with that in mind I would tell you to forget about appraised value and focus on one thing and one thing only, the golden rule of positive cash flow.

Most of my properties purchased at the peak of the market are not worth what I paid (on paper, going by appraised value) but they are great assets because they produce positive cash flow. This is all that matters, if the property gives you positive cash flow it is a good investment. I would argue that you should never sell an asset that makes you money, especially today when there are many ways to finance investments or borrow from equity that all result in not realizing capital gains for tax purposes. So when you evaluate properties you should be looking at cash flow, and not trying to invest and hope the market goes up. You need to invest looking at the near term so you can make it to the future to experience any rise in value.

Invest in properties that make you money today and in the future you will find equity from lower mortgages and appreciation but the main aspect you should examine when choosing a real estate investment is cash flow. There are many great aspects of real estate investing but in my opinion a change in the appraised value of a property is usually irrelevant because I don't plan on selling. The main aspects of real estate investing are cash flow, deductions, and depreciation. With those 3 things you can get great financial benefits that can improve your situation drastically over time.

So because I am terrible at market timing and bought at the peak, I now own properties that have gone down in appraised value steadily since 2008. Luckily I didn't purchase at that time looking to sell now. I purchased to get properties with positive cash flow to improve my finances over time, and since the market collapse in 2008 rents keep rising ;)

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