Should you invest for cash flow or appreciation?
Every person’s willingness and ability to take certain risks are different. In most cases, we decide on which proper investment based on the risk you need to take to achieve your planned financial goals.
When it comes to investing in cash flow or appreciation at the investment-level, cash-flow is a defensive metric. Having a cash-flowing asset protects your bottom-side risk, and equity appreciation becomes your upside potential.
Which one is right for you?
The answer is going to be unique to each individual’s circumstance, risk tolerance, and financial goals. Obviously, the goal of investing is to make your money work for you, but how you go about doing this has an impact. Let’s talk about the Pros and Cons of Cash Flow and Appreciation in real estate investing.
When you invest for cash flow, such as a cash flowing real estate asset, you’ll be one step closer to having the ability to live off of your investment’s income rather than trading your time for money. This is a major milestone! That’s why having some assets that provide cash flow is a critical component of any investment portfolio.
Cash flow investing allows you to receive some returns early to help you hedge against future problems(i.e. inflations or recessions). In the example of apartment investing, tenants of the property pay all of your expenses while any extra revenue the property brings is yours to keep, splurge or reinvest.
If you can offset your salary with passive income from real estate assets, then you have reached financial freedom. You then have the option to retire early and live off the income from your assets.
In general, relatively higher cash flowing real estate assets tend to not appreciate quickly. Considering the spectrum of apartment investing strategies – Core, value-add, distressed – lower risk tends to yield lower returns and higher risk yields higher returns.
Even if you are successful in creating a cash flow portfolio that offsets your living expenses, there will eventually be a time when appreciation becomes the best focus in your investing journey.
Appreciation investing is accumulated over a period of time, which means a portion of the returns on your investment is realized over a longer term. Therefore your money is tied up in the investment until the business plan is executed.
Equity appreciation provides higher internal and annualized returns than cash flow investing. Apartment investing strategies like value-add, distressed, or new construction give different balances of cash flow and equity appreciation. Value add gives you cash flow, and a little appreciation, while new construction gives you zero cash flow and the most appreciation. As an investor, it’s critical to match your appetite for risk to the risk profile of the investment.
When relying on appreciation, you have to invest in areas where there is strong migration, job growth and job diversity. Ideally, you’d want to be investing in the path of progress. Keeping an eye on where and to which areas have new constructions and developments. Choosing the right location is necessary to deciding which real estate strategy to capitalize on. What really matters is how you go about searching and conducting your real estate analysis. All the same, you might make a wrong guess. No one can predict a market crash or what happens when a pandemic hits.
There is no wrong answer. In most cases, you want some mix of both that suits your risk tolerance and portfolio diversification.Money is made with cash flow investing, but wealth is made with equity appreciation.
We HATE only picking one, which is why our strategy is to find investments that offer BOTH. If you want to know more about our strategy and our markets, check out our investment strategy on www.tbcapitalgroup.com.