II Real Estate Cash Flows Vs. Capital Gains B 2

Many new investors consider two options when it comes to real estate investments: cash flow vs. capital gains. Each one has its benefits and risks. If you’re unfamiliar with these options, you might want to explore them to better understand which kind of investment is right for your next project.

Key Takeaways:

  • Capital gains investments are all about buying low and selling high.
  • Capital gains investments require attention to short-term trends.
  • Cash flow investments are long-term ventures.
  • Cash flow investments require maintenance and attention.

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What Are Capital Gains?

Capital gains occur when an asset increases in price enough so its value is higher than the purchase price. When you sell this property, you realize those capital gains. Essentially, this is what happens when you buy a property and then sell it for a profit. For example, you might buy a home for $140,000. You then make $15,000 worth of repairs and improvements to ensure the house is more desirable. After you fix the home, you might flip it for $180,000 and see your capital gains realized.

If you want to build wealth over time and can pay close attention to short-term trends, taking advantage of capital gains is a good strategy. The idea is to buy low and sell high, perhaps fixing and flipping the home to add value. On the other hand, some investors simply purchase a property and sell it a short time later based on pure speculation.

The Benefits of Capital Gains

The biggest benefit of capital gains investments is you can find a great deal, and it can lead to a significant return. Many investors like this strategy because they can make money faster and with short-term management. Capital gains requires holding onto the property for a shorter amount of time, which is desirable for those who want fast returns.

The Risks of Capital Gains

While it’s possible to make great investments with capital gains, it’s also risky. For instance, you could get stuck with inventory you cannot sell after you’ve spent money trying to fix it. These types of situations put you at risk of foreclosure if you’re stuck paying a mortgage in the meantime.

Capital gains are also risky because you might not be able to predict a falling real estate market. You could lose money because you didn’t anticipate a dip in the economy. Additionally, you’ll have to repeat this process to keep money coming in. Cash flow investments, on the other hand, allow you to keep the money rolling in even when you aren’t buying and selling. Plus, you might end up paying more in taxes than you would with a cash flow investment, leading to more losses.

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What Are Cash Flow Investments?

Cash flow investments are long-term investments. You’ll see a return on investment over the course of ownership, not just with a single transaction. For example, you might invest $80,000 in a property and rent it out. After a few years, the property will start returning that investment to you.

Cash flow investments are often good for those who want to live off the money they get regularly from the property. For example, you might count on the money you get from your two rentals to pay your bills each month. This means you’ll be paying more attention to long-term trends rather than what the market is doing in the next couple of months.

The Benefits of Cash Flow

One benefit of a cash flow investment is it can allow you to see earnings right away. You might not have to make as many improvements to the home as you would to sell it, allowing you to rent out the home immediately. You won’t see your entire return right away, but the monthly income adds up quickly.

Additionally, cash flow investments are more predictable. You know how much money you’re going to get each month if you have regular tenants. This can make cash flow investments much more sustainable than capital gains investments, and you can make decisions based on how much money you’ll be receiving.

The Risks of Cash Flow

One of the biggest detriments to cash flow investments is they can be harder to find. You might find it wasteful to spend time looking for the perfect opportunity. You might also find it wasteful to have months where your property sits vacant. Each month with a vacancy is a month you aren’t seeing a return on your investment. You might come across vacancy issues if you have a property that has decreased in desirability.

Additionally, you must wait a long time for the property to return on your investment. Because selling is not the immediate goal, you’ll be working on generating a smaller amount of cash on a regular basis. You might not see a big windfall from this kind of property if you never sell it, but at the same time, you aren’t at the mercy of the market’s ups and downs.

One additional risk to consider is you might have to put more time and effort into managing a cash flow investment long term. For example, you must put money into the property’s maintenance and repairs on a regular basis.

Cash Flow Has an Upper Hand

When it comes to making safe investments, cash flow has the upper hand. While there’s no wrong choice between the two strategies, cash flow allows you to have money coming in regularly. Even if you aren’t actively adding value to your rental, you’re making money. You won’t have to deal with intense market swings, either.

Ultimately, which investment option you choose comes down to what risks you’re willing to take. Do you like to take advantage of short-term market trends, or do you prefer a long-term venture? Building a solid real estate portfolio is all about taking smart risks. While you can’t minimize every risk, you can account for the factors that matter most.

Infinity Investing Featured Event

In this FREE event you’ll discover how the top 1% use little-known “compounders” to grow & protect their reserves. Our Infinity team of experts show you how to be the best possible steward of your finances and how to make your money and investments work for you instead of you working for them. Regardless of your financial situation today, you’ll have a road map to get to where you want to be.