“I’m a cash flow guy. If it doesn’t have cash flow, I’m out.” — Robert Kiyosaki
Between cash flow or appreciation, which one is more important?
Should you be focused on having cash flow in your deals?
Or should you look at total appreciation over that period of time?
I think these are really great questions.
The last several years I’ve spoken with over 1200 investors individually and these are questions that come up.
Let’s try to answer them!
1. Cash Flow vs Appreciation
What does cash flow really look like?
If you want to retire, it’s possible to live off your cash flow.
That sounds amazing, right?
People are really drawn to cash flow for that reason.
If the cash is coming in, if it covers your expenses, you should be happy.
That’s something a lot of people are interested in.
So am I!
The other side of that is appreciation growing long term wealth.
It doesn’t matter when the cash comes in.
If I get a big lump sum at the end, that’s okay.
A lot of deals are structured this way.
Deals sometimes have a mix of both or one or the other.
If you would like monthly or quarterly income, then cash flow might be a good way to go.
If you’re looking at a cash flow deal, here is an example:
We partner with the fifth largest operator of ATMs in the country.
This is a very high cash flow deal we offer periodically.
It starts paying out quickly.
Within a couple years, you’re projected to have about half the investment back.
People love cash flow deals because the cash comes back so soon.
When an investment comes back that quickly, it can be reinvested in other stuff.
It can cover living expenses.
It’s almost like an annuity.
But what happens if you have a deal that’s going to appreciate steadily over time?
An example of this might be a house that doesn’t necessarily cash flow.
In Los Angeles, I choose to rent instead of owning my house.
I’m personally less on appreciation and more on cash.
If somebody buys a particular piece of property believing it will appreciate, they’ve still seen a huge paper gain even if they haven’t realized.
Or if they sold it, they’ve actually had a realized gain in that particular property.
Maybe you wouldn’t have cash flow by owning a house in LA.
It might be a breakeven if you’re lucky.
But you hope it will appreciate over time.
I would say there’s also a third option.
2. Having Both
Whenever you look at different investing options, it’s not simply black or white.
It’s not either all cash or all appreciation.
There are some deals where you can have both.
It’s like having your cake and eating it, too.
So if you want to have and eat your cake, one way is to find a deal that has a mix of both.
We do apartment investing.
That’s our bread and butter.
One thing I love about apartment investing is the mix of cash flow and appreciation.
It also has an inflation hedge built in.
So as rents go up generally, so does the value of the property, and causes rents to rise over time.
This is very common for us, what we’ll see in value-add apartment deals.
Value-add means we come in and we renovate.
We cause forced appreciation, which happens if we do renovations on a particular property.
If we spent maybe $10,000 per unit, we’ll see rent increase $200 a month.
That will increase the value of the property, which will also increase the rents.
In a recent property we had, the average rents were less than $900 a month.
We were expecting to spend $10,000 per unit and see about $200-$300 a month in rent increases.
What we’re actually seeing is around $420 a month in rent increases.
In a commercial property like this, the overall value or appreciation of the property is based on the cash flow or on how much income is coming in.
They’re kind of directly related in different ways.
7-10% cash-on-cash is a common way to look at it.
You’re getting that cash flow per year, typically paid out quarterly.
It often takes around 6-12 months for the cash flow to start.
And then you have the appreciation component.
You’re hoping the deal will double in value.
The overall investor equity potentially can double over five to six years.
Then that inflation hedge kicks in.
Rents generally rise with inflation.
It’s usually a little lagging, but over time we see a pretty strong correlation between those two.
3. Which One is Better?
Now the question becomes which of these options is better.
Is it cash flow or appreciation?
It depends on your situation.
I was able to retire off my passive income.
If you want to cover your expenses in a similar way, then look at deals high in cash flow.
The idea is to cover those expenses and then become financially free.
Another consideration is inflation.
Does the investment itself hedge against inflation so your cash payments from the investment will rise over time?
Or is it more of a fixed annuity type of thing?
If you’re getting an annuity at 4% or 5% and inflation is anywhere from 7% to 20%, you’re actually losing money in real terms.
I don’t want to say that appreciation is completely bad.
My friend George Gammon says he puts about 10% of his investable wealth into speculative stuff.
For me, this is a little challenging because I like to know I won’t lose money.
It’s like the Warren Buffet quote: “Rule number one is don’t lose money. Rule number two is don’t forget about rule number one”
There are the things with a much higher upside such as crypto or gold mining stocks, that have a chance of loss…
But there’s also a chance they could go up by 2x, 5x, or even 10x.
Now I want to hear from you!
Is it more important for you in this stage of life: cash or appreciation?
Let us know in the comments below.
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.