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Cash Flow vs. Capital Growth: Which is Better?

“I’m a cash flow guy. If it doesn’t cash flow, I’m out.”

— Robert Kiyosaki

I’ve spoken with over 2,000 individual investors.

In those meetings, I always ask this question:

What’s more important to you: Cash flow or appreciation?

Cash flow is money you’re getting each month or each quarter during a deal’s life.

Appreciation gives you a lot of money on the back end.

Those are two separate things.

The more important of the two really depends on what’s important to you.

I’ve become much more of a cash flow guy myself.

Today, I’m going to share why this is.

I’m also going to talk about the importance of having a plan.

Let’s jump into it!

1. The Difference Between Cash Flow and Appreciation

Most deals are a mix of both cash flow and appreciation.

Some can be one or the other.

Cash flow should be important if you:

A)   Want to retire from a job/business, or

B)    Want to live off the cash flow produced from the deal

Both reasons are pretty similar, but they’re important to remember.

Appreciation is important if you value long-term wealth.

Maybe the appreciation comes from a retirement account, for example.

If you go this route, you probably don’t care when you get paid.

You’re looking for higher total returns.

Appreciation deals don’t have cash flow for a while, but they do have a lot of backend growth.

Some unique deals could offer 4x to 100x potential growth.

But you do trade off consistent cash flow for the promise of money later..

2. Examples

An example of a cash flow deal is a business deal we’ve done for a number of years.

The deal offers consistent cash flow.

It doesn’t offer any appreciation.

The investment is in equipment that actually depreciates completely to zero.

Really, there’s no other upside.

But this deal offers cash flow every month and every quarter.

In fact, according to this research on the influence of cash flow: The higher the operating cash flow, the more the investment will earn.1

An example of appreciation is if you buy a single-family house.

I used to invest in these myself.

The issue with them is they don’t cash flow.

A house will appreciate, but it won’t cash flow.

It might even have a negative cash flow.

But if you invest in single family housing, you’re more hoping for long-term appreciation.

With property deals that mix the two, you get maybe 8% cash flow and hope that the property will appreciate over time.

You’ll actually get more money when you sell it.

3. Which is Better?

So, which is better?

Cash flow or appreciation?

I have come to believe that cash flow is king.

It allowed me to quit my job.

It allowed me to cover my living expenses.

It allowed me to replace my overall income through investing.

A lot of money someday is great, but it doesn’t actually give you the freedom you want.

We all want freedom from a job.

In my book, Fire Yourself, I give tips on how to replace your work income with passive income in three years or less.

The only way to do that, in my opinion, is through cash flow.

The people who don’t care about cash flow usually have a net worth of $10 million or more.

If you’re somebody making less than a $1 million dollar salary, cash flow will be really helpful for you.

Appreciation might work in more speculative deals.

Speculative deals are things like venture capital, crypto, and stocks.

Those deals can make more sense because they have a higher upside.

That’s why some people really love higher appreciation deals.

It doesn’t matter if you get paid now or paid later—you’ll get paid a lot of money eventually.

However, speculative deals come with a lot of risk.

According to this study on speculative bubbles and productive investment, speculative investments are primarily short term and liquid.2

Because of this, you need to pay close attention to the market and when to cash out.

In contrast, cash flow reduces your risk in the deal because you’ll always get paid back.

If you have a deal that pays you every single month, it’s reducing the amount you have invested in that deal.

That’s another thing I like about cash flow deals.

Now I want to hear from you!

Are you more for cash flow or for appreciation?

Let us know in the comments.

Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.

If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.

Check out my bestselling book on Amazon!

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.

Works Cited

1. Dwi, Martani, Narita and Dini. “The influence of operating cash flow and investment cash flow to the accounting conservatism measurement.”, 9 (2010): 1-6. https://doi.org/10.17265/1537-1506/2010.06.001.

2. Xavier Raurich and Thomas Seegmuller. “On the Interplay between Speculative Bubbles and Productive Investment.” Corporate Finance: Valuation (2016). https://doi.org/10.2139/ssrn.2845780

Bronson Hill

Bronson used to work as a consultant for a medical device company but switched to investing in apartment buildings to make his money work for him. He started with a single rental property that made good money and, after some advice from a family member, moved into bigger real estate projects. Now, he's all about helping others get into this kind of investment to earn money without having to work all the time. When he's not dealing with investments, Bronson loves to travel, write songs, stay active, and help fight modern slavery through his work with Dressember. He believes in working smarter, not harder, and wants to share how that's possible with everyone.

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