Cashflow or Appreciation?

Consideration of the question of whether you should be investing for cash flow or for appreciation. When it comes to investing, the goal is to make money and get a good return on investment. This can happen in one of two ways- cash flow or appreciation. A cashflow investment is an investment where the revenues cover all expenses (for example when it comes to rental properties, cash flow is considered to be supreme- covering the cost of the mortgage, insurance, property management, and more). And ideally, the revenue should be enough to leave you with the leftover money. It is important to note though, that with a cash flow investment, you are sacrificing some of the appreciation in exchange for net cash flow. A cash flow approach is optimal for those wanting to focus on achieving specific financial goals (like reducing your work hours, investing in a side hustle, or retiring). Cash flow investments make it easier to plan and track your future based on the passive income you’ll receive every month or period. And although cashflow investments enjoy the same tax benefits that appreciation investments do- and we’ll get into appreciation in a moment, cashflow investments tend to help pay for themselves and can have higher returns in the end. 

Now, let’s talk about appreciation, appreciation is when you buy and hold an asset or investment that you think will increase in value over time. When looking at an appreciation strategy, the hope is for the value of the investment to continue to increase over time, but the appreciation won’t be realized until after you extract it. For example, looking at real estate- investors buy a property, renovate, refinance it, and then rent it or sell it. These usually produce low to negative cash flow initially; with investors putting in additional cash each month to stay afloat. Overall, there are ways to reduce negative cash flow, but it is important to be aware of this. Another crucial thing to keep in mind is that a market crash or other economic forces could take away any unrealized appreciation. A double-edged sword with appreciation is that cash flow will improve over time, but the return on equity will decrease, as equity will increase due to principal paydown and appreciation.

With either option it can have an adverse reaction, the more you focus on appreciation, the less cash flow you can expect, and the more you focus on cash flow the less appreciation you can expect. However, the truth within all of this is that in most cases, an investor does not have to choose between the two, as an asset may appreciate AND generate cash flow depending on how long the asset is held. When looking at passive investments there are different options on where best to place passive income efforts- either in cash flow or appreciation. Cash flow provides value that starts returning immediately, while appreciation provides value that grows in the future. Both hold potential unforeseen variables, and it comes down to determining what is best for you. For argument's sake, we are going to say cash flow investments are better for the average person. It can be summarized as when and how you want a return on your investment. With cash flow, the hope is that your return on investment is continuous, frequent, and compounding. Meanwhile, appreciation holds hope on you being able to fund and support it with the goal of it being a good market when you choose to sell the asset. Remember when we said that passive and active investments should be considered in relation to the type of investment you want to make? This is where it all comes together, passive investments that have been done for cash flow, allow you to take a more hands-off approach- looking for compounding future gain, while still having a payout in the present. While active investments align more with appreciation; you have to be active in renovating and making improvements to the rental property you bought, for example. Not only that, but you’ll need to keep an active eye on market trends so you can sell to make a profit and get a return on your investment. 

However, if you’re looking to truly build a solid foundation with a safety net when you invest, then a passive investment might be what is best for you. And when you add the investment substyle of cashflow and appreciation you solidify the potential to reach your goals. With appreciation, it mirrors an active investment through the pour-in of time and energy (and money!) while holding the potential of a high payout when you sell. Whereas, cash flow, mirrors a passive investment through the maintenance of the asset as it grows with the hope of a long-term payout. And although each investment substyle has it gives, a passive investment with an emphasis on cash flow is the better option. It allows you to gain without having to overexert yourself, hold zero or negative cash flow (for the most part), and minimize the need to invest in support staff.