Is Cash Flow better than Capital Gain?
posted in General Finance |My co-worker and I were driving past the construction site of a high end condominium near to our work place. Naturally, the conversation shifted to the condominium and my co-worker muttered that if he has the money, he would seriously consider buy a unit although his current place is less than 3 years old. He was speculating that the property price will go and in a few years time, he would be able to sell it off for a tidy sum of profit.
Thinking back, this has been the traditional investment model which most people are practicing. It is what Robert Kiyosaki called the Capital Gain or Captial Appreciation investing model.
Generally, with this investing model, people invest into things which they think the value will go up with time. Commonly, people would buy up and invest into real estate with the hope that it will appreciate and they can sell it off for the profit later on. However, there is no guarantee that real estate you own will appreciate. The price can go down! I have seen it with the houses of my relatives and my friends. They are stuck with it, for selling it would incur a loss.
In fact, Robert Kiyosaki cautioned that capital gain investing model alone is risky. Instead, he advocated Cash flow investment model.  Robert Kiyosaki, in his Yahoo Finance column, explained cash flow and capital gain this way:
One of the reasons I was able to retire at age 47, and my wife, Kim, at 37, was simply because we had enough cash flow coming in (primarily from our real estate investments). It wasn’t much — about $10,000 a month — but we only had about $3,000 in monthly expenses. That left us with $7,000 a month to do with as we pleased. Â
On the other hand, capital gains are when you buy a stock for a dollar, and it goes up to $10 so you make $9 a share. Or, you buy a house for $100,000, and it appreciates to $150,000. You sell it and make $50,000.
One of the reasons people do not become financially free is because most of them are focusing on capital gains rather than cash flow. Chasing capital gains alone is gambling — not investing. Want proof? You don’t have to go back very far to find it: Between 2000 and 2003, millions of investors lost trillions of dollars in the stock market.
From what Robert Kiyosaki said, it seems the wiser choice is actually to go for cash flow model. If you are going to buy real estate, then make sure it can generate cash flow or income for you. You only buy real estate primarily for the purpose of collect rents from it. If you are invest into stocks, then go for dividend paying stock or income generating securities like bonds and REITs.
However, it does not means that we should not go for capital gain at all. The main point here is that capital gain alone is risky. If you retirement plan is solely based on capital gain investing model, the stake is going to be very high for you, for there is no guarantee that at your retirement age, the value of your investment has appreciated.
Robert Kiyosaki agreed that:
The key to financial intelligence is how to use both cash flow and capital gains to grow wealthy. So many people are not successful, because they’re generally focusing on only one of the two. The majority is focusing on capital gains.
A simple example of how to use both cash flow and capital gains is buying a piece of real estate that has potential for appreciation in value and renting it out. You have cash flow from the monthly rent you collected and in event that the property has appreciated to a certain value, you can realized the gain by selling it. You get the best of both world!
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