Real Estate: Cash Flow vs Capital Gains
If we had to list one thing the rich do differently than the poor, is that they put their money to work instead of working for their money. The majority of people earn their money by going to work everyday and collecting their monthly paycheck. This is what they have been taught to do by their family and from teachers. This also provides as a sense of security and feels like the safest route to take.
However, what if we told you there is another way? An alternative path in life that does not require trading your time for money ? A path that will allow you to pursue your passions, achieve financial freedom and reach your life goals ? Intriguing isn’t it?
How can you do that you ask? Investments, of course . This is how the rich do it. Instead of having their money sitting in a savings account, it is being invested and delivering a return.
What is the difference?
Difference investments provide different results When it comes to investing in real estate, there are two primary outcomes and investor invests for:
Capital Gains: it essentially means buying a property, doing some repairs and renovations and then selling it a profit. Typically once you have sold the property and deducted the acquisition and renovation costs, the remaining should be your profit.
Let’s say you purchase a 1 bedroom house for £100,000. You make some repairs and improvements to the house which increases it selling price to £150,000. Now you’ve made back your initial investment with a £50,000 profit. This is termed as capital gains. Any asset or investment you sell at a profit is a capital gain.
The same principle holds for other investments. If you buy a share for £30, it then increases in value £50, it is also considered a capital gain profit.
While you can make money through capitals gains, it is important to note the risks. One of them being that you need to keep buying and selling properties non-stop. If you stop, your means of income stop as well. You also have to be watchful of the real estate market. If for instance the market crashes you risk of being left with unsold inventory.
Cash flow: is realized when you purchase a property, hold on to it and every month, quarter or year the investment gives you a return. In comparison to capital gain investors, cash flow investors do not want to sell as this gives them an income on a regular basis.
If you own a stock and it pays you a dividend, for as long as you keep that stock it will give you money in the form of a dividend. This is called cash flow.
Now cash flow in real estate is when you buy to rent. Every month you collect rent, and pay your expenses including the mortgage. If you purchased the property at a good price and it is kept well maintained, you will have a positive cash flow and eventually a good profit. Although before you reach that stage, you do have to spend time and money to find the right property and in most cases you will have to take a loan out to get yourself started.
Being a cash flow investor will not have you concerned whether the real estate market is up or down. The cash flow investor has its assets working for them creating constant cash flow also referred to as passive income.