But what are exactly these two types of investments, and why are they so different? Let’s take a closer look at real estate investing.
Cash Flow Investments: When you invest based on cash flow, your investment will be based on the return on investment (ROI). In other words, you will invest by basically considering how much your investment will pay you back every year. For example, if you invest $100,000 in a property and it pays you back $8,000, you will have an 8% ROI. Good cash flow investments are not easy to find and are usually long-term investments, which means that selling the property is not a short- or mid-term goal. In the majority of cases, properties will never be sold using this type of investment, as the only goal is to keep the properties and increase the cash flow by increasing the value of the property.
Capital Gains Investments: The goal of this investment is to buy low and sell high. In other words, you buy the properties and then flip them and make a profit on them. Here, we can find basically two types of flippers:
• Investors who just buy and flip: Their investments are based on speculation.
• Investors who buy, fix and flip: In this case, the investor adds value (capital expenditure, or CAPEX) on the property, which can be high (build new homes) or low (small renovations). The investment is a mix between speculation and added-value investment.
In capital gains investment, ROI is also taken into consideration. When you invest to flip, usually the ROI is higher than in cash flow investments, but it is also riskier, as many times your success is based on the market fluctuations.
So which one is better? In my opinion, there is no worse or better option. What you expect of your investments will determine the kind of investment that fits you best.