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Income Investing vs Capital Gains Investing

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MTF

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Do you prefer income/cashflow investing or capital gains/appreciation investing?

The way I see it, capital gains investing seems to be more fitting as a Fastlane vehicle (because you have to do something over and over again, sort of like a business) while income investing is a better choice to stay retired once you achieve your Fastlane goals (because you invest once and most likely hold it long-term, getting predictable regular cashflow from it).

What are your thoughts? If you invest using both, what's your percentage split between them? What are your favorite ways for income investing and capital gains investing?
 

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CDM

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It would depend on what you are trying achieve.

if you’re sitting on $10mil and trying to set up a money system, then investing for cap gains would be stupid.

If you’re sitting on $1k and looking to grow your pot, then investing for income would usually be ineffective.
 

biophase

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Do you prefer income/cashflow investing or capital gains/appreciation investing?

The way I see it, capital gains investing seems to be more fitting as a Fastlane vehicle (because you have to do something over and over again, sort of like a business) while income investing is a better choice to stay retired once you achieve your Fastlane goals (because you invest once and most likely hold it long-term, getting predictable regular cashflow from it).

What are your thoughts? If you invest using both, what's your percentage split between them? What are your favorite ways for income investing and capital gains investing?

In my experience, while income investing is great, capital gains investing is where the large chunk of my returns come from. I think @SteveO used this method.

For example, if I get $500/mo from an income property for 5 years, that's only $30k and the property appreciates $100k in the same time period, the amount my net worth goes up in 5 years is so much more due to capital gains.

I've found this to be the case in most of my investments. Except the one in Chicago, lol.

We'd obviously like both. But if I had to do it again, I'd take a breakeven cashflow in a fancy area vs. alot of cashflow in a ok area. I guess I'm saying that at a younger age I'd invest in capital gains and then when my net worth is sufficient, I'd switch over to investing for cashflow to fund retirement.
 

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It would depend on what you are trying achieve.

if you’re sitting on $10mil and trying to set up a money system, then investing for cap gains would be stupid.

If you’re sitting on $1k and looking to grow your pot, then investing for income would usually be ineffective.

100%. So a good question is how you decide when you're at a stage in which you may consider transitioning from one to another. This is probably personal, though. For one person $2 million may be enough to go cashflow only. For another $10 million is the starting point.

In my experience, while income investing is great, capital gains investing is where the large chunk of my returns come from. I think @SteveO used this method.

For example, if I get $500/mo from an income property for 5 years, that's only $30k and the property appreciates $100k in the same time period, the amount my net worth goes up in 5 years is so much more due to capital gains.

I've found this to be the case in most of my investments. Except the one in Chicago, lol.

We'd obviously like both. But if I had to do it again, I'd take a breakeven cashflow in a fancy area vs. alot of cashflow in a ok area. I guess I'm saying that at a younger age I'd invest in capital gains and then when my net worth is sufficient, I'd switch over to investing for cashflow to fund retirement.

While your capital gains are over 3x higher than income, this is just paper gain, though. As long as you don't sell it, it's not a real return on investment. So theoretically the value over the next 5 years may drop back to the level at which you bought it while the income would stay the same.

Or is such volatility in real estate extremely rare? Is there anything in specific that's a must-have for you to "guarantee" (or as close as guarantee) that it'll most likely go up instead of down?

I guess this is my main issue with capital gains. You actually have to sell something—and go back to square one with cash and seek a new deal—to make a profit.

@SteveO I'd love to hear your perspective!
 

thechosen1

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I think everything already said is pretty accurate, but wanted to add one thing: are you investing or speculating?

Gambling on appreciation is good in hindsight, but it's not necessarily good investing practice.

However, capital gains from something that you can influence (like selling your business) is a lot less risky if you know what you're doing. Expecting CG from just buying stock or land and hoping it goes up in value is a little bit closer to gambling.

It works in hindsight - like the SF Bay Area appreciation, or the recent rapid growth of Austin TX. But did anyone foresee the future? No. I think that needs to be taken into account.
 

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I think everything already said is pretty accurate, but wanted to add one thing: are you investing or speculating?

Gambling on appreciation is good in hindsight, but it's not necessarily good investing practice.

However, capital gains from something that you can influence (like selling your business) is a lot less risky if you know what you're doing. Expecting CG from just buying stock or land and hoping it goes up in value is a little bit closer to gambling.

It works in hindsight - like the SF Bay Area appreciation, or the recent rapid growth of Austin TX. But did anyone foresee the future? No. I think that needs to be taken into account.

Good point. In real estate, you can influence the result of your capital gains investment through improving it. It's not really possible with stocks, though.
 

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While your capital gains are over 3x higher than income, this is just paper gain, though. As long as you don't sell it, it's not a real return on investment. So theoretically the value over the next 5 years may drop back to the level at which you bought it while the income would stay the same.

Or is such volatility in real estate extremely rare? Is there anything in specific that's a must-have for you to "guarantee" (or as close as guarantee) that it'll most likely go up instead of down?

I guess this is my main issue with capital gains. You actually have to sell something—and go back to square one with cash and seek a new deal—to make a profit.

@SteveO I'd love to hear your perspective!

Yes it could go up and down, but you would monitor your investments and then make some decisions.

With capital gains its the same as pretty much everything else you would own. You have to sell to get its value. So I don't see this as a big deal at all. You could own a stack of baseball cards worth $1M, but you can't spend baseball cards. You can always get a loan against your assets to free up some cash.

What would you do with your cashflow anyway? Besides living expenses, you would probably spend them on assets that you must sell to get cash.
 

thechosen1

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Good point. In real estate, you can influence the result of your capital gains investment through improving it. It's not really possible with stocks, though.
Absolutely. I’m doing this now with my second primary home. Plan to sell in 2 years for tax free capital gains.
 

SteveO

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I see cashflow investing as an endgame. Let's say you have a goal for income that would set you up for your "base" and allow for a certain lifestyle. There are investments that can be made that allow for a stable income with rent increases built in.

Commercial retail, office, apartments, industrial/warehouse, all fit this bill. There are some deals that can be found that have 20-30 year leases with 2-3% annual increases built into the lease. Typically something like this has a NNN (also known as triple net) that puts all of the responsibility onto the tenant. All repairs, upgrades, taxes, insurance.

An example of this would be a walgreens or rite aid drug stores. They usually have long term leases on prime real estate lots. Of course cap rates are lower on these types of investments but security is greater. They will bring a steady income with virtually no work after it is setup.

Another type would be industrial. They usually have very specific requirements for their operations. This can involve a lot of money for the setup. If the tenant pays for the majority of this, they will be reluctant to move or relocate.

Office and apartments are fairly management intensive. But with the larger projects, you may be able to find a good manager to deal with everything. The returns may be better than a drug store if you buy well enough.

All of these can be cashflow plays.

My preference is to look for projects that have a "value-add" or calculated method for appreciation. Or both...

Buying in the right place at the right time is a big piece of that. Let's say that you find a city that has high vacancy rates. Rents and other rental income is depressed as a result. Let's also say that you have data to suggest that there will be jobs and population growth coming to the area. Small reductions in vacancy lead to more income exponentially. The property values will grow exponentially as well.

Let's combine this with another value-add component. Find something that is rundown and/or mismanaged. It will usually require some fix up and tenant changes.

Using these methods, I liked to look for 100-200% annualized return on my money. This would make the 6-8% return from cashflow look very small. Of course it is a lot more work. It can all some risk in as well but experience begins to lower that.

Buying in good locations will make it tougher to find deals but will significantly lower the risks.

I'm way out of touch with current reading materials on these topics. But I did study them many years ago. The books that I found helpful in developing my processes were "the complete guide to buying and selling apartment buildings" by Steve Berges and "how to buy and sell apartment buildings" by Eugene Vollucci.

Berges is all about the "value-play". Vollucci lays out a roadmap for how to gather data to buy in the right place at the right time.

The bottom line for me is to do whatever you can to build enough capital to allow for the most passive and secure investment. Using the value increasing models that I talked about in one method for building capital. But, it can be life consuming.

The endgame to me is easy cashflow.
 

SteveO

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Just to add to the last post. Many investors get lost is figuring how much income and expenses there will be. Sellers are not going to be honest with you. It took a lot of time for me to develop my own models for these.

Capital improvements come into play with all but NNN leases. Parking lot maintenance, paint, roofs, HVAC and other appliances, flooring, etc... Can easily chew up your perceived cashflow. These things are important to keep up with though and need to be calculated in.
 

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MTF

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Thank you for your post, @SteveO.

When I looked for NNN properties, I mostly found deals with at most 10-year contracts. And they're usually all super expensive so hard to try it with lower risk. Perhaps this is different in the US.

Have you ever owned any vacation rentals? Seems like you can both add a lot of value to them as well as get steady cashflow each year (depending of course on the location).
 

SteveO

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Thank you for your post, @SteveO.

When I looked for NNN properties, I mostly found deals with at most 10-year contracts. And they're usually all super expensive so hard to try it with lower risk. Perhaps this is different in the US.

Have you ever owned any vacation rentals? Seems like you can both add a lot of value to them as well as get steady cashflow each year (depending of course on the location).
I haven't owned any vacation rentals. I'm considering whether to purchase properties in the area around the golf course to try this out on. No experience though.
 
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SteveO

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When I looked for NNN properties, I mostly found deals with at most 10-year contracts. And they're usually all super expensive so hard to try it with lower risk. Perhaps this is different in the US.
There is usually a tiered approach for finding these deals. The lower the credit risk of the company, the higher the price or lower the cap rate will be. Nothing is free of risk. Your thorough evaluation is one way of mitigating this.
 

MTF

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@SteveO were your investments always in the city or also elsewhere? I'm more attracted to rural land/vacation rentals/improving natural surroundings rather than fixing properties since I can't even drive a nail straight.

Is there any type of real estate investment that you think can work for a person who's hopeless at DIY or is learning it essential to be able to add value?
 

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@SteveO were your investments always in the city or also elsewhere? I'm more attracted to rural land/vacation rentals/improving natural surroundings rather than fixing properties since I can't even drive a nail straight.

Is there any type of real estate investment that you think can work for a person who's hopeless at DIY or is learning it essential to be able to add value?
Mostly city.

Land development is something that can be done without a lot of diy experience. Of course there are a number of things to learn associated with land but for the most part it is generic. I like land and am playing around with it right now.
 

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Just to add to the last post. Many investors get lost is figuring how much income and expenses there will be. Sellers are not going to be honest with you. It took a lot of time for me to develop my own models for these.

Capital improvements come into play with all but NNN leases. Parking lot maintenance, paint, roofs, HVAC and other appliances, flooring, etc... Can easily chew up your perceived cashflow. These things are important to keep up with though and need to be calculated in.

Can confirm. Taxes, operations, maintenance, other phantom costs can eat into margins.

Hope you're well @MTF !
 

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This is a matter of preference for each individual. I prefer income over capital growth, but also seek the growth of the capital but it is a secondary goal. Thus I look for stocks that 1) provide income, 2) grow that income regularly, 3) grow capital. My reasoning is that the income can be reinvested and thus buying more shares and snowballing the income. Overall, dividend growth stocks outperform the growth stock by almost 4% annually.
 

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There should be a mix depending where you are on your journey IMO. I’m still getting started and need to focus more on CG, but a small rental that I could pay off and take all the cash flow isn’t terrible. Unless a get 10x more of these though I would do better to grow my money using a different method or asset all together IMO.
My dad is at the retirement age and he has plans to leave money behind to his kids. He has it set up where he is able to pull out exactly what he made his last day working every year and still have money if all goes right to pass some along to his kids. Talking with him though he is majority cash flow with a little CG besides your average returns. I feel he is too far on the cash flow side( only 60) at this point in life and he needs to do something riskier with a small portion now that he is retired and has talked about a business since I was little, but never pulled the trigger.
 

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