Cash Flow or Capital Gain, Which One Is Better For You?

Cash flow is recurrence income, usually every month, from an rental property either residential or commercial real estate. For a business owner, recurrence income is from the business they own. For an investor with huge capital at disposal usually hundreds of thousand to a million, they get income in the form of dividend from stocks they own. In nowaday information age, people earns recurring income by harnessing the power of Internet.

Most of the time when we invest in anything, we invest for capital gain, flipping – buy a pre-constructed property and sell it after completion with certain percentage of appreciation is capital gain. Stock market, buy low and sell high is capital gain. Mutual fund, unit trust, Amanah Saham, etc are all rewarded, ultimately, in capital gain.

So which one is better? cash flow or capital gain.

Ultimately if we want to retire early and retire young, we need cash flow. Why? – Simply because cash flow is automatic, it’s recurring every month without us actively working on it. If you own a few paid up rental properties, it will generate positive income every month for you to support your life and expenses.

However, in order for us to invest into a cash flow positive asset, we need huge capital, well lots of the time. That’s why we go for capital gain in the first place, through stock investment, flipping property, so on and so forth, until we have enough capital to invest in cash flow asset. However, saving enough money or invest in capital gain might be too slow sometimes, capital gain sometime might end up becoming capital loss. As Robert Kiyosaki put it, invest in something and hope that its’ price go up is a gamble. An investment have to make sense when the day you bought it, not 10 years after you bought it. Buying a stock at a fair price and hope the price will go up further is a gamble.

To raise capital in shorter time, this is when leverage comes into the picture - to purchase a property by borrowing money from the bank. It is very common nowaday for people to get a house loan with a 10 percent upfront, leveraged on the rest 90 percent. We can use the same leverage in acquiring cash flow positive asset or flip for capital gain if you know what you are doing. However bear in mind leverage is a double edge sword - if you don’t make a killing, you end up killing yourself. Typical example is owning a rental property that doesn’t make positive cash because the maintenance fee or mortgage interest is too high, in this case you need to fork out money in order to cover the negative cash flow, the cash from your wallet could deplete if negative cash flow recurs. That can’t go on for long, and you can’t afford to purchase another rental property. However a rental property that provide recurring positive cash, be it a small amount every month, you can keep doing it for a long time without eating into your own cash. Again, a deal have to make sense the day you bought the deal, not 5 or 10 years later, if a rental property can’t provide you positive cash, most likely it will be hard to turn around.

As a landlord myself, i know it is easier to say than done. There are a lot of problem in the name of renting property, for example difficulty in recovering rental from bad tenants, equally difficult to keep good tenants to maintain cash flow continuity, overwhelming processing work that consume your personal time, rental price go down because deteriorating surrounding environment which happen mostly to apartment building with bad management. But, no one says this will be easy. With some due diligent it’s not impossible.

In term of wealth building, there is a rule called 10-90 money rule; 10 percents of effort and 90 percents of rewards. It basically means if we are willing to sacrifice 10 percents of our life time in hardwork to build up businesses and cash flow, we would have 90 percents of your life time of financial freedom.