passive income strategies capital gains vs cash flow

Capital Gains Vs. Cash Flow

Setting up passive income strategies is important. Which one would you rely on? Capital Gains or. Cash Flow? When Robert Kiyosaki came out with Rich Dad Poor Dad, one of the foundational ideas he taught was that the rich invest for cash flow, not capital gains.  In other words, the rich buy assets based on the passive income they would likely to produce throughout the years, rather than just trying to predict that an asset would increase in value.

passive income strategies capital gains vs cash flowBut I’d like to start off by saying, it’s a little more complicated than that.  In reality, the rich use both.  And often, one relates to the other.  For example, Warren Buffet values businesses by the earnings they produce, and are likely to produce in the future.  However, his buying and holding of stocks often leads to growth in the form of capital gains.  His stocks are famous for doubling in value every 2 to 5 years. Passive income strategies should be more diverse.

Robert Kiyosaki is known for his focus on real estate.  He often talks about his rental properties, and how they produce cash flow.  But anyone who actually invests in real estate will tell you that the fastest way to build capital for rental properties is usually through flipping properties first.   Finding distressed properties that can be bought at a significant discount, and repairing them cost effectively, allows them to sell the refurnished property at a significant profit.  It’ s not uncommon for flippers to borrow 100% of the money to acquire, hold, and rehab a property, and then sell it at a gain.  Flippers commonly make profits ranging from $30,000.00 to over $100,000.00 on borrowed money.  That means that not only are they are investing for capital gains, but they’re doing it on leverage.

Many businesses produce cash flow through buying materials at a lower cost, and selling a finished product at a higher price.  It’s like what comes first, the chicken or the egg?

Capital Growth Phase Vs. Passive Income Phase

The way we coach people is to have them think in terms of stages of wealth planning. Rather than thinking in terms of cash flow vs. capital gains, we focus on categorizing strategies as capital growth vs passive income.

The capital growth stage can be comprised of both cash flow and capital gains strategies.  What sets these strategies apart is that they take more time and effort, but produce more lucrative ROI.  For example, in the flipping example above the investor has to put in a lot more work in the form of analysis, negotiation, project management, etc.  But since they are making lucrative up front capital on borrowed money, their ROI is enormous.   Another example is how we teach our clients how to generate high ROI with more active options strategies in order to build up a portfolio which can be invested more passively.  And in this case, the capital growth happens with the cash flow strategy, while the passive phase actually relies on capital gains. Passive income strategies should be composed of these two.

Subsequently, it is the passive stage of your wealth development where you begin to acquire income properties, passive stock holdings, or perform private money lending for interest.

In transitioning from the capital growth to passive income, the emphasis shifts from work intensive up front profits to truly passive streams of income.

 

Which stage should you be in right now? If you need help figuring that out subscribe for free investment strategies.Passive income strategies

About The Author

herbertkoehler

I am a college drop out who found my passion as an investor. I love the many facets of finance, investing, and business. But even more than that, I love sharing what I learn with others.

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