By Garrett Sutton, Esq.
There are two goals for real estate investing. One is for the value of your property to appreciate over time so you’ll be able to sell it for more than you bought it. Those are the two crucial points in time for your property: When you buy it, and when you sell it. This is capital gains investing.
The other goal is for your property to generate a positive income for you each and every month. You want the revenue from rental income to exceed the operating costs and mortgage payment. This is cash-flow investing. Having your money generate passive income for you — monies that come to you whether you are at work or on vacation — is a Rich Dad investment principle. An income-generating property is like an employee working for you. This passive income from a property would end if you sell that property. You may enjoy a capital gain from the sale, but you no longer have that money actively working for you to earn you even more money. To replace it, you may need to reinvest that money into another investment that yields positive cash flow.
A person who is solely a capital-gain investor looks at the optimal time to buy a property (i.e., when its market price is relatively low) and the optimal time to sell (when it appears the market value has peaked or risks plummeting). A cash-flow investor looks at the income history and potential of a property, and usually considers selling only when indicators (such as a decrease in an area’s population) point to a drop in cash flow; or when money from capital gains can be parlayed into a more lucrative income-generating investment, such as a larger property; or when the property has fully depreciated over time and this tax advantage can no longer be enjoyed.
Rich Dad’s philosophy is that once you have your dollar in your asset column, you want to keep it working for you, generating even more dollars that, in turn, will work for you, too. And so on. You may not want to do what most small investors do, which is park your money and hope that it will increase in value (appreciation) over time.
When it comes to real estate, you want to enjoy its appreciation and its generation of income. You want capital gain and cash flow.