Should You Invest for Capital Appreciation vs. Cash Flow in 2022?
In today’s current market, there are a plethora of ways real estate investors can grow and maximize their wealth through unique investment opportunities. However, as you begin to diversify your portfolio, it’s essential to ask yourself whether you want to position your investments to grow your capital or to maximize cash flow.
If you’re unsure which is the right investment strategy for you, keep reading to learn the differences and benefits of growth investing and income investing to determine which one is ideal for your portfolio.
What is Capital Appreciation?
Capital appreciation simply means investing in assets that you expect to increase in value over time. It is measured by taking the difference of the investments’ expected future market value and comparing it to its current purchase or market price. The favorability of an asset often depends on its investment objectives and the investor’s risk tolerance. Riskier investments should have the potential to produce greater returns; if they don’t, why would someone take on the additional risk of loss?
There are various types of investments targeting capital appreciation, including:
- Exchange Traded Funds
- Mutual Funds
- Real Estate
- Equities
- Bonds
- REITs
Each of these investments can be classified as either low, moderate, or high growth opportunity investments. Some can even be considered speculative. Investors should determine which strategy is best for their portfolio by asking themselves how much risk they’re willing to accept in order to maximize long-term returns, keeping in mind the fact that high-risk and speculative investments could result in the complete loss of principal.
For example, if an investor seeks to experience moderate growth, they’ll typically invest in blue-chip stocks from companies with an excellent reputation. On the other hand, if an investor is looking to experience higher, more aggressive growth, they’ll find growth stocks that are predicted to grow more than the average market value. Real estate investments that might be considered higher risk investments may be a ground-up development project to build a new shopping center or investing in a project to build a subdivision of new homes.
What is Cash Flow?
Cash flow investing is a financial strategy commonly used by retirees and others looking to invest in assets that generate consistent income on a monthly, quarterly, semi-annually, or annual basis to cover current living expenses or simply supplement their other sources of income passively. This type of investment strategy allows investors to receive reliable dividend or interest payments through mutual funds, stocks, bonds, ETFs, or real estate. Some real estate investments commonly used to produce passive income are stabilized apartment buildings, shopping centers with long-term leases, and single-family rental properties. While it’s not always the case, many cash flow-oriented investments have a lower risk profile. It’s possible to realize capital appreciation on cash flow investments, but the primary objective should be income.
Which is the Better Strategy for Real Estate Investors?
As you will see, capital appreciation and cash flow aren’t mutually exclusive, and you can diversify your portfolio with a combination of the two. If you’re looking to experience both at the same time, real estate is a great investment strategy to focus on as it provides the opportunity for capital appreciation, income, and various tax benefits.
As a rule of thumb, investors should remember that capital appreciation has historically been shown to occur over an extended period, and there is no guarantee your property or investment will gain value. That’s why it’s crucial to research data of where and what you want to invest in to maximize the probability that your investment experience is in line with your expectations.
Finding Opportunity. Delivering Results.
MRA Capital Partners offers real estate investment strategies focused on maximizing the internal rate of return through favorable deal structures and the pursuit of non-correlated investment returns. Learn more about our investment strategies by visiting us online. Also, sign up to join MRA Capital Partners’ preferred investor network to learn more about our upcoming unique investment opportunities.