Is Capital Appreciation Better Than A Positive Income Return?
There are two different ways to look at property investments, and it depends on what you’re looking for.
If you want to retire without taking a lifestyle or pay cut, you’re going to need passive income, to replace your salary.
This is possible by converting your capital appreciation into a series of payments to yourself…
…but once you’ve spent this gain, then it is gone forever.
You become dependent on further capital appreciation which is by no means guaranteed. You assume that the market will continue to rise fast enough to cover the payments you require.
However, positive income returns regenerate, which means they may continue indefinitely.
Yes, tenants will come and go, and there may be times when your property will be vacant, but generally speaking, your passive income stream is not limited.
Wealth Creators Place A Higher Value On Income Than Capital.
If you want to make money in real estate (property) to create a degree of financial independence, so that you are no longer dependent on a job, then it makes sense to focus on positive income returns rather than capital appreciation.
One reason is that you do not eat up all your capital, i.e. the entire asset.
Another is that positive monthly rental income is extremely liquid!
You can take it straight off to the shop to pay your grocery bills, whereas there is no “capital appreciation debit card” that gives you immediate access to funds.
Best to have a win-win situation – capital and income.
Ideally, you should have both capital appreciation and positive income.
But opportunities offering this can be more challenging to find, especially at present.
Horses For Courses
It’s fair to say that different property investments offer the potential for different types of returns.
Some are specifically designed for capital appreciation and focus on location irrespective of cash flow returns.
At the other end of the spectrum are investments that offer high cashflow returns but no or low prospects for capital gains.
You can only determine what property you should buy after you’ve clarified what outcome you’re working towards.
Income And Independence
For example, your goal is to work less now, then you would not buy a negatively geared property that is designed to lose money.
Because you’d have to work harder than ever before, to pay for the loss.
You should focus on properties that deliver ongoing positive cash flow.
Because that is what you’d need to replace your salary and fund the lifestyle you deserve.
Once you have clarified the outcome you require, then the Property Pro Program becomes vital. Without it, it is almost impossible to measure the risk and return on any property deal. You cannot factor in the 27 variables that affect the investment.
Property is not the only investment that can generate passive income.
If you own a business which is managed reliably by someone else and it is generating a healthy profit (more than the running costs), then that is another way to access passive income.
The nature of the investment could be anything from a business to a bank deposit to a life policy.
The amount of passive income you receive, however, will vary greatly depending on which type of investment you choose.
With certain retirement products, it is simply impossible to generate enough passive income to live on…
…no matter what the salesman tells you.
Enough passive income – in other words, the levels that can realistically be achieved with property investments – improves your standard of living and may replace your regular source of income.
If the investment is sound and maintained, there is every reason to expect your passive income to last your entire lifetime, and your children’s lifetimes as well – if not longer!