As investors, we often face the difficult task of choosing between cash flow and capital growth investments. Our primary concern is the ideal investment to make us wealthier. The final choice we make is influenced by various factors, including our short-term and long-term financial goals. We may diversify into other areas to help with this, such as those explored by Masterworks, as well as more traditional means, but even so it is important to keep our eyes to the basics.
Cash flow investments are the ideal income streams in the short term, while the opposite happens in equity growth. Before selecting either method, it’s vital to understand their underlying principles.
Cash Flow Investments
In cash flow investments, we finance a portion, or the entire asset, then lease it for monthly, semiannual, or annual income. We receive frequent cash distributions or income from such investments.
The trick to staying afloat is to ensure that the expenses we incur while holding these assets are less than the regular cash distributions. The biggest demerit of such investment is the slow appreciation rates of assets.
Capital Growth Investments
The description of wealth is open to many interpretations. However, it’s generally viewed as our ability to maximize on starting investment. And growth capital fits this definition. Capital appreciation depicts the rise in the value of assets over some period.
It involves a long-term strategy to pounce on assets when the market value is low and off-load when the value increases. We can rake in astronomical amounts compared to income from cash flows. Here are more perks of capital gain investments.
Long-term Wealth
Investing in capital gains is the ultimate creator of wealth. We shouldn’t mistake rental incomes as an indicator of wealth. That’s because we could be accumulating small percentages of cash, yet our assets’ value is stagnant or even lower. It only takes a cut of these monthly income streams, and we’re in financial trouble.
Unlike cash flows, capital growths can double, triple, quadruple our investments on the go. Take the property market; its market value has been on the ascendancy for years. Most of us who invested early can gain significant amounts if we choose to sell.
Grows Our Portfolios Faster
There’s no point of having birds that do not increase their nest eggs. This analogy is particularly true for investors. With cash flows, we generate cash distributions from our portfolios. However, our portfolios don’t grow.
Contrary, equity gains have unlimited potentials of increasing our portfolio’s value. We can generate positive equities through higher consistent investment growth. Another factor is that we can release equity and use it to finance new investment projects. In the end, our portfolio grows tremendously.
Decreased Income Tax Bills
Whenever we decide to invest in capital gain properties, our rental incomes are negatively affected. To the untrained investor, it might look like a wrong decision. Yet, the reduced monthly or semiannual income comes with an unseen advantage.
We’re less likely to pay the absurd taxes paid by individuals with high rental yield properties. The reason for the low taxes is simple; cash gain investors tend to be low rate taxpayers. Most of our properties yield low income, which attracts lower tax bills.
Deferred Tax
Capital gain taxes come into full effect when we sell our investment properties. The tax is not imposed on the property’s market value, but from the gain we make after the sale. The tax rate is also calculated based on the period we have held the asset.
If we own an investment for more than 12 months, then dispose of, it will attract a low tax rate. These rates are way lower compared to those paid by cash flow investors.
Property forecasts indicate an enormous demand for property in the future. Such indicators show that capital growth investment is the way to go.
