Investing for Cash Flow vs Capital Gains. Which one is better?

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Derivative
Posts: 261
Joined: Wed Jul 03, 2013 8:05 am

Investing for Cash Flow vs Capital Gains. Which one is better?

Post by Derivative » Fri Dec 01, 2017 3:25 am

Investing for Cash Flow vs Capital Gains. Which one is better?

To my understanding, investing for capital gains (e.g. in the stock market) is heavily taxed and passive income from cash flow investments is the least taxed income. So should people invest for capital gains or cash flow?

Also, I believe that if you invest for cash flow (e.g. investment properties), you have a constant stream of income and positive cash flow no matter how good the market is doing (unlike for stocks and funds where your share amount goes down).

Here is what Rich Dad says on the topic:
Cash flow is better than capital gains for three reasons:
  • It is resilient from market swings and market chaos.
  • It brings money into your pocket on a regular basis (not imaginary “paper wealth” such as net worth)
  • It is generally taxed at a lower rate.
I am asking these questions after googling and coming across some articles, some of which are below:

http://www.richdad.com/Resources/Rich-D ... tocks.aspx

http://www.richdad.com/Resources/Rich-D ... ncome.aspx

inbox788
Posts: 5235
Joined: Thu Mar 15, 2012 5:24 pm

Re: Investing for Cash Flow vs Capital Gains. Which one is better?

Post by inbox788 » Fri Dec 01, 2017 3:39 am

Whichever you have to pay lower taxes! Otherwise, it's pretty much the same thing.

Don't underestimate the leverage involved in real estate as well as the business aspects. It's not as passive as investing in a 3 fund portfolio.
Last edited by inbox788 on Fri Dec 01, 2017 3:40 am, edited 1 time in total.

Derivative
Posts: 261
Joined: Wed Jul 03, 2013 8:05 am

Re: Investing for Cash Flow vs Capital Gains. Which one is better?

Post by Derivative » Fri Dec 01, 2017 3:39 am

Investing in capital gains is a ponzi scheme: https://youtu.be/nn-bd20zoU4

Any thoughts?

bgf
Posts: 437
Joined: Fri Nov 10, 2017 9:35 am

Re: Investing for Cash Flow vs Capital Gains. Which one is better?

Post by bgf » Fri Dec 01, 2017 8:56 am

i don't know much about real estate investing and have only ever owned my home. i think he is drawing a clear distinction between purchasing a home for the consistent, periodic cash flows generated by renting it out in contrast to someone purchasing a home with the intention of "flipping" it in the near future at a higher price. the latter is generally viewed as riskier than the former.

an analogy can be drawn to stocks, though there is little point as BHs advise to simply buy the market. the analogy would be purchasing a stable company, with a solid balance sheet, that earns consistent and relatively predictable cash flows. in contrast, one might buy a company that is growing rapidly, but has debt and is not yet earning a profit. one is buying that company hoping to sell it in the future for a higher price, based on predictions of increased growth and profitability at some point in the future.

money can be made and lost using either strategy, and i do not think that one is "better" than the other. you can make a lot of money "flipping" homes and investing in growth stocks.

you can lose money investing in once solid but slowly dying businesses.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Investing for Cash Flow vs Capital Gains. Which one is better?

Post by avalpert » Fri Dec 01, 2017 10:21 am

Derivative wrote:
Fri Dec 01, 2017 3:25 am
Investing for Cash Flow vs Capital Gains. Which one is better?

To my understanding, investing for capital gains (e.g. in the stock market) is heavily taxed and passive income from cash flow investments is the least taxed income.
This is incorrect - 'cash flow' is taxed as income at your marginal rates, capital gains are taxed at the lower capital gains rate (will put aside qualified dividends for the moment).
So should people invest for capital gains or cash flow?
People should invest for total return, not a particular type of return.
Also, I believe that if you invest for cash flow (e.g. investment properties), you have a constant stream of income and positive cash flow no matter how good the market is doing (unlike for stocks and funds where your share amount goes down).
Of course not, your income stream is contingent on the performance of the properties - that may or may not be correlated to the market overall but it certainly is no guarantee of a constant stream of positive cash flow.
Here is what Rich Dad says on the topic:
You shouldn't be getting your financial propaganda from someone whose sole source of financial success is selling propaganda. Really, Kiyosaki has nothing to offer you.

Derivative
Posts: 261
Joined: Wed Jul 03, 2013 8:05 am

Re: Investing for Cash Flow vs Capital Gains. Which one is better?

Post by Derivative » Fri Dec 01, 2017 11:31 am

avalpert wrote:
Fri Dec 01, 2017 10:21 am
Derivative wrote:
Fri Dec 01, 2017 3:25 am
Investing for Cash Flow vs Capital Gains. Which one is better?

To my understanding, investing for capital gains (e.g. in the stock market) is heavily taxed and passive income from cash flow investments is the least taxed income.
This is incorrect - 'cash flow' is taxed as income at your marginal rates, capital gains are taxed at the lower capital gains rate (will put aside qualified dividends for the moment).
I just looked into this deeper and what you said seems to be true. But people also said you can deduct business expenses as usual and that you don't have to pay the additional self-employment taxes. Would this make the tax liability less than those from capital gains from investment accounts?

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Investing for Cash Flow vs Capital Gains. Which one is better?

Post by avalpert » Fri Dec 01, 2017 11:44 am

Derivative wrote:
Fri Dec 01, 2017 11:31 am
avalpert wrote:
Fri Dec 01, 2017 10:21 am
Derivative wrote:
Fri Dec 01, 2017 3:25 am
Investing for Cash Flow vs Capital Gains. Which one is better?

To my understanding, investing for capital gains (e.g. in the stock market) is heavily taxed and passive income from cash flow investments is the least taxed income.
This is incorrect - 'cash flow' is taxed as income at your marginal rates, capital gains are taxed at the lower capital gains rate (will put aside qualified dividends for the moment).
I just looked into this deeper and what you said seems to be true. But people also said you can deduct business expenses as usual and that you don't have to pay the additional self-employment taxes. Would this make the tax liability less than those from capital gains from investment accounts?
No, you don't pay self employment or FICA taxes on capital gains from investment accounts either and deducting business expenses just means you aren't paying for expenses that reduce the income - you deduct transaction costs for your capital gains too (or add the cost to your basis, same effect).

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