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.

Say you want to retire without taking a lifestyle or pay cut, then you're going to need some kind of 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 certain. You make an assumption 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 to create 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 difficult 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

Say 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, to pay for the loss. Instead you would focus on properties that deliver an ongoing positive cashflow, since 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 (visit www.propertyschool.co.za for more information) becomes vital. Without it, it is almost impossible to measure the risk and return on any kind of property deal. You simply cannot factor in the 27 variables that affect the investment.

Final thought …

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. In some cases, with some retirement products, it is simply impossible to generate enough passive income to live on – no matter what the salesman tells you (go to www.retirequickly.co.za for more revelations about conventional retirement products).

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 normal 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!