#75: Is It Better to Invest for Cash Flow or Appreciation?

Foreign. Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone. Hope you've had another great week. I know I say that every single episode, but truly, I hope you've had an amazing week. Spending time with your family, your loved ones made an impact on the world, and hopefully you found a way to progress towards your goals. Now, I found that, you know, when we talk about happiness and fulfillment, I mean, that's not the point of this podcast episode, but it really matters whether you feel like you're making progress and growing on a weekly basis. And so I hope you are. I hope you can find a way to do that if you're not. And each week we're just gonna be talking about a different topic. This week we're gonna be talking about a topic that, you know, I've used. I've talked about this before, but we're gonna be talking about a kind of versus or contrast or what's better type podcast. So today we're gonna be talking about is it better to invest for cash flow or appreciation? If you go back to a couple of my podcast episodes from before, I've always said that cash flow are the two most important words of free personal finance, right? I believe it's what makes the world go when it comes to investing, just in general, whether it's in real estate, whether you're saving for retirement, whether you're doing the stock market, whatever it is, people are always trying to figure this out, is it better to invest for cash flow, stuff that goes in your pocket, or for what's called appreciation? And what I mean by appreciation is like the increase in value in whatever asset that you have. I think the common goal of all of this investing is, right, it's to make money like we want to make money. And whether that's money on paper money in your pocket. The point is that we want whatever, you know, we've earned through our hard work at the hospital, wherever you work, and we're able, we want to take that capital and create more income with it, right? And the future goal, hopefully for you, is to take control of your time, take control of your future. The way you spend your day to day, being able to do the things you love with the people you love, that is the ultimate goal. The question is, you know, do you invest for the returns that start now or for something that grows for the future. Now, let's just talk a little bit about the difference between the two, cash flow and appreciation. With cash flow, again, we've talked about it like, let's say you have a rental property every single month. You have rental income that comes in, you have expenses that go out, and whatever's left over in terms of the net, that's your cash flow that goes in your pocket. You know, whether that's a couple hundred bucks, a couple thousand bucks, in many cases. With a lot of people that we've worked with who invest quite a bit now, five to six figures, you know, sometimes even five figures a month, that cash flow is what you used to live on. Whether you can use that for income replacement. For some people, they've been able to cut back on their work. Some other people, they are still continuing to work full time, but using that money and reinvesting that. But whatever it is, it puts money in your pocket every single month. You know, in stocks, that happens too, you know, with things called dividends and distributions. I don't know if you've heard, you know, certain companies, every single quarter, they give you some sort of quarterly dividend based on the amount of shares that you have. They seem like small amounts. You might hear like 60 to 70 cents a share, but it depends on how many shares you have. And every once in a while, they'll announce. Certain companies will announce that they're going up, you know, in terms of their quarterly dividends or going down or shutting them down for a while. Many companies don't distribute dividends, but that's totally at their discretion. But there is a way to get, you know, technical cash flow from stocks as well. Now, some people live off the cash flow without any other sort of income. And that is ultimately what we call financial independence. When the cash flow that comes from all of these investments that you have at least are at the level of your expenses, that's like basic financial independence. Now, if you're someone like me, that was never my goal. I mean, of course it was one of the goals, but the goal was really to live the life that I want, you know, beyond just paying off the basic expenses. I want to, you know, take my family on trips, do what I want to do, enjoy life, at least right now. And that is kind of the level of cash flow that I desired. So anyways, that's cash flow. Now, when you talk about investing for appreciation, especially in real estate, you're investing in something that you think will be Worth more later on. For example, if you buy a home, I mean, many of you have a home and you know that the value, especially in today's market, the value of it has increased quite a bit. It's appreciated quite a bit. Now that's just money. It's just value on paper until you actually go and sell. But at least you can sit comfortable knowing that your the value of whatever you've bought in terms of your investment has gone up over time, right? I mean, when it's for stocks again, your mutual fund or your index fund or whatever it is, the value of it has gone up over time. You see that number on your stock chart for those who have Bitcoin, maybe the number in terms of the value of that, you know, those crypto has gone up over time. That's all appreciation again. The hope with that is that the value increases over time. And whenever you decide you can sell some, sell of it all for profit and turn that into income someday. So I know the question is always like, which strategy is better? You know, which is the best way to go for. Because oftentimes when you look at different types of investments there you have a choice. And so I think it really matters for you to back up a little bit, look at your needs, your goals, and definitely your capability to manage the investment. Because that actually is a determinant in terms of how much cash flow and how much it appreciates. So let's talk about the benefits of investing for cash flow. If your goal is to make passive income so you can reduce your time as a doctor and spend more time with your family now, then cash flow is what you need, right? That's gonna be right for you. Having that cash come in on a monthly basis is what's gonna allow you to drop clinical time, right? Call, drop moonlighting shifts, drop weekend shifts, leave early in the day, give up some cases, you know, have clinic one day less a week. That's only made possible by cash flow because you need to repl income that you have to that normally goes out and pays your expenses. Now over time, just so you know, my strategy with all that stuff was to do something called gradual retirement where as the cash flow, you know, got to a certain point on a consistent basis, when it would be enough to drop a shift, I would drop a shift and give up a shift to someone else, right? And as it got to number two and three in terms of income level, I would drop shifts two and three. And I just really, the point was to find a happy sustainable level for some people. That might be maybe working one day less a week. For some it might be down to 50%. And for some of you, it might not be. It might be just not to work at all. And that's fine too. Whatever is right for you, that's gonna all be made possible by cash flow from your type of investment. Now, there's no guarantee that, first of all, you're gonna create cash flow. But with the type of investment, when you go to look at it, you should be very clear whether it's a syndication, real estate fund, investing in an apartment building or a condo, whatever it might be, whether that is going to create the right type of cash flow for you or not. So here's a simple example of how you can create that cash flow. Let's say you buy a rental and apartment building and it brings in $10,000 a month in rental income. But your expenses, when you, you know, total your mortgage, your interest, your taxes, your maintenance, you know, put in some reserves for the roof that might go in, you know, in five years, whatever, that sort of thing, and let's say all of that put together brings, you know, the expenses, comes out to about $7,000 a month. So that gap between the income and the expenses from 10,000 to 7,000, that's $3,000, and that's $3,000 in your pocket every month. And that's $3,000 less you have to make at the hospital. Now, I don't know what your hourly wage is, I don't know what your reimbursement rate is, but how much time would that you be buying back by having that? Now you can imagine if you have multiple ones of those that could snowball over time, whether it's five years or 10 years. Let's see what it would look like to invest in syndication, where they might promise you an 8% cash flow per year type thing. And you know, you put a hundred thousand dollars into that investment, you get $8,000 a year. Now, over time, that might, 8% might increase to 10%, whatever it might be. And when you exit and you sell that syndication, you know, you can get anywhere from 80 to 100% return on that in five years. And then you take that and then you reinvest that again. Then your cash flow tends to multiply. And you just do that again and again. And over 5, 10, 15 years, this thing starts to grow on an exponential basis. It can be extremely powerful. And again, it's kind of like that snowball effect of increasing cash flow over time. Here's some ways that I've seen physicians approach the concept of cash flow, think about their portfolio, be super intentional about where their capital goes and how much cash flow it's going to produce so that they can ultimately figure out how to, hey, I can buy my time back in this number of years. And that can ultimately give you a significant amount of financial freedom. That was ultimately how I thought about investing in real estate. And that's what's really created this life for me today. Now there are benefits of investing for appreciation as well. Investing for appreciation lets you build potential wealth for the future. And that's what probably a lot of us do when we invest in our retirement accounts. We don't expect any of the benefits now, but we're thinking 20, 30 years down the line that it's going to grow to an amount that makes an impact, that sustains us in our retirement. Now what happens is in some of these investments, whether it's real estate or that sort of thing, you can invest for appreciation, still get a little bit of cash flow. But you'll notice that the cash flow might be a little bit lower, but the potential for appreciation has a significant like advantage in that situation. For example, let's say you invest in a development deal. You know that as you're building this thing from the ground up, you're not gonna be getting any cash flow. There's no renters in place. But you know that in the three to five years, you know, if all is done well, the market's hit, it's been, you know, good people that have been operating and doing this thing, and it hits their thesis that in three to five years you're gonna get a big lump sum. That's, that's kind of like an appreciation type play. That value of that land and that building grows over time. Another appreciation type play might be maybe you invest in an apartment building in a high cost of living area. In that type of case. Just the way the economics tend to work these days is that you're not going to get a lot of cash flow because the rental versus the amount you purchased it for, that whole ratio isn't quite favorable for producing cash flow. But in some of those high cost of living areas, like I live closer, you know, I live west coast, Southern California, the value of those buildings has skyrocketed, creating a ton of wealth for people when they ultimately decide to sell. Now I've seen some physicians invest smartly for appreciation, take advantage of these large run ups in stocks and real estate. In the last seven, eight years, they've done Quite well. So which one do you think you would pick in terms of a strategy for you currently, where you're at in terms of thinking your finances and your goals? I want to take you, I want you to take a moment to think about it. You know, cash flow or appreciation? Now, I know what you're probably asking, can you do both? And to be honest with you, that is probably the best way to do this is to create a whole portfolio. I know I've saved this for the very end, but it's possible to do both. You create a portfolio that creates, you know, that has a significant amount of. It might be creating the cash flow that you want for today to change your life today, but has an eye on the future, that you know that there's appreciation potential there that will only increase your asset value, your net worth, which will ultimately increase your probably cash flow at the end of the day as well too. I do a lot of that, again, with real estate investing. When I invest, again, both active and passive in my own properties and then also in other people's deals, I'm trying to mix and match, trying to figure out, okay, how much cash flow am I going for now, how much cash flow am I going for, hopefully in five years and then kind of where do I want to be in 10 to 15 years as well? Am I willing to go into some deals that might be short on cash flow up front? But again, I know that the payoff is there down the line. I go ahead and mix and match that. To be honest with you, I skew a lot heavier on the cash flow side because again, it's, it's what I use on a daily basis and allows me to have total flexibility in terms of the way I schedule my time. But I know that depreciation needs to be there to ultimately create more wealth down the line. So I not only invest in my own rental properties in my area, I invest in certain areas that are better for cash flow. When I invest in syndications, I do the same. I invest in certain areas where I know that maybe it won't be cash flow heavy up front, but the backside will be a nice potential reward. But then I also invest in some of these more stable cash flow type real estate investments. You know, in a future episode, we'll talk about what that looks like. But there are those type of investments as well. They're not, those numbers aren't as gaudy, they're not as shiny as some of the other ones that you might see, but it produces that nice steady cash flow. That you can start living off today. So ultimately it all comes down to your goals. Have you sat there and I've talked about it so much. Have you sat there and actually calculated what your needs are today? In a year, maybe when there's going to be a certain life change for some people, whether you're going to have, you know, some children or whether you're deciding to retire or maybe a change in career, you know your cash flow needs are going to be different. And it really helps to plan for that. So at the end day, diversify, understand your goals and ultimately use both cash flow and appreciation to your benefit to create the life that you want. All right, everyone, hope you've had a great week. Let's talk again soon. Take care. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group, PassiveIncome Docs, and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.