How do we decide between investing for cash flow or appreciation?  It depends on the stage of life you are in. 

Do you need appreciation so you can build up your “nest egg” or do you need cash flow to perhaps replace the income from your “job”?

Here is the Youtube link:  https://youtu.be/y78za6Lcsmw

Here is the Transcript of the YouTube video.

SHOULD I INVEST FOR APPRECIATION OR CASH FLOW?

Mike

Welcome back. This is the sixth in a series of lessons on F.I.R.E., Financial Independence, Retire Early. Today we will take on the question of should I invest for appreciation or cash flow? To answer that question, we’ll look at three stages of your life.  By the end of this short video you’ll know what stage you’re in and what are the wise approaches to invest in for your stage of life. I’m Mike Jacobson.

Harland

And I’m Harland Merriam. Good to see you. We’re with Attune Investments. We help people invest in real estate, primarily in multi-family real estate opportunities because they create both appreciation and cash flow for people like you. We just mentioned these two, cash flow and appreciation.  Mike, help us understand what these two are.

Mike

The primary ultimate goal of F.I.R.E. is to have enough passive cash flow to cover your monthly expenses. This is like getting money in the mailbox whether you work or not. So appreciation is the accumulation of value due to improvements in the value of your investments. For example, if you bought Apple stock at $100 per share, what would it be worth today? How much is your house worth today compared to when you purchased it?

Harland

So Mike, cash flow is money coming off that we can put in our pockets, and appreciation is that growing of our nest egg. There are times when we want increased value and there are times when we want steady cash flow. You shared a story with me recently when you learned three stages of our life. Tell that story to our listeners.

THREE PHASES OF LIFE

Mike

Sure.  When I turned 50, I went on a bike ride with Robert. He was somewhat older than me, and upon learning that I had just turned 50, he told me about three phases of life. 

The first third, up to 25 years old, is diapers to adulthood. These are your foundation years when you go to school and get your education. 

The next 25 years are the building third. You may start a family, start to grow a business, maybe even have a career at a good company, and grow your nest egg. 

Then 50 to 75 are the best third. This is when your kids are launched and on their own, they may get married. You may have grandkids. You may also get to retire and enjoy the fruits of your labors from working all those years. 

And anything over 75 is gravy. I think Robert was in his gravy years and making the most of them. He had built a successful transportation business in his building third and was able to enjoy the best third.

Harland

So diapers to adulthood. Perhaps ages birth to early 20s. That’s stage one, and then the building years, your working years, primarily from 26 until your 50s, and the best years. What are the best years again, Mike?

Mike

The best years are over 50, but that’s really when you have achieved F.I.R.E. Your passive income is greater than your expenses and you have the freedom of time to enjoy doing the things you want. You’re able to truly live the vision that we talked about last week. Some people have achieved financial independence while still in their 30s or 40s. This gave them the freedom to do more with their families while they were younger. 

Unfortunately, I was already in my best third before discovering the F.I.R.E. concept. I made a decision that we needed to achieve F.I.R.E. as quickly as we could in order to have more choices about our lifestyle, while we are still young enough and healthy enough to enjoy them.

Harland

Yeah. So when you achieve financial independence, whatever your age, it’s all gravy after that, huh? Having heard your story, let’s go back to the original question. Should I invest for cash flow or should I invest for appreciation and equity? Let’s start with the early building years. On our way to financial independence, what do we want to focus on during that time, appreciation or cash flow?

Mike

In the building third of our lives we want to focus on building equity. So we look for appreciation.

Harland

So some of the ways to focus on appreciation that you and I have used that I can think of right now are creating a business and growing that business. So it’s worth more and more, or buying the right portfolio of growth stocks. You gave the example of buying early Apple. If you make good choices, which is not easy with stocks, you could grow your nest egg significantly. Or for us, real estate. Mike, you and I found real estate to be a relatively safe and effective way to appreciate the value of our nest eggs. Haven’t we?

Mike

Yes, and much of it has been by purchasing distressed properties, and rehabbing them and then making them available to rent. More recently, we have focused on multifamily properties such as apartments and mobile home parks. These have professional management and we can force appreciation with improvements in management and condition of the property.

Harland

You and I have realized that we can increase the income on our real estate investments, say at an apartment complex, particularly, and that forces the property to appreciate in value. We’ll talk about this in future F.I.R.E. lessons.

Mike

One more question about appreciation. Have you ever been able to force appreciation on a stock?

Harland

Not me. That’s a good point, Mike. That’s why you and I have focused on real estate investments. We can maintain a lot more control with these. 

DECIDING BETWEEN APPRECIATION AND CASH FLOW

But when should we shift our emphasis from appreciation to cash flow? I’m sure some of our listeners are asking this.

Mike

My dad told me once that when we are younger we should invest for appreciation. When we get older, we should invest for the cash flow.

Harland

Good advice, and this requires that through steady investments and the growth that happens through appreciation, we’re able to achieve that financial independence. And, in your own case, you had to keep using appreciation to get to your goal, even though you were in your 50s. But, as we approach our nest egg target value, we can begin to focus on cash flow.

Mike

So let’s take that in the context of achieving F.I.R.E., Financial Independence, Retire Early. We really want cash flow to cover our expenses. But first, we generally need to create equity that can be converted to cash flow.

Harland

So during our diapers to adult years, that first third, we’re probably not thinking much about retirement or financial independence, are we? We’re focused on learning a skill set and to earn a living and create a business. We’re laying the foundation.

Mike

Right. And then, in the building years, we begin to use the F.I.R.E. approach to build up a sizeable nest egg by regularly investing and living in such a way that we’re creating assets. Those assets will grow to produce the cash flow to support us without us having to work. And we’ll focus on appreciation during these years.

Harland

And then, during the best years as they arrive, hopefully with us achieving that financial independence at some point, our assets are producing a nice cash flow. We’re free to focus on cash flow and then balance that with appreciation as we need to.

Mike

So for those listening, determine what stage you’re in and whether or not or and whether you might be wise to focus on appreciation or cash flow, depending on your stage of life. 

Next week we’ll be talking about making tough choices on your way to F.I.R.E. See you next week.

Harland

Goodbye everyone.

HELP US GET TO KNOW YOU BETTER

Join us at noon Eastern time on the third Wednesday of each month as multi-family investors network and engage in conversations about how to be better investors.  We discuss opportunities and what we are doing in the current market.  Watch for the Zoom link if you have subscribed to the blog.

Attune Investments provides a better return for our investors.  And we make a positive impact in people’s lives and in our world.

If you want to learn more about how others are investing with us then we invite you to join our club and request a conversation with us.  See below.

Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.  

Or you can choose to loan money, get in with a clear return, and get out earlier.  

If you haven’t already subscribed to our BLOG, you can increase your knowledge and comfort with this asset class by subscribing now.  It’s free.  We publish an article every week.  SUBSCRIBE HERE And take one more step. Become a member of our ATTUNE INVESTORS CLUB in which you have more personal access to us.  JOIN HERE.