Investing 101: Capital Gains Properties or Cash Flow Properties – Which Strategy Should You Adopt for Your Real Estate Investments?

Let’s start off by defining the two one after the other.

📍Capital Gains:

Capital gain investing is when you buy a real estate property with the intention of selling it later at a much higher price.

For example, you buy land in Epe now for let’s say 6M, knowing that with the development happening in that axis that next 10 years, 12 years that land might be selling for 60M, 70M.

That is capital gain. It follows the age old law of business which is buy low sell high.

📍Cash flow investment:

This is the type of investment where you buy a real estate property which starts generating consistent cash flow for you either on a monthly or yearly basis.

For example: you buy a 4 bedroom duplex and rent it out or start using it for shortlets.

This way you turn it into a cash machine, a source of income for you. This form of investing is known as cash flow investing.

So which one should you adopt in your real estate investments?

Well, it depends on the level you are on, both in life and in real estate investments.

Optimally it is best to start with capital gains investment.

The Nigerian, and Lagos real estate market in particular favours capital gains investment better in the long run than cash flow investment.

If you read my last article, you will be more familiar with what am talking about because I properly dissected the topic there.

The main real estate capital gain investment you can make is to buy land and the major capital real estate cash flow investment you can make in Nigeria is to either buy houses or buy apartments and rent them out.

If you are familiar with the history of Lagos real estate market, you will be aware of the fact that lands perform better than houses as far as value appreciation, which is capital gain is concerned.

You can use 100M and buy a house in Lekki, then rent it out at say, 10M per annum.

Suppose that are all factors remain the same, it will take you 10 years to get back the money you used to buy that property.

Kindly note that we didn’t factor in inflation and we didn’t factor in the money you have been spending maintaining the house.

Now if you put that property back in the market, it won’t fetch 100M in 10 years time. The reason is simple, the house style is outdated.

Anyone buying it most likely just wants to demolish the house and build something else.

Something new. but let’s assume that you sell it for the 100M you bought it, plus 100M that you collected accumulatively as rent over the 10 years you held that house.

Total money you made from the house is 200M.

I feel like my analysis is so pessimistic so let me inflate the numbers a little bit.

Let’s say total money you made from rent is 150M and you end up selling the house for 200M. This is after a period of 10 years.

Remember you bought this house originally for 100M. So you made 250M from this investment over a period of 10 years.

However if you had taken the 100M and bought a land right now at locations like Epe or Ibeju-Lekki.

Worst case scenario, in 10 years time you will be a billionaire.

Yes!

Your assets would be worth a minimum of 1 billion naira.

This is a worst case scenario.

However some people prefer cash-flow real estate investments over capital gains real estate investment because they believe that cash is king.

They prefer to be seeing that cash, getting that cash instead of just putting it somewhere.

That is why I said that it depends on where you are in life. Some people are so well off, the prospect of making a billion naira over 10 years or 15 years doesn’t ruffle their feathers anymore because they feel like that is a long time.

They prefer something they can be seeing now. Getting now. So they buy houses and use the income for their expenses, like vacations, children school fees amongst other things like that.

That is the edge that cash flow real estate investment has over capital gain.

You can buy real estate asset that generates income for you. This way your main capital is secure while you just live off the passive income that is coming from that cash flow asset, e.g rental income.

So in the short term, cash flow real estate investment is king but if you are aiming long term. Then capital gain real estate investment is the emperor.

For someone who wishes to create and hand over multi-generational wealth. Capital gain real estate investment is the way to go.

Buy land. Acres of land. Years after you are dead, those lands will still be appreciating and your children and their children will live like kings.

All because you bought land when you were alive.

That is the story of Joseph Adefarasin who is the father of Paul Adefarasin, the founder of House on The Rock Church.

He bought land for just £2,000. Then leased the land. The money from that is what he used to train all his children in schools abroad. He gave them a sold foundation and lived well.

50 years later that land was sold for $5 million. He already died before the land was even sold.

He changed the course of his generation because of capital gain investing.

So here you have it.

If you want to play short term game and have the money, then go for cash flow real estate investment. However if you want to play the long term game, go for capital gain real estate investment.

“Buy land, they aren’t making it anymore”