Is It Better to Invest for Cash Flow or Appreciation?


Investing is a great way to save for retirement, but you can also turn investing into a lucrative side hustle. From real estate crowdfunding to angel investing, being the money behind the man, woman, or endeavor has its perks. Before you start putting your cash to work, though, make sure you understand why you're investing.

What's in It for You?

While there are all types of reasons and benefits for investing, obviously the common goal is to make money. I always say that passive income beats active income any day, but there is a difference in opinion out there for how to best receive that passive income. Should you invest for cash flow (value that starts returning immediately) or appreciation (value that grows for the future)?

What's the Difference?

The difference between investing for cash flow and for appreciation starts — but doesn't end — with when and how you receive the return on your investment.

Cash Flow

When you invest for cash flow, such as via a rental property, you might begin receiving an immediate return depending on how the numbers shake out.

Cash flow is technically the difference in the amount of income and the aggregate expenses each month from an investment. So, if you earn $900 in rent and have $600 in expenses monthly, your cash flow from the above real estate investment would be $300 for the month.

Note that cash flow can go both ways — if you earn rent of $900 and have expenses of $1200 in a month, your cash flow is -$300.

Perhaps you aren't comfortable with owning real estate and would like to create some cash flow from the stock market? One way you can do that is through dividend payouts from companies whose stock you own.

For example, some companies will take their excess earnings and distribute that amongst their shareholders on a quarterly or monthly basis. Apple recently made news by increasing their quarterly dividends 16% from 63 cents a share to 73 cents a share. Whether a company distributes dividends or not is entirely at their discretion.

Some people live off the cash flow from these dividends without any other income. Others choose to reinvest those dividends in an attempt to continue to grow their portfolio at a more rapid rate.


When you invest for appreciation in real estate, you choose a property that you think will increase in value over time. Perhaps you have reason to believe home values in the area will increase, or you might intend to rehab and put money into the property to increase its value before you sell it. Either way, you may not receive cash flow from the property if the income doesn't exceed expenses. Therefore your money is tied up in the investment until it sells.


Again, you don't have to invest in real property to make this type of long-term wealth building work for you. Investments in a well-diversified index fund or stocks, in general, rely on appreciation for the most part. The hope is that the value will continue to increase over time and at some point, you'll sell some or all of it for profit and for income some day.

Which Type of Investment Strategy Is Better?

Both investment types have benefits and deciding which one is right for you means closely considering your needs, goals, and capability to manage the investment.

Benefits of Investing for Cash Flow

If your goal is to make passive income so you can reduce work as a doctor and spend more time with your family now, then cash flow investing may be right for you. You can start using the cash flow immediately, and use it to drop some clinical time. I call this “gradually retiring” – dropping your work as a physician to coincide with the amount of cash flow you receive from your passive income. Your overall income pretty much remains the same and you continue dropping clinical hours as you choose to find a good sustainable level. For some that might be 60% FTE, for some 30%, and for some it might be not working at all.

While there's no guarantee with any type of investment, cash flow investing does let you receive some return early to hedge against problems with the investment later. But definitely do your research and choose rental properties with a good potential for return by understanding the location, the types of renters you'll likely deal with, and the numbers behind your investment.

A simple example of this cash flow model is buying one house a year and seeing how the cash flow could snowball in 5-10 years. Others like to purchase multifamily properties and scale up a bit quicker. Either way, cash flow allows you to make decisions with your time now.

I've seen many physicians take this approach and equal or exceed their physician incomes in a short period of time, giving them the ultimate freedom for how they use their time.

Benefits of Investing for Appreciation

Investing for appreciation lets you build potential wealth for the future. Unlike cash flow investing, which usually brings in smaller increments more frequently, appreciation investing often comes with a larger end payout that you can cash out or reinvest.

One benefit of appreciation investment over cash flow is that you can really make use of the power of compound interest. Not touching your principal and just letting it all gain in value can add up powerfully over time.

I've also seen some physicians invest smartly for appreciation and take advantage of the large run-up in stocks and real estate over the last 7-8 years. Then based on the 4% rule, they can estimate they have enough to retire while maintaining their current lifestyle.

Can You Do Both?

Personally, in looking for my side hustles as I'm sure most physicians are, I'm looking for both of these benefits: some extra money to fund today's lifestyle and security for tomorrow.

I've heard it's possible to do both with the stock market if you have enough invested and it's spinning off a significant amount of dividend payouts. Personally, I invest almost exclusively in broadly-based index funds so the dividend payout is minimal but I do know there are funds dedicated to companies that tend to pay out larger dividends. Unfortunately, I don't have a whole lot of experience with this and can't speak to it well.

However, I do know that you can do both with real estate investing. If you have enough to invest, you can fund both rental properties and long-term appreciation properties. In some cases, one investment could be both types. You may be able to purchase and rent out a property now in a neighborhood with a lot of potential, earning cash flow on it for years until the values are high enough that it's worth remodeling and selling the home for a final payoff.

Where you invest will depend on your primary goal. When investing for cash flow, look for areas with strong rental rates and affordable investments. Different areas around the country tend to carry different investment profiles so don't be afraid to look outside of the area which you live. Where I live, people tend to invest primarily for appreciation. Cash on cash return is lower but the appreciation potential is huge.

At the end of the day, I diversify my investments to have some where my goal is cash flow, some for appreciation, and some where it's a mixture of both. I guess I'm in both camps and like it this way.

Do you think it's better to invest for cash flow or for appreciation? Or do you invest for both?


  1. The one thing about cash flow is that although it is nice it creates a tax drag. That is why some stocks like Berkshire hatthaway are great investments for people who are early in their accumulation phase. You don’t want money being returned to you at this stage and have taxes incurred.

    The great thing about cash flow in the decumuoation phase is that if it is sufficient enough you may never need to touch the principal and the 4% safe withdrawal becomes a moot point. This is the reason right now all my investment money outside of retirement accounts is going to cash flow (with some appreciation benefits) now

    • It can create a tax drag so it’s nice to get cash flow from investments such as real estate where you’re able to offset some capital gains with depreciation and expenses.

  2. Great summary. I like cash flow best because it is easier to live on. You must sell the asset to live on appriciation. That is like killing the goose that laid the golden eggs. Keep the asset and spend the cash flow is my motto.

    I was recently faced with the decision to sell a cash flow asset and wrote about it here:

    In real estate, the cash flow is also protected from tax drag because of depriciation. Investing for cash flow allowed me to retire from medicine and pursue writting and coaching.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  3. The tax advantages of appreciation probably make it a better option, especially for physicians who are likely already in a high tax bracket. However, there is something very comforting about getting regular income from cash flow assets unrelated to your day job.

    I think its a little like the save and invest or payoff your mortgage debate. In most cases you are better off mathematically to save and invest the money rather than putting it toward your mortgage. But there is a psychological benefit to not having a mortgage hanging over your head, that is very appealing.

  4. I’m still young and hungry enough that I’m not looking to cut back my clinical hours. I already live on less than half my W2 income. My side hustles are purely to make money I don’t need to create wealth for my future self. With cash flow you don’t get to decide your tax rate. With appreciation you get to decide how much you sell, when you sell it and therefore the long term capital gains tax you owe.

    • The point of cash flow in my world was to have a choice when I was no longer “young and hungry.” Funny how quickly that can change for some people as life circumstances change (health, family, politics, etc.) Yes, it may not be the most tax efficient. Love that you live on less than half, impressive.

  5. In the accumulation phase, i.e. the working years, appreciation is much more tax efficient than cashflow, particularly for us high-income professionals.

    I can see the wisdom in a shift to cashflow as one nears retirement. It’s nice to get mailbox money without much effort and without having to sell capital.


    • Makes sense for those looking to accumulate then retire. I guess I’m a little different in that I’m putting the cash flow to use now to buy my time, and subsequently working less. At the end of the day, we’re all looking for cash flow to fund our retirement lifestyles.

  6. Maybe Rob Kiyosaki corrupted my thinking but I love assets that produce cash flow to me. Appreciation seems less real or predictable so I see it as icing on the cake.

  7. Like you said. Do both. In my current wealth building years, I’m heavier on appreciation. In the future, when I near retirement, I will shift more to cash flow.

  8. I do both but def. heavier on the appreciation side. I’m early in my career / accumulation phase and don’t need the tax drag but this is also the time to test risker investments.

    I see value in trying and testing different cash flow investments like real estate (crowdfunded and private) so I have a plan when I choose to transition. I don’t want to be “testing” different strategies in the middle to late part of my career

  9. In the beginning we invested for cash flow only, but as time has gone on, we’ve used the appreciation from some properties to expand our portfolio further. We’ve also experienced headaches like high turnover and maintenance costs in our more recent cash flow investments, which are in more volatile markets or neighborhoods given the competition for deals and state of many investment markets.

    Now we look to invest for cash flow but only in markets or for deals we think have appreciation potential, while staying away from outright speculation.

    We wrote about it here:

  10. I have almost exclusively real estate investments, and the goal is always both cash flow and appreciation but in actual reality it’s clear that some are better at one or the other. My share of a large apartment building has appreciated massively, but zero cash flow in 7 years as all of the money has gone back into renovating the building from rooftop to individual units to lobby and elevators to fire suppression and exterior. As a result the asset value has risen dramatically as it remains 90% occupied but at higher rents, even though all cash flow has been put back into the asset. So there’s one that’s useless for month to month living expenses but an incredible asset for the future. It’ll cash flow again shortly but even then if you look at the cash flow relative to my equity stake value it’s not very good. In other cases the property is making substantial cash payments while also increasing in underlying value. In all cases depreciation is the big key. I have so many disallowed losses (since I’m not in real estate, losses must be offset against future real estate gains) that I won’t pay a dime of federal or state income taxes for years despite substantial income. This is why people are able to build incredible wealth in real estate, to be honest. I know a lot of high earners who don’t quite realize their regular income doesn’t compare to investment income that can largely be sheltered from taxes for long periods of time. Even when a building is sold, it can be sold via 1031 exchange and traded into another asset, starting the depreciation cycle again in many cases and making sure you still don’t pay capital gains taxes because you’re trading the asset not selling it for cash. If there’s enough cash flow, you can keep trading the underlying equity / asset and avoid taxation for long periods of time.

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