How Cash Flow VS Capital Growth Mirrors Bodybuilding VS Weight Lifting


Picture Mr. Universe, the epitome of bodybuilding, workin’ out like he wanted to be the world’s strongest man. Then ask yourself why nobody would ever think that’s effective. Those who want the ultimate bodybuilder’s physique sometimes think it works, or they wouldn’t workout that way. What’s their thought process? Do they have one? If so, how long will it take for them to realize their mistake — which begs the question — will they ever realize their mistake?

Each month I get half a dozen calls or more from folks in their 20’s and 30’s who’re either already immersed in developing immediate and substantial cash flow through real estate investment, or want to. Their incomes run the gamut from a couple grand monthly to five figures a paycheck. They don’t plan on retiring any time soon — usually at least 15-20 years down the road. They’re saving copious amounts of money after taxes.

Yet they wanna develop cash flow yesterday. It makes no sense whatsoever.

Here’s why

If you’re 33, makin’ $125,000 plus whatever your workin’ wife brings to the table, (often an equally considerable amount) cash flow ain’t your problem. In fact, you have money to invest in real estate because cash flow’s not an issue. It’s akin to stoppin’ at the store for some ice cream when you already have eight gallons of it at home. No, you’d make the stop cuz this morning you noticed the kids were outa their favorite cereal — and you remembered what kinda hell that created last time. ๐Ÿ™‚

What’s your real investment need?

In two words — Capital Growth. Ask yourself who’s better off, the guy who bought cash flow properties from Day 1? — OR — The guy who grew his capital as big as possible, as safely as possible over time? Go with me here, OK? It’s the second guy by a mile.

Maximum cash flow at retirement

What most people never quite catch on to, is that capital growth and cash flow are exactly analogous to bodybuilding and weight lifting. The former’s agenda is a perfectly symmetrical body, while the latter’s end game is brute strength and nothing else. To the extent you adopt bodybuilder principles, you defeat weightlifter results. Try doing both in a so-called compromise, and you’ll end up as a weak weightlifter with a funny looking body. A lose-lose if ever there was one.

When a real estate investor goes for cash flow, they defeat capital growth and vice versa. You can bench press 315 pounds 8-10 times and sculpt a killer lookin’ chest, or you can train to bench press over 1,000 pounds once, and scare the crap outa Zeus. Ya gotta pick one.

Remember — you want the highest cash flow to arrive just as you cross the retirement line.

To do that you must be cognizant of what makes for maximum cash flow any time, anywhere. Maximum cash flow comes from a yield on maximum capital. The way you get to maximum capital is to concentrate on making it bigger each and every year. Capital simply will not grow at maximum possible velocity when the investor’s main agenda is maximum cash flow now. ย The sound you hear in the background is the Captain Obvious alert. ๐Ÿ™‚

This ain’t rocket science. 8% on a million bucks yields more than 8% on less than a million bucks. Duh. Yet thousands fall in love with their ability to create lots of current cash flow now, completely oblivious to the reality: They’re purposefully discounting what their retirement income coulda — woulda — SHOULDA been. How you might create that capital growth is a different discussion altogether. But please, for the love of common sense, embrace capital growth as if your retirement depended on it.

Cuz it does.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Thanks for the explanation Jeff. While my wife is by no means a wild spender (in fact, she thinks Dave Ramsey is too soft), Whenever we recieve a dollar of cash flow or profit from an investment, I have to explain to her how much more valuable that dollar is to us in the future rather than spending it today.

  2. Jeff, what do you say about the cash flow investor who is reinvesting all the cash income? For the yet to be retired person, isn’t maximum net worth growth the goal? And in some cases the cash flow strategy, reinvesting the cash, causes greater, surer, overall growth? The cash flow investor can get 10% NOI, plus possible appreciation. The growth investor gets unknown growth, albeit more. Kinda like buying dividend stocks vs. growth stocks, no?

  3. JonK — “Jeff, what do you say about the cash flow investor who is reinvesting all the cash income?”

    First, Jon, we must decide if the investor is indeed employing a cash flow or a capital growth strategy. If it’s capital growth, then investing for cash flow, actually being a cash flow investor as you suggested, is counterproductive. On the other hand, since you added the tactic of ‘reinvesting’ the cash flow, let’s look at it more closely.

    You make the most salient point when you rightly aver that in pre-retirement, capital growth, i.e. net worth growth is the goal. The question then remains: What generates that result more quickly, while maintaining safety?

    It’s properly executed analysis that gives us the answer. Sometimes, in some markets it makes sense to use leverage to a ‘break-even’ and reap appreciation. If there’s no appreciation then paying down debt gets it done. An investor with $250K would, in today’s scenario be far better off by acquiring 2-4 properties using 25-50% down payments than paying cash and investing the cash flow. There are rare exceptions to this reality.

    Furthermore, the ultimate end game will be significantly more retirement cash flow AND net worth. I have clients making these exact choices, and the analysis virtually always indicates an assumption of no appreciation, prudent use of leverage, and the application of both cash flow and any additionally available funds to the job of debt elimination.

    Make sense?

  4. Good article. I sometimes get caught up in trying to maximize cash flow without thinking about capital growth. I would argue, though, that you don’t have to just pick one. Actually, I would say every deal is a combination or blend of the two. A property with high cash flow can have a little appreciation potential, and a property with high appreciation potential may even cash flow. Finding the right balance for your situation is the key.

  5. Jeff,
    Can you elaborate a bit? (Dont’ worry I’ll be specific! – hehe)
    Being fairly new (2 years) I’m not always clear on “what” cash flow vs. cap apprec. really “visions out” to. So I find myself unclear on what you’re addressing. For example, are you saying people should focus more on SFH’s or really expensive brand new Texas duplex’s or are you simply saying that, for retirement, one might do better to put larger down payments and domino the mortgages?

    Also, a little side quesiton… I started out two years ago “cautiously” by buying SFH’s first. I then got brave and bougth a duplex … a fourplex … a 7 unit. Gave it a 6 month break … had two – hour long conversations with you during that break by the way! Then bought another 4 unit, a foreclosure 2 unit, 2 SFH’s fro 57k for the pair and finally an 11 unit for 220k ARC.

    My attitude now is, “SFH’s are for the birds” — my “nicer ones” (read: one’s I paid 65-75k for) are also the hardest to find qualified renters for . They sit empty the longest, and every little repair quickly eats up my 8-10% maint. allowance. I KNOW they SHOULD appreciate better than multi units due to the emotional factor, but I’m not convinced. I find them to be alot of headache in the here and now. Probably my experience is opposite of most. (I find multis a joy and SFH’s a completely negative experience start to finsish). Do you think it behooves one to hold onto SFH’s anyway as a “diversifier” … ? i.e. “non” cash flowing properties that promise more int eh way of appreciation? Also seem to remember that your calculations NEVER factor in a rise in income OR value though …. ok, enough babbling…I might need to be your “fix” again soon!!

  6. So I also would like a bit of clarification of exactly what you are advocating.

    If you are saying that one should look at long term potential vs squeezing every last penny of cash flow out of a long investment I can see your point.

    However it is NEVER prudent to buy a long term hold that does not cashflow. If you want to hold the property for many years banking on it going up in value you still want it to minimally pay for itself via the rents. It is always painful to carry even a small negative and circumstances can make it very painful.

    If Mr. and Mrs. $125K+ per year thought it was worth carrying a $100/month negative (Hell that is probably less than their cable bill!) and have a 5-10 year plan to let the value grow and sell it than you can say that was a good plan.
    So they decide to do this… in 2004 but now they have had the place forclosed on because he got laid off from that $125K job in 2008, could not afford to carry the $100 negative that turned out to be closer to $200 since they overestimated the rents to start with, and they lost all of the money they put into it since it not only didn’t appreciate it went down by 20-50% and since they had made the negative payments all that time their savings was $5-10K less than it would have been.
    A tiny positive cashflow would have allowed them to weather the storm since the investment might still suck but at least it wasn’t costing them money they did not have.

    I am taking a pretty much worst case but for the timeline I said it isn’t that unrealistic.

  7. Shaun — If you’ve read anything remotely, even indirectly into this post encouraging negative cash flow, you’re, um, mistaken. The point, in a nutshell, is that focusing on truckloads of cash flow early in the game, especially when the day job is piling in the cash, is counter productive.

    But negative cash flow isn’t endorsed by me with extremely rare exceptions. Don’t know how you could possibly infer this post did.

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