Why Cashflow is Better Than Capital Gain
By: Rendy H
Tags: Personal Finance, Passive Income, Investing, Retrenchment, Retirement

I may be fortunate when it comes to my personal finance. I grew interest in this subject since the day I started to invest my saving in the mutual fund back in 2010. I have read books from authors such as Robert Kiyosaki, Ray Dalio, Dave Ramsey, to name a few or books such as The Millionaire Next Door or The Richest Man in Babylon. During the past 11 years of my corporate years I have made sufficient money to life comfortably but not lavishly, I tend to avoid materialistic lifestyle as it doesn’t suit me that much. I get more satisfaction from seeing my net worth growing than having the material belongings. This is one of the reasons why I still don’t have house or car in my mid 30s. Owning stuff means that you have to take care of the maintenance and also I don’t see it as a form to impress as I don’t have the urge to do so.

My investing style has been changing in the past 5 years. Now, the aim is to have enough passive income streams which pays on a monthly basis rather than relying on capital gain alone. The target is always 10% of your net worth cash flow per year. Back then I used to invest 80% of my money on stocks, however I don’t find long term investing is the best suit for me, I often caught day trading along the way. This reality made me revisit my investing strategy. In 2016 after being laid from corporate world, I managed to secure 2 units of rental properties which generates around 9% rental yield in cash paid monthly. This gives me an extra income to save apart from my salary from my corporate job (which I got straight away after my retrenchment). I found that this kind of investing strategy gives me a peace of mind. In 2017 and 2019 I invested in another rental units so in total I have 4 rental units.

I found out that owning rental properties entails a lot of work. Here’s why:

1. I always despise housekeeping and thank God in my country we have cleaning service app which I use to outsource the dirty work (pun intended).

2. Having the unit vacant in between tenant check in/out discounts my rental yield.

3. I need to advertise the unit to be seen and showing the unit to potential tenants are tiring since I have to travel 2 hours back and forth to the location.

4. Sometimes I had to deal with bad tenants. These things ranging from tenants who always pays late, check out leaving lots of mess and broken stuff, problem with officials (I had tenant with expired visa and my unit was visited by immigration officers) or any combination of these.

However, the main reason is that I only managed 8.7% of rental yield per year excluding the asset appreciation. Yes, I may be able to cash out when I sold it, however my plan is to keep for minimum 10 years before I sell.

In 2020 I thought about another investing avenues which enables me to reach my target of 10% yield a year. Then P2P lending comes into the picture. I used all of my investing budget for this year into P2P lending with a satisfying yield of return. I managed to get 12% return per year on this asset class and this ramps up my overall yield of return to 10% of my net worth.

I also diversify in laundry franchise which was open late in November 2020. For now, it is still unknown how much is the profit however I aim for a 23% ROI per year.

All in all, these are the key takeaways from what I have learnt:

1. Cash flow > capital gain. Having capital gain is nice but it can only be used if it is liquidated. Cash flow in another hand, can be used right away to pay your expenses, think of it like having secondary salary.

2. Diversify; from having property as my only source of passive income, I managed to add P2P lending, laundry, and forex robot into the mix of my portfolio. Using a pareto principle:

- 80% in property (low risk)

- 13% in P2P (moderate risk)

- 0.5% in robot forex (high risk)

While the rest is cash, I managed to get 10% yield return cash flow.

3. Debt is bad when the economy is tanking, as a person with risk averse profile, I tend to stay away from it as long as I don’t have the necessity to do so.