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Variable rate financing in real estate investing

When it comes to real estate investing, the investor usually has one of two primary goals, obtaining ongoing cash flow or getting either a short-term or long term capital gain. First, some basic definitions:

Capital Gains – If you invest for capital gains, your goal is to sell something for more than you bought it after that asset has appreciated. In order to receive the gain, you typically no longer own or control the asset.

Cash Flow – If you are a cash flow investor, your goal is to receive a series of cash payments from your investment, typically monthly or quarterly rental payments, while you own or control the asset.

There are of couse other considerations for real estate investing, primarily depreciation and tax advantages, that go into a decision to buy, sell, or hold an asset such as a residential or commercial real estate property. No matter what your goals, unless you are financing the purchase with existing assets, you will have to consider the role that your loan or mortgage will play.

If you’ve ever taken out a loan, owned a credit card, or have a mortgage for your house, you are probably quite familiar with the various interest rate options you may have. Investors are typically more sophisticated than buyers who are only looking for a place to live in rather than an investment property, and this could give the investor certain advantages. For example, if you have an investment that was financed at a fixed rate, and you are in a position to sell to a buyer who is unable to find a reasonable rate loan, if your fixed rate were low enough, you could offer a variable rate that would ensure a larger cash flow to you in the future.

To get an idea of what the situation may be like for someone who is considering purchasing a single family residential property that you own, you may want to visit a bank site to see what a Standard Variable Rate may be for your buyer.

If you know what kind of options your buyer has, and what your options are for offering alternative financing options, you could put yourself in a better position to profit over the long term.

Do you know your cash flow from your capital gains?

When it comes to investing, words and definitions matter. If you don’t understand the question in the title of this article, then you might be easily fooled by a fast talking financial salesperson, or you may pass up an outstanding opportunity because of your lack of knowledge. If you are confused by the terms in the article, stick around, by the end of this article, you will have a good idea of the difference between cash flow type investment and a capital gain type investment.

The basic definitions are simple enough:

  • Capital Gains – If you invest for capital gains, your goal is to sell something for more than you bought it. In order to receive the gain, you typically no longer own or control the asset. Stocks that don’t produce dividends are a classic capital gains investment. Another type would be investing in unimproved land.
  • Cash Flow – If you are a cash flow investor, your goal is to receive a series of cash payments from your investment, and you typically still own or control the asset. Long term ownership of dividend producing stock fits this model, as does investing in rental real estate.
  • This is a very, very simplified description of the different between cash flow and capital gain investing, and you can read any number of books that go into the details. Depending on what kind of investing you are doing, you probably have to have a completely different approach depending on which kind you are doing.

    The key to remember is that any type of investment vehicle may include both cash flow and capital gains. Whether one type or another is best for you depends on the investment and a variety of other factors, including your near term and long term needs for a return on your investment.

    For example, if you are investing in a company that specializes in advertising on radio, if you purchased the company and intend to keep it for several decades, you may want to do so only if it is a cash flow type investment so that you can pay the employees and other overhead costs. If you think that radio will be a dead medium in five years, you may want to take a capital gains approach and position to sell the company quickly, and profitably.