Several months ago, I had an enlightening conversation with a potential investor that perfectly highlighted a disconnect I see all too often.
This guy is a tech executive pulling in mid-to-high-six figures annually. During our chat, he talked a lot about legacy planning and protecting the wealth he's built over his career. He wasn't looking for "get rich quick" investments - he wanted his wealth to provide for his family for generations.
But then something interesting happened.
As soon as we started discussing specific investment strategies, it became clear that he was laser-focused on appreciation potential. His eyes lit up when talking about investments that target outlandish IRRs and equity multiples, but he practically glazed over when I mentioned cash flow.
The irony was clear: his stated goals (wealth preservation and legacy) were in direct conflict with the types of investments catching his attention. He just didn't realize it.
The Capital Preservation Conundrum
There's an inherent tension in investing that’s rarely talked about: the conflict between growing your capital and preserving it.
For most of our investors (typically high-earning W-2 employees or successful business owners), their primary income already provides strong growth. What they’re really looking for from their investments is preservation of their hard-earned capital.
But here's where things get interesting: the best way to preserve capital isn't through chasing appreciation – it's through consistent cash flow.
Cash Flow vs. Appreciation in Real Estate
Let's break down exactly why cash flow is your secret weapon for capital preservation:
Cash Flow:
Real money hitting your bank account
Natural inflation hedge
Predictable and stable
Lower risk profile
Appreciation:
Dependent on future market conditions
Often subject to interest rate risks
Requires excellent execution
Paper gains until realized
Higher risk profile
Cash flow is like getting paid a salary from your investments, while appreciation is more like hoping for a future payday that may or may not come.
Why Commercial Real Estate Gives You Both
One reason I love investing in apartments is that you can actually get both cash flow and appreciation – but in a way that gives greater control over the appreciation part.
It’s known as forced appreciation in commercial real estate. Unlike single-family homes, commercial properties are valued based on income they produce (NOI). This means we can directly increase the property's value by increasing income and/or decreasing expenses.
For example, if rents at a 100-unit apartment building are $50/month under the market rate, bringing the rents to market adds $60,000 in additional annual NOI. At a 6% cap rate, that single improvement just added $1M in value to the property.
Forced appreciation is like having a value dial to turn, rather than simply hoping the market moves in your favor.
The Risk Reality Check
There’s a fundamental concept that often gets overlooked:
Every investment's total return is made up of two components – the cash flow received during the hold period and any appreciation you realize at exit (typically through a sale or refinance).
Take a typical value-add apartment deal – if we're projecting a 17% total return, that might be comprised of 7% annual cash flow plus 10% from appreciation.
But here's something that might surprise you: the more of an investment's return that comes from anticipated appreciation, the riskier it typically is.
Why? Because appreciation-heavy returns depend on several things outside of anyone’s control:
Favorable debt markets
Interest rates cooperating
Market timing working out
Availability of future buyers
Executing a perfect business plan
That's a lot of things that need to go right.
And while cash flow isn't guaranteed either, it's typically much more predictable.
We can look at current rents, expenses, and expected debt payments and have a pretty good idea of what the cash flow will be. Appreciation, on the other hand, requires a crystal ball – and I haven't found one of those yet that actually works.
The Bottom Line
If capital preservation is your goal (and it probably should be for many high earners), you need to be incredibly thoughtful about how much of your expected returns from an investment are from appreciation versus cash flow.
This means potentially avoiding things like ground-up development projects (pure appreciation play) in favor of stabilized assets or debt investments that prioritize current cash flow.
The real key is matching your investment strategy to your actual goals.
Think of it this way: if you're already making great money in your career or business, you don't need a striker trying to score spectacular goals with your wealth. You need a reliable goalkeeper who's focused on protecting what you've already earned while still contributing to the team's success.