Some people are long-term investors. Others not so much. Often I hear real estate investors seeking immediate cash returns of 5-6% and more after expenses. Often this is not realistic, especially in high-cost cities. Often, they are losing out.

Yes, strong cash-flow is wonderful, delivering those rent checks every month. The alternative is appreciation of the asset, usually over an extended period of time, years, not weeks or months. That patience can pay. Cash-flow is taxed differently. Imagine a $1,000,000 asset paying you $4,000 per month (net). 10 years later, without any rent escalations, that's roughly $500,000 in income. If the asset increases in value by $250,000, that's a healthy return. The other alternative is $2,000 per month net income over 10 years, roughly $250,000 in net income total but it appreciates in value by $500,000, both may produce the same totals but one will be the beneficiary of lower capital gains tax rates, ultimately netting you a better return on investment if you sell. Also, if instead of selling you did a 1031 exchange, you would be in a position to invest in a higher-valued asset with Zero capital gains taxes.

The above two scenarios are driving lots of the fairness rhetoric in the taxation discussions we are currently witnessing. Most people don't know anything about the above scenario. Most cannot acknowledge that the second scenario is being rewarded via the tax code for one important ingredient that the first has less of, risk. If there is no reward for risk, will people (and investors) take on risk? If asset values do not rise, can an economy grow?

This little over-simplified tale also omits important tidbits like repairs, maintenance, surprises, vacancies, etc, but it demonstrates how often long term investments can differ.