Cash Flows Versus Capital Gains

  • James Walker III is a licensed real estate agent with an estimated $1 million real estate portfolio.
  • He broke down the pros and cons of the cash flow versus capital gains investing strategies.
  • Walker prefers focusing on cash flows for their tax benefits and lowered market risks.

Officially, James Walker III makes a living as a practicing corporate mergers and acquisitions attorney — but it’s merely one of many hats he’s worn throughout his life.

Walker has also been a bit of a handyman since his childhood in Connecticut, when he used to wake up at 7:00 a.m. every weekend to help his parents repair, clean, and manage their rental properties. He’s also been an entrepreneur since starting his first snow-blowing business at age 12, making extra cash during college by cutting hair and starting both a moving and ride-sharing business.

Now 27 years old, Walker has been a real estate investor and landlord for the past five years, and is also a licensed real estate agent in Maryland. In 2022, he officially hit his goal of acquiring $1 million in real estate properties — four years ahead of his original goal timeline.

Walker purchased his first property for $350,000 in 2017 when he was just beginning law school, choosing to live in one of the rooms while renting out the others to fellow students. The Maryland home, located just one mile outside of DC, has likely appreciated considerably since he purchased it, Walker believes. Last year, Walker’s purchase of a Brooklyn condo for $549,000 officially tipped his

net worth

of investment properties around the $1 million threshold, he estimates.

James Walker III in his Brooklyn condo.

Walker in his recently purchased Brooklyn condo.

James Walker III

Even though the value of his first property has appreciated over the last five years, Walker chooses to focus his real estate investing strategy on making cash flows over

capital gains


As he breaks it down, there are two traditional schools of real estate investing strategy. Investors can either concentrate on making cash flows, such as through passive rental income, or capital gains, like through a fix-and-flip.

For both strategies, Walker emphasized the necessity for investors to understand the amount of demand in a specific area by conducting market research and studying housing trends in a specific area. “This is one of the most important things that people don’t do when they talk about investing in property,” he told Insider. “The information is out there, but I don’t think people see the value in it.”

This information, he clarified, can be as simple as examining publicly available data online, like U-Haul moving trends, driver’s license issuances, and new job statistics.

The capital gains strategy

When focusing on capital appreciation, investors must focus not only on increasing the home’s valuation, but also on finding a community conducive for buyers, said Walker.

“Especially as an early investor, you don’t want to be the first one trying to flip in an area. You want to come into an area where you see there are other investors coming in; that’s your indicator that this is an area that’s up-and-coming,” he explained. “You want to come into a community where you’re able to benefit from other money coming in at the same time.”

That’s because as more investors flock to a specific area, the likelihood for further private — and oftentimes public — investment is high. This means additional retail, public amenities, and infrastructure improvements. However, there is a tipping point where a sustained increase of investment in a focused area can lead to gentification and runaway rent prices, meaning that existing residents of a community could become priced out.

But in terms of making improvements to a specific property, a comparative market analysis is especially relevant for investors interested in fixing and flipping, because the price of an extra bedroom or bathroom differs across cities.

“One of the biggest mistakes people make is that they do not understand how much they should buy the property for when they’re trying to do a flip or when they’re trying to rehab an investment property,” said Walker. “This is barring them having not done their market research. They flip the property and there’s no buyer.”

At a certain point, the value-add of each additional dollar invested might not return the same ratio of gains, he explained. “The biggest mistake people make next is buying the property at too high of a price, and that’s because they don’t understand their After Repair Value,” said Walker.

As an industry standard, investors usually aim to buy a home for no more than 70% of its After Repair Value, or ARV. But oftentimes, they don’t fully factor all other possible costs into their budgets, including any emergency repairs, unexpected renovations, listing fees, and taxes, which leads to lower returns, said Walker.

The cash flow strategy

For investors whose main focus is passive cash flow, Walker suggested looking for an area with both high migration and a shortage of existing homes. These two factors combined will lead to an increase in rental needs, he explained.

Investors should focus on a property’s specific location in proximity to business and education districts, where one would find universities, subway stops, grocery stores, and parks, especially since certain areas might return more rent per square foot or bedroom. Such infrastructure and attractions will help with a “consistent access to quality tenants,” Walker says.

However, this doesn’t mean that investors can’t find opportunities in areas that may not have as many amenities, Walker added. “What I’ve found is that you can attract a certain type of tenant because they’re more comfortable with coming into an area that’s maybe not as fast paced,” he explained.

At a minimum, Walker recommended real estate investors seek a 10-20% return on their rental properties. By foregoing a property manager and directly overseeing each of his properties, Walker has been able to cut down on his overhead costs to maximize profits, he said. He’s also been able to stay competitive with tenants by continuously and frequently updating appliances to “meet market standards.”

Why Walker prefers cash flows

Even though factors like increasing property taxes and ongoing maintenence can affect a property’s cash flow, Walker still prefers the cash flow strategy because he believes it’s less susceptible to market trends.

“If home values drop — maybe you can’t increase rent, or your rent even is reduced a little bit — but as a general note, you’re holding the property and you’re cash flowing it, so it doesn’t matter if the value drops,” he explained. “The value of the home dropping only really matters when you go to sell it.”

Additionally, Walker recommended starting with the cash flow strategy because it inherently carries less risk than the overleveraging required to fix and flip a house.

“I just don’t want young investors to jump out there into these very aggressive loans without the knowledge, experience, and the financial backing,” he said. “I highly suggest that you start small.”

And like all assets, investors must pay taxes when they realize a capital gain on a real estate property. According to Walker, investors can also benefit from the cash flow strategy through its tax advantages.

“When you come in and do a quick flip, it can be taxed as a short-term or a long-term capital gain. Based on how long you hold it for, how long it takes you to do the flip, and the state that you’re in, capital gains are taxed at a higher rate than cash flow, or passive income,” said Walker.

Due to passive income taxes, investors can sometimes take a loss on their real estate profits. But once these taxes are offset against property depreciation or repair and utility costs, investors can come out with a “passive loss,” which they can use to reduce their overall taxable income by up to $25,000 as long as their modified adjusted gross income isn’t over $100,000.

Investors are also able to use a passive loss to offset a capital gain so they no longer owe any outstanding tax liabilities, said Walker. “This is called tax planning — many people create capital gains to benefit from their passive loss,” he added.

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