The answer is BOTH. But given equal market opportunities, what you actually do would depend upon your particular financial and income tax situation. Those with a current income tax bracket above 20% would pay less taxes if they bought properties for appreciation rather than income.
Theoretically, those with 15% income tax brackets could structure a fairly decent life-style around the 10% capital gains rate, but practically speaking, they might not have been able to save up enough money to play the ‘waiting game' that growth strategies demand.
Your government has spoken. And what it has said is that you should spend long term capital gains to support yourself rather than earned income. For everyone over the age of 14, whether originating as interest, rents, royalties, or capital gains, non-active income is taxed at lower rates than active income once pay-roll taxes are factored into the equation.
Suppose you had a garden that grew enough year around to provide for all your needs. You'd think nothing of harvesting your crop as required to feed your family. In like fashion, if you had a garden of houses that grew by 10% per year, every 7.2 years their values would double.
So, theoretically, if you had the financial resources to invest $10,000 each year in a $100,000 rental house with rents that just matched operating and loan repayment costs, you could buy one $100,000 house each year for 10 years.
At the end of that time, by selling a house each year and replacing it with another, similarly leveraged, at the then-current market price, you'd have an income indexed to inflation that would place you in the top 25% of wage earners, but with a maximum 20% income tax bracket.
Practically speaking, you'd pay far less in taxes because the tax-shelter thrown off by 10 break-even rentals would shelter most of the gains recognized on sale. As a matter of fact, a person with the financial resources to be able to buy larger, more elaborate, expensive homes could make a career of searching out high priced ‘ugly ducklings' that could be bought at discount. Moving in for 2 years while making the cosmetic repairs to bring up their market value, then selling them and repeating the process, you'd be able to generate a totally tax-free income.
What would a person live on while waiting for a home to qualify for capital gains? Loans! At today's low interest rates, and readily available equity financing, the tax-free loan proceeds made today to pay personal expenses can be repaid with long term low-taxed or no-taxed capital gains later. And in most instances the onerous 15.3% pay-roll taxes and workers compensation needn't be paid.
Many moons ago in Palm Beach, I met a couple, Don and Daphne, who specialized in homes selling for upwards of $500,000. They'd look for bargains to buy just at the end of the ‘season' when all of the beautiful people were leaving town. Then they'd spend the entire year doing most of the work themselves, selling completely refurbished furnished homes to the rich and famous for cash as the Palm Beach season resumed. They made about $100,000 net after-tax profit each year. And they lived the good life among lavish surroundings in Palm Beach while they plied their trade. You can do it too if you want to.