Investing for Cash Flow and Financial Independence

How is your retirement plan going? Are you frustrated with the way your mutual funds, stocks and other traditional investments have gone / are going? If the answer is YES then you need to consider the alternatives.

Financial Planners will always tell you to diversify. That’s a good idea except that diversification is usually exercised by most people solely through the purchase of many different mutual funds. It is still investing in mutual funds or the stock market. There are ways to obtain wealth (and financial security) that you may not currently be exploring, ways that go beyond buying mutual funds.

Instead of planning for retirement, plan to reach Financial Independence instead. True Financial Independence is an easily measurable known target, and is a goal that can actually be reached within a short period of time. How? Through passive income. Generate positive cash flow from hard assets such as real estate income property. Rental income is passive income for the most part, especially if you have a solid property manager taking care of the details.

The principles of creating a long-term, on-going cash flow can be applied to most kinds of real estate investments. Mobile home lots, apartments, garage/storage units, and houses all make excellent income producing assets. Houses, in particular, low-end houses, make an excellent vehicle for creating long-term cash flow for a multitude of reasons.

While appreciation is often the most significant form of profit for real estate investors, investing for cash flow is easier to determine and with lower risk. So how do you achieve positive cash flow ethically in the real world? You need to buy in the rare market where high capitalization rates (15%+) are the norm. Such markets are usually depressed like Rochester or Memphis and have a large pool of renters. The reason tenants are willing to pay more to rent than they would have to pay to own in such markets is that they believe property values are falling or level in which case not owning is a good idea in spite of the high rent. Positive cash flow is so rare and so desirable that it eventually attracts out-of-town investors. Their coming into Rochester or Memphis or wherever causes property values to climb so that high cap rates are no longer available.

There are the three primary ways that an investor makes money in real estate: 1. from cash flow, 2. property appreciation and 3. paying down of the mortgage thereby increasing your cash flow and equity. Only if you buy on a bargain basis can you get positive cash flow from a rental property.

Why low-end houses make the ideal Cash-Flow vehicle

First, houses are abundant. Every city, town, and neighborhood has houses. Houses are probably the easiest to buy because they are the most common. Houses are also probably the easiest to buy at a discount, since there are so many sellers who own them in some sort of crisis ownership position: Vacancy, disrepairs, judgments/liens, back taxes, etc.

Houses are the easiest to manage, with the possible exception of storage/garage unit rentals, since these are occupied with stuff and not people, thereby making evictions easy. Well-maintained houses will often keep tenants for a 3-5 year cycle, sometimes longer. Most of the other vehicles have shorter-term occupancy.

Houses are by far the easiest to sell because of the naturally large demand for places for people to live. In most cases the property will sell without holding paper, but many smart investors will sell their houses on some sort of payment contract and be able to charge a 10-15% price premium to the buyer without using a Realtor!

The so-called low-end house can be very desirable from an investor's standpoint. First, lower-end housing doesn't mean becoming a slum lord. It means basic, starter homes that are located in good, but not necessarily great locations. These marginal areas typically are more of a buyer's market, thereby, tilting the negotiation in favor of a hard-cash buyer or a buyer seeking owner financing. Actually, owner financing is easier, much easier in these slightly marginal areas.

Next, these lower level houses can frequently be purchased at various distress auction (tax, foreclosure, estate) sales. In many areas of the US, these houses are bought for prices anywhere from as low as $5,000 to $25,000, without a lot of difficulty (after you know the many inside strategies and secrets).

These homes can typically generate rents of $600 - $900 per month, which based on the low purchase price makes an outstanding return on investment. Returns of 25% - 35% per year are common. It's not uncommon for smart investors to receive income for 20 years or better from their houses. After this period of ownership many owners will find a stable buyer and sell the house with a vendor take back mortgage (payment contract) and receive another 10 to 15 years of "mortgage" payments.

Here’s an example:

Purchase price            $ 20,000
Rehab                     $ 15,000
Cash Investment:          $ 35,000

Gross annual Income:      $ 9,600       $800 month
Ordinary Expenses:        $ 4,320       45%

Positive Cash Flow:       $ 5,280 yr.   $440 month

After Repaired Market Value    $50,000
Equity Created                 $15,000     30%

Cash on Cash Gross Return      26%
Cash on Cash Net Return        15%


To put things into a little more perspective, if you were a risk averse investor, how much money would you need to invest in order to earn $5,280 per year in interest income, not accounting for taxes?  Assuming the current 5 year GIC rate of 3.5%, you would have to invest $150,857. Based on the example above, you could buy 4 houses with that money and have an income of $21,120 a year. In addition, you would not have to worry about interest rates on renewal, or stock market fluctuations, or running out of capital if you were withdrawing an income from your portfolio.

Finally, when investing in rental properties you need to keep your eye on the long-term goals rather than shortsighted goals. Property rental is a marathon rather than a sprint with the greatest profits coming at the end. You will want to pay the property off as quickly as possible in order to realize the maximum profit potential and acquire new properties. The real money when renting properties as a real estate investment isn't in renting out one or two units but twenty or thirty. The more rental properties you own the more money you stand to make from owning them.

In summary, investing in real estate is always a good idea, no matter the economic environment. Investing in income producing property is even better as positive cash flow properties provide inflation protected real cash for your retirement.


For more information on Positive Cash Flow investments click here.

WHAT IS MONEY?

Everyone uses money. We all want it, work for it and think about it. If you don't know what money is, you are not like most humans. However, the task of defining what money is, where it comes from and what it's worth is belongs to those who dedicate themselves to the discipline of economics. While the creation and growth of money seems somewhat intangible, money is the way we get the things we need and want.

So what is this thing that means so much to everyone? Normally when people think of money, they do not focus on the raw concept of money but on how to acquire it, how to spend it and how to hang on to it. Most people spend a great deal of time thinking about money without ever contemplating what it is.

Most people go through life believing that money is nothing more than paper and coin. They are mistaken. These objects are merely symbols that denote an arbitrary value. Paper and coin are inanimate objects that have no power of their own, other than the power we assign to them. What makes them special is the agreement we have with others. What gives the paper and coin value is what they stand for.

Do not confuse money with Yen, Pounds, Deutschmarks, Euros or Federal Reserve Notes. Items of currency have no intrinsic value as food, shelter or clothing. At best, items of currency can be exchanged for things of value, provided you are in the right country.

If you see money only as currency, you miss a critical point. Money is not matter. Money is an idea, a concept, a communication. The paper notes and the metal coins are not money. They represent money, but they are not, themselves, money. Money is that which lies beneath these material objects. That remarkable mystery, whatever it is, is the true identity of money.

WHAT IS MONEY?

Most people think they know me.

They don’t.

I am not what most people think I am.

I am not the paper in your wallet, or the coins that jingle in your purse.

I am not quietly sitting in your bank account, hoping to be used to one day.

You cannot see me, feel me or touch me.

I am an idea, and I am energy. I’m neither good nor evil.

I am only what you decide that I am, and I fulfill the role that you create for me.

I don’t care how smart you are, where you live, what you do, or where you come from.

All I care about is your energy.

Your energy decides what thoughts you have, and therefore your thoughts will determine the relationship you have with me.

I have very simple needs, and simple rules.

I am infinite.

I have no limits, except for those you place on me with your mind. There is no limit to the energy in the world, and because I am simply energy, I cannot be restricted or controlled.

I crave abundance.

I am attracted to whose who think without restrictions, who like to think big. When you believe there is enough of me to go around, I am naturally magnetized by that thinking.

I despise scarcity.

Because there is no limit to me, I avoid those who think from a win/lose or scarcity perspective. Those who believe I am in short supply, or difficult to receive, will find that very reality, because I choose to avoid those who think small.

I love value.

What magnetizes me most is the creation of value in the universe. I move to places where value is created, because creation is energy. If you wish to attract me into your life, focus on creating value for others, and I will appear.

I avoid entitlement and complacency.

No one ‘deserves’ to have me, and I am always moving to the place I am most respected and where value is created. It has nothing to do with ‘fair’. Those who take me for granted or become complacent with my energy will find me gone.

I only have one job, and that is to serve you.

It is a matter of energy and value creation. My purpose is simply to move to where I am attracted most, and where I can grow.

My one goal is to replicate myself.

Because there is no limit to energy, my purpose is to reproduce and grow, in order to bring more energy to the universe. I am created and replicated through value creation. I am an energy of evolution.

The message for you should be clear. Those who create value for others in the world will find me in their lives.

I am whatever you believe me to be.

So what you believe about me can make you miserable, or what you believe can enable you to perform miracles.

I'm neither positive, nor negative. I am what you decide I am.

If you fear me in any way, I can crush your ability to survive. If you get to know me, I can make your life flourish and your dreams come alive.

I can be your master, or I can be your servant.

I am only what you make me.

So, the relationship we have together will be determined by you.

So what is money? I leave it to you to answer that question yourself. Pondering the mystery of money is like meditating on a unsolvable paradox: You may never answer the question, but you will learn something in trying.


Till the next time,


Bruce



P.S. If you want to learn how to create a positive flow of money in your life visit http://www.flowofmoney.com/index.htm