Why focus on cash flow when investing?
Why focus on cash flow when investing?
The fundamentals of cash flow are making the headlines between the pending Facebook IPO and the many challenges that JP Morgan is now facing. JP Morgan Chase stock has plummeted more than 15% this week in light of their newly discovered $2B loss. Facebook has gone the opposite direction with their pending IPO by adding 25% more shares and increasing their IPO price to $38 per share. It appears that it’s biggest share holders will now sell off about $3.8 Billion and create tremendous cash flow for themselves in the process.
Why should you focus on the fundamentals of cash flow when investing? Isn’t it easier just to rely on the analysts to analyze and just tell everyone else what to invest in? If you were strictly after safety you could just land your funds into a CD and accept the fact that your returns are not going to keep pace with our inflation rate. There must be a better way to invest for great returns using alternate investment vehicles. A lot of investors are returning back to real estate. Everyone knows it is on-sale and there is still a lot of distressed inventory on the market in the form of short sales and foreclosures.
Warren Buffett recently made the following statement on the Squawk Box on CNBC, “If I had a way of buying a couple hundred thousand single-family homes… I would load up on them.” He went on to make more remarks concerning low interest rates, low prices and valid points regarding why he likes single family homes. Real estate has historically created more wealth than any other investment platform. This exchange or transfer of wealth has happened over and over again and most clearly during the tough economic times of recession. I believe we are experiencing the greatest transfer of real estate wealth of our generation. Understanding the dynamics at play in the current market and how to position to leverage the voids in the market with low downside risk is the key to your wealth and income.
One challenge is that investors have the perception that real estate investing takes a lot of work and experience to succeed. Who would want to invest time and have to deal with toilets and tenants? Certainly not an investor looking for great returns in a passive investment model. Here are some alternate real estate investment models that provide the investor with passive returns. The key to the investment success is joint venturing with an experienced real estate catalyst that can put funding to work in a safe environment that still provides great returns. The investor only provides funding and the real estate catalyst does all of the work including finding, negotiating, renovating and managing the property. Here are some models to consider that work great for the investor and the real estate catalyst.
1. Buy and Hold Rental Property: Today is the perfect market to establish your plan to buy and hold rental property. Why? Because the returns are so much better than they were just a few years ago and investors from coast to coast can now establish strategies to establish positive cash flow from rentals. My advice is to buy houses for the positive cash flow, not to merely build your Real Estate Empire and net-worth. If you focus intensely on cash flow your investments will pay you an income stream every single month. Buying and holding rental property can create long-term wealth, cash flow for today, and huge tax savings. Consider using joint ventures and equity financing rather than the traditional approach of getting bank. Long-term, every investor needs to buy assets and transfer from active/transactional income streams into passive/residual income streams to become financially free. This investing model should provide approximately a 10 – 18% return to the investor and allow them to invest locally in their own community rather than on Wall Street.
2. Lending income streams: Did you hear the good news? You can make great returns lending money privately! There are two basic types of financing that can be structured to provide great returns for everyone involved.
Debt financing – This is typical bank style financing that includes an interest rate and points. Points are essentially another form of interest, but it is pre-paid. For example if a bank is loaning $100,000 on a mortgage and they charge two points. The two points equals $2,000 and they collect that fee up-front when the loan is originated, rather than on a monthly basis. Real estate investors are able to pay 6 – 10%, add in additional points and the overall return can grow to 12 – 17%.
Equity financing - An alternate form of financing that that does not include interest or points, instead the borrower pays the lender with a portion of the equity and dividends in the form of rental income. This works perfect in a joint venture structure strategy to buy and hold rental property. You could also joint venture with a real estate investor looking to fix and flip property and split the upside profit 50/50. This type of investing can yield 20 – 30% returns and still work for everyone involved in the transaction.
There are a lot of income streams available utilizing real estate as an investment platform. Which ones you choose depends on where you are at, where you want to go and the amount of work and risk you are willing to take.
If this message of focusing on cash flow resonates with you and you want to learn more, then consider reading Jim’s new book on the subject. “Cash Flow Now” was published in May 2012 and is available on Amazon with this link:
Make this year all about the cash flow. There is no better day than today to begin to plan your future!