Who’s King and Who’s Queen? Cashflow vs. Cash
Cashflow brings gives stability, security and protects you from the unknown
Acquiring assets and investments that produce consistent and predictable income can lead to time freedom. If all your monthly expenses are covered by the positive cash flow of your assets you have in theory eliminated the need for a job and created financial freedom!
We've all heard the expression "Cash is King" and without a doubt there's a lot of truth in this statement. Having cash at the right time, deployed in the right investment, can make you some major mullah and offer tremendous returns.
But today I would like to challenge the classic and say that "Cashflow is King and Cash is Queen" 🙂
Why exactly? Acquiring assets and investments that produce consistent and predictable income can lead to time freedom. If all your monthly expenses are covered by the cashflow of your assets, you have in theory eliminated the need for a job and created financial freedom!
In this article we’re going to cover:
· Why cashflow is king
· When is the right time to buy
· What types of investments can provide cashflow
· Where to get access of cash to acquire cashflow
Before we even discuss investments make sure you have a rainy-day fund - usually 6 months reserves for living expenses. You know, just in case the world shuts down. The rainy-day fund will give you a sense of stability, security, and protect you from the unknown.
Why - Cashflow is king?
Building a foundation
As you amass assets that generate monthly income it gives you a foundation of positive cashflow so that once you reach a certain level you become financially free. What I mean by this is if you generate enough income to replace your W-2 salary, your working income, or your monthly expenses you’ve essential freed your time to do what you want to do when you want to do it.
Multiple streams of income
The typical millionaire has 7 streams of income!! Buying property that produces positive cashflow is an extremely advantageous strategy at all stages of an economic cycle because you get income, tax deductions and possible appreciation. The reason why it makes sense to acquire income producing property regardless of market cycle is because the additional income streams give you stability and security in case other revenue sources dry up.
Income regardless of market
Velocity of money is a key principle for return, if you have money sitting in a checking account for 1 year you essentially have a 0% return. When the market conditions are unknown, acquiring income producing property is a solid investment strategy because you're generating a return based on purchase price and net income produced. After you’ve purchased the investment and it is producing income, the value doesn’t matter until you sell it.
When – is the right time to buy?
· You can’t time the market tops or bottoms, but you can tell the economic cycle direction so you want to ride the cycles if possible.
· Cashflow works regardless of what stage of the economy we’re in. Assuming you’re holding on to the Investment for 5-7 years and its producing income. You don’t have to worry about the value while it’s producing that income.
· When we’re in a transitioning market top, liquidity and short-term investments are optimal.
· When we’re at a market “Bottom" invest into value add projects to ride the upswing and get the highest return.
What - Type of investments give cashflow now?
For the near future, I recommend trying to keep your money as liquid as possible, but still invest in conservative options that generate income.
Residential rental properties
One of my personal favorites - generally speaking there’s a shortage of affordable housing in the United States. Most people are forced to rent in some form or another and there are many submarkets where you can purchase cashflow positive rental properties. In the environment we’re in right now it’s probably easier to invest in passive rentals instead of being an active manager yourself. During tough economic times dealing with tenants can be more difficult and experience is key.
Short term hard money loans (debt lending)
With the right deal sponsor you can loan out your cash and securitize it based on an asset as collateral. From there you can earn 8-12% on your money for a 6-18 month period. This can be achieved through a variety of different asset classes or alternative investment that are real estate or non-real estate.
Residential fix & flips partnerships
My general standpoint is right now you have to be extra careful with this type of investment strategy. The benefit is that it’s a quick investment 6-9 months and can easily yield a 15% annualized return. It’s not cashflow but it’s a short term investment with a quick payout. The residential market has been extremely hot because of the low inventory, ample cash on the sidelines, and historically low interest rates. All of these have led to stable and increased sales prices in some markets for this summer of 2020. You want to get in and out of the property quickly and make sure there’s a back-up plan, for example turning it into a rental.
Investing in a syndication can provide solid quarterly payouts and a great overall annualized return on the exit. These types of projects are a pool of investor capital into a limited partnership and the hold period is typically going to be 5 to 7 years.
Cash – is not an investment
Cash is the ultimate liquidity and allows you to jump on opportunities in the near future, it’s not an investment. The best way to hold cash in the bank is a high yield savings account currently at ~1.1%. Staying on the sidelines isn’t a bad strategy because market timing is difficult, no one can truly time a market. The skills, experience and ability to make a sophisticated, high-quality, well-timed investment can be difficult especially right now when there's so much uncertainty in the world.
CDs – I don’t like
I have no idea why anyone would ever buy a CD, there's literally nothing beneficial about it, you lock up your money for a long-term. You're paid less than the inflation rate, so you're basically just locking up your money in a government vehicle that doesn't pay anything - that's just my two cents
Where - Can you access cash to invest in cashflow?
· Savings & checking accounts
· Equity in your real estate - main residence or other investments
· Retirement accounts (Self Directed IRA or Solo 401ks)
· Loan on your retirement account
· Equity in your business
· Loans from family or friends (at a lower interest rate)