This post is meant to be a follow up to the Stopping the Endless Cycle of the 9 to 5 which discusses how to start a side gig and build up some value in that side business. Once you have built up a sizeable cash value for that side business, let's use an example of $5,000, then you can look for ways to leverage that money in a way that better fits the volume, such as "Cash Flow Investing."
There are two types of investing: Cash Flow and Capital Gains
What is Cash Flow Investing?
Cash Flow Investing describes the activity of investing in assets such as property, vehicles or dividend stocks that can be held for cash returns on a regular basis. The assets in this scenario have value, are owned in full and are leveraged for a gain.
What is Capital Gains Investing?
Capital Gains Investing describes an activity of buying assets or stock at a lower price point and selling them at a higher price point. The assets in this scenario do not have a firm value until sold.
What's the difference?
Both methods are profitable for investors, but the main difference is best explained by the example of buying an investment home (a home that you intend to rent out). If you own the home without a mortgage from a bank, then the rent you collect would be directly received in cash that you could then re-invest. If you own the home with a mortgage, then the rent collected would likely cover the mortgage costs, fees, taxes and perhaps routine repairs (if you broker the deal with the bank correctly). The gains you would be making in the second example would be in equity or the value of the home versus what you owe with the bank. Effectively, the renters are slowly paying for the house for you.
How can I use this?
I have experience with both examples and highly recommend the cash flow method if you can save up for it. Here is a tactic that maximizes the investing potential from this method.
CAPITAL GAINS INVESTING:
Investment House #1:
Cost: $150,000
Down Payment: $20,000
30 yr mortgage, Interest rate 4%
Monthly Payment: $1014
(Including Taxes and Insurance)
Quotes generated with
Rent: $1150-$1250
If you do nothing else with this asset, it will accrue value with the bank as the market value of the property goes up annually and as the debt with the bank is paid monthly.
CASH FLOW INVESTING:
Investment House #1:
Cost: $70,000
Down Payment: $20,000
15 yr mortgage, Interest rate 4%
Monthly Payment: $653
(Including Taxes and Insurance)
Rent: $750-800
With only 50k left until this house is paid, you can power pay this loan and attempt to finish it before that 15 year timeline. Once it is paid, let's say you use the 1st house as a security on the next loan (offering the bank the deed to this home in lieu of a down payment)
Investment House #2:
Cost: $70,000
Down Payment: $0 (Secured with equity)
15 yr mortgage, Interest rate 1%
Monthly Payment: $731
(Including Taxes and Insurance)
Rent: $750-800
Rent from House 1: $750-800
With this house, you are able to double pay the mortgage and speed up the pay off time significantly (7 years or less!)
Once this house is paid off, you will be able to use the deeds from house 1 and house 2 to secure a house with a value up to 140k. And then use the rent from the tenant of that property plus the rent from house 1 and 2 to TRIPLE pay the house. The generated cash from these assets acts like a snowball resulting in potentially owning THREE houses in approximately 30 years instead of just one house in that time.
WRAP UP:
Cash flow investing can also be done with other assets you can own and rent, for example: owning a condo, a limousine company, bouncy castle business, owning and Airbnb a vacation property, or dividend stock investing. The main thing I want you to take away from this strategy is that it grows by not taking the profits as income to increase your lifestyle. As the cash returns from this strategy grow, they should be re-invested into purchasing more assets, which return more cash and so on. This tactic leverages time by starting young and growing over the years. When you feel the cash flow is sufficient as an amount to live on, you could choose to retire and live from that income solely. The faster you reach this level would be the faster you could retire hypothetically. That level is described as financially independent.