Everybody should want to get their hands (and bank accounts) on some additional passive cash flow. The question I hear the most is what is passive cash flow? The question I hear the second most is how do I get some extra passive cash flow? And the statement I hear the most from people who say they want to invest, but have not done so yet is “I am going to wait to invest in real estate for extra passive cash flow until I have more money.”
We should address these three topics in detail, as cash flow is the foundation for freedom. Cash flow is the way to provide security for you and your family. Cash flow is the way to retire without being dependent on bankrupt or nearly bankrupt social security systems or pension funds. Cash flow is a way to free yourself from being dependent on a system that seems to be showing ever more cracks and is likely on the path to failing.
What is cash flow?
Essentially, cash flow is the amount of money left over for investment or discretionary spending. From a real estate perspective, cash flow is the after debt, pre-tax cash flow generated by a property after taking all property level and mortgage expenses into consideration (Revenue less Expenses less Debt Payments).
Cash flow is important because it measures how much cash you have available after expenses and how much cash you have available to invest in another deal or to use for another purpose. Cash flow is also a double-edged sword in that if you are not disciplined about your cash flow, you could end up spending that money rather than investing it for your future. I am sure that you have heard the stories before. A friend gets a raise and before you know it, that friend has a new car and new speaker system for the house, but no money left over to invest and really nothing to show for the money spent except depreciating assets.
How do I get cash flow?
There are numerous ways to get cash flow. There are side hustles. In fact, there is a great book by Chris Gillebeau called Side Hustle School that outlines a number of side hustles that you can start inexpensively. Cash flow can be created through the gig economy, through side jobs, by creating side businesses, or by investing in real estate to name a few.
Since our focus at Guardrail Finance is real estate, there are numerous ways to invest in real estate to obtain cash flow. The following is a list of ways to invest in real estate or real estate instruments to obtain passive cash flow:
- Syndicated Equity Investments
- Friends and Family Investments
- High Net Worth Investments
- Private Lending
- Trust Deeds
- Real Estate Investment Trusts (REITs)
- Private Real Estate Investment Trusts
Why would you wait to invest in real estate?
When prospective investors, friends, and family tell me that they are going to wait to invest in real estate until they have more money, I cannot help but think that I can’t imaging when that time will not come for them. Waiting is not the path to freedom and security. I understand wanting to build up reserves, but if you have money sitting around waiting to be invested, people should make the choice to invest to grow their cash flow and net worth. Real estate investing is one of the surest ways to grow your passive cash flow and net worth over the long haul. Values will ebb and flow, cash flow may ebb and flow, but at the end of the day, you still have an asset that has value and that provides you with a return on your capital.
I do not get the concept of FOMO (fear of missing out). I never invest in a deal because I am afraid that I am missing out. There are always good deals available once you start investing. However, I also do not understand when people do not take action to invest when they say that they fear that they will not have enough money to retire.
If someone has fear about real estate investing, that means that they should get better educated on real estate to understand the true risks and potential returns. If someone says that they want to invest, but they feel like they do not have capital, that tells me that they are not sure whether they will even have enough money to meet their family’s needs. If you may need the money that you have earmarked for investment, then you probably should keep the cash in your reserve funds.
If someone says that the returns come back too slowly or the returns are too low from real estate, I believe that everyone should remember two things. The first thing to remember is that returns are a long-term game that help you get to where you are going on your path to freedom and security. The second thing to remember is that return on capital is a function of how much you invest at least initially. If you invest $25,000 and expect an 8% return per year, that is equal to $2,000 in cash flow per year, which is $166 per month. But if you can do that over time in 10 different deals, you will have $250,000 invested earning $24,000 per year. Real estate is a long game, but it can be sped up when one of your assets sells for a much higher price and all of a sudden, your $25,000 turns into $50,000 or $75,000. It does happen. It has happened to me numerous times now. While I do not anticipate that happening, I am always grateful when that does occur.
Bottom line, I am a cash flow investor. I determine how much I have available to invest, what the expected annual cash returns will be from the investment, and I then evaluate both the deal and cash flow against the risks. If I perceive and analyze that the returns outweigh the risks, then I invest. It takes time to hone your intuition, but I have a good sense of the types of deals that I have strong confidence in at this point.
Until next time, let’s continue growing our passive cash flow and net worth together!