What is a Cash Flow investment?
Cash Flow investments are investments that provide regular monthly, quarterly, or annual payments. In almost all cash flow investments, the general principle is the same; an investor puts up a lump sum in order to receive re-occurring payments and therefore, receives a return on investment. When you start to incorporate cash flow into your portfolio, a new world of financial possibilities appears at your fingertips. These investments are structured to yield reliable and dependable returns, which give you the power to plan your financial future.
Here are some other examples of cash flow investments:
Residential Real Estate: The most well known form of cash flow investing is purchasing residential real estate to use as rental property. In this investment, you put up a lump sum of cash to purchase the property in order to receive the monthly income that the rent of the property produces.
Returns: 8-17%
Time Horizon: Varies.
Hard Money Loan Collateralized by Real Estate – In this investment, an investor loans money to someone with a house as collateral. This is most common when the borrower needs while they flip a rehabbed house. Example: The house’s After Repaired Value is worth $100,000. The lender loans the borrower (flipper) $60,000. This is called a 60% Loan to Value, or LTV. When the borrower sells the house, he pays the lender from the profit that he makes from the sale of the property.
Returns: 10-12% (+ points).
Time Horizon: 6-12 months.
Bridge Financing – This is a method of financing businesses use to maintain liquidity while they wait for anticipated inflow of cash. These investments are usually collateralized by the businesses themselves, purchase order agreements, or the businesses’ assets. For example: A company gets a purchase order for a deal it will receive $100,000 for completing. The business needs $20,000 to accomplish the job. An investor puts up the $20,000 as the bridge financing. When the job is complete, the investor is paid out of the $100,000 that the company receives. Depending on the time horizon, the returns vary.
Returns: 15-25%.
Time Horizon: 2 months – 9 months.
Real Estate Notes- When a real estate owner owns a house “free and clear” he can sell the property and carry the financing with interest. He has created a “note”, with the property as collateral. The new owner of the home pays the note holder the mortgage instead of a bank. This investment is similar to a hard money loan in the fact that the house is the collateral of the investment, with the main difference being the time horizon.
Returns: 7-12%.
Time Horizon: 3-7 years.
Cash Flow Domain Names- This asset class is has more risk, by nature, because it is still a new asset class and the collateral is not physical. However, investing in domain names can be a great way to diversify your portfolio and achieve great returns due to the size of the the profit margins. Example: An investor puts up money to purchase a domain, advertisers use space on the domain and pay the investor monthly or quarterly payments to advertise on their site.
Time Horizon: Varies.
Returns: Varies
Mobile Homes– Investing in mobile homes can be a great way to supercharge cash flow. Unlike real estate, mobile homes depreciate quickly which makes this asset class interesting for several reasons. In this investment, an investor puts up the money for the mobile home park and then rents the park out. One of the best ways to invest in mobile homes parks is to hold a note on the properties instead of owning the properties yourself. (Similar to real estate notes.) Because mobile homes depreciate in value, most mobile home notes are amortized over a short amount of time, which makes the cash on cash return higher than almost any other investment.
Time Horizon: 3-5 years.
Returns: 12-30%
I have met with many financial advisors and lawyers who have all but kicked me out of their office when I told them that these returns were possible. Investment advisors don’t sell this kind of opportunities because they are incentivized to go with the status quo, rather than make any creative decisions. Lawyers believe that these investments are naturally “risky” because there are situations they cannot control for. (Vacancies, maintenance, etc.) I disagree wholeheartedly. If you have a vacancy in your rental property, you can do some marketing and find a new tenant. What were you able to do if you invested in Enron? What about the stock market crash of 2009? What about the current situation in Greece? With cash flow investing, you have control over your own financial future.
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Once you have a portfolio that is actually generating cash flow like this and the double-digit returns are dependable, you will be shocked to see what is possible over the long term.
My favorite example:
The day your child is born, you put $20,000 in an account for him/her. You invest this money in a mortgage note that yields 11% annually. You don’t put any extra money in the account, only re-invest the returns of the initial deposit. What do you think the account will be worth when the child has graduated from college at the age of 22?
The answer is staggering: $222,451
Happy 22nd birthday KID-O!
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- Hunter Thompson
DISCLAIMER: This is not an advertisement to purchase a security. This website is strictly for educational purposes only. Please consult with your financial advisor and your attorney before pursuing any investment. Non-factual statements, including possible future events constitute only subjective views.
This is an excellent post for somebody at my level of financial knowledge. I think that often a simple definition of terms is what I need most of the time so that I can then plug-in my two-cents into the conversation.
Posted by Tmornstar | March 4, 2012, 6:35 pmNice post, Thanks for the ideas, Maybe ill use some of them in the future, but for the moment ill stick with dividend stocks because in my opinion there an easy source of cash flow.
Posted by Rajesh | July 1, 2012, 1:30 pmThank you for reading Rajesh!
I agree, dividend stocks are an easy source of cash flow. The only problem is, they don’t generate ENOUGH cash flow!
The average dividend yield for the S&P 500 is a whopping 2.17%.
The mortgage notes that we focus on in yield 8-10%.
If you have $100,000 invested for 20 years at 2.17%, you will end up with $154,281
If you have $100,000 invested for 20 years at 10%, you will end up with $732.807
When you consider that inflation is eating your money at a much greater rate than 2.17%, it becomes clear why investing in dividend stocks on major indexes just doesn’t make sense.
Posted by HunterT545 | July 12, 2012, 10:36 amI understand that s&p 500 returns and other mutual funds don’t do well, but i like to invest in stocks picking my own company’s, for example i invest in Tesco, dividend yield of 3.5%, they raise there dividend up 8-10% every year(they have a long history of doing so) , they keep way above inflation, and over the long run, after 8 years that dividend yield will double, due to compounding returns an when the economy is back to normal that stock price will also be worth double, It will double because I’m not selling the stock back to normal people, I’m selling the stock back to investors like me who want a return for their money. I have stocks in safe large company’s like, things that help people meet their everyday needs like electricity, gas, water, food, fuel, things like that. But the thing is that’s taking low risk, if i were to take a higher risk i would invest in medium cap growth stocks, on average it took me a month to find 8 company’s that have a dividend yield of 3% an raise it by 20% a year, every year since they started giving out dividends, so that means every 4 years your money will double, but id prefer going with the safe way because I’m not wanting to become rich, just wanting financial freedom to enjoy life the way i want without money effecting every decision i make. Oh an here are my reasons why i love dividend stocks: Because i live in the uk i don’t have to pay any taxes from dividends up to a limit of £35,000, above that i have to pay an average rate of 25% tax,Stocks that sell basic human needs are king for cash flow, As population increase there will be more demand for food, utility and fuel, more buyers means more cash flow to shareholders , as these stocks sell basic needs of people, they are rescission proof, they raise their prices along with inflation an people will have to buy them for survival needs, so stocks to me are rescission proof, tax proof, inflation proof and raise dividend every year for increased cash flow. compounding returns is truly an amazing thing. Sorry i made this post abit long but thx for reading anyways.
Posted by Rajesh | July 12, 2012, 1:47 pmAn excellent post with lot of information. This post is an answer for my alla questions. Thank you very much..
Posted by Debra Turner | December 18, 2012, 3:43 am