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.
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.
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.
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.
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.
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.