Generate the results of a Professional

Generate the results of a professional

What results are you focused on?
As it happens, the easiest way to get what you want out of life is to give other people what they most want. It's a simple philosophy. As an investor you usually offer money. Or when selling you offer the deal.

If you have made your way here and you are delving into these pages you are probably aware of certain fiscal realities by now. One of those realities has to do with taking a more hands on approach to your finances. Another has to do with the questions of "cash flow" or "capital gains"

The Dilemma.
Cash flow is usually a derivative of capital gains. (for example we derive cash flow through the instrument of a "lease" on the property we own in exchange for leaving our capital gains in place by not selling the property)
According to well respected contemporary authors cash flow is the only reason one should invest. According to this tennet, any investment should be purchased for positive cash flow alone. Capital gains should not be a reason to enter into an investment proposal. To be fair it is suggested that if Capital Gain is possible all the better but cash flow is the goal.

The idea behind this wisdom is that you are encouraged to build income streams with cash flow that will eventually replace your weekly earnings facilitating early retirement. It's a great idea and if that's what you are in the middle of working on our most sincere congratulations. We respect the path you've taken. All we ask is that you keep the communication channels open.

There is a better way and it is diametrically opposite to this "system" When it comes to building wealth there really is only two alternatives to focus on and those are...building a positive cash flow OR capital gains. There are no other known concepts (for want of a better way to express it) for the structuring or manipulation of money for profits. All financial activity falls into one of these two broad categories.
That's the Dilemma.

Our reaction to this latest rush, to get into major debt in exchange for a trickle of funds (the cash flow model) is to balk. Specifically, we are talking about the investor real estate market. We cringed over the last few years as book after book and article after article advocated borrowing millions secured against real estate for the purpose of generating a small trickle of cash flow.

The idea of building a bottom heavy network of mortgages secured against real estate to the tune of millions of dollars for a return of $20 or $30k makes our collective bellies churn. We picture the sleepless nights even before we even attempt to consider, thinking about the possibility, of putting ourselves in this position.

It's a house built on sand.
Many have manufactured mediocre results because they sold. Those that hold on for the long term with heavy leverage are in for a chest clenching ride.

It is truly a "put the cart before the horse" phenomenon. Passive positive cash flow is always the result the final ultimate reward for large asset equity. Borrowing capital should not be used for trickle money cash flow. In conjunction with leverage-it's a really dicey maneuver.

The only reason the trend sustained for so long is because of the natural rhythm of the real estate market over the last few years. Had all these people not followed the goal of aggregated property ownership for small cash flow profits they could have easily quadrupled their current asset-equity-base in the same time frame simply by pyramiding Opportunity investment profits, one after the next.

Having said all that, Cash flow is the ultimate goal. But only unencumbered cash flow or at worst cash flow that is at 30-50% LVR maximum.(Loan to Value Ratio) Cash flow purchased over that LVR is not cash flow its temporary earnings. Money you receive that you will give back when any number of factors change. (Especially in the maintenance heavy property market)

The Solution.
Without the in-depth content on cash-flow issues required to offer the insights necessary for understanding at this stage we will leave it there for now. No doubt we will revisit this in upcoming titles. For the sake of the exercise trust us, cash flow is undesirable without your payment on the barrel. If you need to borrow money to buy cash flow you can't afford it.

Capital Gains, which is simply another way of saying the profit left over from the sale of an asset after we have deducted the purchase price, holding costs and any debt costs. An asset is defined, as any commodity/product/service that has a ready liquid market that was purchased for resale in mind. In other words buyers were identified before the asset was purchased (non-specific)

quote: "and any debt costs"

Opportunity investing is the only other alternative and in fact it is the right one, it always has been. It's the only path taken by those who started with little and forged a path to large fortunes. Capital gains is the only goal of the upwardly mobile. Free fast returns on cash, pyramided into a big cash asset base. And incase you are wondering borrowing money is not essential however it does speed your success up immeasurably.

1/ As an investor the less money you have to tip in yourself the better. How many investment opportunities can you handle if you had to deposit your whole investment fund to control the asset?

You can only handle one because you have no more funds available. You can not move on the next deal because you are committed to the first. What if you come across 3 superior opportunities while you are still making the first one happen? Nothing you cant do anything about it unless you use your existing funds to operate a line of credit thereby enbling you to deal with more then 1 investment at a time.

2/ Lower risk, the less you put into an Investment deal the less you have to lose....full stop. If you tipped in nothing and it didn't go your way then your risk is nil. All professional Opportunity Investors minimize there exposure while simultaneously attempting to maximize control over there projects. Using finance is the only way to achieve that.

4/ ROI Return-on-investment. The percentage return on investment is bigger because your borrowed funds allow you to buy more expensive assets which means higher yields. 10% of $1000 is $100 profit.
10% of 50,000 is $5000 profit. Same time frame. It's a higher level of operating.

5/ ROE Return-on-Equity on a $5000 investment purchase that you have funded 100% yourself at a profit of 10% is $500. A flat 10% return-on-equity.
you put in $5000-you sold for $5500 your return on equity was 10% or $500
$5000/$500=100/10=10%

Compare this with the same investment of $5000 borrowed at 80% LVR. You tipped in $5000...that is your equity. The full loan amount is $25,000 So if the return is the same as the above example 10% or $2,500 that's a 50% return on equity.

A final point on the above example has to do with the velocity of your returns. The speed at which your profits hurtle back into your holding account. Your investment transaction may have taken a month to conclude for example. To calculate the true annualized return on this investment we have to multiply the achieved 50% by 12(months) to give the true accomplishment. In this case, 600%!

Tying it together.
Despite the overwhelming chorus of authors advocating the principle of cash flow above all else. We recognize that cash flow costs too much if leverage is used. The risk is substantial for long term holding especially in real estate investing.

Ultimately efforts made will lead to a slower less exciting more stable positive passive cash flow. Over time an equity base can be built to purchase outright assets that offer an attractive yield. This yield will be your ongoing steady income into retirement from work.
But be patient, first build your asset base then buy cash flow when you can truly afford it.

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