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Cash Flow vs. Capital Gains

george2 Cash Flow vs. Capital Gains

George Antone on "Cash Flow vs. Capital Gains"

UPDATE: Due to the response, George has agreed to do several free training sessions on “How to create passive cash flow by becoming a private lender.”

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When you think about all investments, they boil down to one 1 of 2 things:

Cash Flow or Capital Gains.

Cash Flow is obvious – it is about generating regular, passive income. For example, income-producing real estate, bonds, dividend-paying stocks, etc. You buy these assets, and they generate regular income.

Capital Gains is about buying something, hoping it goes up, and selling it for a higher value. For example, stocks. You buy a stock, pray it goes up in value, then sell it for a gain. Similarly, real estate, gold, silver, etc. You buy them, hope they go up in value, and sell them for a gain.

The middle class and the poor primarily invest in capital gains, typically stocks. The wealthy invest primarily in cash flow, and then in capital gains, second.

Let’s touch on Cash Flow here for a second. I cover this in some detail in the book “The Wealthy Code.” But, I will give you the basics here. Wealth comes from cash flow. Cash flow comes from spreads (arbitrage). Arbitrage comes from leverage (arbitrage is a leveraged strategy). In the book, I go through a lot more detail without it being specific to any particular investment vehicle.

So in summary for Cash Flow: Wealth >> Cash Flow >> Arbitrage >> Leverage

I’ll discuss ‘Capital Gains’ now. Capital gains comes from the obvious “Buy Low, Sell High.” So to break that down further, we will need to make sure we’re going to profit from this transaction. Therefore, buying at retail price (needless of the investment vehicle) makes no sense, because now you have to PRAY it goes up in value. So buying a stock or real estate at ‘retail’ is a crazy idea. Remember, savvy investors make money going into a deal.

Realize also, that when you buy a property, the top 10% of the value is immediately LOST. That means if you buy a property for $500k, the top $50K is LOST. Why? Try selling the property and see what happens. You have to pay commission, closing costs, etc. How does that affect you? Well, you have to wait for the property to appreciate 10% for you to break even, which means waiting for at least 2 years if you are lucky, just to get your money back.

So what should one do?

Obviously, buy under market value to guarantee your gain (aka, forced appreciation).
So before I continue, let’s step back. All the way back, and ask ourselves “Why do we buy real estate?” Think about it.

There are FOUR profit centers in real estate:

1. Income
2. Appreciation
3. Mortgage Pay-down
4. Tax Benefits

That’s it. I’ve listed them in order of popularity, from the most to the least popular. In other words, ‘passive income’ is the number 1 reason investors buy real estate, followed by Appreciation. If you combine #2 and #3, you can call this new category ‘Equity Buildup’ (through appreciation and mortgage pay-down). This leads us back to our core two reasons we invest – Cash Flow and Capital Gains (Income and Equity Buildup).

What if we could break our investments into these 2 core pieces and ask ourselves if there are more efficient ways to do Cash Flow and Capital Gains without having to ‘buy and hold’ real estate, and/or stocks or other investment vehicles.

It turns out that there are some very efficient ways to focus on these two. In fact, buying stocks and real estate at ‘retail’ market value is very inefficient.

The MOST efficient method for generating Cash Flow is private lending.

The MOST efficient method for Capital Gains is real estate options investing.

In the book “The Wealthy Code,” I discuss the cash flow method. However, it turns out real estate options investing is the most efficient strategy for building capital gains. In fact, it offers the least hassle, the best leverage, and the highest return method to increase your net worth FAST. I am not talking about ‘Lease Options’ here. I am simply talking about ‘straight’ options.

In fact, you will find out that when you combine private lending with real estate options investing, there is really no reason for anyone to buy as many single family homes as some investors purchase (except that the agents and some ‘gurus’ want to sell you more of them).

So in summary for Capital Gains: Net Worth >> Capital Gains >> “Buy Low, Sell High” >> Buy Under Market

Here is what I would consider a GREAT portfolio:

1. Use private lending for cash flow.
2. Buy a few single family homes within 60 miles from your home to hedge against inflation. Buy them at least 10% under market value.
3. Use real estate options to build your net worth FAST.

Whenever you are considering ANY investment, ask yourself FIRST: Is this for Capital Gains or Cash Flow?

Next ask yourself, is this an EFFICIENT way to generate that?

Then ask yourself, are you speculating or investing? Speculating is buying an asset at retail and hoping it goes up in value. Investing is buying an asset KNOWING you will make money at the time of purchase.

… And please, stop following the herd!

Hope that helps.

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  1. 26 Comment(s)

  2. By Carl J. Hewitt | Reply

    As someone with education-related debt, I’d value present income over the other three profit centers. As my personal debt subsides, I’d place more value in capital gains/appreciation.

  3. By Eddie | Reply

    Hey Jack,

    I know George from the past too, where the heck has he been?

    Eddie

  4. By Albert Anzalone | Reply

    Very good presentation of the fundamentals.

  5. By Jeffrey D. Smith | Reply

    I like George’s book, “The Wealthy Code” that is inspired by “Rich Dad Poor Dad” (and the other books by Robert Kiyosaki).

    RK’s latest book, “Unfair Advantage” is a must read, especially for the chapter on real estate investing for cash flow.

    I follow RK’s model for cash flow. See my free videos at:
    http://www.SmithSyndication.com/education

    I explain in-depth about analyzing cash flow and debt service for repositioning apartment buildings. If you’re not analytical, then don’t bother watching the videos. It’s real meat for real professionals.

  6. By James B | Reply

    Great information! Thx

  7. By Travis | Reply

    Where can I find more info on options?
    Thanks
    Travis

  8. By William B | Reply

    George,
    I’m very familiar with Lease Options, you indicate that is NOT what you are referring to in your excellent article. Please tell me what Real Estate Options you are referring to. Thank You !!

  9. By Terry Preuit | Reply

    All excellent ideas. The one area I’d argue about is using private lending for cash flow. I prefer buying existing RE debt at a discount. Having done both, I find this allows for higher yields and with lower risk. At least that’s how it’s worked for me.

  10. By Dee | Reply

    I would like to know more about Private Lending, and how that works with Cash flow (it is a debt!), and more about RE Options. Never heard of this.

  11. By Bina | Reply

    Enjoyed the article.Good organisation of investment criteria.However in my opinion there are ways of getting better cashflow in real estate by trading notes etc compared to private lending yield.

  12. By Neil | Reply

    Very interesting presentation.

    I’m going to have to get myself a copy of the book.

  13. By MVicki | Reply

    Great Stuff , makes sense
    it is time to advance to the
    Graduate Level… :-)

    William B …buy the book, I know I am
    George, thank you so much,

  14. By Richard | Reply

    That is about as concise as I have ever read

  15. By Terrel Miller | Reply

    George…consistently brilliant. This is an excellent ‘executive summary’!

  16. By Dominic | Reply

    I’d like to know from experienced note buyers who specialize in distressed assets the following: I’ve seen several note investing programs that tells how to get started in buying non-performing and performing notes. Now based on your knowledge, which complete a-z program would you reccommend for the beginner? I’ve bought a few programs in the past regarding other real estate investing, but after my research, I’ve come to the conclusion, as most of you have, that distressed asets purchasing is where it truly is at. I don’t wont to spend hours on the phone trying to negoiate a short sale or reo when I can go directly to the asset manager and buy, control and own the same thing with less effort and more profit. It just makes more sense and much easier! So with that said, can someone please tell me who has “the best” step by step program that is actually doing the business?

  17. By CAPUS ROBINSON JR. | Reply

    where do you get the money to fix up the house after you purchase it do you have a source?

  18. By Luis | Reply

    This analyze was very important for me.Thanks.

  19. By L Morris | Reply

    Something to think about – great article!

  20. By admin | Reply

    @William, I believe George is talking about wholesaling where you get an option contract on a property and then flip the contract.

  21. By Patrick | Reply

    of course what other logically way to make it big quick and consistently…thanx george A.

  22. By Jeffrey D. Smith | Reply

    A real estate option contract grants the *right*, but not the obligation, to buy the property at an agreed price and terms for an agreed time frame (called the “option period”). The optionor (property seller) sells the option to the optionee (property buyer). The optionor escrows a purchase & sale agreement, signed only by the optionor. Other conveyance documents, such as a warranty deed, are signed and notarized, and escrowed.

    The “option consideration” is the fee paid to the optionor from the optionee to obtain the right to buy the property. The fee is usually money, but can be anything (product or service) of mutually agreed value. The option consideration is non-refundable, unless the optionor is unable to perform as agreed in the option contract. Repairs can be negotiated as a form of additional option consideration. Option consideration is usually applied towards the agreed purchase price to reduce the amount due at closing of the property purchase.

    The optionee does NOT have an equitable interest in the property until the option is exercised. The optionee is usually granted a recordable interest in the property to prevent the owner from selling the property to a 3rd party.

    At the time of exercise, the current optionee signs the purchase & sale agreement as the buyer and closes the transaction.

    An option is a great way of acquiring control of a property with a form of “selling financing”; the owner carries the property and the optionee can sell (assign) the option contract to an end buyer for a profit without ever taking a deed to the property (and avoiding any liability that may arise from having a record of ownership on the property).

    There’s much more to learn about option contracts than I can write here.

    Two cents worth. Your mileage may vary.

    http://www.SmithSyndication.com/education

  23. By Tim | Reply

    Informative article…thank you for sharing it. I would like to know more regarding the programs available for private money on buy and hold properties. Especially multi-family properties.

    Thank you again.

  24. By George | Reply

    George’s article is so precise. so much low risk opportunity in this market if you do it correctly. I would like to share my model with you.

    http://chartercg.com/investment-overview/

    George

  25. By Larry L. | Reply

    I am familiar with the benefits of cash flow and am currently trying to purchase investment property using private lending. I have also been looking at options investing and see that if can be used with a REIT.

  26. By Rick | Reply

    Today, in 2011, it’s easy to negotiate with a property owner b/c they’ll try anything to rid themselves of the albatross they called “home” when times were good. BUT, unless the “optionor” has a mailing list a mile long of cash investors, they’re going to find it difficult assigning the rights to buy the house (the contract),to earn their finder’s fee. Yeah, you can make the contract null and void in 60 days to buy you time to locate the wealthy investor, but the wealthy don’t talk to us commoners. Never have. Unless you have a home under contract in a rentable area (highway, town, shopping, JOBS nearby, not seventy miles away) and you’ve calculated repair costs(repairs are inevitable) and you have the time during the day, if you’re unemployed that is, to locate the wealthy investors (who won’t deal with inexperienced newbies b/c they don’t have to), you’ll find this way of earning a living very difficult and very discouraging and FAST.

    Yeah, go right to the bank and speak with the asset manager to locate distressed home owners. Oh, the banks never outsource their REO properties, no way. The large companies that obtain the banks REOs only deal with experienced Real Estate Brokers. The bank requires a Broker’s Price Opinion that’s why. And one needs to be a licensed Real Estate Broker to do this and obtaining your broker’s license takes years of struggling financially as an agent first.

    Even if you obtain a listing of Pre-foreclosure home owners, you still need an investor to assign the contract to. Where do you get this? Trial and error, walking the walk the best you can for years, flying under the radar so you’re not called out, hope and luck. Hoping you’ll meet an honest investor who won’t go around you and make the home owner an offer and cut you out of the deal.

  27. By Ken Casey Sr. | Reply

    Hi i’m new at this and was hoping too learn from someone who knows what there doing, So could you please teach me about Real Estate,
    and cash flow notes as a mentor? I live with
    my wife Stella of 26 yrs. and 2 teen son’s we
    live off my Social Security Disability($1,500)
    a month and it has been quiet a struggle so if
    there is anyway you can find it with in your-
    self to help Me and my family i would Appreciate very much! God Bless You!

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