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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:
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.