Investing for cash flow requires different analysis than investing for growth. Like Ben Turner said when I interviewed him Australia really is a growth market for most investors. They’re not just investing for cash flow because they want to see some sort of capital growth. Otherwise they’re not really happy with their investment.
However I want to discuss cash flow exclusively and how to invest for it and what analysis needs to be done to invest for cash flow.
First let me note that investing for cash flow is different than investing for growth. What we’re looking at is return on investment as a percentage of the money that you put into the deal. A lot of people call this your “cash-on-cash return” which is how much cash you’re getting back versus how much cash you put in to the deal.
For instance pretend that you buy a property that is $500,000. If you only put $100,000 into the deal then you would be looking at how much cash you’re getting back versus that $100,000 that you put in. In other words you are looking at the return of investments not return on investment and this is what we look at when investing for cash flow.
It’s important to know how fast you can get your money back because if you invest in something then getting your money back quickly can mean being able to invest in another asset.
So what are some ways that you can invest for cash flow?
Invest in Positive Cash Flow Properties
What we talk a lot on this website is positive cash flow property. Positive cash flow property is when your property brings in more income than you have to spend in expenses. Expenses include but are not limited to:
- Interest rates on your mortgage
- Maintenance fees
- council rates,
- Body corporate fees or strata fees (if you’re in a unit complex)
So if you’re getting more rental income than you’re spending in expenses that creates a surplus in cash flow known as positive cash flow. You can then work out what positive cash flow you receive and the cash return that you’ll get from it. You can do the process by yourself or you can access the Advanced Property Calculator which is inside OnProperty Plus at onproperty.com.au/plus.
Invest in Stocks or Dividends
I have some friends that choose this option. Rather than investing in stocks to get the growth of those stocks over time they invest in order to access the dividends and receive the payout. That way they’re getting the cash flow from the dividends and that’s how they’re measuring their investments.
Invest in Cash
The cash-on-cash returns are going to be really easy to measure if you’re investing in cash. If the banks are offering 4% per annum for the amount of money you put in then you’re going to get four percent back so it’s a really easy calculation.
There’s not much you can do to add value to your investment or speed things up. It’s generally a slow way to invest and because of inflation and the devaluing of money over the time a lot of people advise against this method. However I can’t give financial advice because I’m not a financial advisor.
Just make sure that when you’re investing full cash take into account the fact that money will lose its value over time due to inflation.
Invest in a Business
With this you can invest capital up front into a business and then receive cash profit as the business generates a profit.
With new businesses there are high levels of risk and you should make sure to do research into the business you want to invest in. You could also be an active business investor so rather than being a silent partner you could start a business of your own or go in with someone else and provide funds while playing an active role in the business.
Now this option is not a straight investment that’s passive but businesses do spin off great cash flow if they are profitable and can be a great way to invest for cash flow.
Lastly, I just want to talk about some alternative investments. I haven’t looked into the details so I don’t have specific information but I heard about them through Corr and Helene and you can check them out at bluehorizonproperty.com because they offer these and other alternative investments.
This option is where you provide the funds to purchase an ATM machine. Someone else would get a contract and then pay you cash. The pay they give you is an investment sum that you can get back because you helped provide the capital for the ATM machine.
For this you can provide upfront capital to purchase shipping containers and again someone else will most likely rent them and then give you a portion of the profits back.
There are many different investments out there and you can look into them for more details if it’s something that you’re interested in.
Again it’s important to remember that investing for cash flow is more about your cash-on-cash return rather than looking at the growth of the asset.
I hope that this has been useful for you and if you want to get access to the free report of 10 real positive properties go to onproperty.comw/free and sign up today.
Until tomorrow remember that your long term success is only achieved one day at a time.