There are many types of investments that can be structured to achieve a positive cash flow. More than a dozen unique alternatives were presented at the 2017 Cash Flow Wealth Summit (CFWS) alone. Some investments approach being truly passive, while others require substantial, consistent effort to succeed. Yet, others bring tremendous risk for all, but the most experienced individuals. The best investment is defined more by how well it matches the personality of the investor than how its characteristics stack up side-by-side with other options.
A perennial CFWS speaker, investment real estate (income property) expert, close friend and mentor of mine, Jason Hartman has developed a filter, or litmus test, through which I now pass every investment I consider – I made many costly mistakes from which I’m still recovering before I adopted these! He calls it (cheekily and with true deference) his “Ten Commandments of Successful Investing.” It is a fantastic list of lessons painfully learned by others consolidated and explained so that we don’t have to learn them firsthand, and are applicable to any type of investment.
1. Thou shalt become educated
Become your own best advisor by continuously educating yourself, and always do your due diligence before investing. With so many valuable and free resources available online, you don’t need to spend money on becoming investment savvy.
2. Thou shalt seek guidance and have a team including an investment counselor
While it is vital for you to educate yourself, it’s also important to surround yourself with people you trust. It is vital that you coordinate your investment plan and strategy with your long-term investment counselor, and make sure your interests are aligned.
3. Thou shalt maintain control
Three problems can occur when an investor relinquishes control:
– You may be investing with a crook.
– You may be investing with an idiot.
– You will at a minimum have someone unnecessarily charging a huge management fee (taking a large cut out of your profits).
These problems often occur in syndications because the dealmaker earns money whether you do or not; when your interests are not aligned, the investment will fail.
4. Thou shalt use prudent financial planning techniques
Be aware of your risk tolerance, investment goals, and investing style. Always invest with your goals in mind (whether they be linked to retirement, financial freedom, creating wealth, etc.), and be prudent when investing.
5. Thou shalt not gamble
Robert Kiyosaki asks an investor in one program I purchased “If your investment has only slightly negative cash flow (CF) of $100/mo, how many deals can you do?” Answer – if I have $1000 free CF, then I can do 10. Then he asks “If it had just $1 positive CF, how many could you do?” Answer – Millions…unlimited. Another way to make his point: People who invest for CF having staying power, those who invest for appreciation don’t. In short, invest for cash flow, not appreciation; if and when appreciation happens, it is icing on the cake.
6. Thou shalt diversify
The key here is to have uncorrelated sources of income where a crisis in one region or product does not impact all of your cash flow (e.g., loss of jobs when a major employer leaves town).
7. Thou shalt be area agnostic
This one is essentially #6 but applied to real estate. Rather than getting attached to one area, invest in multiple regions based on common factors that affect all markets – please contact your wealth strategist to learn more.
8. Thou shalt use borrowed money
Accelerate wealth creation, reduce risk, and maximize leverage by investing with borrowed money. Use other people’s money! At Paradigm Life, we teach clients how to use private, bank and insurance company money to grow their wealth.
9. Thou shalt only invest where there is universal need
Avoid investments that are short-term trends or fads; stick with those that are enduring and solve a universal need. For example, while housing is a universal need; industrial, office space, carburetor and typewriter businesses are not. My favorite saying from Jason is that
“There are three basic human needs: food, clothing, and shelter. Let them rent the shelter from you.”
10. Thou shalt invest in tax-favored assets
As taxes will be the largest expense for most, take the time to learn more about how to reduce this expense. Non-cash write-offs, 1031 tax deferred exchanges, and tax free access to insurance dollars can help massively grow your wealth.
Interested in learning more about prudent Cash Flow investing? Please reach out to your Wealth Strategist, or for real estate education and resources, directly to Jason at jasonhartman.com.