Level VII — Buy Cash Flow Businesses and Real Estate
Okay, now you’re at the final level of the game of Winning Financial Freedom. You’ve learned many lessons along the way. What is different about this level compared with all other levels? One aspect is the stakes. The deals we’re looking to do here are bigger. Another is moving into more active and direct investing. This means investing directly in businesses, real estate and commodities versus buying stocks (paper assets) in companies or real estate trusts. Another difference is the goal. We’re here to finalize the task of generating enough cash flow over expenses to win financial freedom. And the final difference is exactly what we’re investing in to achieve the goal.
At this level, we’re looking to start, or buy, whole businesses (or majority ownership), or investing in whole pieces of real estate such that we’re owning corporations and/or direct property, not paper assets (e.g. shares of partnerships or in companies). In Level VI, we were looking at owning shares of companies and limited partnerships. At this level, however, we’re looking at being the majority owners and much more active in the investment.
Active Management
Being more active in your investing activities provides several benefits. One is that you can set the terms. You can make active management decisions. You can leverage yourself to produce a better return. In Level VI, it was more about getting some deals down and being a minority owner, via owning shares or units. This level is about building long-term investment structures that are going to produce great cash flow returns directly for you. For that to happen, you’re going to need more control in the deals and in the decision-making. Also, being the primary decision maker in active management opportunities means you can always look to add leverage into the investment with other people’s time or other people’s money. In this position, you can always hire employees or invite investors to the table.
Strategy — Two Main Paths
There are many ways to get to the promised land. There’s no one set path that’s going to get you to financial freedom. You need to focus on what you’re interested in and your “why.” Having a good understanding of your “why” will provide the passionate, driving force that will help lead to success. I can’t provide the “way” to go about this, but I can provide a few examples.
Grow Existing Cash Flow
There are two main paths to achieve this goal. One way is to buy cash flow assets, like investment real estate. The investment grows over time, say 10 years, and the rent they produce will gradually increase to exceed the amount of your expenses. In this way, you’ll achieve a win. One small variant to the above is where the cash flow increases, but so does the value. You could potentially refinance the loan or do a partial sale, allowing you to take the new proceeds to buy another cash flow investment. In this way, you increase your cash flow from your original holdings and the cash flow increases to exceed your expenses.
The other way involves capital appreciation. This means you’re buying some assets for capital appreciation and at some point in the future, the appreciation will pay off. At some point, you sell one or more of your original cash flow assets, which allows you to buy a much bigger cash flow asset. Most people use this second path. By leveraging cash flow and capital appreciation, you can ultimately get yourself across the finish line faster.
Use Capital Appreciation In The Mix
There are a lot of ways to create capital appreciation. You can use paper assets, such as stocks in an investment account, and look for the stocks to appreciate in value over time. This way, in many regards, is the simplest way. One downside to this approach is that your investment is passive — you have no real ability to affect the outcome or the management of the investment. Another downside is that there is no real way to leverage your investment with other people’s time or other people’s money. But it is still an option to consider.
Another way to look for capital appreciation is through real estate investing. In this mode, you’re looking to get a property for a good deal, perhaps fix it up and then sell it for a profit. In this approach, you’re able to be an active investor. You’re able to pick the deals, the price paid, the property where you will invest your money, and what fixes will produce the most upside. You can also leverage other people’s money by taking in investors and other people’s time by bringing in contractors to help with the fix-up, reducing overall time.
Another way you can look to create some capital appreciation is by starting a business. In this approach, you’re an active investor. You will make the decisions in this new company. You can leverage other people’s time and money in a variety of ways to scale and increase value. There will be a many future articles on this topic, but suffice it to say, this is a great path to creating real wealth. Most millionaires become millionaires by starting a business. Of all the options, I would say this one is probably the approach that will get you across the finish line the fastest.
Sample Paths
Again, there are a lot of ways to achieve the final steps in winning financial freedom. One of the most common in the “old days,” (prior to 2000) would be to open a retirement account (401k or IRA) and start socking away money over 30 years. Then, that money would grow via compounded return, and at retirement you’d have enough money to live and enjoy your retirement years. One of the most common ways to convert a pile of cash into cash flow is the use of annuities. Like anything, there are good annuities and bad annuities. Using good annuities (which we’ll talk about in future posts), most financial advisors might recommend converting half of your retirement net worth into annuities creating an income stream for life. That, coupled with Social Security payments, potential pension payments and cash flow generated off your other investments would exceed your expenses. There, you’ve won!
Another common way would be by building a cash flow real estate empire. Buy a house, fix it up, rent it out. Generate some cash flow. In a few years, raise rents and increase cash flow. Also, look at a refinance and take the proceeds to buy another property. Lather, rinse, repeat. A lot of people take this approach and it’s a great approach.
I took another approach, which is the “building a company approach.” At the end of the dot-com bust in 2000, I started plotting how I could start a business. I was a software developer and worked for a boutique consulting firm.
When I saw the opportunity, I took the nice lay-off package and started my own consulting firm, Venice Consulting Group. The first year we did fine and in the second year, I invited three partners to join the company. Over the next three years, we doubled the company’s revenues every year. We ended up buying another small consulting firm and continued our growth path.
We got to a point where we could sell the company and we hired an investment banker to shop our deal. Unfortunately, we hired him in August of 2007. The Great Recession took out our sale potential and I ultimately ended up buying out my partners and selling the other consulting business back to its original owners, for a profit of course. While I didn’t achieve a “win” at the time, I did learn a lot about the process and how this option can really work to create wealth. And, it set me up for future business opportunities and successes.
Your Own Approach
Do you see a potential path for yourself? I always recommend reading a few books about building financial freedom and look for what inspires you. What inspired you? I also recommend to see if you can start with a small deal and learn along the way. And, if you can discover what you’re really passionate about, that will go a long way to adding fuel to your commitment in creating consistent success for yourself over a longer period of time.
Finale
So, you’re at the end of the game. You learned quite a lot in the beginning levels. You learned to budget and produce more than you consume. You learned to kill off all bad debt. You learned to save and build a pile of cash.
In the middle levels, you learned to start a long-term retirement plan and put the structures in place to stay on track. You learned how to start an investment account. You learned to buy a home and take all the advantages of mortgage deductions and the leverage potential of other people’s money with a mortgage.
And, in the advanced levels, you learned how to build cash flow assets and produce more passive cash flow than your expenses to become financially free. There are many different ways to win and hopefully, you too, will tell your story. You’ve won the game, congratulations. Remember, there’s more to play.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Please do your own homework.
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