| First the Disclaimer: This is a thought-provoking | | | | guarantees the value of an investment regardless |
| article that draws upon real world examples, | | | | of the markets. Imagine the difference between |
| articles, books and websites that are readily | | | | a real estate investor who bought a house |
| available to the public. This article is not intended | | | | expecting it to go up in value versus the investor |
| to offer investment advice. Any actions that you | | | | who bought for cashflow. The capital gains |
| take in the market place should be the result of | | | | investor bought at very high premiums in the |
| your own financial education and consultation with | | | | market such that the rents received for his |
| a licensed professional. | | | | investment do not cover the expenses. Now the |
| This is the conclusion of my 3 part series that | | | | investor must find a buyer who paid more than |
| began with Home Ownership: The Biggest Financial | | | | he did in order to make a profit. If the market |
| Scam of the Twentieth Century and was | | | | goes down that investor will find that he has no |
| followed up by parts one and two of The Stock | | | | staying power and will likely sustain a substantial |
| Market: The Second Biggest Financial Scam of the | | | | loss to liquidate the property and limit his on-going |
| Twentieth Century. | | | | monthly losses. The fate of the cashflow investor |
| What is Cashflow? Cashflow simply put is the | | | | is much more secure. The positive cashflow |
| flow of money. Positive cashflow is the revenue | | | | yielded by the property will continue regardless of |
| or income that a person receives from a job, | | | | market activity. Should the market go down, the |
| investment or business. The majority of people | | | | cashflow will continue, giving the investor staying |
| derive their cashflow from their jobs. To the | | | | power and continued profits in a down market. |
| extent that they come to derive cashflow from | | | | More importantly, most if not all of the positive |
| investments and or businesses is the extent to | | | | cashflow will be shielded from taxes by |
| which they will become financially free when their | | | | depreciation expenses on the property. In short, |
| working years are over. Negative cashflow is the | | | | the cashflow, not the capital gains, on a property |
| revenue that a person loses due to an | | | | will usually be tax-free. Avoidance of unnecessary |
| investment or business. | | | | taxes is one of the best wealth acceleration |
| Most people are taught to invest for capital gains | | | | strategies you can employ. To quote David |
| rather than positive cashflow. Investment success | | | | Swenson from Unconventional Success, ?Taxes |
| depends on appreciation of the underlying ?asset? | | | | impair wealth accumulation.? |
| rather than income production. This is the basis | | | | Cashflow strategies can also be applied to the |
| for ?investing? in a primary residence or the stock | | | | stock market. |
| market for wealth creation. Yet, success of the | | | | The trouble with cashflow investing is that it |
| capital gains investment strategy is by no means | | | | requires having a financial education. Cashflow |
| assured. No one can guaranty that an asset will | | | | investing requires the ongoing thirst for financial |
| appreciate in value, despite the tendency to quote | | | | knowledge specific to your chosen area of |
| historical gains as justification for an investment | | | | cashflow generation. |
| today. The current housing and market crises | | | | The capital gains strategy encourages financial |
| highlight the fallacy of depending on capital gains to | | | | ignorance. Tempting the would-be investor to |
| create wealth. The housing crisis alone will destroy | | | | treat their investment as a money-in-money out |
| billions of dollars of personal wealth. From the | | | | proposition. Actively seeking financial education is |
| October 25, 2007 Joint Economic Committee | | | | the only way that a cashflow investor will be |
| report: | | | | successful. Yet the odds are against him. Not |
| The JEC report found that the subprime | | | | because financial education is difficult to attain, no. |
| catastrophe is likely to accelerate the downward | | | | The odds are against him because the financial |
| spiral of house prices. Based on state-level data, | | | | sales people any would-be investor will encounter |
| the report estimates that by 2009: | | | | are paid commissions based on their ability to sell |
| ? 2 million foreclosures will occur by the time the | | | | products and the majority of those products are |
| riskiest subprime adjustable rate mortgages | | | | for capital gains rather than cashflow. I find one or |
| (ARMs) reset over the course of this year and | | | | two real estate deals per year that yield sufficient |
| next. | | | | positive cashflow for me to consider the deal, yet |
| ? Approximately $71 billion in housing wealth will be | | | | I am often encouraged by brokers to ignore my |
| directly destroyed because each foreclosure | | | | criteria for cashflow and invest instead for capital |
| reduces the value of a home. | | | | gains. |
| ? More than $32 billion dollars in housing wealth will | | | | The cashflow strategy requires that you learn to |
| be indirectly destroyed by the spillover effect of | | | | work with people to form a team and generate |
| foreclosures, which reduce the value of | | | | profits for all. A capital gains strategy has people |
| neighboring properties. | | | | so focused on maximum gain that they ultimately |
| ? States will lose more than $917 million in | | | | succumb to greed, fail to exit an investment at |
| property tax revenue as a result of the | | | | an appropriate time and experience financial loss. |
| destruction of housing wealth caused by subprime | | | | Even in today?s economy cash in the bank is not |
| foreclosures. | | | | a source of solace as savers are seeing their |
| ? The ten states with the greatest number of | | | | returns destroyed by interest-rate-cutting policies |
| estimated foreclosures are California, Florida, Ohio, | | | | of the Federal Reserve. People who depended on |
| New York, Michigan, Texas, Illinois, Arizona and | | | | interest from savings to provide retirement |
| Pennsylvania. But there are several others that | | | | income are seeing their incomes dissipate as the |
| are close behind in the rankings. | | | | Federal Reserve sacrifices their incomes to bail |
| ? On top of the losses due to foreclosures, which | | | | out Wall Street, Banks and the derivatives |
| this report examines, a 10 percent decline in | | | | markets. |
| housing prices would lead to a $2.3 trillion | | | | The actions of the Fed and the behavior of Banks |
| economic loss. | | | | and Wall Street have proven that it is cashflow, |
| The power of positive cashflow is that it | | | | not cash that is king. |