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Acquiring cash flow assets that bring you money every month is one of the pillars of achieving financial independence. Ideally, as you grow your wealth, you want to diversify into more passive investing to free up your times to find… yep, more great investments. However, not all cash flow assets are created equal and it’s important to read about the different types to figure out which fits best with your risk/reward meter.
What is Cash Flow?
Cash flow is basically the money your asset is generating minus the expenses (which can include financing costs, service costs to keep it up, etc). It’s the amount of money you get to pocket at the end of the day. It is important that we don’t just look at how much the asset is producing; we have to look at how much it is costing us to operate or own it. We want to focus on assets that have positive cash flow, so you are growing your money month over month.
Money Making Money
Having your money make additional money for you is the cornerstone of passive investing and financial independence. Most of the assets below are passive, meaning they don’t require a lot of work from you, and each comes with their own level of risk as a cash flow asset.
For more info: 6 Types of Investments You Should Know
1. Dividend Paying Stocks
Investing in the stock market is a very common means to creating passive income. Your money will increase or decrease based on the value of the individual, or collective group, of stocks you’ve purchased. In order to add dividend paying stocks to your cash flow asset column, you will need to check to see if that stock you’ve purchased pays a dividend- some stocks do not. Dividends are basically a small payout based on the number of shares you own and is generally based on how well the company did in a given quarter.
You can figure out which stocks give dividends by searching for them in Google and looking for the dividend percent (shown below). Always research the company before investing, or look into investing into an index fund, which means you are buying a subset of the market instead of a specific company.
2. Peer-to-Peer Lending
Peer-to-peer (P2P) lending can be a good way to generate passive income on the side, by loaning your own money out to people and earning cash flow through interest payments. There are a lot of websites out there, like Peerform and Upstart, that connect individuals to investors who are willing to loan money to qualified applicants. Many websites come with predetermined interest rates and loan periods, but some allow for input from the lender (you), so it’s important to research the different P2P lending websites to figure out which is right for you. You can check out a starter list here.
3. High Yield Savings Accounts
If you are looking to grow your money beyond the 0.01% interest of typical savings accounts but aren’t quite yet ready to dive into investing, then check out a High Yield Savings Account. High Yield Savings Accounts are typically online only accounts that can yield anywhere from 0.3% to 3% interest on your savings. These rates typically fluctuate with the federal interest rate, so these will vary based on how the economy is doing, but still far out pace the typical bank interest rate.
The only drawback to High Yield Savings Accounts is that it can take a day or two to transfer money in and out of the account, so make sure you keep enough on hand for any emergency that could arise. High Yield Savings Accounts are great for people who are working to build their nest eggs- you can store your money in a safe place and also make decent returns on it at the same time. Check out banks like Ally and Wealthfront to get started.
Real Estate Investing
Real estate investing can be a lucrative way to build up your passive income and add positive cash flow assets to your portfolio; however, real estate investing can take more research and work, so you’ll want to research the different types and choose what works best for you.
For more info: 6 Real Estate Strategies for Building Wealth
4. Single Family Rentals
Single family house rentals are probably one of the most popular types of real estate investing, at least for beginners. Single family rentals entail finding and purchasing a home that is meant for one family and renting it out. There is a long list of criteria to consider when purchasing a home, including sales price, interest rate, location, potential rent rates, etc. You can read more about single family rentals here.
If you can find a home that fits the 1% rule, i.e. your potential rent is equal to 1% of the homes sale price, and has positive cash flow (the rent you’re bringing in is more than the expenses it takes to have the home), then you will have an asset that is producing cash for you month after month. Some investors try to play the market by buying a home they think is lower value and selling it when it grows in value shortly thereafter, and some hold on to single family rentals for years.
5. Multi-Family Rentals
Multi-family rentals are similar to single family rentals, except they involve homes like duplexes or larger that have multiple homes in each structure. In fact, some investors do house hacking, where they buy and move into one of the homes in the multi-family building and rent out the remaining homes, effectively using that rent to pay their monthly mortgage. Multi-family rentals do require a larger initial investment, but can be a great way to accumulate more rentals, especially when a lot of newer investors go after single family rentals.
6. REIT’s (Real Estate Investment Trust)
If having your own tangible home to rent out seems like a lot, you can look into REIT’s as a way to establish a cash flow asset. REIT’s are like index fund investing for real estate. Instead of having to go out and purchase a tangible home and rent it out, you can invest your money into a trust of homes, in which you would receive a portion of the profits, similar to receiving dividends from the stock market. Investing in REIT’s is one of the most passive ways to invest in real estate, and allows you to more easily liquidate your investment than traditional real estate investing.
7. Real Estate Crowdfunding
Real estate crowdfunding is one of the newer methods of real estate investing to hit the scene and is somewhat similar to an REIT. However, real estate crowdfunding allows you to invest in a property directly, where as an REIT allows you to invest your money into a company that spreads your investment over multiple properties.
Real estate crowdfunding involves finding a platform like Fundrise or Crowdstreet, which pairs real estate professionals with individual investors. These investors can then invest their own money with the professionals who will go out and procure real estate deals. This form of investing is riskier as you are relying on the professional to make good deals, but it can be a quick way to get exposure and bring in positive cash flow. Check out this starting list of Real Estate Crowdfunding sites here.
8. Vacation Rentals
Vacation rentals have grown in popularity over the last decade with sites like Airbnb and Vrbo making it easier for people to stay in other’s homes on their vacations. Vacation rentals can be a good investment if you are looking to purchase in a location you’d like to travel to yourself. However, it’s important to do research on the competition in the area to determine what your return will be each month. It can also be more expensive to purchase a property in a place that is a popular vacation spot, so it’s important to analyze potential rent vs expenses to ensure you’ll be generating positive cash flow.
Owning land is often recommended as a good investment due to the fact that there’s only so much of it. However, it’s important to understand the growth pattern of where you’re buying the land and what you could use it for. Unfortunately, if you purchase a piece of land and plan to wait 5-10+ years for it to grow in value, it won’t be a cash flow asset for you if it just sits there, it’ll be negative cash flow. So, if you’re looking to invest in land it’s important to determine what money you can make off of it in the meantime to bring in income. Options include using it for livestock, renting it out to someone for crops, turning it into an orchard, renting it out as recreational land, etc.
10. Trailer Park Rentals
Owning a trailer park real estate investment is similar to owning land as real estate investor. Typically, the real estate investor can either charge people to park their personal mobile homes on the land or place mobile homes on the lots and charge people rent to live in those homes. Trailer park rentals has grown in popularity over the years with many investors pocketing sizeable returns.
The pros of owning a trailer park is the low capital cost relative to purchasing traditional real state. Depending on where you are looking to invest, your land purchase will probably be the largest investment made, with the actual mobile homes themselves running less than $10,000 second hand. Low investment costs can yield high returns on investment (ROI).
The cons of owning a trailer park is that it can be difficult to finance, as banks deem these types of investments more risk than traditional home rentals. Finding the right location is also important, to ensure you will actually attract people to live on your lot.
Build Your Own Business
Building or buying a business can be a great cash flow asset to add to your portfolio, but these typically take more work than traditional investments.
11. Build a blog or buy a website
Creating a blog or website can be a great source of income through ads and affiliate income. Building a website from scratch will take more effort initially, but it can be a great source of income once you build up your articles and readers. You can also look at purchasing a website that is already built through sites like Flippa, which sells websites to investors who are looking to spend more upfront capital in order to start realizing returns much quicker.
For more info: 6 Types of Blogs That Make Money
12. Own a traditional business
Finally, owning a traditional business is the OG of adding cash flow assets to your portfolio, but can sometimes require the most amount of work depending on how the business is set up and ran. If you have an idea for a new business and the capital required to start it, then creating your own business can be one of the most lucrative ways to generate money but it comes with a lot of upfront work.
What is the best cash flow asset?
So, which is the best cash flow asset to add to your portfolio? If you are looking for more passive incomes research more into index fund investing or REIT’s. If you are looking for more active forms of investing, check out real estate investing or creating your own blog. Whichever you choose, analyze your risk vs reward tolerance and start your journey!