Step 3 - Use Your Cash Flow Engine
Module 2: Acquire Income Producing Assets
Acquiring Income Producing Assets – As an Employee
Okay, now we’re debt free. It’s time to take our cash flow engine and redirect that into the acquisition of income producing assets. Now, my hope is that all this time that you were getting debt free, and for all these months that you were working your way out, you were listening to our newsletter every two weeks and you were developing the type of income producing assets that you really wanted to acquire. But, just to go over them briefly, I will review some options for you for income-producing assets.
The first, if we take a look at the pie chart, is to be an employee and continue as an employee. For most of us this will be our approach. For me, I stayed this way until I was 47 years old. It was only at that time that I decided to move into the small business and business investor category. For most employees, you need to understand Ray’s Rules.
Ray’s Rules are:
- Control the Asset
- Control the Leverage
No matter which kind of asset you are talking about, if you can’t have a significant amount of control over the asset, and if you can’t control leverage you really might as well go to Las Vegas with your funds for income producing assets. The fact of controlling means that you don’t just put it in an investment where some external factor can totally control the value of it and the cash flow return to you. In other words, if it were in the stock market, and something happened anywhere over in China or Europe or anywhere that could adversely affect your investment, there is little control. Also, your investment could be manipulated by large purchases in the stock market. No one individual entity controls the stock market. There’s no element of control there. Sure you can make guesses, and sure you can take intelligent guesses and a do a lot of research. But, there’s no particular way you can control the stock market. If there were we would not be a free-market enterprise. It would just be an elevator to the top for everybody, and nobody would take the elevator going down.
So. this goes contrary to a lot of the financial planners. This goes contrary to a lot of the investment community, but you have to remember the motive. Their motive is to sell you things; to sell you investments and make commissions. That’s what their motive is. Most of these people are just working for a salary. They don’t have their own portfolio. Relatively few of them develop their own portfolio and actually know more about what they’re talking about than merely from an academic viewpoint. In any event, the people that are successful at the market are spending hours and hours of research and are really trying to make the best bets they can, I use the word “bets” on purpose here.
The second, is to control the leverage. Now, the leverage is the amount of financing that you have on the asset. If you have control over the asset you can actually put financing on it to leverage the amount of the investment that is required to acquire income producing assets. For example if you worked saving up to purchase a rental home for $150,000 it would take quite a while for you to do it. However, with leveraging you can get a reasonable and acceptable down payment and a financial institution would give you a mortgage. With that mortgage you can actually put the whole $150,000 to work for you even though you didn’t have to save up the entire $150,000.
Now the idea of a mortgage sounds like a contradiction but it is not. When it’s a mortgage on an income-producing asset the mortgage debt is called good debt versus bad debt. Bad debt is debt to purchase an asset that doesn’t put anything in your pocket. Good debt is leverage debt that you would use to acquire an income-producing asset and as long as you control the percentage of the leverage then you can actually accelerate your financial success. I’m not saying go out and get a 90% financing or anything like that. I’m saying no more than 80% financing and in a lot of cases in the 50 or 60% financing percentage. Another way to have leverage without having the additional risk would be to have other people doing this with you. Many belong to a group of people going as investors together in acquiring income producing assets. Either way you look at it, the only way that you can really control leverage is if you have a controlled asset and that’s a key factor here to maintaining a positive cash flow.
In acquiring income-producing assets you need to have some control. Overall as an employee you’re probably limited to real estate rental type property or to something that you can have some control over such as a high-yield bond. This would be with an organization that you can basically understand and control the risk factors. For example you can avoid the risk where no external person could make a stupid decision and all of a sudden make your income-producing asset worthless or almost worthless. These areas would be a good research area for you look at it. The point is that we’re not here to sell you anything. We want you to take this basic advice and start your research path to move in this direction. For 85% of people that are in the employee category, that’s pretty much the best options when it comes to accumulating some income-producing assets.