Have you ever wondered what it takes to be a Successful investor?
There is one thing the rich do differently than the poor, it’s that they put their money to work instead of working for their money. What does that mean? Their money isn’t just sitting around in a savings account, accruing little-to-no interest, waiting for a rainy day. Their money is being invested — and delivering a return!
Different investments produce different results. The question is, what results do you want? The answer you get will be your litmus paper test for determining your next investment strategy. Whether you are investing in the stock, crypto currency or real estate market, there are two basic principles of investing you will definitely be dealing with and they are –
- Cash Flow Investing
- Capital Gain Investing.
One of the foundations for successful investing is to be clear on which principle you intend to follow. Although every Investing have a little bit of the other, smart investors have a clear cut motive for every investment they want to venture into. If you decide to go in just any direction at any point in time, chances are you’ll end up being confused, frustrated and disappointed.
The primary reason to have an investment principle is to help you measure your investment success.
Therefore I will love to make it emphatically clear that, contrary to what you might have read in the past, cash flow investing isn’t superior to capital gains investing – nor vice-versa. Your choice Principle should depend on your investment goals. This is why I would recommend you read this – 5 most important questions you must ask before Investing in Real Estate because there is a wealth of knowledge there for new investors and old investors who wants to do it right.
In this article, I am going to show you how to maintain maximum profit while Investing using either or both Cash Flow and Capital Gain with focus on real estate. I love real estate as my major investing vehicle because I found it to have an unfair advantage over any other form of investing known to man currently.
CASHFLOW AND CAPITAL GAIN –
WHAT IS CASHFLOW? –
Cash flow investing is the art of buying an investment and holding unto it with the intent of generating monthly, quarterly or annual income. This type of investing provide regular income in form of rent, lease or dividend.
When you purchase a stock that’s pays dividend and decide to hold unto it. As long as you hold that stock, you receive income inform of dividend. This is a form of Cash Flow.
In Real estate investing, you could purchase a unit apartment or more and, instead of fixing it up and selling it, you decide to rent it out or you could buy an empty land, and erect a rental apartment inform of block of flats or office spaces. Every month you collect the rent from tenants. If this property is in a good location and properly managed, you will attract good tenants, and if your management is good, you will generate good rental income that maximizes profit. This is a golden form of Cash flow
The basic idea in CASHFLOW investing is generating constant income and building steady wealth passively. The idea is to make your money work for you while you are busy with other businesses. Most people recommend it as a retirement plan and for building long term wealth.
Cash flow is good for building capital, as it assures the Investor of a constant income at intervals. The reason why experts advise people to invest for cash flow is that it helps people keep their eyes off short-term market movement, which could lead into panicking.
Although cash flow investing could be a great strategy for the right investor, there is always the possibility that the investment will not cash flow (for example, there could be unforeseen vacancy that reduces your rental income below total expenses, among others). Performing comprehensive due diligence and fully understanding the possible outcomes will help investors determine the right investments for them.
Smart cash flow Investors always take the long-term view into an asset. You have to research the potential state of an asset (real estate or equity) for years to come. At the minimum, even if the asset will have a problem in the future, you need to be on a high certainty that the asset would have generated enough cash flow to cover your initial investment cost. Let’s use two illustrations to explain cash flow in the equity and real estate market for proper understanding
EXAMPLE 1: CASH FLOW IN STOCK MARKET – Smart investors don’t invest in a dividend-paying stock just because it pays well at the moment.
You need to conduct research to have some level of certainty that the company behind the stock have the ability to sustain its business at a level where it can keep distributing its gains among investors at intervals.
It’s of great importance to note that slow economic growth and depressed earnings, among other factors, could make companies cut their dividend payout or even completely stop paying dividends.
When investing in stocks for income, you need to be aware that the most important thing is the ability of the company in question to maintain a huge cash reserve. It is from cash reserves that companies pay dividends.
Lets say you want to invest in coca cola, you want to be sure that the company can generate and maintain a huge cash reserve.
An effective way to assess a company’s cash-generating power is by looking at its businesses. You want to check how diversified the company is. You have to check the company’s position in the markets in which it operates. One thing I have found with the most-performing dividend stocks is that they are leaders – not necessarily number one – in their industries.
Coca cola for instance is a leader in bottled beverages and juice making and have a very efficient distribution system on a product that have been accepted globally. The system have been built to generate cash flow almost automatically
Because Coca cola is a leader in beverage making and bottling and diversified enough to keep creating healthy cash flow, it could be a good cash flow investing option. Although I do not recommend this, it’s only meant to be an illustration and investing without comprehensive due diligence and expert guidance is risky.
EXAMPLE 2; CASHFLOW IN REAL ESTATE
In real estate investing, cash flow is the difference between a properties income and expenses. Expenses includes debt or mortgage and total money spent in running and maintaining the property. The term CASHFLOW is used in properties that produce income. This could be flat, mini flat, terraces, office spaces, mall, convenient stores, warehouses etc.
A property can be said to have a positive cash flow when the income it generates exceed the expenses, and a negative cash flow when expenses exceed income generated and landlord loses money.
Most real estate investors aim at owning rental property with positive cash flow. The more cash flow a property have, the better the return and the more income the real estate investor earns. Having higher cash flow also provides the landlord with a safety net for when unexpected expenses arise like a burst pipe, roof replacement parking lot maintenance, special levies etc.
See also – HOW TO OPTIMIZE PROFIT WHILE INVESTING IN REAL ESTATE – WHAT THE RICH DO
How To Calculate Cash Flow –
Calculating a rental property’s cash flow is a relatively simple process. The process is outlined in its simplest form below –
- Determine the gross income from the property.
- Deduct all expenses relating to the property.
- Subtract any debt service relating to the property.
- The difference is the property’s cash flow
Smart Investors do their due diligence until they are able to forecast with certainty the future of a property before investing in it.
In this due diligence, you will be able to understand what future event could possibly forestall the inflow of income.This will help you to make an informed decision.
Finding a positive cash-flowing property isn’t always easy especially in Nigeria, but if you know how to accurately calculate rental property cash flow, you wille be able to to evaluate property outcome before purchase and this will help you get the best deals that maximizes profit always
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WHAT IS CAPITAL GAINS?
Capital gain is the act of buying an asset at low price and selling at high price for profit. A capital gain transaction can be completed within a day, a week, a year or 10 years depending on the complexity of the transaction and the expertize of the Investor and the investment purpose.
For instance, you are a capital gains investor if you buy a stock for 100 naira a share and sell at 150 naira a share. This means that being successful at capital gains investing fundamentally hinges on your ability to identify undervalued assets.
People often mistake capital gains investing for the game of speculating on assets. Although for inexperienced investors, it’s pure speculation. Smart capital gain investors don’t buy and “hope” that the asset just appreciates, as many antagonists of this investing principle describe it.
Capital gain investing is a game of buying low and selling high. It’s not the game of buying at, or even above, retail price and hoping that inflation will occur to make a profit. The latter is speculating while the former is investing. Investors who invest for capital gains research assets to be sure they are trading below their intrinsic value.
Before you can become a capital gain Investor, it’s advised you first educate yourself to become a value investor or align yourself with a seasoned expert to help you with identifying great deals and negotiating for them. Value investors look at certain aspects of an asset to determine the asset presents and future potential.
If you’re going to invest for capital gains, the first thing you want to do is to research an asset to make sure that it’s not already overpriced. This is where most investors get it wrong. You have to put down some criteria for anything you want to invest in. Just like we did in cash flow investing, we are also going to consider two examples, one for stock and the other for real estate, to establish a proper capital gain investing practice.
EXAMPLE 1 – CAPITAL GAIN IN STOCK MARKET – Since the stock market is made up of various industries, the first thing I recommend is to only invest in the industries you understand and this requires a lot of due diligence and personal research.
Investing in industries you don’t know is what amateurs do and this is what makes them speculators, they end up making mistakes because their Investment decisions is inadequately informed.
One key advantage of investing in an industry you understand is the fact that it’s easier to know when the company is doing something that presents an investment opportunity.
Having said that, let’s consider an investments that target capital appreciation as a case study.
Imagine that the year when Netflix was unveiled, you predicted that Netflix would change the entertainment landscape and decided to invest in Netflix buying netflix stocks with certainty that price will rise in the future.
Because you realized that the cable TV service no longer dominate the market, So you decided to cash in on your Cable TV investment because you just found something new with a greater potential for profit maximization. And finally this happened in 2019 when statistics have it that 21.9 million Americans have cancelled their cable subscriptions and netflix have realized 193 million paying customers.
I am not trying to recommend Netflix nor Stock investing, but this is typically what Smart Capital Gain investors do in the stock market and this means that you have to be on your toes to know the market trends less you be swept off your feet.
EXAMPLE 2-CAPITAL GAIN IN REAL ESTATE- As a capital gains investor who wants to invest in real estate, you have to outline some real reasons why you want to invest in any property.
Whatever the reasons are, there must be a reverse potential. You don’t just buy a property because there is an in-built theory in real estate investing that properties will always appreciate. This is so wrong. Buying properties randomly believing that one would appreciate is what I call gambled investment and this is what losers do in real estate investment.
Here is what smart Investors do –
Firstly, target your investing on properties in fastest developing areas and areas with visible growth potential – regions that could see significant urbanization over the next few years.
For instance, if you have reliable information that a higher institution or a world class business that will create massive employment will be established in an environment that is relatively under-urbanized, you might decide to take positions in properties in that environment knowing that, when the institution arrives, the value of the properties will rise.
This is exactly what smart Capital gain investors do and I would highly recommend it because I have personally used it to realise over 20x profit on an investment within 8 years. Unfortunately a lot of people does it wrongly because they are lazy to researching the market thoroughly before Investing. A lot of people invest in bad deals within good area which is the reason why you need a lot of education before Investing.
You’ll notice that, in the two examples above, the key strategy is buying when an asset is undervalued and selling when it’s no longer fairly priced, or better yet, overpriced. But unfortunately, most amateur investors usually invest in a location when it’s overpriced and becomes victims of market crash. These are the people that will always give you 10 reasons never to invest in real estate because they don’t understand how the market works and have also decided to be uncoachable.
KEY STRATEGIES TO MAXIMIZING PROFIT USING CAPITAL GAIN INVESTING-
It’s easy to speculate when you invest for capital gains than research and analyse a deal. However there is a lot of value in research and analysis before Investing. if you would love to take advantage of Capital Gain Investing in building your investment portfolio, you might need to consider the following as part of your routine –
- Don’t sell just because an asset you bought at 1 million naira is now 10 million. Your reason for selling should be that, at whatever price it is, the asset no longer holds the criteria which motivated you to buy in the first place. Take this as an instance – Mr Jude bought a property in Lekki phase 1 at 3 million naira, sold it after 4 years at 11 million naira and today regrets his action because that area got valued at 120 million naira just in another 4 years.
- Never let your decision be driven by fear nor greed but by proper research and detailed analysis. If this is done properly, it’s almost impossible to fail
- Don’t sell because the market is down. For instance, if you bought Netflix because it would dominate the entertainment market, chances are you will always be tempted to sell whenever the market fluctuates. Most of the time that will be a wrong call, as long as the market crash won’t make netflix lose its position in the entertainment market. You should always keep in mind the market always fixes itself somehow.
- Don’t speculate. No matter how much analysts talk up any asset, you need to be sure that it meets your investment criteria before you take any position. You have to be sure that it is really undervalued. Anything other than that is called speculating.
- Research a lot, buy few. If you’re going to be successful at capital gains investing, you have to spend more time researching than investing. If you conduct your research diligently, you will always find out that only about 10% of the assets you research are worth investing in. But don’t be tempted to invest because of the time you have invested, invest only because the asset solves your investment goals
HOW UCHE COMBINED CAPITAL GAIN WITH CASH FLOW TO ACHIEVE FINACIAL FREEDOM
In 2002, Uche got an offer on a 15 plots of land at 2 million naira each and was given the option of paying for the land in 3 years.
The young bank manager was able to do his due diligence and realized that Lekki phase 1 had a great potential for growth.
He immediately secured the deal with a 10 million naira deposit and started sourcing the revenue to balance up 20 million. He was willing to share some portions of the investment with his friends if they would contribute to make sure the deal is not lost. He spent time explaining to them the importance of securing some plots for themselves but they turned him down.
Before the three years elaspe, Uche was able to complete the payment of the property, got his documents completed and secured the property.
In 2013, after Ikoyi bridge was commisioned, landlords in Lekki phase 1 were the most blessed as Price of properties trippled and rent jumped off the roof. This was the exact time Uche decided to develop this property. He did some market research and realized that tenants were looking for 2 and 3 bedroom flats.
Rather than seeking financing from the bank, he decided to sell off 3 plots at 70 million each. In june 2015, he already had his 40 units apartment completed to suit the current taste of tennant., consisting of 2 and 3 bedroom flats. Today the property generate an annual rent of over 80 million naira for Uche.
Today Uche is still a heavy investor and have acres of land across Lagos and mostly in Ibeju Lekki. As a smart Investor, focus your investments on an asset because you see value in it. This will always give you higher returns even in the long run
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TAKE ADVANTAGE OF MY EXPERTIZE –
Anthony Cee is a real estate expert dedicated to helping investors make great investment decisions that maximizes profit. He is also a seasoned real estate and property manager with the result you’ve been looking for. You can talk to him directly using the yellow button or you can click the orange button to book an appointment .
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