What Are You Investing For? Cash Flow or Capital Gains? – Robert Kiyosaki

investing for cashflow or capital gains

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Investing can be both rewarding and complex. Different strategies can lead to varying outcomes, making wise decisions essential. Many investors often struggle to understand the fundamental differences between cashflow and capital gains, and how these concepts shape the outcomes of their investments.

The real estate market, influenced by demographics and broader economic factors, poses unique challenges and opportunities. Understanding these dynamics can make a significant difference in one’s financial journey. Discovering the strategic mindset needed for successful investing can transform the way people approach their financial goals.

Key Takeaways

  • Fundamentals and technical aspects influence investment decisions.
  • Cashflow and capital gains require distinct investment strategies.
  • Demographics and market trends play a crucial role in real estate investments.

This concept is laid out very well by Robert Kiyosaki in the following video:

YouTube video

Fundamentals of Investing

Investing can be broken down into two main categories: fundamental and technical. Fundamental investing focuses on the basics, like cash flow and return on investment (ROI). For example, if you invest $10 and receive $1 back, that’s a 10% ROI. It’s like the game of Monopoly; every house generates income, and the goal is to create a steady cash flow.

In contrast, technical investing is more about emotions and market trends. It revolves around the fluctuations in stock prices, often driven by the mood and sentiment of the market.

Cash Flow

Many people misunderstand cash flow. They buy properties based on emotion rather than logic. Poor financial decisions, like purchasing a big house without sufficient cash flow, can lead to financial strain. Instead, focusing on buying properties that provide a steady cash flow is a smarter approach.

Capital Gains vs. Cash Flow

The market influences property values, but it’s a mistake to rely solely on capital gains. Many investors buy properties with the hope of selling them quickly for a profit. Yet, this strategy often backfires when market conditions change. For example, during times of economic downturn, property values may plummet, leaving investors with unsold properties that can’t generate income.

Strategic Investments

Understanding demographics and market trends can guide better investment decisions. For instance, cities with growing job markets, such as those booming due to oil, offer better investment opportunities than areas suffering economic decline.

Long-term Approach

Investing requires patience and strategy. Instead of buying one expensive house, invest in multiple smaller properties that generate a consistent cash flow. This method allows for financial growth over time. As your investment portfolio grows, you can reinvest profits into more properties, eventually affording the lifestyle you desire without risking financial stability.

Key Takeaways

  • Focus on investments that generate cash flow rather than those promising quick capital gains.
  • Emotions should not drive investment decisions.
  • Patience and strategic planning lead to long-term financial success.
  • Understand market trends and demographics before investing.
  • Building a diverse portfolio of income-generating assets is a smart strategy.

Investing wisely means prioritizing steady income over speculative gains. This approach ensures financial health and stability over the long term.

Cashflow Versus Capital Gains

When you’re looking at investments, it often boils down to two main strategies: cashflow and capital gains. Simply put, cashflow is the money you get regularly from an investment, like rent from a property. For example, if you buy a house for $100,000 and it gives you $1,000 a month in rent, that’s cashflow. It’s straightforward and consistent.

Capital gains, on the other hand, are the profits from selling an asset, like a house, for more than you bought it for. Imagine buying a property for $100,000 and selling it later for $150,000. The $50,000 is your capital gain. This approach can be riskier because it depends on market conditions, which can be unpredictable.

Let’s take a closer look at the differences between these two strategies:

FeatureCashflowCapital Gains
FrequencyRegular payments (monthly rent)One-time profit (when sold)
RiskLower, predictableHigher, market-dependent
FocusSteady incomeOne-time big pay-out
ExampleRental incomeSelling property at higher price

People often get caught up in capital gains because of the lure of big, quick profits. They’ll buy a big house hoping to sell it for more later. The drawback? If the market drops, they could lose a lot. On the other side, focusing on cashflow might seem slower, but it builds a steady income stream over time.

Investors who play the game right start small. They focus on creating cashflow before going after big capital gains. This strategy ensures they have money consistently coming in. For instance, one investor mentioned starting with just $25 a month in cashflow. Over time, that built up to substantial monthly incomes, providing financial freedom.

So, which is better? It depends on your goals and tolerance for risk. Cashflow offers stability, while capital gains offer the potential for large returns. Understanding their differences is key to making smart investment decisions.

The Emotional Impact of Technical Investing

Technical investing can feel like a rollercoaster. Investors often make decisions based on market fluctuations, leading to moods that swing up and down with the stock charts. When the market is up, emotions are high. When it’s down, anxiety sets in.

This emotional turmoil happens because technical investing relies heavily on market prices, trends, and momentum. The focus is usually short-term, making it tempting to buy or sell based on emotion rather than logic. This emotional buying and selling can lead to poor decisions and financial losses.

Comparing cashflow strategies to technical investing, the differences in emotional stability are clear. With cashflow, there is a steady stream of income, which provides emotional security. The investments grow gradually but predictably, leading to less stress and more confidence in future financial stability.

Here are a few key points regarding the emotional impact:

  • Volatility: Market fluctuations lead to emotional highs and lows.
  • Short-term Focus: Decisions are based on immediate market trends, creating stress.
  • Emotional Decisions: Investors may buy or sell based on feelings, not facts.
  • Stable Cashflow: Regular income from cashflow strategies provides emotional stability.

Staying emotionally grounded requires discipline and a focus on long-term financial health. While technical investing might promise quick gains, it often comes with significant emotional cost. Prioritizing cashflow and long-term investment strategies can help maintain emotional balance and ensure lasting financial security.

Real Estate Market Perspectives

Investing in real estate can be broken down into two types: cashflow and capital gains. Understanding cashflow is like playing a game of Monopoly. If you buy a house and it pays you rent, that is your return on investment (ROI). For example, if you invest $10 and earn $1 back, that’s a 10% ROI. Many people often forget this simple concept and instead focus on buying properties out of emotion, not logic.

Many investors are losing money because they buy homes on a whim, seeing them as status symbols rather than income-generating assets. Owning a large, expensive house without sufficient cashflow to cover the mortgage and other expenses often leads to financial trouble. It’s crucial to invest in properties that pay you monthly, ensuring a steady income stream.

Cashflow vs. Capital Gains

  • Cashflow: Monthly income generated from renting out properties.
  • Capital Gains: Profit earned from selling a property for more than its purchase price.

In a city like Calgary, the real estate market saw a 50% appreciation in just one year due to the oil industry’s influence. This increase in property value shows the importance of location and industry impact on real estate investments. Buying properties in areas with job growth and economic stability ensures better returns.

Flipping houses might seem profitable, but it’s risky. In Phoenix, for example, people who flipped properties in 2003 lost up to 80% of their investments. Had they held onto their properties, they would have benefitted from higher rental incomes as the market evolved.

Increasing populations in growing states like Arizona drive up rental demand and property values. As the population rises, more people need places to live, which pushes up housing prices and rents.

Key Takeaways:

  • Buy properties based on cashflow, not emotional appeal.
  • Investing in growth areas can lead to significant appreciation.
  • Holding properties for the long-term is generally more profitable than flipping.
  • Ensure your real estate investments generate enough income to cover expenses and provide financial freedom.

Invest smartly and focus on building wealth through steady, consistent cashflow rather than quick, risky gains. This approach can lead to financial stability and independence.

Strategic Investing Mindset

Investing can be broken down into two main types: fundamental and technical. Fundamental investing focuses on understanding cash flow. If an investment returns money regularly, it affects the return on investment, or ROI. Imagine playing Monopoly: you buy a house for $100 and it gives you back $10 every turn. That’s a straightforward example of a 10% return, and it’s the basis of fundamental investing.

On the other side, technical investing is more about emotions and market movements. It fluctuates with trends, much like how the value of properties in Monopoly can go up or down. Some people are driven by the excitement of buying foreclosed properties, thinking they’re getting a bargain. They often don’t realize that these emotional decisions can lead to financial losses.

There’s also a crucial difference in mindset between different types of people. Wealthy individuals often start small and grow their assets over time. They invest in multiple properties that generate consistent cash flow instead of spending everything on a big, expensive house right away. For instance, one speaker noted how his first investment brought in only $25 a month, but over time, his investments grew to generate $120,000 each month in passive income.

Conversely, many people fall into the trap of buying luxury items like expensive houses and cars before they have the financial foundation to support these purchases. They might look wealthy, but they often don’t have the necessary cash flow to sustain their lifestyle. It’s a pattern of spending on emotions rather than sound financial strategy.

Another point raised is the importance of location in real estate investment. For example, cities like Calgary saw a massive appreciation in property values due to the booming oil industry. In contrast, areas without such economic drivers didn’t see the same growth. Investors need to recognize these patterns and shifts in demographics and industry to make smarter decisions.

The bottom line is, investing with a strategic mindset means focusing on cash flow and making informed, unemotional decisions. This approach builds a strong financial base and paves the way for long-term financial freedom.

Poor vs. Rich Investment Philosophies

Investing can seem complicated, but at its core, it can be broken down into two main strategies: investing for cashflow and investing for capital gains. The main difference between the two philosophies often separates the wealthy from the less wealthy.

Wealthy people focus on investments that bring in regular income or cashflow. This kind of investment includes properties or businesses that provide a steady stream of money. For example, buying a house and renting it out can bring in monthly rental income. Even if the return at first is small, like $25 a month, it’s a start that builds over time.

On the other hand, people who are less well-off tend to invest in things they hope will increase in value, known as capital gains. They buy things based on emotion and anticipation of future price increases. This includes buying large homes or flipping houses, banking on the property prices going up. Too often, these investments are risky and can lead to significant losses if the market drops.

Here’s a simple way to see the difference:

Investment TypeWealthy Approach (Cashflow)Less Wealthy Approach (Capital Gains)
Real EstateRent out properties for monthly incomeBuy and sell houses for profit
StocksDividend-paying stocksGrowth stocks aiming for price increase
BusinessesOwn businesses generating steady incomeInvest in trendy startups hoping they’ll soar in value

The smart move is to build a strong foundation of reliable income before making big purchases. After securing a steady cashflow, one can expand and buy bigger assets without the financial strain. This approach not only ensures financial stability but also provides the freedom to focus on things that truly matter.

By understanding these investment philosophies, you can start making better decisions that secure your financial future.

Importance of Demographics in Real Estate

Demographics play a huge role in real estate investing. One key factor is population growth. Areas with increasing populations see higher demand for housing, driving up property values. For example, Phoenix and Arizona have high growth rates due to more retirees moving in, which boosts real estate investments.

Job markets are another critical element. Cities with booming industries attract workers, pushing the need for housing up. Taking Calgary as an example, the city saw a 50% rise in property values primarily because of jobs linked to oil.

Aging populations also affect real estate. As Baby Boomers retire, they often relocate to desirable areas, further raising demand. This trend is evident in many states like Florida and Arizona, where new residents drive housing needs.

In summary, understanding where people are moving and why can give investors a real edge. Real estate in areas with job growth and rising populations tends to offer better returns. It’s crucial to keep these demographic shifts in mind when deciding where to invest.

The Decline of Flipping Properties

Flipping properties might seem like a smart way to make a quick profit. Some people think they can buy a house, fix it up, and sell it fast for a higher price. This can sometimes work if the market is rising. Yet, many have found out the hard way that this isn’t always true.

Many who began flipping in Phoenix in ’03, for example, faced significant losses. Instead of gaining, they lost 70-80% in value. If they had kept their properties, they would have benefited from rising rents and home values. When the market fell, those profits vanished. They would have fared better by holding onto the properties for rental income.

The demand for rental homes has increased, especially in growing places like Arizona. As Baby Boomers move and populations grow, rents and property values climb. Flipping doesn’t take advantage of this long-term growth.

Differences in Wealth Building

Poor people often want to look rich. They buy big houses and new cars without the income to support them. Rich people aim for actual wealth. They might live in smaller homes, invest their money wisely, and grow their real estate portfolios before buying a luxury home.

Poor PeopleRich People
Buy big house firstBuy small house first
Focus on appearancesFocus on real wealth
Lack cashflowCreate steady income

The Financial Reality

Investing in cashflow properties gives a steady income. This income can fund further investments and lead to financial freedom. For example, one investor started with just $25 in monthly cashflow and now has about $120,000 every month. This steady income creates real security and freedom, unlike the risky gains from flipping.

Investing in properties for cashflow rather than quick resale helps build real, lasting wealth. This strategy supports long-term financial stability and growth. Avoid the short-term lure of flipping and aim for investment that brings consistent returns.

Key Takeaways:

  • Flipping properties is risky and often leads to losses.
  • Rental income properties offer long-term financial benefits.
  • True wealth focuses on steady income and smart investments, not just appearances.

Making smart investments can pave the way to financial freedom and real wealth, unlike the risky approach of flipping properties.

Cashflow Game Strategy

Investing often comes down to two key elements: cashflow and capital gains. Cashflow is essential yet challenging to secure. It’s tough to find investments that provide a steady income, but those that do can significantly impact your return on investment (ROI). For instance, if you invest $10 and earn back $1, that’s a 10% ROI. Simple, right?

Consider the game of Monopoly, a classic example of cashflow principles. Owning houses and collecting rents demonstrate the basic idea of cashflow investment. This isn’t complicated but requires a shift in thinking from buying on emotion to focusing on steady income streams.

Key Points:

  • Aim to build a foundation of cashflow before seeking capital gains.
  • Avoid the trap of purchasing big-ticket items on impulse without securing underlying cashflow.

Take note of a common pitfall: many people blame market conditions when they lose money. They fail to take responsibility and understand the importance of cashflow. Instead of buying homes based on emotions or trends, smart investors focus on properties that generate income.

Example:
Someone may invest in a large home driven by the desire to own their dream house. Contrast this with someone who starts small, securing a property for $117,000 with low monthly payments. Over time, as cashflow builds, they can afford to upgrade. This approach distinguishes successful investors from those who struggle financially.

Investing Strategy:

  1. Start Small: Begin with affordable properties that generate consistent rental income.
  2. Reinvest Earnings: Use initial cashflow to invest in additional properties, gradually increasing your assets.
  3. Avoid Emotional Buys: Prioritize cashflow over flashy, high-value purchases.

Location plays a crucial role too. For example, areas like Calgary saw a 50% appreciation due to oil industry growth. Investing wisely in such regions can lead to significant gains.

Tips:

  • Focus on areas with job growth and rising demand.
  • Avoid markets with declining industries.

Responding to market trends sensibly often means holding onto properties rather than flipping them. This approach can prevent losses and benefit from long-term value appreciation and rental income.

Remember, the goal is to build a reliable stream of income that eventually supports more significant investments and luxurious purchases. Start with fundamental principles: cashflow first, then capital gains. This strategy not only secures financial stability but also leads to eventual financial freedom.

Building Wealth Through Cashflow

Investing Basics: Cashflow

Cashflow is one of the most fundamental concepts in investing. In simple terms, cashflow is about earning more money than what you spend. Think of it like playing Monopoly: buy houses, collect rent, and watch your wealth grow. It’s not something you need a college degree to understand.

Cashflow vs. Capital Gains

Investors often get caught up in the idea of capital gains, buying assets with the hope they’ll increase in value. But cashflow investing is different. It’s about generating a steady income, month after month. This style of investing is more stable and less dependent on market moods, unlike capital gains which are highly influenced by market emotions.

The Importance of Cashflow

Proper cashflow management is essential. Many people make the mistake of buying big houses or luxury cars without having the cashflow to support those expenses. They prioritize appearances over financial stability. It’s crucial to first establish a solid cashflow before splurging on life’s luxuries.

Real-world Examples

For example, an investor might start with a small property generating a modest monthly income. Over time, as they acquire more properties, their total cashflow grows. This steady stream of income can eventually surpass typical yearly earnings without the need to sell assets during market highs or lows.

Cashflow in Different Markets

Different markets offer varying opportunities for cashflow. Places with job growth, like areas benefiting from an oil boom, can be prime locations for real estate investments. On the other hand, regions with declining industries may pose higher risks.

Strategies for Success

Flipping properties might seem attractive, but it’s risky. Those who held onto properties saw significant appreciation in value while those who flipped lost out. Focusing on long-term cashflow can lead to greater financial security and stability.

Key Takeaways

  • Start Small: Begin with investments that generate a positive cashflow, even if it’s modest.
  • Reinvest Wisely: Use your earnings to build more income-generating assets.
  • Avoid Emotional Decisions: Stick to cashflow fundamentals rather than getting swayed by market hype.
  • Look for Growth Areas: Invest in regions with strong economic prospects to maximize your returns.

Monthly Cashflow Example

Initial InvestmentMonthly IncomeAnnual ROI
$10,000$1,00010%
$100,000$10,00010%

These fundamentals emphasize why cashflow is key to building lasting wealth. Consistent income streams not only cover day-to-day expenses but also pave the way to financial freedom.