Streams vs Piles
I think that maybe one of the things that keep people in jobs is the recurring income. Obvious right? Everyone has recurring bills so they meed recurring income to handle those bills. But even with the recurring nature of bills a lot of people are looking for a big payday. They think that once I have a large amount of cash, I will be set. Though what happens to that large amount of cash? It shrinks as the bills are paid or the toys are bought. I have heard that even if someone amasses 1 million dollars by the time they retire, that person has an 80% chance of out living that money. I don’t know the source on that, so take it as just another meaningless statistic if you wish, but given human nature to spend more to match their means it makes complete sense to me. So in order to not deplete the pile of money one must go make another pile of money. And then go make another pile.
Counter to piles of money are streams of money. Now I think that in the beginning that streams of money are not nearly as sexy as piles of money. Lets look at a scenario involving real estate. Buying a house and fixing it up and then selling it for a profit is called flipping. With flipping it is not unreasonable to easily make tens of thousands, possibly even hundreds of thousands of dollars in one transaction. 90 days to fix up a house you just bought and then have it on the market with a realtor for a couple weeks to make $75,000 is extremely sexy. In addition to sexy, one should be able to live fairly well on $75,000. That is higher than the median income of the US I believe. So with that methodology one could flip one house a year, work 4 months of the year, and otherwise be comfortable. There is certainly a lot of appeal to that.
Now with streams of money, called cashflow in most business including real estate, and more specifically to real estate rental income, that money comes in month after month with little to no effort to make it appear. So instead of working 4 months of the year to get one paycheck, you might have to work a couple of weeks to get one paycheck a month. For ever, effectively. However opposed to the $75,000 in one fell swoop, that rental you just picked up is going to be making you $300-$500 a month. That is a lot of months of rent checks to equal one flipping check. Yet even though the amount is much lower, it is recurring and steady. Just like your bills. So pretty easy to slot the incoming cash to match the outgoing cash.
Note that I said piles of cash are sexier at the beginning than streams. When does that change? Well it is going to change and be sexier with streams when compounded. It takes 3-4 months to do a flip, and if you hire out and are skilled in managing you can even have several going at once. It takes several weeks to buy a rental, but that time is mainly spent waiting. Waiting for the rehab to finish, waiting for the escrow agents to close, waiting to find a property that meets your criteria. So it is pretty easy to scale that and be waiting for 3 different properties to close at the same time. You have the same issue on the rehab in both cases, but otherwise waiting on multiple rentals is a pretty simple affair. So arrange to buy one rental a month. Or maybe two. Even go for 3 if your financials allow it.
So lets look at the situation of working 4 months a year and buying one rental a month that cash flows $300. The first month you make $300. Not terribly sexy, but that covers your car note. A little bit of mental easement there I would say. The second month you make $600. That looks a bit better. The third month you have $900, and the fourth month you have $1200 coming in. Now $1200 every month is starting to look pretty attractive. By the end of the year you will have amassed almost $12,000. Still not as amazing as the one $75,000 payout we talked about earlier, but still an attractive sum.
But instead of one house a month for 4 months, what if it was one house a month for 12 months? Or 3 houses a month for 12 months? Then the recurring income numbers are way sexier than the numbers for the piles. Especially given the amount of work needed to match those goals. I can hear some of you muttering that someone would need to have a pretty big bankroll to be able to buy 4 houses a month for a year. I agree, there is a pretty hefty sum of money needed to make those purchases. But it doesn’t need to be your money. Next time I will cover my plans to buy properties on that scale and not have funds on that scale.
Until next time, take action. Feel the fear and do it anyway.