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18: OUCH! I Got Slammed!

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I got a stinging response from one of our readers last week. It was in response to the weekly wealth widget where I questioned why people thought that investing in the equity markets was “conservative” and investing in real estate was “risky”.

She told me that all asset classes move in tandem and “don’t for one hot second think that real estate is superior. That would be wishful thinking.”

I’m not sure what a hot second is. However, I do know that cash flow investors faired extremely well in 2008. My dad increased his monthly income by over $40K per month by purchasing cash flow properties from failed flippers and speculators.

Meanwhile, many doctors I knew got their proverbial asses handed to them in the equity markets.

Now, don’t get me wrong–the reader is correct in that asset classes do typically move in tandem (EXCEPT LIFE SETTLEMENTS). The housing crisis of 2008 ultimately set off the stock market crash. Like stocks, values of real estate in many cases did plummet. If you were flipping houses in South Florida, you probably did not have a good year.

But let’s go back, once more, to the distinction between a real estate investor and a flipper or speculator. A real estate investor, as I define it, is interested in cash flow. What happened to many real estate investors with my philosophy in 2008?

Well, the appraised value of a B or C class apartment building might have gone down because some people sold off buildings quickly to cover margin calls in the stock market–the reason for markets moving in tandem in the first place.

BUT…investors like me did not care that appraised value of our real estate went down because we weren’t selling anyway! The working class tenants didn’t seem to care if the stock market took a dive–they still had to live somewhere and had to pay rent to do that. In fact, affordable housing actually became a hotter commodity during the recession.

In the meantime, because appraised values were coming down, it became a buying opportunity for cash flow investors and many, including my friend Ken McElroy, made millions of dollars by taking advantage of the blood in the street.

The moral of the story is that you can’t look at real assets like you do stocks, bonds, and mutual funds. With equities, all you care about is their value. Apart from dividend stocks that pay ridiculously low distributions, cash flow isn’t really part of the equation and so it is a completely different investing paradigm.

For those of you who are not business owners, this is a concept YOU MUST understand.

Business owners like me instinctively understand that cash flow is different from the appraised value of a business. Unless we are in the market to sell our business, we probably have no idea what its value is. All we care about is that we are making money.

That’s how I recommend you view your investments. Stop thinking about buying assets in hopes that they become worth more over time. Hopefully they do.

In the meantime, you are better served by thinking about how you can buy streams of income. Once you get enough streams of income, you will have a river of cash flow that takes the guesswork out of investing.

Of course, at the end of the day, the choice is yours. What I do know is that focussing on cashflow has worked for me.

But what do I know–I’m just a retired surgeon at this point 🙂