Larry or anyone else,

I have a question for you regarding the relationship between investing in paper assets and investing for cashflow.

Several of the articles that you have posted as well as several of the posts that I have read in this forum strongly suggest that we are headed for a massive implosion in Real Estate prices. I listened to Jim Puplava's interview with John Rubino and was amazed at how bearish these two gentleman are regarding the overall national real estate market.

I have also studied many other articles and spoken with experts who strongly disagree with this sentiment toward a real estate bubble. Obviously, there is a whole spectrum of opinions out there on this subject, but in my opinion I would tend to agree that we are headed for tough times in the real estate markets, if not nationally, at least in several parts of the country.

Anyway, I am a big fan of Robert Kiyosaki's philosophy of investing for cashflow. Because of this, I tend to lean heavily on the Real Estate side in my bias toward investing. Real Estate offers an excellent vehicle for producing cashflow and seems to me to be a more obvious way to produce cashflow than investing in paper assests, i.e. financial derivitives. Cashflow will feed my family regardless of my health, employment status, or any other unforseen circumstances. Cashflow will pay my bills over and over again.

This leads me to my question. If right now is a bad time to invest in real estate for cashflow, what are my other options? How can I generate monthly cashflow if I am following the COT report and buying gold as well as other commodities? Should I focus on trying to get a dividend from the stocks that I buy?

I am going to follow the COT report regardless of whether or not there is a real estate bubble, but in my stage of the game I am mainly looking to buy assets that produce passive income.

Thanks in advance to anyone who takes the time to respond! This discussion forum is fantastic!

--Ben Crozier

Ben,

When do you need income from your investments? Do you need it now? Five years from now? Ten years from now? The answer to that question is very important in answering your question.

Larry

Also, how much risk can you take?

Larry

Larry,

Thanks for your prompt reply!

My thinking goes right along with the lessons that I learned from playing the game "Cashflow", which I purchased from you (thanks again!). I want to purchase assets that will produce cashflow right now... because I want to get out of the rat race. I think that I am interested in following your COT strategies for more of a long-term approach where I invest money that I make from my business and other income producing assests.

I am fine with taking on plenty of risk as long as I fully understand the risks that I am taking... I am a very aggressive learner and I'm well aware of the fact that the more I understand something, the less risky it will be.

I hope that I've given you enough information to work with in trying to help me.

Thanks again,

--Ben

Ben,

I'm going to make a general statement right now for you to think about and then I'll try to be more specific when I have more time.

Income is very difficult to come by in this low interest rate environment. The proper way to view current income is to start with the risk free rate and understand that any rate of return you want over and above the risk free rate is subject to additional risk. And the higher rate you want the more risk you're going to have to take. In other words, there is no free lunch. The risk free rate is generally considered to be 3 month U.S. Treasury bills which right now will give you a big 1% (or less).

Real estate is a great way to go if you don't believe the real estate bears (I do) and you don't mind your investments to be illiquid.

As a general principle I personally always invest for growth. It's something I learned from the great Sir John Templeton years ago. He said to always invest for growth and, if you need cash flow, just liquidate your investments a little at a time while the rest is still growing.

I'm going to think about it some more since you asked, but at the moment I can't think of any income investment that I like right now. I don't like bonds at these rates. I wouldn't touch real estate right now with a ten foot pole. And I think we're in a bear market so I don't want to be in high yielding stocks, with the possible exception of energy stocks. That doesn't leave much. But I'll give it some more thought.

Larry

Larry,

I appreciate your insight on this matter very much. I will be anxious to hear any further wisdom that you might share with me.

By the way, how do you feel about investing in Tax Liens? That could be an indirect way of "shorting" the implosion of the real estate bubble. If you own the tax lien on a house, not only is it insured by the state government in most states at rate of around 12-16 percent, but if the taxes go unpaid you can foreclose and end up with a house for pennies on the dollar. Just a thought.

I would, however, prefer to learn about any "paper asset" strategies that you might know about for producing income... yes, I heard you loud and clear on your philosophy on investing for growth and then pulling cash out as you might need to. I think that would be a brilliant way to go, but wouldn't that create "low-income" periods when the markets don't move much? Also, it seems that I would need to have a pretty fat nest-egg built up before I could live off of some of those gains.

In real estate, I can recieve tremendous leverage with the bank's money, and if I buy smart, I can immediately have positive cash-flow.... that is, until the interest rates go up! That's why, like you, I am warry of the idea of buying right now and I am looking for alternatives.

What do you think?

--Ben

Ben,
I also really like the real estate angle, and also like you, came across this great site by buying Cashflow from Larry's business.
I've been itching to get into real estate, but after seeing the huge bubble forming, decided to refocus on other investment vehicles like stocks. Take a breather, make some money in the stock market and when real estate has cooled off, go in charging scooping up all the deals.

Just my two cents,
Jason

Ben,

First of all, I want anyone reading this to understand that I’m not objective on this subject at all. I just don’t like illiquid investments. My idea of investing is to sit in my chair with my feet propped up on the desk, a beverage in my left hand and my mouse in the other, and move money around with a click of the mouse. The first thing I want to know before I put my money in anything is where the exit door is in case things go wrong. And with illiquid investments I don’t know where the exit door is.

Essential to my investment philosophy is to have a big picture paradigm. The only way I have ever seen big money made in investing is by buying things that are undervalued and selling things that are overvalued. In comparing asset prices today to where they were 20 or 25 years ago, what is overvalued and what is undervalued? I would have to say on the overvalued list I would include U.S. stocks (with the exception of energy and maybe certain commodity oriented stocks), U.S. bonds, and U.S. real estate. I don’t understand how in the next ten years or so anyone is going to be able to make significant money in those assets except by shorting them.

On the undervalued list I would include precious metals, commodities, and emerging markets. So my beginning paradigm is that for the foreseeable future I generally want to be a buyer of metals, commodities, and emerging markets and a seller of U.S. stocks, bonds, and real estate.

So given my big picture view, where do would I find income? First of all, I agree with Jason. I would go for growth and I wouldn’t take money out of my investments unless I needed to. But if I needed income right now, I would stay with my big picture view. For example, in early 2003 I wrote about the Templeton Emerging Market Income fund (TEI). They invest in the high yielding bonds of emerging market countries. That fits well with my big picture view. It was trading at around 11 and yielding about 10% when I wrote about it. Today it is at 13.53 and yielding about 7.5%. So I don’t like it as much as I did in early 2003, but I still like it. That’s just an example.

Your traditional real estate idea about using the banks money and taking advantage of leverage to achieve significant cash flow is a great idea under the right circumstances. But where is the exit door in case things go wrong? Let me share with you an anecdote. We moved to Houston in 1982. I’ll never forget that the real estate agent told me that the way you make money in Houston was to buy the most expensive house you can qualify for, put the least amount of money down, and immediately put it up for sale and move about every six months or so. I had already been in the investment business for several years at the time so I knew better. But I also know that there were many who took that kind of advice literally. By 1987 those houses he was showing me were selling for about 20% to 30% less.

Real estate bulls may end up being right and I may end up being wrong. No one can predict the future. But the only thing that bothers me about so many real estate bulls is that they don’t even seem to allow for the possibility that they could lose. I’ll assure you they can. Real estate prices can go down significantly and interest rates can go up significantly. In can happen in Houston and it can happen in Peoria or wherever. So I say again, if you think leveraged real estate is the way to go then, by all means, go for it. But just make sure you know where the exit door is.

You asked about Tax Lien Certificates. I looked at those several years ago when Kiyosaki mentioned them in his first book. 16% is a very good return. But I found that I have the same problem with them as I do with other illiquid investments. I can’t get my money out of them. Also, if the property owner goes bankrupt (and I think we’re going to see a lot of bankruptcies in coming years) I don’t lose my money. But it can take a long time to get my money back until the bankruptcy is settled or until I can go through foreclosure procedures. Also, it seems too much like actual work, something I try to avoid at all costs.

Anyway, the above its just one person’s opinion. Compare it with the opinion of those who have an opposite view and make your own decisions.

Larry

ben,

in robert kyosaki's book "prophecy" he mentions investing in real estate through "real estate syndacates". when the time is right that's something i plan to look into.

do a google search, read up on them and see if it's for you.

-ja

Thank you for all of the wonderful replies!

Larry, after reading your very informative comments, and the great comments from joeaaron and Jason, I was wondering if I could ask an additional question?

First of all, I am with Larry 100% in thinking that buying precious metals, commodites, and bonds in developing nations is a great way to go. Indeed, money will always flow from over-valued assets into undervalued assets. I will also look heavily into energy stocks.

It would seem to me that if the real estate bubble bursts and there is suddenly a flood of people who can no longer afford their homes or qualify for a loan due to foreclosures, etc., that would likely mean that there would be an increase in the number of renters out there... but I most definitely wouldn't want to be owning any rental houses if there is a sudden interest rate increase that creates a negative cashflow situation.

Well, for this reason, perhaps buying apartment complexes could be the way to go... that is, if there is enough of a cashflow cushion to aborb any increases in interest rate payments. It seems to me that apartment complexes wouldn't fall into the same pitfalls that single-family homes would. Maybe I'm wrong...

What do you think?

--Ben

Go to www.creonline.com

They have plenty of forums with people experienced in the questions you have.

Good luck,
Steve

In this weeks economist they have a blurb about Warren Buffet and his annual newsletter to shareholders. One of the points made was that he rather have his money sitting and earning pathetic returns rather than doing something stupid just for the sake on investing.

Real Estate is very tricky right now, because after a brief leveling off, real estate assets are going up again in the double digits. Clearly this is unsustainable, even at these interest rates. Eventually we will hit a wall in the form of higher rates or when assets become so outrageously priced. The longer they rise, the more they will fall.

But reading many of Robert Kiowsaki's books - there are always "deals" in real estate if you poke your nose around enough. You can analyze any property to determine whether or not it would be cashflow positive. (including all the repairs and ongoing costs). But the real estate mania may create too much competition and therefore drive up prices even more. And of course, it varies from region to region. I'm all for using the banks money if you can find a deal worth doing.

The other option is starting a business. I quit my job after accumulating sufficient money, and my wife will follow suit soon. When we get going our cash flow will be drastically reduced during the startup phase, but we also enable a tool that Robert K. preaches - and that is to reduce your tax burden (which you could say will increase your cashflow down the road). I do this already with an existing seperate part time business - my internet, telephone, mobile phone, and other expenses are paid tax free. Over the years it will add up a lot.

FYI- I do own a few stocks with good dividends, but I put in stop losses in case they go into the red. But I'll enjoy the dividends (10% + ) as long as I can.

Hope this answers some of your concerns..