Want out of the Rat Race? Don’t Start out Buying for Cash Flow

Start with your Goals

Many new investors tell me that they want to get out of the rat race. Build up enough passive income to quit their job, or flat out retire. I’m right there with them! One thing I always suggest with new investors that I meet with is that they outline clear goals for their investing. There are a variety of reasons why I think this is important, but today I would like to focus on the importance of picking investments today that will benefit you most down the line.

Cash Flow may not be King

For all of the Rich Dad, Poor Dad readers you will know that a common strategy pitched for each one of these solutions is to buy rental units that bring in cash flow. For every unit that cash flows, you get closer to your goal of getting out of the "rat race" and living off of passive income. All you have to do is keep adding units. While I believe that this is a viable investing strategy, and one that I held when I was getting started, I no longer think that this is the most efficient way to invest for future cash flow.

Take Cues from Cash Flow 101!

I don't mean to throw Robert Kiyosaki under the bus here, in fact if we were to corner him right now I'm pretty sure he would agree with me. Along with reading his book, Rich Dad, Poor Dad, I have also played his game, cash flow 101. I will describe it for anyone that has not played it. You start out as a rat with a career that is handed to you - like “Doctor, Lawyer, Janitor, Police Officer, etc.” In this game, you run around a tiny wheel, called the “rat race” and are given a pay check, required to pay bills and “doodads” and also given opportunities to buy “big deals” and “small deals.” When you buy a new deal, you can add any passive income that deal generates to your balance sheet. Once the passive income on your balance sheet is greater than your expenses, you are out of the rat race, and you don’t have to rely on your job any more!

Spoiler Alert! Here’s How to Win

Here’s a tip for anyone that plays the game. If you keep picking up small deals that bring in a little bit of cash flow ($100-200 per month) and hold them, hoping they’ll add up over time, you will be hurting by the time everyone else is out of the rat race. The way to win the game is to pick up small deals that appreciate quickly (e.g. buy a 3 bed, 2 bath single family home for $90,000), and flip them for a massive profit (sell for $150,000 just a few turns later.) You can also make these big capital gains deals in stocks, precious coins, and bootstrapped business startups. Once you have amassed $50,000 or more from capital gains off of these "small deals," you can start looking at the “big deals.” That’s where you find apartment complexes that bring in $1,000+ per month of passive income after all expenses. Take a look at your own balance sheet. Do you have a balance sheet? You ought to make one! How many deals that cash flow $100-200 are you going to need in order to quit your job and live exclusively on passive income? Contrast that with investing for equity growth at the beginning, and repositioning your portfolio every 10 years to fit your goals at the time.

Conclusion

I think that it is important to begin with the end in mind. Make sure that the moves you are making will get you to where you want to be! Think 5, 10, 50 years down the road, and make sure that the deals you are looking for today fit with that future you envision. Take this example from Cash Flow 101 and apply it to your own life, with your own finances and market. I’m interested to hear your thoughts! Please share them in the comment section below!