Welcome to the fifth and last part of this series on the 3 types of income one can get through real estate investing. Before you begin reading this article, I recommend you review the first four parts:

How to get portfolio income through real estate investing

Earned income through real estate investing

Passive income through real estate investing – the path to financial freedom(Part 1)

How passive income through real estate investing can lead to financial freedom(Part 2)

In this series finale, let me share some final words and how one can use all three types of income to achieve financial freedom. Here goes…

Recap and some afterthoughts…

Portfolio Income

In a nutshell, portfolio income in real estate is basically income on paper in the form of equity. You still need to either sell or refinance a property to make use of your equity. Any property bought below market value should have a big potential for a gain in equity, if it really was bought below market value.

Portfolio income may boost one’s net worth and may give one bragging rights, but as Rich Dad would put it, someone’s net worth is often “worth less” than they think. In other words, if one’s equity cannot be turned into cash, or if the property cannot generate any positive cashflow, then those properties are “worth less” as they really are not  assets that put money in your pocket but are rather liabilities that take money away from your pocket.

Speaking of paper assets, one may soon be able to invest in a Real Estate Investment Trust or REIT here in the Philippines, which I believe is a form of paper asset. More information about REIT in the Philippines can be found here: Real Estate Investment Trusts (REIT) – The next big thing in real estate

Earned income

Earned income that one can gain through capital gains, and commissions(now referred to as professional fees because of the RESA LAW) is a relatively quicker way of earning from real estate investing, but should not be looked at as a means to get rich quick.

I believe that the earned income one can get through capital gains from flipping properties should be used to acquire passive income generating assets later on.

Although it may appear that earned income through flipping properties received a bashing from me when I compared it to the rat race, make no mistake, I still believe that we still need to flip properties for capital gains as it is a great way to build capital. This can then be used later on to buy bigger deals that can produce bigger positive cashflow, much like lesson #2 in the Top 7 lessons I learned from playing Rich Dad’s Cashflow 101 game.

Passive income

Passive income, considered by many as the holy grail of real estate investing, can really help one become financially free, but there are a lot of things one should remember when investing for passive income. Let me summarize them below.

1. Proper pre-screening of tenants is needed to avoid “tenants from hell”. Failure to do this can spell disaster.
2. Rental properties require competent property management and maintenance.
3. It is the hardest real estate investing technique to do because finding properties that can generate positive cashflow is more difficult than finding properties that can be flipped for a profit, and this applies whether you buy foreclosed properties from banks, or those that are for sale by owners or FSBO’s.
4. It may sound simple, but is definitely not easy.
5. Although it may not be easy, it is easier than most people think. It is definitely easier than spending most of your life stuck in the rat race as an employee.
6. Negatively geared rental properties can become positively geared eventually through rental escalation(Thanks Gio for reminding me about this through your comment), provided the property is in a good location. Of course, it would be ideal to have a rental property produce positive cashflow from the very start.

Which investing strategy should you use?

Do you invest for equity and build you net worth, or for capital gains through flipping (wholesaling and retailing), or for passive income by acquiring rental properties? If you ask me, I believe it would be better to combine all of them! let me try to explain as follows:

1. “Make money when you buy, not when you sell…”

In other words, make sure you buy properties below market value. How much below market value? That would depend on your profit targets but a safe target would be to acquire properties between 40% to 50% below market value. In effect, that discount would translate to a bigger potential for equity gain. This would help ensure that a deal will really be profitable, provided you were able to arrive at a fairly accurate estimate of a property’s market value.

2. Raise capital through earned income/capital gains

As mentioned earlier in this post, one can potentially raise capital faster by flipping properties that are bought at a price below market value for capital gains, or even through the accumulation of “professional fees” by acting as a real estate broker or agent. These can then be used later on to buy bigger deals that can produce bigger positive cashflow.

3. Use the capital to acquire passive income generating assets

The capital that can be raised through flipping properties can then be used to acquire income generating rental properties.

There you have it folks…

I hope you have enjoyed reading this series as much as I enjoyed writing it.  I would like to believe that I have this burning passion for real estate investing and I wish that somehow, I was able to share this passion of mine through this post. Feel free to let me know what you think by leaving a comment below. Thanks!

Let me leave you all with a quote from Herbert Spencer, which I often hear from Ebb, a teammate of mine in the RYP team:

“The great aim of education is not knowledge but action.”

Herbert Spencer-English philosopher (1820 – 1903)

To our success and financial freedom!

Jay Castillo

Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter:http://twitter.com/jay_castillo
Find us in Facebook:Foreclosure Philippines facebook page

Text by Jay Castillo and Cherry Castillo. Copyright © 2010 All rights reserved.

PS. Are you a new visitor? Click here NOW to start learning more about foreclosure investing in the Philippines

PPPS. Don’t be the last to know, subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. Inbox getting full? Subscribe through my RSS Feed instead!

3 types of income in real estate investing and which strategy to use is a post from: Foreclosure Investing Philippines

Incoming search terms:

I first played Rich Dad’s Cashflow 101 game way back in 2007, after I found Think Rich Pinoy Seminar attendees who organized their own cashflow 101 game sessions.

I was hooked ever since. I play cashflow 101 whenever I get a chance to do so as part of “sharpening the saw”.

I believe that the cashflow 101 game effectively simulates one’s  journey out of the rat race and I would like to share here what I have learned from playing what I consider to be a “life changing game” and its practical applications in real life.

Here goes my Top 7 lessons learned from playing Rich Dad’s cashflow 101 game…

A photo of the cashflow 101 board game courtesy of Earth del Mundo

1. Simplify and get out of the rat race faster

I noticed that whenever I played the cashflow 101 game and was able to choose a “simple” profession like a truck driver for example, I was able to get out of the rat race faster. This happened during the Think Rich Pinoy Seminar I attended last August 2007. As a truck driver, although my salary was low, my monthly expenses were also very low.

Because I had  low monthly expenses, I already had a positive cashflow and all I needed to do was just get those passive income generating deals. After each payday, I had more money to invest, and with just a few passive income generating deals, I had enough passive income that exceeded my monthly expenses, and I was able to get out of the rat race faster.

In real life, I am applying the same strategy by reducing my monthly expenses by leading a simple life. This was also described by Bo Sanchez in his book “Simplify and Live the Good Life” and T. Harv Eker in his book “Secrets of the Millionaire Mind“. My family and I lead simple lives, which explains my very low target monthly passive income which is why I know I am going to get out of the rat race in real life very soon!

2. Start with small deals first, and the big deals will follow

In the beginning of the game, I always chose small deals even if they produced little cashflow. Later on, when the market presents good opportunities, I was able to sell or “flip” these small deals and then I used the profit to buy the bigger deals that produced greater cashflow, allowing me to get out of the rat race.

My four “green houses” which I’ll exchange for a “red hotel” during a recent game I played with Earth. I was not able to get out of the rat race during this game but we only played for an hour due to time constraints.

In real life, I am also following the same path. I focus on single family homes or properties which may produce little cashflow at  the very least, but can actually generate significant profits if “flipped” or sold through “rent-to-own”. I can then use the profit later when they are enough to get bigger deals that can produce bigger positive cashflow.

3. Over-leverage often leads to bankruptcy

During the game, we often encounter great deals that produce a lot of positive cashflow but require a big downpayment and it is tempting to borrow money from the bank just to be able to buy those great deals. However, there is such a thing as becoming over-leveraged which can produce negative cashflow situations because of the high monthly payments for those loans.

Even if one’s passive income is enough to cover the monthly payments for those loans, imagine if something happened and the monthly income of one’s investment properties were affected, suddenly the monthly payments for the loans cause a negative cashflow and can lead to bankruptcy. The same can also happen when one is downsized. This is the reason why one should avoid deals that lead to too much exposure or over-leverage.

Applying this is real life is a no brainer. I would not dare buy those multi-unit apartments unless they were in the same price range as the single family homes I focus on. As mentioned in lesson number 2 above, I can go for those bigger deals later when profits from my small deals are enough.

4. It is better to wait for a good opportunity than settle for those not so good deals

In the game, good opportunities come in the form of deals that have big ROI potential, and can be bought with little or no downpayment, while producing positive cashflow. If any of these elements are missing, I consider a deal as “not so good” and I pass them up and just wait for the good deals.

In real life, I do the same and patiently wait for good opportunities. If a not so good deal comes my way, I can either look for ways to make it into a good deal, or I just pass it up and wait for another more worthwhile deal to pursue.

5. Learn how to spot a good deal and grab it

One of the biggest challenges one faces in the game is how to spot those good deals so that you can grab them. Sometimes a good deal is right under your nose and it slips away because you didn’t realize soon enough that it was a good deal.

I believe spotting good deals is a skill and you can only learn this skill by continuously analyzing deals. Once you get the hang of it, you will start seeing those good deals more often. Normally those deals would have slipped away without you knowing it. If you see good deals often, it’s just logical that you will eventually grab one of those deals right?!

6. Learn how to protect your investments

I distinctly remember games where apartment buildings getting toppled by mud and all the cashflow generated by these properties are gone, unless I am covered by insurance.

Does Ondoy and Pepeng ring a bell? Who would have thought that a game like cashflow 101 actually teaches us to protect our investments from such disasters and calamities. Better get your investments insured with “Acts of God nature” coverage pronto!

7. Net worth is worth less, cashflow is king

Once you play cashflow 101, you will notice its emphasis on the importance of cashflow over one’s net worth. You will see that it really is more important to have positive cashflow from passive income. What is the use of having a big net worth if you don’t have any positive cashflow?

In real life, we should apply this by focusing on building our positive cashflow with income generating assets. Even if we have to use leverage to buy these assets, it really is okay. We call this good debt. Don’t be afraid to have good debts that buy real assets that produce the cashflow we need to get out of the rat race for real!

Get out of the rat race in the game, and in real life!

So you got out of the rat race when you played cashflow 101. So what?! That’s useless if you don’t take action and apply the lessons you have learned from the game in real life. But playing a game is one thing, doing it in real life is an entirely different thing… or is it?

I can truly say that Robert Kiyosaki‘s Cashflow 101 game is a “life changing” game because my life has really changed ever since I decided to apply in real life the lessons I have learned from it. Take note that I only listed the top 7 lessons I have learned and I can assure all of you that there are more lessons one can learn from this game.

People may find it hard to believe that one can learn so much from a game and can have such a huge impact in life. I guess you just have to play the game and experience it for yourselves.

How about you, have you played Rich Dad‘s cashflow 101 game? What did you learn? Are you applying them in real life?

—

My vision – financial freedom for all!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Twitter: http://twitter.com/jay_castillo
Facebook: Foreclosure Philippines fan page

Text by Jay Castillo. Copyright © 2009 All rights reserved.

PS. If you are a new visitor, please start here to learn more about foreclosure investing in the Philippines.

Top 7 lessons I learned from playing Rich Dad's Cashflow 101 game is a post from: Foreclosure Investing Philippines

Incoming search terms: