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One clear means to earn passive income is through cash flow investments. Think of cash flow investments like the steady income you get from a successful business. Just as a profitable business makes money consistently, investments that bring in positive cash flow give you a reliable and steady income.
Whether you're running your own business or investing in another person's business, it's important to prioritize cash flow. At regular intervals, be it monthly, quarterly, semi-annually, or annually, you should receive consistent cash returns from your investments.
Depending on your investment capital, you can include any of these cash flow investing options in your portfolio.
Key Takeaways
- Cash flow investing options include dividend investing, stocks and bonds, high-yield savings accounts, money market accounts, private credit investments, short-term notes, and real estate investing.
- In addition to real estate investing, other passive income opportunities include car rentals, ATMs, laundromats, vending machines, and equipment rentals.
- Before investing in any business or company, it is important to assess their financial health based on their cash flow statements, and even more important to work with a financial advisor in all your investing activities.
Disclaimer
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here. More on disclaimers here.
Work with investment experts
While cash flow investing is an effective strategy for investors, there's always the chance that an investment might not generate positive cash flow. For instance, factors like unforeseen vacancies could cause rental income to fall below total expenses.
Hence, it is important to work with an investment advisor to conduct due diligence on each investment option. They will help you gain a comprehensive understanding of potential outcomes and assist you in selecting the right investment opportunities.
Depending on your investment goals and interests, you can schedule a meeting with a fiduciary financial advisor as well as a real estate agent to get expert help.
Best cash flow investing options
These are some of the best cash flow investing options you should consider adding to your portfolio.
1. Dividend investing
Incorporating dividend investing in your financial strategy is a simple way to improve your cash flow. By allocating a significant sum of money to the stock market, you can generate passive income through the purchase and retention of dividend-paying stocks.
To receive dividends from a stock, all you need to do is possess shares in the respective company through a brokerage account or a retirement plan like an IRA. When dividends are disbursed, the corresponding funds will be automatically deposited into your account. The amount of dividends you earn is directly linked to the number of stocks you possess.
2. Dividend stocks and stock funds
Another effective method for initiating dividend income is to invest in a company with a track record of paying dividends. For example, in February 2023, Walmart announced its 50th consecutive annual dividend increase. The company's cash flow and sustained profitability enable it to maintain this dividend paying practice.
As individual stock dividend rates can be relatively modest, it is imperative to diversify your dividend portfolio, for example, through stock funds. This approach is less prone to risk compared to other stock market investments.
The stability of your cash flow depends on the overall performance of the market. When you invest in well-performing companies and retain their shares, you will witness favorable returns and this will be reflected in your financial statements.
3. Stocks and bonds
Investing in bonds can generate significant passive income, with some bonds providing returns exceeding 10%. There are also bond exchange-traded funds (ETFs) that enable you to own a diversified portfolio of bonds issued by a specific state or government.
Most of these investment options, including stocks, ETFs and bonds, are readily available through your preferred brokerage. It's worth noting that the range of offerings may vary among different brokerages. Many brokers now offer the advantage of no minimum investment requirements or commission fees, which allows you to begin investing with just a small amount of capital.
This accessibility means that you can start earning passive income regardless of your current bank balance. Of course, this only applies when your chosen brokerage imposes no minimum investment thresholds and offers commission-free trading.
High-yield savings accounts
High-yield savings accounts are a particular category of savings accounts that feature variable interest rates, which typically exceed the rates offered by traditional savings accounts. However, like conventional savings accounts, high-yield savings accounts provide you with the flexibility to both deposit and withdraw funds as needed.
Money market accounts
Money market accounts too can be considered a type of savings accounts, and these are generally considered safe investments. But their primary use is as short term rather than long-term investments. What sets MMAs apart from several other interest-bearing savings options is their flexibility and liquidity.
A money market account may come with the ability to write checks. But unlike standard checking accounts which usually do not yield interest on the account balance, when you deposit money into a money market account, it accrues interest. Money market accounts may also offer variable and higher interest rates compared to traditional savings accounts.
Unlike certificates of deposit (CDs), which require you to lock your money in for a predetermined period, money market accounts often provide greater flexibility in terms of accessing your funds. With an MMA, you may have access to a debit card and ATMs, allowing you to make both deposits and withdrawals as needed.
Private credit investments
As a non-bank lender, private credit involves providing loans to companies, usually small and medium-sized enterprises that aren't considered very safe investments. Private credit can be a good thing to have in your investment mix because it doesn't move in the same way as the stock market, so it helps spread risk.
Private credit covers various subcategories, such as investment-grade private placements, real estate debt, and venture capital loans. These loans primarily fall into two main categories: corporate loans (which finance companies) and real asset loans (which finance physical assets).
Returns in private credit are generated by charging an interest rate spread above a reference rate. This allows lenders and investors to profit from rising interest rates. Unlike private equity, private credit arrangements have fixed terms, which means that the investment's exit strategy is predetermined.
Investing in short-term notes
Short-term notes, often referred to as promissory notes, are debt instruments with a maturity period of one year or less. These notes are typically issued by borrowers seeking short-term financial support for purposes like managing working capital, buying inventory, or addressing temporary cash flow gaps.
Some investors prefer investing in short-term notes as they offer a more favorable return compared to cash, while still providing the flexibility of quick access to funds when necessary. Short-term notes can be issued by various entities, including governments, corporations, and financial institutions.
Renting single-family homes
Investing in real estate is a solid way to generate passive income, and one avenue for passive real estate investment is investing in single-family houses or condos. Many investors buy these properties, spruce them up, and then rent them out to tenants. Some enjoy being landlords and taking care of everything like contracts, advertising, and maintenance.
If you live in a tourist hotspot, you might even put your house or condo on Airbnb to earn a higher monthly income. But keep in mind, this isn't always a hands-off income stream because you'll need to clean up after guests and handle maintenance tasks, which can cut into your earnings.
Real estate crowdfunding
Crowdfunding is a way to team up with others online and pool your money to buy property together. Real estate crowdfunding can be an interesting way to spread out your investments and add some variety.
It's not usually recommended to put a big chunk of your money into real estate crowdfunding. But if you want to take a bit of a gamble for potentially higher rewards, you might think about putting a small part of your investment money into it.
Real estate syndications
Another common cash flow investment is through a real estate syndication company. Have you ever checked out an apartment complex and wondered who might be its owner? Chances are, it's owned by a real estate syndication, and while the term might sound unfamiliar, the idea behind it is quite straightforward.
Real estate syndications are essentially groups of investors who come together to purchase a property and collectively share in its rental income and property value appreciation. Syndications are often structured as limited liability companies (LLCs), with each investor being a member.
Typically, these groups hold onto the investment for about five years, working on enhancements and increasing its profitability and eventual resale value. Data from 2021 indicate an average 8% preferred return, with investors receiving back 80%-95% of their initial capital investment when the property is sold.
Real Estate Investment Trusts
REITs, which stands for real estate investment trusts, are companies that own or operate real estate that generates income, which may include various types of properties. The majority of REITs are publicly traded on major stock exchanges, and they provide several advantages for investors.
Investing in publicly traded REITs comes with certain benefits, particularly in terms of regular dividend payments. REITs are obligated to distribute 90% of their yearly income to shareholders as dividends. Consequently, they provide some of the most consistent and high dividend yields in the stock market.
For new investors, a straightforward way to enter the real estate market is by purchasing publicly traded REITs through online brokers. Another option is to diversify real estate holdings by investing in mutual funds or Exchange-Traded Funds (ETFs) that track multiple REITs.
Land rentals
Land rentals are another facet of the real estate market that deserves attention. This involves leasing parcels of land to individuals or businesses for commercial purposes, such as agricultural use or storage. Land rentals can be a valuable addition to a real estate investment portfolio, offering a different set of opportunities and challenges compared to traditional building-based commercial properties.
One reason commercial properties are regarded as some of the most attractive real estate investments is due to their potential for generating higher cash flow. Those who choose to invest in commercial properties often discover that they offer greater income opportunities, longer lease durations, and lower vacancy rates compared to other real estate options.
Generally, real estate investing is best done with the help of a real estate agent and investment advisor, and you can schedule a meeting with a certified Realtor to begin.
Other top investment opportunities to consider
Real estate isn't the sole avenue to generate cash flow and earn passive income; many individuals opt to invest in businesses or assets that offer this type of income without heavy involvement. Common examples include car rentals, ATMs, laundromats, vending machines, and equipment rentals.
If you are willing to get a little bit more hands-on in your investing activities, you can consider managing any of these businesses to generate income; some of them require very low operating cash flow while promising a substantial net income, since they usually have high cash inflows.
Equipment rental business
Starting an equipment rental business can be a reliable way to generate regular income. What's great about this kind of business is that you get to decide what equipment you want to rent out.
You can offer tools, party gear, or even heavy machinery like lawnmowers, snow blowers, and pressure washers for rent. The reason this business can be so profitable is that you make one initial purchase of the equipment, and then you can rent it out multiple times.
To keep the equipment in good shape, you'll need to do regular maintenance. However, the income you earn from renting should quickly cover these maintenance costs. So, you can expect to see a steady flow of income coming into your bank account.
Car/truck rentals
Car or truck rental can be a strong option for generating ongoing income through rental fees. Investors can acquire a fleet of vehicles and rent them to individuals or companies, providing a consistent cash flow. This investment is particularly beneficial in regions with high demand for transportation and logistic services.
While it involves continuous vehicle maintenance and management, car rental can be a hands-on yet profitable opportunity for those seeking to diversify their income sources and cater to the transportation needs of both individuals and businesses.
ATMs
When you purchase an ATM and place it in a high-traffic location, you can earn passive income through transaction fees, with minimal effort required for collection.
With non-bank ATMs widely available and the increasing popularity of online-only banking, the ATM industry has grown significantly, amounting to billions in revenue. Despite the decline in cash and coin usage, the ATM business remains relevant, as people continue to rely on debit and credit cards to withdraw cash.
The initial investment for an ATM typically ranges from $3,000 to $10,000, which constitutes the majority of your startup expenses. Selecting the right location where an ATM is in demand is crucial for the success of your venture. Once your first machine is in operation, you can witness your passive income steadily increase.
Laundromats
Establishing a laundromat in a high-traffic area can prove to be a profitable venture that requires relatively minimal hands-on involvement. However, the initial investment can be substantial, as it involves securing a suitable storefront location and purchasing essential equipment like washing machines, dryers, seating, and folding tables. Once the laundromat is operational, it begins generating passive income.
Moreover, operating a laundromat can be a valuable community service, provided you overcome potential challenges. Identifying the ideal location for your laundromat can be a complex task. Thorough research is essential to ensure sufficient foot traffic, minimal competition, and ample space to accommodate multiple machines.
Commencing a laundromat business may require an investment upwards of $100,000, potentially involving the use of credit lines which come with high-interest payments. Typically, once you cover your initial expenses, the ongoing income generated can quickly offset your startup costs, with the added benefit of requiring minimal hands-on management thereafter.
Vending machines
Vending machines can be found in various settings, such as educational centers, medical facilities, and recreational areas. The vending machine industry has expanded to become a $9 billion market, and it's projected to continue growing in the coming years.
The original investment required for purchasing your first set of vending machines is often the most significant expense when starting this business. Once you have your vending machines, you'll need to find suitable locations with substantial foot traffic to ensure the success of your venture.
Another crucial decision to make after selecting a vending machine location is determining what items to sell in them. Popular choices include candies, chips, beverages, and cookies.
Once you've sorted all of this out, you can kick back and enjoy the passive income while occasionally restocking your machines. Additionally, you can include the depreciation of the vending machines in your business's taxes. However, it's important to note that this won't be reflected in your free cash flow metric since it's a non-cash expense.
Cash flow statement
Whether you're managing a business or investing in various enterprises, it's crucial to have a solid understanding of cash flow. A company with a sizable free cash flow and high cash flow can be an attractive option for investment.
Cash flows from investing activities
Cash flow from investing activities (CFI) is a section in the cash flow statement that discloses the amount of cash generated or spent on various investment-related activities within a specific timeframe. These investment activities may include the acquisition of physical assets, investments in securities, and the sale of assets or securities.
To determine cash flow from investing activities, combine the expenditures or income from property and equipment, other enterprises, and marketable securities. These transactions can also be identified by comparing non-current assets and securities on the balance sheet over two different time periods.
Analyzing your free cash flow can offer valuable insights into your business's or investments overall worth and underlying trends.
Free cash flow and high cash flow
Free cash flow (FCF) is the money a company has left after covering its day-to-day operating expenses (like salaries and bills) and investment in things like new equipment or buildings. The more free cash a company has, the more it can use for things like paying dividends to shareholders, reducing debt, or expanding the business.
The 'free' in free cash flow tells us how much money a business has available to spend. It's a reliable way to see how much cash a business actually has. When a business has a healthy, positive free cash flow, it means there's plenty of money left over.
A high cash flow suggests that a business makes a good amount of money compared to what it spends to run. Many businesses start with strong financial statements, and over time, they can create opportunities for passive income.
Revenue vs cash flow
Revenue represents the income a company generates from selling its products and services, while cash flow refers to the net amount of cash moving in and out of a company. Revenue serves as an indicator of how well a company's sales and marketing strategies are performing, whereas cash flow primarily reflects a company's liquidity.
Revenue and profit doesn't always offer an accurate depiction of a business's financial position, but cash flow can provide a more precise assessment. Cash flow isn't easily manipulated to suggest business growth that may not be genuine. This is why business owners and investors often rely on an organization's cash flow to gauge its financial well-being.
How to improve investing cash flow
Here are six common investment options that improve cash flow:
1. Cash and Cash Equivalents: Many UHNW-individuals are quite frugal and keep a portion of their wealth in cash or easily accessible assets.
2. Real Estate: Real estate is a favored investment among affluent investors due to its potential for long-term growth and income.
3. Stocks and Stock Funds: Investors often invest in stocks and stock funds to benefit from the potential for capital appreciation.
4. Private Equity and Hedge Funds: Some investors allocate their resources to private equity and hedge funds to diversify their investments.
5. Commodities: Investing in commodities such as gold, oil, or agricultural products can add to the cash flow of your portfolio.
6. Alternative Investments: Investors may explore various alternative investments to increase their cash flow and diversify their holdings.
Positive cash flow is a crucial financial metric indicating that a company's liquid assets are growing. This allows the company to meet financial obligations, reinvest in its operations, distribute returns to shareholders, cover expenses, and build a financial cushion against future challenges.
Raise your cash flow
When it comes to building a robust and diversified investment portfolio with good cash flow, it's essential to consider allocating your resources wisely. Investing in a mix of assets such as stocks, bonds, real estate, or complementary businesses can effectively mitigate risks and potentially boost your overall returns.
Without adequate experience, navigating investments in real-time can get confusing. Hence, working with a financial advisor is a non-negotiable investment strategy. To further your investment journey, take the next step by scheduling a meeting with a top-tier US financial advisor today.
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Sources
https://www.realtymogul.com/knowledge-center/article/what-cash-flow-investing
