Understanding the difference between cash flow and capital gains is one of the biggest differences between the poor and the rich.
In this video, Robert Kiyosaki and Ken McElroy (Rich Dad Advisor on Real Estate) discuss the primary reason they invest in real estate: cash flow.
They begin by the discussion explaining the two basic types of investing analysis: fundamental and technical. Fundamental analysis involves understanding everything involved between current economic and industry conditions. Knowing how to read a financial statement, a balance sheet, and the correlation between the two, for example.
Technical analysis, however, isn’t as subjective. Technical analysis seeks to identify patterns and trends in the markets.
Merging Of Fundamental And Technical Analysis Through Game Play
Robert and Kim Kiyosaki developed CASHFLOW® 101 board game to teach the basic fundamentals of investing. They later developed CASHFLOW® 202 to teach the technicals of investing.
After mentioning the fundamentals and technicals of investing, Robert and Ken explain why people who attempt to make portfolio income through capital gains ultimately lose. Even though they might time the market correctly when they trade on the stock market or flip a property, they are missing out on the real prize: cash flow.
Cash Flow And Capital Gains In Real Estate Investing
Back from a recent trip to Calgary, Canada, Ken explains why real estate is appreciating in value because of job growth. What industry is driving the boom? Oil.
Robert and Ken elaborate by explaining why they invest in Oklahoma (oil wells) and not Michigan (GM losing jobs).
In addition to job growth, Ken compares the cash flow he and Robert receive through cash flow and the capital gains earned from “flippers”. The way Ken and Robert see it, when you invest in real estate for cash flow you will make money regardless of what the market is doing. The market can go up or down, it doesn’t matter. You make money with cash flow either way.
A flipper, however, only makes money when they sell it. When someone buys a property and rehabs it with the intention of selling it, the money they make is called capital gains, or portfolio income.
Difference Between The Rich And The Poor
The poor want to LOOK rich. The rich want to BE rich.
As Ken continued to grow his real estate empire he had a choice to make. He could have taken his hard-earned wealth and bought fancy doodads people desire like a bigger house or more luxurious car. Or he could have put that money back into his investments to help them grow bigger, faster.
(Guess which option he chose.)
To wrap up the lesson on cash flow vs capital gains, Kim joins Robert to discuss her first cash flowing deal. Thought it wasn’t much (only $25 in monthly cash flow), it was a start. Today, she brings in over $125,000 per month in cash flow, not including passive income she makes from her other investments.
Take away: If you are focused on achieving financial freedom, focus on investing in cash-flowing assets. If you are seeking big wins through capital gains, you might get lucky and time the market correctly… but maybe not. Cash flow puts money in your pocket regardless of what the market is doing.
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