When it comes to strategically investing to build wealth and positive cash flow, my buddy Jeff Brown has the right idea. He always says you want to develop as much positive cash flow as you can, as quickly as you can, and to have as much of that tax-free or tax-deferred as possible, especially by retirement age.
My youngest son recently asked me, “So dad, what is your retirement going to look like, and would you ever consider moving out to the West coast like me?” We proceeded to talk about my properties, notes, businesses, and other investments that I have going on, and then we started to really dig deeper and compare things.
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Properties vs. Notes
I was telling my son about working on my taxes, all the deductions I’m adding up, like repairs and maintenance. When I started describing all the things that I’m going through, liquidating one of my properties that’s been in the family since 1964, he said to me, “Hey dad, not all cash flow is created equal.”
Of course, I hate to tell my twenty-five year old that he’s right or that he’s brilliant or anything. After thinking about it, though, I realized that he is right.
Here I am selling my property, and I’m doing all sorts of repairs, from radon, old termite damage, home inspections repairs and concrete, to miscellaneous items for the Township (U&O). With notes, there usually aren’t repairs, unless of course you have to take a property back. He was right; all cash flow isn’t created equal.
The Aggravation Factor
What I think he was referring to was the aggravation factor.
I’ve made good money off of my properties and other investments, but how hard was it to earn that money? It just seems that more and more people have their hands in my pockets.
Since I’ve owned properties for so long and even have some paid off, some of these properties start to lose their luster. Even with no mortgage, it’s as if just one expense left the picture. With increases in taxes and increases in insurance, as well as rising maintenance costs, it’s still a management intensive type of investment for me.
As time marches on, you’re decreasing your deductions from your mortgage interest and decreasing the amount of depreciation you can take as time marches on.
So, Junior and I started talking asking each other what we would rather have: a paid-off property or a note. After doing both for many, many years, the funny thing is that we both kept coming up with the same answer: We’d rather have a note.
Owning notes seems to involve much less aggravation, time, and work than properties, even if the cash flow is identical.
Our conversation covered questions like the following:
- Would you rather have a house that cash flows $300 a month or a $300-a-month cash flowing note?
- Would you rather have a $600 month cash flow with no mortgage on a house or two $300-a-month cash flowing notes?
Although we both kept coming back to notes, I’m sure there are other cash-flowing investments that involve much less work, too. Maybe it’s an annuity or insurance contract, or perhaps it’s a dividend stock or municipal bold.
For me, anytime that I can buy a note at a discount with a high yield and collateral backed by real estate, it’s pretty tough to beat.
Although I don’t mind owning real estate while I have earned income, largely because I can offset the tax on the income with depreciation and mortgage interest deductions, but once my earned income stops, notes may make more sense than properties. When I retire, maybe I will move to the West coast, too.
So, what type of cash flow do you like the best?
Let’s talk in the comments section below!