Should You Build or Buy Cash Flowing Assets?

Did you know that you can build cash flow producing assets, not just buy them? Most people think only of purchased assets like stocks, bonds and real estate, but there are so many more opportunities available.

Consider this: it would take $10,000 invested in a dividend stock that yields 3.65% (a pretty typical yield) in order to produce $1.00 per day of cash flow. For so many people, $10,000 is out of reach or at least might take multiple years of saving. And that’s simply to get to $1 a day!

So how can we beat this? We create something from nothing. We create eBooks, iOS apps, blogs, a portfolio on Medium, podcasts, niche sites, and more. These can be long-lived assets that generate time-leveraged or completely passive income post-creation.

Do you think you could create an eBook that generates $1 a day in cash flow? Perhaps you have technical skills and have been interested in learning how to create animations for websites. The best side hustles for developers not only generate positive cash flow but have the synergy of enhancing your technical skill set as well. Whether or not you have technical skills, you could probably spend 5-10 hours per week for a few weeks and create an asset with cash flows equivalent to $10k in stocks.

How to create cash flow producing assets

Happily, assets can be created simply by applying your time and existing skills.

These are the following assets that I have either created or think anyone could create, especially if you have an in-demand skill set:

  1. Short-Form Writing
    Blogs, Medium, and any other platform where you own your articles. Writing is low risk, builds your reputation, and enhances your knowledge. For Medium, I target writing technical articles that rank in organic google search. I basically treat it like a niche blog that is automatically monetized.
  2. Long-From Writing
    eBooks and PDFs. Writing an eBook is more of a gamble with your time than short-form writing. If the book does well, you may have a long-lived asset generating income for years. If not…you may have burned a few months. However, eBooks are scalable in the sense that after they are written, you can market them in numerous channels to boost sales.
  3. Software
    Apps and Software as a Service (SaaS). Who doesn’t dream of making the next big iPhone app?
  4. Online Brand
    This is arguably the ultimate goal of the above assets…build a brand around your digital products, grow your following, increase sales exponentially. That book that no one cared about…suddenly it’s interesting because you are now an authority. The app you made that was selling a copy or two a day? Multiplied 10X because you grew an email list and can market effectively. An online brand also can be capitalized and sold for a one-time payout.

While attaining $100 a day in passive income from purchased cash flowing assets may seem insurmountable considering the capital required, creating cash flowing assets that get you to $100 a day may only take a few years.

My investment strategy in light of being able to create assets

While I spend my time creating assets, I still want to invest my excess cash flow from my day job and side hustles. However, I need to optimize my investing. (The usual disclosure: I’m not an investment advisor, this is simply how I invest and I’m not recommending anything specific. Talk to an investment advisor first.)

I was a dividend growth investor for a long time, then several years ago augmented this with selling options for additional cash flow.

The allure of dividend growth investing is the near certainty of receiving a dividend. On top of this, the dividend tends to grow faster than inflation over time. It’s a great strategy for many and I am not knocking it. However, I have a far more compelling strategy now.

I now believe there is a massive opportunity cost to the dividend growth investing strategy if you are capable of creating your own cash flow producing assets.

When I create cash flow from building assets, it frees me to buy assets that will be the highest performers because I can tolerate more volatility. I get the cash flow that I crave while generating capital gains to propel future wealth creation. This is simply a strategy of pursuing the lowest opportunity cost strategy. And don’t forget, cash flow truly is important and shouldn’t be ignored; cash flow protects you from selling assets at depressed prices during a downturn.

Here’s an example (not a recommendation) of a growth asset that I didn’t buy, but wish I had. At the beginning of 2015 AMZN opened the year at $312 per share. Five and a half years later, it has now reached a high of $3200 a share (as of writing this article).

Amazon Stock Price
Source: Google Finance

That’s more than 10X growth in a time when my dividend stocks have registered little return beyond their dividends.

Advanced strategies for generating cash flow from equity

Just because I may not buy dividend stocks anymore doesn’t mean I won’t generate cash flow from my equity portfolio.

It’s truly the topic of another article (in fact, I already wrote it here), but suffice to say the equity can be used as collateral to sell what’s called “naked put options” (options backed by access to margin, i.e. debt, provided by your stock broker). Selling options is an advanced topic in investing, but it can be used to produce cash flow while letting your growth stocks do what they do best: grow.

Even better, the more equity your growth stocks create, the more capacity and margin of safety you have for selling put options against margin. The more put options you sell, the more cash flow you generate.

While there are myriad other opportunities for using equity to buy cash flow assets, that’s not really the focus of this article. I mention it simply to show what’s possible.

Are there cash flowing assets that I would still consider buying?

In other words, what do I want to allocate my money to beside growth stocks?

I believe that the Price-to-Earnings* multiple (P/E) that an investor has to pay to buy traditional cash flowing assets is simply to high. For example, Johnson & Johnson (the quintessential dividend stock) has had a P/E above 20 for most of the last five years. This means that to buy $1 of earnings, I have to pay at least $20.

This is no way to build wealth in a timely fashion unless you have a fire hydrant gusher of cash coming your way.

Instead, if I did want to buy cash flow I should consider a synergy of my existing skill set (web development) with the market for non-traditional assets. I might buy the following assets created by someone else:

  • websites
  • eBooks
  • apps
  • anything else digital that there is a market for

A website typically sells for a 20-40 monthly P/E. That’s a huge difference and it means you get your investment back in about three years. There are also many ways to amplify the earnings of a website such as switching ad networks, adding affiliate links, increasing traffic, and so on.

There are growing marketplaces for these non-traditional assets. Websites such as flippa.com and empireflippers.com/ provide a brokerage and some vetting for purchasing websites. Even royalties have a marketplace at www.royaltyexchange.com/buy-royalties.

These assets don’t have the same transparency as capital markets in the U.S. and require far more due diligence. However, the potential for non-correlated high yield is an intriguing opportunity.

A final thought

My favorite entrepreneurship podcast is The Side Hustle Show. The host, Nick Loper, interviews successful entrepreneurs about their story. At the end, Nick asks the guest for one final piece of advice. Almost invariably, the advice is along the lines of “Just Start”.

Whatever the specifics of your situation, I encourage you to take your skills, interests, and time, and “just start” making a better life for yourself. A life of more security, freedom, and abundance.

Share this post:

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.