I recently read a great book, The Wealthy Barber Returns, by the legendary David Chilton. I really loved this following passage. “Each year, the Washington Post runs its Mensa Invitational contest where readers are asked to add, subtract, or change one letter of a word to give it a new meaning. One year’s winner was cashtration. The act of buying a home, which renders the subject financially impotent for an indefinite period of time.”
I am a huge supporter of adding assets into my wealth portfolio. The mistake that most people make is they simply don’t know what an asset really is. Most people believe that an asset is stuff they own. The more sophisticated say that it is stuff that appreciates over time.
I tend to feel that a true asset is something that generates enough cash flow to (at minimum) sustain itself, and ideally creates cash flow that will support your personal expenses. An asset will not only cover its pure expenses, but also its debt servicing.
These are the following assets that can lead to personal “cashtration.”
1. Cottage. It is no surprise to most that a cottage is an expense. Yes, over time it may appreciate but you can never completely bet on appreciating values. When you consider property taxes, utility expenses, insurance, occasional repairs and debt servicing, this is a true expense.
2. Personal Residence. This one might generate a few arguments. How many times do we hear parents say that their house was the best investment ever owned? This could be because they never owned any other investments. I agree that you need to live somewhere, however, as long as you contend that it is a needed expense, we can all agree.
3. Downtown Condo Rental. The rental income in this case needs to generate more than the carrying costs.
How can you avoid cashtration? Simple. Make sure that any asset you own carries itself and actually contributes to your income.
We have all heard the expression “two-income household”. That typically refers to a household where both spouses bring an income that contributes to the household expenses. Why can’t you have the goal of having a 10 income household? Some might think that this means having some harem of women all working towards the household income.
But what if you add assets that pay you money on a regular basis? For me personally, I have my own realtor income. My wife’s salary. Our RRSP’s and other paper investment’s dividends. Finally, each property I purchase must contribute to the family income.
Not quite the harem of women solution, however, I’m pretty sure that option would have its own host of challenges too.
This way if one of the incomes dry up, like my wife’s job ending or one of my properties unable to rent for six months, then we have alternative sources of income.
Investor and Realtor focused on cash flow generating properties in southern Ontario. Besides adding properties for his own portfolio within Oshawa, Cobourg and Orillia, Michael is building a joint venture team for these markets. As a realtor, with ReMax Jazz Brokerage, he uses those investor mindset skills to make a valued member of his clients' power teams. You can reach Michael at [email protected] and follow him on twitter @durhamhome or on his website http://www.durhamhome.ca/
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