How to Grow Rich by Creating Multiple Streams of Passive Income

Praveen Kumar, Prashant Kumar

• Publisher: Praveen Kumar
• eBook ISBN: 9780473460839
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

If you are the kind of person who wants to break free from shackles of limited finances and finally get whatever you want from life, then this book will lead you to the Promised Land where money will no longer be an issue in your life.

Most of us start making money through a job where we trade hours for money. The trick to real wealth is to slowly change our income source from linear or work income to residual income were money works for us. By creating multiple streams of passive income you will be able to reclaim financial control of your life.

This book will reveal the secrets how the rich create their wealth and sustain it for generations. The best part is you can apply same principles and become seriously rich within a short span of time.

Creating Multiple Streams of Income through Investing

To be financially stable you have to stand on minimum two legs:

• Employee + Investment

• Self Employed + Investment

• Business + Investment

Investing is the key to your financial stability whether you are an employee, self-employed or in business. There is a view that only people in jobs who do not invest are financially vulnerable. You will be surprised to learn that even very smart businessmen do not invest and their financial empire collapses because of this reason. Nothing can be further from truth. There are smart guys who build a great business and sell it for a profit of millions of dollars. They then want to repeat the process and start a new venture only to lose their entire capital.

Businesses, as they grow, demand more and more capital. In some cases, businessmen continue pouring money in expansion of their business rather than investing a part of their profits outside their business to gain financial stability.

Even a most profitable business standing on one financial leg is unstable. Smart businessmen, however, choose to do otherwise: Bill Gates sells his shares of Microsoft every year and invests in other areas to continue growing rich. His current holding in Microsoft is only 4%. Yet he continues to one of the richest men on earth.

The strongest financial legs are: business + investor, because you generate excessive cash flow from a well-run business to invest in passive income investments. Employees and self-employed people are limited in their capacity to create huge cash flow because they do not have tax advantage, leveraging power or time freedom for wealth creation. They can become wealthy if they invest intelligently but will find it extremely difficult to create accelerated wealth.

Investment basically means, ‘Make money with money to become wealthy.’ As an investor, you are interested in Return on Investment (ROI).

You can either be an employee, self-employed or a business owner to be an investor. They all may be investors but they operate at different levels of cash flow and knowledge. For example: an employee invests money that grows with time. This is because the principle of compounding works with time. On the other hand, a business owner –when he buys a new business – is basically leveraging another person’s time to grow rich. We will look into this in more detail later.

There are basically two types of investors:

• Passive Investor – A passive investor is the one who is either an extremely busy person or a person who lacks the knowledge to make investments. These people either trust their money to fund managers or buy mutual funds to diversify the investment risk. This generally results in very slow growth of investment portfolio. In the majority of the cases, these investors only make money if the market is moving up. Their investment loses value if the market value of the investment goes down.

• Active Investors – These are investors who take the effort of learning about investing. Most active investors take time to analyze and find deals that are below market value and therefore give higher returns. They actively follow the market trends and carry out both technical and fundamental analysis of their investment before buying. They make money irrespective of market dynamics, whereas passive investors are satisfied with a 10% growth in their investment each year an active investor looks for 20–50% or more. They understand risk and take steps to contain than risk.

Types of Investments

There are basically three types of investments:

• Real Estate – This is simple, robust and most forgiving to mistakes. Property prices move very slowly and therefore do not require constant monitoring. Real estate investment also provides financial leverage that investing in stocks and businesses do not provide. It, however, requires a deposit and cash flow income for banks to approve your loan.

• Stock Market – Investing in stocks requires knowledge to get started or you may land up losing your principal amount. You also have to monitor your investment regularly as stock prices fluctuate constantly. You have to buy stocks at market value - they can never be purchased at a discount. There is very little financial leverage as banks hesitate to give loans against shares. To make serious money out of stock market, you have to become sophisticated and accredited investor. For this, you need assets worth $ 1 million and an annual income of over $200,000 in USA. This amount can differ in other countries. Once you are an accredited investor, you will be able to invest in securities that give higher returns but also carry higher risk. If you have limited knowledge or no time then stick to buying mutual funds. Buy index funds that track markets such S&P 500 funds, BSE, ASX etc. These funds operate without interference from fund managers and carry no management load and therefore give higher returns. It may seem strange but statistics show that very few fund managers beat market on regular basis.

• Businesses – This gives the highest returns if you can buy low performing businesses for cents to a dollar and turn them around for profit. However, you need to have experience as a business builder to turn around companies in your area of expertise. For inexperienced operators and first-time buyers, it is advisable to either buy a reputable franchise business that have all the systems in place or a well-run business. After you have gained experience in operating a business for couple of years and gained some confidence, you can look to buy businesses below their value and increase profitability by increasing the turn over and reducing costs through better management.

Skills of a Knowledgeable Active Investor

Many active investors make huge loses because they lack financial skills or do not have adequate control over their investments. To become a sophisticated investor, you have to master the following skills:

• Knowledge of Taxes – Taxes can make or break an investment. An otherwise attractive investment opportunity may have a huge downside after taking account its tax implications. It can erode the bottom-line. You have to have knowledge or seek advice on the tax implications of an investment. This will differ from person to person depending upon the financial situation. A knowledgeable investor can gain higher returns with low risk after studying the implications of tax law, corporate law, securities law, capital gains tax, stamp duty etc.

• Management of Investment – When making an investment you have to take into account on how you will manage the investment. Some investments are messy and very difficult to manage even though they may promise very high returns. For instance, it may be very attractive to buy a property or business overseas as it shows excellent cash flow and growth prospects. Your financial analysis may be right but before making such investments, you have to take into account travel and administrative costs to manage the investment. You will need to create legal entities in a foreign country, hire a tax accountant and managers to look after your asset. You have to understand time and management cost of an investment before rushing to make a decision.

• Brokerage – High brokerage fee can sometime make an otherwise good investment into an average one. There are many investments that have re-occurring brokerage fees. Many times, it is only the broker who makes a profit and not you. An example of this is when you buy a property in an area that does not have stable tenancies. Re-leasing cost will dramatically reduce the net return from your investment.

• Control Over Income and Expense – A good investment is when you can exercise control over income and expense of your investment. Investing in hotel units on profit share basis may sound very attractive especially when you can live in them for 2 to 4 weeks each year. Unfortunately, in such investments you neither have control over the income or expense. In most cases, returns from such investments are extremely poor.

• Information – Information is the key to making sound investment decision. If you do not have adequate or transparent information about an investment, refrain from buying it. Always cross check the information provided to you for its authenticity. Don’t get duped by slick salesmen who appeal to your greed and put you under time pressure into making decisions with incomplete facts about an investment. Warren Buffet says that secret to his success is that he spends 80% of his time reading financial reports.

• Terms and Condition of Agreements – It can be tedious reading through fine print in most agreements. This is especially true for agreements drafted by crafty lawyers of big corporations to be signed by small-time unsuspecting investors. Most novice investors sign agreements without knowledge of the implications of certain clauses in the agreement. These can come to haunt you when you least expect. Ask anyone who has gone through an insurance claim. If you are not sure about a clause, seek legal advice. It may cost you a little in the beginning but save you considerable amount of distress at a later date. Best situation is if you have the control of setting your own terms and condition of an agreement.

• Buying and Selling – You should have control over buying and selling an investment. There are investments that have long lock in periods. It is best to avoid them. By having control over buying and selling, exiting an investment if things go wrong becomes possible. It can also give you much needed liquidity in times of distress or if you wish to invest in a better opportunity. Remember there will always be a time when you will need to sell a long-term investment to maximize your profit.

• Management Control – This may not be possible for small-time investors but when you make major investments then always endeavor to have some management control. This will give you inside information regarding your investment. As you’re starting out, you may not be able to gain control in large corporations. It may be better for you to investment in small and medium size companies depending upon your budget. Better still, start your own company that gives you a total control over your investment.

• Business Entity – A knowledgeable investor creates entities not only to take advantage of taxes but also to protect the asset. These include forming Corporations, Limited Liability Companies, Trading Trusts and Family Trusts. It is best to seek legal advice as this will depend upon your situation, country you live in or location of your investment as laws differ for each country and sometimes states.

Fundamental & Technical Investing

With the advent of online trading many investors have become ‘day traders’ operating from the comfort of their home office: they buy and sell shares by using various types of software available in the market. Most of these people are engaged in technical investing. Though ‘day trading’ strictly cannot be termed as investing, if the aim is to create passive income, it is good for generating cash flow if done properly.

A truly knowledgeable and sophisticated investor takes investment decisions after doing both fundamental and technic...

Table of contents

• Introduction
• The Myth of Job Security
• Why is Residual Income Important?
• Why Create Multiple Streams of Residual Income?
• Great Passive Income Ideas
• Online Residual Income
• Real Estate as Basis of Residual Income
• Creating Multiple Streams of Income through Investing
• How to Generate Massive Cash flow to Fund Investments
• The Dreaded Product Life Cycle (PLC)
• Problems in Creating Multiple Streams of Income
• The Right Way to Create Multiple Streams of Residual Income
• Other Books by the Authors
• About the Authors
• Appendix