When it comes to measuring wealth, most investors think about net worth – that is, the total wealth of an individual or household, taking into account all financial assets and liabilities. But when you ask high net worth (HNW) investors themselves, they’ll tell you that cash flow is key to living a truly wealthy lifestyle. Net worth is retroactive, measuring past information, whereas cash flow measures how much money is coming in and out of your account every month. Investors looking to maximize their investment portfolio should think about boosting their cash flow instead of relying solely on capital appreciation. 

Cash Flow Versus Net Worth

Your net worth represents your accumulated wealth, measured by assets like real estate, financial securities,, or cash, minus liabilities like loans and mortgages. Net worth is a snapshot in time based on an assessment of the current value of your assets and outstanding balance on your liabilities. Your home may be worth $500,000, but that value is only an assumption until the property is actually sold. Your stocks may be worth $1 million, but the value of your portfolio only reflects paper gains until you actually sell your assets. 

While net worth helps quantify your overall financial well-being, it doesn’t accurately measure stability, liquidity, or financial freedom. These concepts are arguably better achieved by focusing on cash flow, which refers to any income stream generated by investments, business revenue, or work. For HNW investors, cash flow investing means purchasing assets that provide regular, predictable income instead of buying assets based solely on price appreciation. Cash flow investments provide regular cash distributions that can be reinvested or used to finance your lifestyle, making them ideal for retirement planning. Unlike an abstract net worth value, cash flow is liquid, stable, and predictable. 

Investing for cash flow is especially attractive during volatile market periods, which have become more frequent in recent years. Following the longest bull market in history, which ended during the Covid-19 pandemic, public markets have experienced tremendous volatility, leading central banks to intervene in extreme ways. Cash flow investors are better positioned to ride out market volatility even as their net worth declines because they don’t have to sell assets to maintain their lifestyle. By holding onto their assets, they stand a better chance of increasing their net worth once markets recover. If 100-plus years of market data have taught us anything, markets eventually recover no matter how bad things get. 

Types of Cash Flow Investments

Overview – Top 5 investments for income:

• Real estate
• Dividend stocks
• Bonds
• Annuities
• Mortgage investments

HNW investors have access to several cash-flow-producing investments, one of the most common being real estate. Whether through a syndication program or buying and renting out single-family homes, real estate can provide positive cash flow through the collection of rent payments. Investors can also benefit from capital appreciation if the value of the property increases over time. Despite these benefits, real estate investments are capital-intensive, have high transaction costs, and depend heavily on local rental demand. If your tenant leaves, so does the cash flow they produce. To generate meaningful cash flow through real estate, investors often must acquire multiple properties, which increases their investment risk. 

Financial assets like stocks and bonds have been used for decades to generate cash flow for their investors. Although the primary purpose of buying stocks is to benefit from capital appreciation, reputable companies with strong balance sheets pay regular dividends to their shareholders. Dividend stocks are considered significantly less risky than other publicly traded stocks and allow investors to reinvest distributions for compound growth automatically. The downside, however, is that dividend yields are typically insufficient to generate meaningful cash flow unless the investor owns considerable shares in a company. Also, while less risky than common shares, dividend stocks aren’t immune to the volatility of public markets and are susceptible to changes in the business cycle. 

Bonds have historically been a “safe haven” for investors because they carry low risk and generate predictable yields. However, bond yields have collapsed since the 2008 financial crisis due to a combination of central bank policy, long-run inflation expectations, and economic trends. In fact, long-term U.S. government bond yields, a bellwether for the fixed-income market, have trended lower for more than two decades. And while yields have increased since 2021, they have not outpaced inflation. Annuities, on the other hand, offer a guaranteed income stream over a predetermined period of time; however, their popularity is tempered by a number of drawbacks, including high fees, inability to keep up with inflation and limited liquidity.

Alternative Cash Flow Investments

With traditional investments failing to satisfy investors, portfolio construction has increasingly shifted to alternative assets for cash flow. Private mortgages are a fast-growing segment of the alternative investment landscape that provides higher yields, diversification benefits, and exposure to residential real estate without the risk of homeownership or title transfer. 

Mortgage investments are geared toward cash-flow-focused investors. When you invest in mortgages, you are lending money to borrowers needing short-term capital for any number of reasons – to finance their next home purchase, fund a renovation or consolidate high-interest debt. Millions of Canadians each year turn to alternative lenders for their mortgage financing needs. In exchange for lending their capital, mortgage investors receive regular payments, typically monthly,  in the form of interest rates and fees charged to the borrower. 

Whole mortgage investing is ideal for HNW investors who have at least $500,000 in liquid financial assets available to invest. These lending investment programs are usually administered by mortgage companies that manage the entire investment portfolio, from sourcing investment opportunities to underwriting the mortgages and maintaining correspondence with the borrower. 

Mortgage investments have historically outperformed other cash-flow-focused investment strategies, generating anywhere from 6% and 16% annually in the case of CMI Mortgage Investments. Mortgage investments can be tailored for performance to meet the needs of defensive, moderate-risk, and high-yield-seeking investors. Unlike stocks, bonds, and residential real estate, mortgage investments are not correlated with public markets, which means your mortgage portfolio isn’t directly impacted by volatility in the S&P 500 or asset prices. 

Become a Private Lender

Are you interested in exploring how mortgage investing can increase your cash flow? CMI Mortgage Investments is one of Canada’s fastest-growing non-bank mortgage lenders. With nearly $2 billion in successful mortgage placements, we offer our investors tailor-made mortgage portfolios with competitive returns that are optimized for cash flow. 

If you want to become a private lender with CMI, contact us to request a free consultation with one of our Investment Managers. CMI will work with you to curate a selection of mortgage investment opportunities tailored to your investment objectives, risk tolerance, and investable capital. All mortgages sourced by CMI are fully backed by real estate and managed by our expert team.