The world is more open now than ever before for you to invest in various types of assets to grow your wealth and increase your passive cash flow. Individuals nowadays have access to various deal types located in different markets and with multiple sponsors.
A very common investment vehicle for both wealth creation and passive cash flow is real estate. Real estate has so many facets that your investment choices are widespread. You can invest directly or indirectly. You can invest in residential, multifamily, and a number of commercial real estate options.
Many investors are looking for passive cash flow investments, and rightly so in my opinion. Passive cash flow investments enable you to focus on your personal career and the people, things, or causes in your life that are important to you. With due diligence, you can determine whether the asset type, geography, and Sponsor fit with your investment strategy. And while passive cash flow deals carry risk, these types of deals can be quite lucrative for those savvy investors who are seeking cash flow with upside potential.
What is a Passive Cash Flow Investment?
Experts define passive cash flow investment in different ways, but in simple terms, it is the steady flow of money without having to exert a considerable amount of time and effort to generate that cash flow. It usually is designed for long-term investing. Through these types of investments, investors will be passive investors who intend to earn a good return on their investment without having to manage the day-to-day operations.
Since most passive cash flow investments are long-term, they are usually not affected by short-term fluctuations in the market. The two caveats on that comment are when the business plan is a value-add or construction project and when the Sponsor uses a floating interest rate. In my opinion, a long-term view, thorough due diligence, and the intentional creation of a robust portfolio should be the priority of passive investors who invest in passive cash flow investments.
Why Invest in Passive Cash Flow Investments?
There are a number of good reasons to invest in passive cash flow investments. The following are some of those reasons:
Passive Cash Flow Real Estate Investments are Based on Numbers
Similar to stock investors who invest based on fundamentals, real estate investors looking to generate strong in-place cash flow also base investment decisions on real estate fundamentals such as location of the property, stability of the tenant(s), basis of the property (price per square foot paid), in-place cash-on-cash returns, demographics in the vicinity of the property, and expected growth rates for rents in the area. And similar to value investing in stocks, buying and holding real estate can be an important determinant of increasing your wealth and cash flow.
Most people do not plan to work forever. But even if you do, it’s important to plan for retirement on some level. It’s also beneficial to use self-directed retirement accounts because you can obtain tax benefits by doing so. You can earn passive cash flow and profits in your self-directed retirement account while deferring taxes until you start taking distributions from the account. This enables you to set aside money and invest that money into deals that allow you to generate passive cash flow and upside potential. Once you are ready to retire, the goal is to be able to live off of the interest generated from the investments you have made. This strategy allows you to have your money make money for you, which is a concept called compounding. If you invest steadily over time while also making wise investment decisions, you will have a chance to grow your money exponentially.
Allows You to Spend Your Time with People, Activities, and Causes that You Care About
Having money gives you flexibility. It buys you time and freedom. Many people have to work to live, but what if you didn’t have to work to live? What would you focus on?
As human beings, we are better off when we can enjoy the activities that we do. If we spend most of our time doing things that we are not interested in, it can take a toll on your outlook and health. So, why not focus on increasing your passive cash flow and net worth so that you can spend your time with the people, activities, and causes that are most important to you?
At some point, when you increase your passive cash flow to the point where you can cover your annual living expenses, you give yourself the buffer to be able to pursue the things that you are passionate about. To reiterate, when your passive income surpasses your day-to-day cost of living, any money you earn from your earnings will then be above and beyond your expenses. You can then focus on the people, passions, and causes that you care about.
Allows You to Take Advantage of Various Sponsor’s Experiences and Expertise
Instead of having to become an expert in various investments, you can invest with experienced Sponsors who are focused on various asset types located in multiple geographies. However, it is still important to continue learning by studying and investing time and effort to learn industry specifics. That allows you to understand deals that you are investing in, but allows you to leverage the experience and expertise of qualified Sponsors to manage and oversee assets that you co-invest in with them.
It is still your money, so you have to ensure that the investment, property location, and Sponsor are adequate for your investment thesis. After making the choice to invest, it is still wise to be in contact with the Sponsor so that you can better understand what they are doing.
Ability to Live and Work from Anywhere
Since you do not actively manage passive cash flow investments, and since you are building your passive cash flow, you will also become more flexible about the location where you live. In many respects, you no longer need to be tied to one place.
Investing in passive cash flow investments comes with risk. Proper research, analysis of each investment you are evaluating, and research about the demographics and fundamentals of the investment should be undertaken prior to investing.
On your path to financial freedom, do not forget to accurately track your progress so you can check where you are and where you can improve. Starting to build your passive cash flow investment portfolio will be hard and will take a lot of patience and time to see results. As you learn and grow, you will become more educated about the investment process, and you will likely want to invest more often.
It is your money, so you have to determine whether the deal is one that fits your goals.
Until next time, happy investing!