Making money is not a bad thing. Money is not evil. Don’t let anyone EVER tell you that. Money is a tool, and you have a duty to do better for yourself, your family, and the causes you care about. Anyone who believes differently is deluding themselves.
And passive cash flow is the penultimate. Robert Kiyosaki created the Cash Flow Quadrant over 20 years ago. The goal in the Cash Flow Quadrant is to get to the right side of the quadrant where you are a Business Owner and where you are an Investor. The focus of today’s article is the Investor side of the quadrant and how passive cash flow from being a Passive Real Estate Investor helps you in life.
#1 – Passive Cash Flow Covers Your Living Expenses
The first way that passive cash flow helps you in life is that once you have enough passive cash flow coming in from your various investments, you can cover your living expenses. In my mind, this is the first step on your path to financial freedom, financial independence, or even a FIRE lifestyle.
#2 – Passive Cash Flow Can Help You Buy Things with the Extra Cash Flow
The second way that passive cash flow helps you in your life is that it enables you to buy things with the passive cash flow that you earn from your investments. You can use passive cash flow to buy material things that you want whether those are houses and cars, or jewelry and collectibles.
#3 – Passive Cash Flow Enables You to Enhance Your Lifestyle
The third way that passive cash flow helps you in your life Is that it enables you to enhance your lifestyle. Passive cash flow gives you the ability to not only cover your living expenses or to buy the material things that you want, but it also lets you purchase the experiences that you want to have in your life whether that means riding first class in an airplane, furthering your education, obtaining memberships to clubs, or gaining access to rich, powerful, and famous people. Passive cash flow from real estate investment can enhance your overall lifestyle.
#4 – Passive Cash Flow Assists You with Continuing to Build Your Net Worth
The fourth way that passive cash flow helps you in your life is it allows you to use the passive cash flow to grow your net worth by reinvesting the passive cash flow and any profits that you get from a deal into new cash flowing deals. Through this process, you receive “compounding,” which Albert Einstein called the eighth wonder of the world. Albert Einstein further said, “He who understands it, earns it. He who doesn’t understand it pays it.”
He who understands how to earn interest from passive real estate investments and then how to invest those dividends and profits into further passive real estate investments with cash flow, understands how to use compounding to his advantage.
The dividends that you have earned from your dividends that are used for new deals is the concept of compound interest. Over time, the compounding on the compound interest grows, your passive cash flow grows exponentially, and you are also very likely growing your net worth as well.
#5 – Passive Cash Flow Sets You Up to Build a Legacy
The fifth way that passive cash flow helps you in your life is that it can help you create a legacy regardless of your nest egg. Once you have enough passive cash flow and enough passive real estate investments that you have invested in, there is a strong likelihood that you are not only able to cover your living expenses, to buy things that you want, to enhance your lifestyle, and to acquire more cash flowing deals with your passive cash flow, but you are also able to provide a legacy.
A legacy means different things to different people. In my definition, a legacy is being able to help others after you pass on. A legacy could mean that you leave money or assets behind for your family, your loved ones, or for the causes that you believe in. You are thereby creating a legacy that allows other individuals or entities to continue operating over time.
A legacy means that it is not just about you and your life. It’s about providing a better life for those in your life and for those causes that you care about in life.
Case Study
As an example, I know someone who has invested in at least one passive real estate deal per year over the last 20 years. He always invests $50,000 regardless of the deal. I asked why he invests $50,000 per deal regardless of the size. He said it was for simplicity. He knows that he has $50,000 extra each year. He decided to invest the same amount in each deal so that he does not have to determine different investment and return amounts.
For this example, we are only going to cover the passive cash flow he receives – not profits. We are also going to ignore the fact that in many years, he has been able to do more than one deal.
If you assume that he has invested $50,000 in at least one deal per year over the past 20 years, my client has invested $1 million during that time period.
On average, his expected cash return for the investments is 8%. Some years his cash flow is more and some years it is less, but on average, he expects to receive about 8% annually off of his passive real estate investments. If he receives an 8% return on $1 million, he can reasonably expect to receive $80,000 in passive cash flow from his real estate investments.
If he doesn’t need the entirety of the passive cash flow, he could certainly seek out additional deals to further increase his net worth and cash flow. Or he could undertake the luxury kitchen remodel he has wanted to do for years. Or he could take his family on the vacation to Africa that they have all dreamed about.
The bottom line is that once you get to a place where your passive cash flow covers you living expenses, you can do a lot more than pay expenses with passive cash flow.
Implement a Strategy
There are a number of scenarios and strategies that you could utilize depending on your PERSONAL situation. Since there are as many strategies as there are situations, I will showcase a common scenario that I discuss with friends and family.
Let’s assume that you are working either as an employee of a company or as a self-employed business owner. The best strategy in my opinion when you are a busy professional is to grow your network of Sponsors that you can co-invest with who you know, like, and trust.
If you are making enough where you can allocate $25,000, $50,000, $100,000, or $500,000 per year to real estate, you would be wise to diversify. I highly recommend that you diversify by asset type, geography, and Sponsor.
Once you make decisions about how to invest your money in deals, you will start generating passive income. With the passive income, you can use the money to cover living expenses out of the cash flow, you can buy products that you have wanted to buy with the cash flow, you can enhance your lifestyle with upgrades and experiences, or you can continue building your passive cash flow by taking the passive cash flow earned plus your savings that you have each year, and decide to invest in additional passive cash flow investment opportunities.
Assume that you started your investing with $50,000 and you earned 8%, that would mean that you earned $4,000 of passive cash flow for the year. If you are saving $50,000 the following year, you could invest $54,000 into another passive cash flow investment. Then you would have $104,000 invested, which would earn you $8,320 in year 2. As you can see, this could snowball your cash flow in a fairly short time period while also rapidly increasing your net worth as well.
The same strategy can be used when you take profits. If you ultimately sell a property and get your investment back plus profit, you can re-invest that into further deals that also grow your cash flow and your net worth.
Note A: if you are just starting out and only have $25,000 or $50,000 to invest, you will have to make a decision about what deal to do initially while you build up diversification.
Note B: If you have $500,000 to invest, I would undertake a strategy to invest $50,000 in 10 deals to obtain diversification. However, if you have $500,000 to invest annually, you could undertake an investment strategy that is a mix of diversification and concentration. Investing $500,000 per deal per year could make sense or you could invest $250,000 in two deals.
Personally I do a combination of a strategies because my passive cash flow is enough to cover my lifestyle at this point. The passive cash flow also enables me to buy some of the things that my wife or kids want. The passive cash flow also enables me to indulge in experiences, education, and travel for the family and me, which is much more important to me than things. I enjoy using passive cash flow to enhance my lifestyle and live experiences that I am passionate about such as travel or attending sporting events that I enjoy like watching football/soccer matches around the World.
But more so than anything else, I use my passive cash flow to continue investing in new cash flowing deals. I am constantly on the lookout for opportunities. I am constantly trying to utilize cash that I have in my self-directed retirement vehicles with sponsors that I know like and trust, and with Sponsors who are investing in asset types, markets, and deals that I like.
I am also regularly using my personal cash and corporate cash in addition to self-directed retirement money to invest in deals with Sponsors that I know like and trust, but also for my own deals that I am Sponsoring. When I Sponsor a deal, I invite others to co-invest with me on a passive basis.
From a legacy standpoint, I think about legacy. I understand that nothing is permanent, but if I can leave the World a bit easier for my family, friends, and organizations that I believe in, then I feel like I have done my part.
We have family trusts that are set up and we are also actively working with charities that we believe in as a family. Most of the charities that we work with revolve around three areas – charities related to housing, water and food. We are also involved with giving back to organizations that are providing an education and an opportunity for those kids striving in school to also be able to play football/soccer. It’s a passion, so we give back there because I believe football/soccer has a connecting effect regardless of your background. As such, we are using our capital to not only enhance our family’s lifestyle, but to also enhance the lifestyles of others.
Summary
In a nutshell, those are the five ways that passive cash flow can really help you in your life and how you can help the lives of those that you love and the causes that you care about. But we believe that, first and foremost with passive cash flow, you have to be able to take care of yourself so that means covering your expenses, purchasing the things that you want, enhancing your lifestyle, and then continuing to grow your passive cash flow to the point where you can invest that passive cash flow and those profits into new cash flowing deals and where over time, you can create a legacy for yourself and your family, so that you are able to leave behind money and assets for those that you care about and love.
Let’s continue growing our cash flow and net worth together!
Robert