The Holy Grail – Compounding Passive Cash Flow 

Compounding passive cash flow is one of the most profound investment strategies in the World.  It is an investment strategy that can compound over time by investing money you already have, earning interest on that money, and then reinvesting that new interest into further investments.  The compounding effect is powerful and you should not only do analysis and due diligence when you initially invest, but also when you reinvest.  Your analysis should be done in a comprehensive way where you invest in good cash flowing assets.  That way, you can seriously  “snowball” both your cash flow and net worth over time.  This compounding effect can provide you with financial security and financial freedom.  The compounding effect is what Albert Einstein called the 8th Wonder of the World. 

Passive Cash Flow 

Passive cash flow is defined as income earned by an investor who invests in an asset, but who does not need to actively participate in the income generation from the asset. 

Passive cash flow is earning interest on the money that you have already earned and that you have already invested in an asset.   

Passive cash flow is earning money while you personally have to do less work that you normally would have to do with an active income.   

How do most people start with passive cash flow real estate investing? 

What we have found is that most people who start investing in passive cash flow deals have an active income from their job.  They are seeking additional ideas and strategies to secure their financial future.  They are thinking long-term.  They understand that real estate is a physical asset that has current income and the ability to create above average total returns when value is added at the property level.  

Many of our investors have expressed displeasure with their company mandated retirement options.  Many of our investors acknowledge that they have demanding careers where they do not have the time or inclination to perform the analysis, secure the financing, or handle the property management functions at the properties that they invest in. 

Passive cash flow real estate investors tend to start their passive cash flow investing for one or two specific reasons.   

The first reason that people want to invest in passive cash flow real estate opportunities is that they are aspirational.  In most cases, even if the investor falls into the second category that I will explain below, there is always an element of the first reason for investing within their rationale.  I have found that even people who have struggled are aspirational.  They want to do better for themselves, they want to do better for their loved ones, they want to have a secure retirement, they want more freedom in their life, and they would like to leave some sort of legacy whether that legacy is financial, societal, or both.  Real estate investing offers that dream.  Earning passive cash flow and increasing your net worth helps fulfill the pursuit of those aspirational desires while still being able to leave behind a legacy.   

The second reason that people want to invest in passive cash flow real estate opportunities is that they are frustrated.  They have had fewer rather than more options when it comes to their investment options through their 401k at work, their traditional IRA, or their Roth IRAs.  Most people I speak with still do not know that they can rollover all or part of their 401k or IRAs into self-directed retirement accounts that can invest in a much wider range of assets.  In addition to the lack of options, many investors are frustrated that their investment portfolio does not seem to do as much as the market.  They are frustrated that the dividend yields are low or not existent with the most in favor stocks.  Investors are frustrated that the gyrations in the market creates a situation where their account values ebb and flow like the ocean tides.  Additionally, the investor is frustrated that there is so little control over what they can do at a firm when things are not going right at the company, in the market, or with the share price.     

What does the typical investor look like? 

We have found that there really is not typical investor.  Our investors are all long-term aspirational thinkers who want to improve their financial situation or legacy in some way.  Our investor base comes from a wide range of careers including real estate, technology, healthcare, finance, insurance, private equity, law, retail, government, shipping, and accounting to name a few.  Our investors are a mix of males and females with investor ages ranging from the mid-20’s to the 80’s.  Investors come from all over the U.S., and most investors have been friends and family, or friends and family of our friends and family.       

Many of our investors are actively employed or self-employed and many of our investors are retired.  We have found that most of our investors plan on setting aside investment funds each year to invest in real estate deals.  Most of our investors want to ensure that they have the opportunity to invest in a variety of asset types in various geographic locations.  And many of our investors have discussed options to reinvest Preferred Returns, refinance proceeds, and sales proceeds into new cash flowing deals to obtain the compounding effect from passive cash flow.   

Does passive cash flow exist or is it a myth? 

Unlike the Loch Ness Monster, passive cash flow has already been proven and while elusive for some, many investors benefit from passive cash flow investments daily.  Personally, the first passive cash flow investment I made was an investment in a Trust Deed secured by an apartment complex in San Francisco.  The interest rate on that Trust Deed was 9%.  I did not know the borrower personally and I did not know the lender until someone introduced me to the group.  From there, I did my analysis and determined that making a small(-ish) investment of $10,000 would yield passive cash flow of $900 per year.  I was invested in that loan for over 4 years and earned passive interest from the loan over that time period and I also got my principal back when the loan ultimately paid off. 

Now, I make passive investing part of my long-term strategy.  I invest in passive cash flow deals annually.  Since I am also a Sponsor of multifamily and commercial real estate investment opportunities, I mostly use my self-directed retirement funds to invest passively with other Sponsors and I use either personal cash or company cash to co-invest in deals that I Sponsor.  If I have exhausted my retirement funds in a given year and I find an amazing deal that I cannot pass up, then I will certainly use my personal cash or company cash to passively invest with other Sponsors. 

I have invested in over 65 passive real estate investment deals at this point, and I have earned passive cash flow on each of the deals.  I have only lost money on one passive real estate investment at this point. 

The Elephant in the Room 

As I stated above, I have earned passive cash flow on all of the passive real estate investment deals I have invested in.  The elephant in the room is the same question that everyone has right now.  What will happen post-COVID19 and post-Ukraine.  Anyone who tells you with certainty that things will be back to normal is lying or is deluding themselves.  The data is mixed in the market at present.  Unemployment is mixed, consumer and business sentiment is mixed, GDP across the World is mixed, and shifts in migration and demographics is evolving.   

I cannot tell you how this will unfold, but I do believe that people and companies still need a place to live and do business once COVID-19 is done.  I personally do not see companies giving up offices altogether.  We anticipate that there will be a disconnect on pricing for some time period where sellers want a higher price than buyers are willing to pay.  The bid-ask spread for commercial real estate will be determined in the next 2-4 quarters in my opinion especially when the Fed is hiking interest rates since it is obvious the Fed has no clue what it is doing.  As such, we are putting together a new fund that can invest in quality deals as they arise.  We plan to do an initial Fund and then roll out additional Funds once each Fund is fully subscribed.  More to come on that…   

For more information, visit our Products page to learn more about our Passive Real Estate Investor Wealth Club.      

What assets can I invest in for passive cash flow?   

There are many assets that you can invest in for passive cash flow from real estate.  Many investors invest in residential, multifamily apartments, office, retail, industrial, self-storage, medical/healthcare, seniors housing, student housing, NNN Investments, ground-up development, Funds, and mortgages.   

The most common real estate investment vehicles to invest in to obtain passive cash flow through real estate investing are as follows: 

  • Friends and Family Real Estate Investments 
  • Privately traded Investments or Funds geared to high net worth investors 
  • Crowdfunding 
  • Real Estate Debt Funds or Trust Deeds 
  • Public Real Estate Investment Trusts (REITs) 
  • Private Real Estate Investment Trusts (REITs) through your broker 

Will investing in passive cash flow deals make me rich? 

If you are already wealthy, then passive cash flow investments have the ability to make you even wealthier at a quicker pace.  If you are working towards financial freedom, there is a tipping point where the passive cash flow from your investments snowballs and starts to increase more quickly with each investment.  Although passive cash flow will not make you wealthy initially, the passive cash flow from your investments can certainly make you wealthy over time, but even more importantly, passive cash flow can secure your financial future and provide you with the financial freedom that you deserve. 

To illustrate the point, I will provide a couple of examples below.   

In example #1, assume you want to supplement your other retirement vehicles such as social security, pension, traditional 401ks, and the like.  If you want to ensure you have an additional $25,000 per year and you believe that you can earn 7% in passive cash flow per year, you would only need to invest $357,000 over your allotted time period.  If you have a 20-year horizon to achieve that goal, then you would want to invest $17,850 per year.    

In example #2, assume that you want to cover your living expenses with passive cash flow.  If your cost of living is $50,000 per year and we assume that you can earn 7% in passive cash flow per year, you would only need to invest $714,000 over your allotted period.  If you have a 30-year horizon to achieve that goal, then you would want to invest $23,800 per year. 

In example #3, let’s assume that you want to earn passive cash flow of $250,000 per year and we assume that you can earn 7% in passive cash flow per year.  If order to earn $250,000 per year in passive cash flow, you would need to invest $3,571,000.   

The one thing that none of these assumptions take into consideration is the profit potential from a capital event with the real estate investment like a refinance, recapitalization, or a sale.  If you take a capital event into consideration, you may be able to increase your rate of investment and the amount that you receive in passive cash flow much more quickly.  I consider good news events, but as I have stated numerous times across the platform, I am conservative.  I want to project my income based on the expected annual returns that I can reasonably expect.  Any good news events are an added bonus that I use to improve my situation even further.    

Downsides of passive cash flow investing 

While the benefits outweigh the downsides of passive cash flow investing, the following are some downsides relate to passive cash flow investing: 

  • Lack of control 
  • Little to no involvement in operations 

Benefits of passive cash flow investing 

The benefits of passive cash flow investing are numerous.  The following are some benefits to passive cash flow investing: 

  • Choice of deals to invest in 
  • Choice of geographic regions to invest in 
  • Choice of Sponsors to co-invest with 
  • Little to no involvement in operations 
  • Cash flow for investment dollars 
  • Above-average returns 
  • Ability to cover your lifestyle expenses 
  • Ability to create the lifestyle you want to have 

Passive cash flow investing is a pathway to a great lifestyle.  Start as early as you can.  Start with the amount of money that you have available to you.  Learn while you are investing.  Take the time to educate yourself.  Take the time to evaluate the deals that you like.  Take time to evaluate which Sponsors you like.  Take the time to evaluate the geographic regions that you like investing in.  As your cash flow increases from your passive cash flow investments, and especially if you are still building your passive cash flow to the level that replaces your active income or to the level that covers your lifestyle, do everything you can to continually re-invest the cash flow earned from your passive cash flow investments.  Over time, re-investing that money will snowball into even more passive cash flow and increased net worth.   

We can help.  If you have interest investing in passive cash flow investments, our Membership programs offer access to deals that we are Sponsoring and co-investing in.  We invest in every deal that we offer.  We believe that it is important to align our interests with our investors.  We believe that our investors should make the lion’s share of the profits.  We are fairly compensated, but we are strong believers that investor capital should receive a Preferred Return on the capital invested and that investor capital should be entitled to the majority of the profits from every deal.  We invest alongside our investors and we act as a steward of the capital and deal throughout the lifespan of each investment. 

Let’s grow our passive cash flow and net worth together.   

Until next time, happy investing! 

⁠— Robert   

Sign up for our Newsletter:

Good news and events details as well straight to your incoming mail!