Don’t Rely on Your Property Portfolio For an Income Stream
So we all know that traditional property is fabulous and incomparable when it comes to building a stable foundation of capital.
For those of you who haven’t heard my three-part game metaphor, part one of the game of wealth-building has to be around building capital. Once you’ve established a baseline level of capital, and when I take you through the next few little bits on how to get to six figures, you’ll understand what I mean by baseline capital.
But once you get to a baseline capital, you don’t have to slog it out for 25-40 years waiting for that capital to grow to the point where it spits out a pissy little income stream for you to live off.
Unfortunately, the way that a lot of property markets across the globe have evolved, particularly in first world nations, is that as people have become wealthier, the demand for real estate investing has gone up.
In general, inflation and other inflationary pressures have pushed up the price of real estate relative to earnings in many countries, and the income stream that you can expect to earn from property is relatively poor.
Today I want to discuss other options rather than waiting for the income stream from your property portfolio to give you enough life-altering income that you can step off, or feeling like you have no choice but to sell down your assets and ‘eat the cow.’
What I want to do is give you this other idea which involves how to use the asset class of alternative investments to build up to a six-figure passive income, and I’m going to take you through some real stories of clients who’ve done this and managed to hit their financial freedom goals within anywhere from 2-5 years without really taking much risk or exposing much of their portfolio.
What Are Alternative Investments?
I think the best starting point is to give you a quick reminder of what alternative investments are.
Alternative investments are a class of strategies that are backed by real property, in my own case, that allows you to have the highest level of control over an asset or a deal, but without having to get into the weeds and worry about day-to-day management.
It includes things like property syndications, joint ventures, lending deals where you become the bank, there’s direct property and all sorts of private funds and syndications.
What’s exciting about alternative real estate is, instead of having to take out a deal in its entirety, the deal can start anywhere from 10,000 per deal up to about 100,000-150,000 per deal.
You don’t need the banks. Usually, the deal maker is the one that secures finance, so all you have to do as the investor is come in, do your due diligence, be confident about the strategy, the deal maker, the way that assets are selected, your exposure, what the downside protection is, and then you put your money in and you just collect the income.
And the reason that these strategies are so awesome for cash flow is that often these dealmakers are specialists in what I call very inefficient markets, meaning there are not a lot of people looking for deals, and certainly, the average investor and the masses are not looking for deals in this particular space.
So for the smart deal operator, this allows them to find opportunities that produce really great income and work with astute, generally experienced investors who are interested in building cash flow.
If I’m a responsible mentor here, I would say to you that as much as people get excited about the sorts of returns (and double-digit returns are pretty common: depending on how ambitious you are, you can get a net return after expenses of anywhere from 8-18% on average) if you’re in phase one, which is building your capital, try not to get too distracted by alternative.
Learn about them and understand them, but know that you need some capital to play with in order to get a meaningful result.
The Freedom Map Calculator
There’s a tool on my website, www.www.inkosiwealth.com, and it’s called the Freedom Mapper.
What’s awesome about this Freedom Mapper is that it’s a super basic calculator that helps you understand if you had a starting balance of X amount of capital and you tried to get a return of Y percentage per annum net, meaning after expenses, and you contributed a certain amount of capital every year, where would you be in five years time?
This is a really great starting point because if you imagine that the amount of money that you need per deal is $50,000 on average, then if you have a starting balance of $200,000 or $500,000, you could carve that up into a number of different buckets.
Now let’s imagine you carve up your $500,000 into somewhere between 6-10 buckets. $200,000 you carve up and you put into 3-4 buckets, so you get the idea. But when you look at the Freedom Mapper, all you’ve got to do is come up with those three numbers and it will just show you that if you allow that income you earn each year to just be reinvested – where are you going to be in terms of a passive income stream by year five?
The reason that I created this calculator is because it’s really hard to grasp that a smaller amount of capital can actually get you to a fairly significant return over five years.
Client Case Study – #1
I have a client who has a starting capital balance of $200,000. They already have a fairly decent property portfolio and they’ve recognised that the cash flow coming from that property portfolio, which I think is in the vicinity of about $15,000 per annum, is just nowhere near what they need to live comfortably.
So, they’re looking at alternative investments as a way of scaling that income, potentially by five to ten times, and they need it to be game over within five years.
This particular client runs an engineering business and they are relatively young. They’re looking to have a family of three to four kids over the next 5-10 years and they want that freedom to just be present with the children. So it’s not that they’ve got only $200,000 to invest, but they just want to start modestly and then build up from there.
They want to aim for an average net return of about 12%, which is very doable in the markets that we operate in, and that they’re going to add $110,000 per annum. If I allow that to compound by the end of year five, that is throwing off $105,000 in cash flow. So in five years, they are going to achieve more than they have in the last 15.
They’ve already hit their borrowing limit, in terms of how many properties they can buy for now – maybe over the next 5-10 years they can throw in another one or two properties, but they’re pretty well leveraged, and the banks are saying no more based on the income they have.
If they were to just sit on the property portfolio they have, they’re about 28 years away from reaching the financial freedom that they need.
You can see why after five years, with a very small fraction of their portfolio, I’m gonna say this will probably constitute maybe 10-15% by the end, they’re actually going to hit their goals.
Client Case Study – #2
Now let’s try something different. If you started with a starting balance of $500,000 and go a little bit more aggressive with 13% net return on average, and only add $50,000 per annum.
Again, you can see that by allowing your returns to compound each year, and this assumes that you don’t need that money to live off, by the end of year five, you’ve hit $124,000.
What the Pursuit of Alternative Investments is All About
So there’s nothing particularly complex about this calculator, but you can start to see that the pursuit of alternative investments isn’t about saying, “I’m going to sell everything I own and stick it in here” – in fact, if you’re working with me, I would probably stop you from doing that.
It’s about working out, what is the minimum viable amount of capital that I need to come up with in order to reach my goals. If you’ve got a shorter timeline, you think about how to alter those numbers.
But if you recall the three parts to the game:
- Build the capital.
- By deploying your money into a few alternative investments, you can massively change the trajectory of your passive income.
- In this case, in year five I’ve got a balance of about $1.2 million invested and it’s throwing off a cash flow of about $124,000. So what do I want? How do I structure now to choose investments where they are set and forget?
The idea is for business owners and entrepreneurs to start thinking about, “How do I divert my precious dividends out of the income stream that I have?”
Instead of trying to live and expand your lifestyle, mindfully allocate money over the next three to five years so that in five years you have the choice as to whether or not you keep working or get off the rat race ferris wheel.
Final Thoughts
The point that I’m trying to make is that these are not crazy scenarios. There’s no crazy risk-taking going on here.
And I haven’t even covered how, in my world, the alternative investments are often lower risk than even some of the traditional assets that people believe in and know and love.
But you know, you don’t have to be a rocket scientist. You have to be someone who is open to a new way of thinking.
Freedom Mapping and the idea of building a passive income over a relatively short space of time is totally achievable.
If you want to be wealthy instead of just looking rich, this has to be an income stream or a strategy to build passive income that you must consider.
So my call to action to you, if you haven’t already gleaned it, is go to the website, get a hold of the Freedom Mapper, have a play with it, and certainly if you’re interested in understanding how alternative investments could fit into your world, how as a business owner, you could step off or have the freedom to choose whether or not you work over the next two, three, four, five years.
Please get in touch. I’d love to hear from you. I’m super passionate about this stuff. It is really changing the lives of so many people and I’m really excited about the contribution that we’re making in this programme to the lives of potentially hundreds of people.
If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!