How to Build $200k in Passive Income in 5 Years or Less

Client Case Study

Let me tell you about the couple I’ve met who will prove that it’s possible to earn $200,000 passively in a relatively short period of time.

To give context, this couple was quite young and had some investment properties with about half a million dollars’ worth of equity.

On top of that, they also recently purchased a home with some development potential they can take advantage of in the future.

They ran a successful business for their active income, and although it was hit hard by COVID, they’re in a position now to get everything back on track.

If things go well for this couple over the next year or two, they will have $200,000 to $400,000 in dividends, which is a great outcome for most people. 

Now, when I talked to them about what they were doing to build the wealth they wanted, I was impressed with how clear they were with their goals and their options to get there. 

The strategy they had chosen to create passive income was commercial real estate. However, after looking at their numbers, we figured it wouldn’t get them where they wanted to go. 

As life partners, one of their goals is to generate a couple of hundred thousand in passive income within the next five years so they would have more choices about whether or not to keep working hard.

I want to give kudos to both of them because they were intentional in their own wealth-building processes.

They were also very clear about their goals, which is not always the case when I first speak to people.

So today, I want to share some principles that will help you choose the best strategy for your wealth-building journey—a strategy that can fast-track your process using the least amount of capital and taking on the least amount of risk.

Principle #1: Doing The Basic Math

The first principle I want to share is the concept of reverse engineering.

To achieve your desired income, you must first understand and calculate the basics of returns and outcomes. 

By reverse engineering and looking at the end result you want to accomplish, you can then work backwards and determine the steps necessary to reach that goal. 

However, it is important to note that reverse engineering assumes ideal market conditions, which may not always be the case in reality. 

Therefore, staying adaptable and open to adjusting your plans as necessary is also important.

One time, I heard Alex Hormozi, a phenomenal thinker, talk about the fact that there’s no single path to entrepreneurial success, and I think the same is true of investing. 

Simply put, while there may not be one set path to reach our goals, it is important to have a clear direction and take consistent steps towards achieving them.

If you can analyse the potential returns and the type of fuel you’re going to have, it’s not rocket science to reverse-engineer a pathway for success. 

Let me give you an example. Let’s say you want to have $200,000 in about five years.

You can start by figuring out how much money you need to save each month to reach that goal. Then, consider what assets you must hold to achieve that outcome.

So if you want to make $200,000 from your investments and are prepared to tolerate a 1% cash flow return, you would need $20 million worth of net assets.

But if you want a 2.5% return on your investment, you’ll need to have $8 million on hand to make a $200,000 profit. 

On the other end of the spectrum, if you’re willing to take a bit more risk, you can get by with less cash. 

For example, if you’re aiming for a 12% return on your investment, you’ll only need $1.6 million to make $200,000.

Then, if you could get a 10% return on your capital, you’d only need roughly 2 million to get that same $200,000, and so on. 

These examples show that if you had X capital at Y percentage net return, you could earn a certain income.

So, if you need a specific amount of income to sustain your living expenses, then you have to figure out how to get that capital to work for you to achieve your goal.

Most investors I’ve met think of investments like stocks and traditional real estate to accomplish this.

However, the income we can get from these investments is quite poor, as it’s typical for most people in Australia or New Zealand to earn 1-2.5% on their investments with very little or no debt.

If you listened to my previous podcast, I mentioned that financial planners nowadays say that even if you’re very aggressive in investing in shares, you can only expect a 4% return. 

So, what I’m trying to say here is that if you go with traditional options, as most people do, you won’t get as good a return on your money, especially regarding cash flow.

Now, that doesn’t mean you shouldn’t invest in them. In fact, I recommend you invest in traditional real estate and property to grow your capital.

However, you must be clever and innovative in making this capital work in your favour. 

For example, if you have $5 million, you might put most of your money into investments you can see and touch, like property that can give you 1-2.5% in return. 

You might also have your retirement funds in a traditional super fund, which will earn less interest.

Unlike other types of assets, alternative real estate deals can earn you an 8–12% return without taking many risks.

The reason for that is that they aren’t susceptible to the conventional fluctuations of the market.

So the question you need to ask yourself is, “What percentage of my capital do I need to drip feed into these real estate deals over the next 2, 3, 4, or 5 years to get me to the passive income I want?”

Let me give you a couple of examples here.

If you had $500,000 and were prepared to accept a 10% after-tax return, and you had a business that could give you steady dividends, then by investing $200,000 into alternative investments each year, after 5 years, you would have $2.026 million that could give you an annual return of about $202,000.

Now, I have been an investor for a long time and have tried many different strategies, and let me tell you, I haven’t found yet another asset class that can give me the same return I can live on sustainably.

Another example you can think of is starting with a lower balance. 

If you save a couple hundred thousand dollars each year, you’ll have $1.54 million saved after five years, generating $154,000 in net cash flow.

So what’s my point in taking you through these examples?

It’s to show you that understanding basic math can help guide you where you want to go financially. 

If you’re happy to earn 1-2.5% in return and are willing to go after building 10 or 20 million dollars’ worth of net real estate to achieve your goal, then go for it.

However, please note that it’s much harder to accomplish that from zero unless you earn a significant active income.

Again, the point I’m trying to make here is that you can do basic math, so you don’t need to take significant risks to achieve your desired outcome.

Principle #2: Finding The Right Deals

Now, let’s assume you already know what you want, when you want it, and how much capital you need to put into different types of investments. The next step for you to take is to find the deals that can deliver your desired outcome.

You can choose from shares, blockchain, active developments, traditional buying, whole property ownership, flipping real estate, or alternative real estate.

When looking for all these deals, consider what feels right for you and how much risk you’re willing to take.

However, as I’ve already alluded to, we’re trying to build a pipeline of opportunities, so take your attention away from individual sales and focus on that pipeline.

Principle #3: Educating Yourself

Before you think about what asset classes and strategies to focus on, you must first learn how they work. 

Don’t be like most investors, who, even though they have the right mindset and great ambition, still fail because of their lack of awareness and education. 

If you want to set yourself on the right foot, you need to cultivate a mindset of being agnostic about the what, how, when, and where and instead focus on the fundamental principles that can be adapted to new situations.

Final Thoughts

Achieving $200,000 in passive income is definitely within the grasp of most investors. 

So if you’re genuinely ambitious about achieving the financial freedom you always wanted, you should consider and educate yourself on alternative real estate opportunities.

If you’re interested in using a calculator to get a taste of how much passive income you could build in 5 years using alternative investments, you can check out the Freedom Mapper Calculator on my website.