084: Keep Passive Things Passive
APPLE PODCASTS | SPOTIFY
Can passive income really turn into active income? 🤔🤔
Let’s find out. 🤓
“You get paid on what you do, you get returns on what you own,” – Unknown
That’s exactly how we feel! This makes total sense! But what exactly is passive income? The simplest way to put it is that you are earning money but not actively involved..
We think that passive always beats active, and we’re going to tell you why.
We’ve said many times that “Time is our only true currency.” We are big believers here that you should not trade your time for money. We define success by working in such a way that we have optimal free time to enjoy what really matters to us, like travel and hanging out by the pool.
This might be contrary 😨 to what you learned in business school, but entrepreneurs love to turn passive things into active things because they see where the margin of loss is. The goal for most entrepreneurs is to have freedom and cash flow.
When entrepreneurs try to switch hats to an investor hat, the problem that most encounter is that they try to turn all their investments from passive into active. If you view your ultimate goal as freedom of time, then you will understand that the key to that is keeping investments passive.
But there’s always a cost associated with turning a passive investment into something active, right?
It’s pretty obvious that the first cost is going to be your time, which ironically is typically the thing you are typically trying to gain back.
For example, if you were to become an active apartment investor via syndication, you would essentially be adding the equivalent workload of at least 3-4 high-level people. We don’t think that makes any sense. 😉
Think about it, when entrepreneurs think about the potential loss of margin when they are passively investing, they fail to realize the most important part – it’s passive, and it takes none of your time or effort.
Take a look for a second at your typical return in multifamily which is 100%. If you invest $100,000, it can potentially yield $100,000 in profit in 5 years. That’s a pretty awesome return…
If you calculate the return based on your investment by dollars per hour, it’s nearly infinite, because you as a passive investor will put in merely a few hours during the entire hold while the asset and the general partners work their magic and run the entire business on your behalf.
If you look at this another way, it frees you up to take on other projects that are near and dear to your heart and projects that you’d never otherwise be able to take on. ✨✨
Once you get to a certain level of success in your life the things that you value will change, and you will start to value how you get to spend your time.
Look at Jay-Z, for example. In early 2021, he made headlines by selling 50% ownership in his champagne brand to luxury brand Moët Hennessy Louis Vuitton. We will link an article in the show notes as well as a link to an interview where he explains his thought process behind the deal.
Some people questioned ❓❓ this move, because they see this as overall margin loss Jay-Z stated, “We’ve been trained to look at the percentage of something you own. It ain’t what you own; you can own 100 percent of nothing. It’s whatever the strategy calls for. Like Ace, LVMH was a brilliant strategic partner for me.”
Beyond a strategic partnership, he then went on to explain that he could have said, and I quote “I want to own 100 percent of this thing,’ or I could own 50 percent of it and … push it even further.” At the end of the day, he wanted an asset that he could pass on to his kids.
In doing so, his wealth may even grow faster because he’s now leveraging an existing high-caliber team and global distribution channels instead of trying to do it all himself. He goes on to talk about how there’s no point building a massive company if he doesn’t have any time with his wife and kids, which is infinitely more valuable than any monetary gains he can get from trying to build Ace of Spades into an empire.
Do you remember how we talked about money and time? We’ve come full circle.
Another common mistake that we see when entrepreneurs try to make passive things active is that they forget that it takes at least 10,000 hours to become an expert. In his book, Outliers, Malcolm Gladwell cites research that states that in order to become a world-class expert in any field, you have to practice a specific task for at least 10,000 hours.
When you are trying to enter a new arena, you are starting from the lowest point on the totem pole. In the case of multifamily apartments, no one knows you, and no brokers will trust you to actually close a deal.
Also keep in mind that this isn’t a case where you can say, hey I have money – that’s nice, but everyone looking to buy apartments has money.
Market and Industry Knowledge
Navigating the lending environment, managing property, and so on, are all skill sets and experiences that a seasoned general partner already spent years and 100% of their time and effort acquiring, while you come in from ground zero. 😇
The third mistake we see entrepreneurs do when they try to make their passive active is they start taking on their own low-value tasks, even though they would never let that happen in their own business.
What do we mean by this?
We had a doctor friend who tried to get into the apartment game.
He bought a crummy apartment in Albuquerque, New Mexico because he just trusted the broker’s word that it was a solid apartment.
You can guess what happened next. 🤷♀️ After a few months of owning it, they noticed that the residents weren’t paying rent on time. Each property manager he hired to help manage the apartment for him kept quitting.
What ended up happening was this high-income earner physician started flying out of SoCal every Friday to go become a property manager on the weekends.
We still cringe when we talk about this story, because it absolutely makes zero sense. He ended up trying to do these extremely low value tasks that he should be able to hire someone way more capable to do for him at a much lower cost.
GET ME ON THE KITTI FREEDOM CLUB
………..
Rate, Review & Follow!
“I love Cashflow Multipliers.” ◀️ If that sounds like you, please consider >> rating and reviewing our show! This helps us support more people — just like you — move toward the financial futures that they desire. Click here to let us know what you loved most about the episode!
Also, if you haven’t done so already, follow the podcast. We’re sharing the best tips, tricks, and secrets in owning your own time so achieving financial freedom early and permanently becomes easier. Follow now!
Comments +