Access Wealth Strategies

In Part 2 of this series on achieving a 10% or more consistent cash flow on invested capital, we established that this type of cash flow is difficult to achieve passively – i.e. with the investor outsourcing the selection and management of the underlying asset, whether it’s a business venture, real estate or something more “unique”.

At the end of my last post, I outlined a few things that investors could do “semi-passively” to get closer to the dream.

The good news is, if you are willing to “front-end” the work of asset selection and management, and learn to identify and hire good asset managers, you could be living the investor’s dream in a few years.

Here are some examples.

Franchises

Franchises have a very high success rate of over 90% and the return on investment is typically double digit. However, a franchisee probably needs to take an active role in the business in the first 2-5 years to build up the business, implement the systems, and hire and train the right staff. Later on, the franchisee can pull back and enjoy the passive cash flow from his business while periodically checking on his management team.

Distressed Assets

A big opportunity in today’s economy is to identify and buy distressed assets at a significant discount to their current market value.  This typically requires access to a channel (deal flow) for buying these assets at a big discount.  The investor then needs to assemble a management team capable of “improving” the asset and realize its full retail value (or close to it).

We are seeing more and more businesses specializing in distressed real estate (foreclosures, short sales, REO’s) in certain markets and taking investor capital to turn these assets multiple times a year.

Alternatively, some “long term” investors are holding these distressed properties after they are “fixed up” to rent them out while waiting for the rebound in valuation.  In this case, they get break-even cash flow or better while they wait for what is hopefully a significant capital gain.

You can do the same thing to distressed businesses (brick-and-mortar or online), though it would probably require even more work and expertise.

Self-Renewing Assets

I have heard of someone buying land in the California central valley and planting a pistachio orchard. While it requires about 5 years of start-up time with no income and only expenses (water, maintenance, mortgage etc.), eventually it will become a self-renewing passive income source for quite a number of years.

The investing principal here works for orchards, fruit trees, forests, etc.  Once the trees or plants mature, it takes much less maintenance to keep up and you could literally “eat the fruits and reinvest the seeds“.

Laddering and Annuities

You’ve undoubtedly heard of CD or bond laddering - the practice of buying a pool of assets with different “maturity dates” (when you get paid back principal plus interest or gain) so that eventually you will have regular (say, monthly) maturity events, simulating “cash flow”.  Note that this strategy also requires a start-up period with no cash flow while you build up your income ladder.

Most investors use this laddering strategy with mainstream products like CDs or corporate bonds that pay low interest rates (3-4% at best).  Similarly, you can pay a lump sum to an insurance company and get an annuity (cash flow) yielding about the same amount. Obviously this is far below the desired double-digit return of 10% or more.

You could apply the same laddering principal, however, to higher-yielding assets such as private notes secured by some underlying business or real estate (see “Hard Money Lending” section below).

Hard Money Lending

Instead of buying publicly traded bonds or bond funds, you can create your own bonds by lending to private parties (usually businesses) who use your capital to generate a return exceeding the interest rate you charge as the lender.

In some markets today, private lenders are able to get double digit interest rates and the note is secured by some hard asset like real estate or equipment.

As a hard money lender your primary concern is the safety of your principal. The key to protecting against loss of principal is to make sure the collateral value far exceeds the amount you’re lending. The lower the LTV (loan-to-value ratio) the safer it is for the lender, who has the option to foreclose and own the underlying collateral should the borrower default on interest or principal payments.

When done well, hard money lending can be a win-win deal for both the lender and the borrower.  You can even structure your hard money lending deals to include back-end profit participation in addition to regular interest payments.  For example, this arrangement can work in distressed real estate flipping deals.

Of course, there are countless other ways to achieve good cash flow by investing a bit of sweat equity up front, limited only by your imagination.  Can you come up with some more examples?  Please comment and let us know.

Note: please do not advertise your investments or solicit investors in your comments – all such comments will be removed.