Passive Cash Flow

As has been said here before, building up enough passive cash flow to cover your expenses is one of the best ways to really "free yourself" and be able to walk away from your job at any time. With that said, what types of investments would you be targeting to build up free cash flow? Bonds, real estate, maybe dividend yielding stocks? Everything seems to have significant drawbacks...yields are low on bonds, stocks are unreliable, real estate can be a pain to manage. Having royalty income would be nice but thats not just something you can go ahead and create. I've even heard people mention things like investing in timber trusts and other ideas off the beaten path. On one hand you need to get a decent cash return yet you need to be risk averse if you are relying on it for retirement or whatever.

What is the best way to go? How would you build a porfolio of cash flowing investments?

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Comments (8)

Jun 22, 2010 - 12:40am

Partner with a friend in buying a small business. You put in most of the cash, he/she runs it. Buy something already producing predictable cash flows. Lever up, remove equity, and buy another. Repeat until satisfied.

One example; a friend of mine was looking to buy a franchise sandwich shop that was selling for 2.5x Price/CF. Not a bad price for predictable cash flows.

In the movie/book The Blindside, the father that adopts the kid has 20 Taco Bells and lives in a mansion. Passive cash flow is nice.

Jun 22, 2010 - 1:11am
proforma:
Partner with a friend in buying a small business. You put in most of the cash, he/she runs it. Buy something already producing predictable cash flows. Lever up, remove equity, and buy another. Repeat until satisfied.

One example; a friend of mine was looking to buy a franchise sandwich shop that was selling for 2.5x Price/CF. Not a bad price for predictable cash flows.

In the movie/book The Blindside, the father that adopts the kid has 20 Taco Bells and lives in a mansion. Passive cash flow is nice.

How would you split profit/loss in a partnership that way with one partner investing capital and the other time? Just curious.

Jun 22, 2010 - 8:07am

@lucaskahn: I would invest a good bit of my capital in closed property funds. they tend to have decent and stable cash on cash returns and relieve you of all the work & duties connected to owning the properties outright. also, given that most of the properties in the portfolio are financed with some 60-70% of debt and that that debt is paid down over the course of the funds life, there is a pretty decent chance that even if property prices drop you will see all or at least a very good bit of your capital back at the end.

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Jun 22, 2010 - 9:43am

@ excelsior - The split will basically be up to you and your partner(s). It comes down to your barginning power, annual CF of business, capital needed for purchase,etc. How much is the passive vs active aspect worth to you?

@ The Anonymous - Just structure the partnership as an LLC. You get profit pass thru and limited liability.

@ mezzmonkey - Ya it could have been 80 TBs. And thats the hard part, when you have that many businesses you need some sort of management structure to keep it as passive as possible. Then again you may decide its fun to run your mini empire of fast food.

Also I would avoid closed investment funds in general. I don't follow real estate investing but I know PMs love closed ended funds because its permanent capital, ie they can do a terrible job and collect management fees into perpetuity. At least until the fund runs out of money.

Jun 22, 2010 - 7:56pm

Thanks guys, good answers from all of you. The small business avenue is one I would never have considered.

How about when you are young though...is it better to invest in cash yielding investments from the get-go, thereby slowly but surely building up your cash flows or do you initially gun for the high yielding investments (presumably trying to chase capital gains over investment income), then switch your asset base towards income yielding investments once your net worth has ballooned?

Essentially, do you want to start investing in income yielding investments (lets say they yield 5-10% cash), or do you want to go very aggressive (shooting for greater than 10% returns) then switch once you are thinking of retiring/taking it easy.

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