Co-Founder and Managing Partner of Disrupt Equity. Learn more about preferred equity & our investment opportunities by visiting our website.
Sir Richard Branson is often quoted as saying, “Never take your eyes off the cash flow because it’s the lifeblood of business.” He’s right. Whether you are investing in real estate with your own money or you have a business that buys and sells real estate, cash flow is king. With enough passive income, financial independence, your dreams of retirement and upgrading your lifestyle suddenly become much more doable. You can also reinvest the cash to generate even more money. And, of course, the only way to generate that passive income is through cash flow investments!
If passive income is attractive to you, here are some different kinds of cash flow investments you can make, including their pros and cons.
1. Real Estate Syndications
Real estate is a great way to earn passive income, and one way to passively invest in real estate is investing with a real estate syndication company. (Full disclosure: I run a real estate syndication company.)
Have you ever looked at an apartment complex and wondered who owns it? There’s a good chance that a real estate syndication owns it, and although the term may be unfamiliar, the concept is straightforward. Real estate syndications are nothing more than groups of investors who buy a building and share in its cash flow and appreciation. Syndications are often LLCs, and each investor is a member. They typically hold on to the investment for five years, making improvements and increasing its profitability and resale value along the way. 2021 data show an average 8% preferred return, with investors obtaining 80%-95% of the initial capital investment upon sale.
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Pros: Real estate syndications are some of the best cash flow investments because they provide such a high potential return.
Cons: Investors typically need to have at least $50,000 and be accredited to join. If you don’t meet those criteria, you may have to wait to invest in a syndication.
2. Renting Single-Family Homes
Another common cash flow investment is the venerable single-family house (or condo). People frequently buy investment properties, fix them up and then put them on the rental market.
Some people like to be landlords and handle all the contracts, marketing, maintenance and so on. If you’re in a high-demand tourist area, you could also put your single-family home or condo on Airbnb and command a higher monthly income. While that can have a higher cash flow, it’s usually not passive since you’ll need to clean between guests and do other maintenance (or pay someone else, but that eats into your cash flow).
Pros: Straightforward, and you have complete control over the investment. Want to add a fresh coat of paint to the home to try and boost rent? You can do that. With this type of investment, you are in charge of your destiny.
Cons: If your tenant leaves, your cash flow also leaves. In that sense, renting out a single-family house comes down to luck. If you get lucky and get the right tenant, you’re set—but if you don’t, you could lose a lot of money and miss out on cash flow!
3. Buying ATMs And Other Money-Generating Assets
Real estate is not the only way to earn passive income. Many people elect to buy into businesses or buy assets that offer this type of passive cash flow. Two commonly cited examples include ATMs and laundromats. When you buy an ATM and put it in a well-trafficked location, you’ll make passive income through fees with minimal effort to collect them. Many other types of assets provide passive incomes, too. Laundromats and renting out cars are other popular options.
Pros: Passive income is reasonably achievable, and the business model is scalable.
Cons: It can sometimes be a gamble, and markets can change. If, for example, you were renting out cars when Covid hit, you would have been in trouble for the period where nobody was traveling.
4. Stocks And Bonds
If you buy bonds and stocks with dividends, you will earn passive income. Some bonds can pay 10%-plus and some dividend stocks offer high returns. There are also bond ETFs that let you own, for example, a variety of bonds from a particular state or government.
Most of these stocks, ETFs and bonds are available from your favorite brokerage, although some brokerages have better selections than others. Many brokers now have no minimum purchase amounts or commissions, which means you can get started with only a few dollars.
Pros: Very accessible. You can start earning passive income no matter how much money you have in the bank right now, assuming your brokerage has no minimums and has zero-commission trading.
Cons: Despite the accessibility, you will need to invest a large sum to earn a substantial amount of passive income. These cash flow investments typically pay somewhere between 1% and 5%, which means that even if you put $1 million in these investments, you’d likely earn no more than $50,000—and that’s on the high end!
The Best Cash Flow Investment Option: Real Estate
While all the investments mentioned have benefits and drawbacks, real estate is arguably the only investment option with passive income and a clearly defined set of rules for asset appreciation. That combination of passive income and appreciation is why real estate is so powerful.
All investments involve the risk of loss, and past performance is never a guarantee of future returns. However, if you do your due diligence on your next cash flow investment, you’ll give yourself the best shot at earning the passive income you desire.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.