Are you tired of constantly chasing your dream job or lifestyle and never catching it? Are you looking for a way to supplement your income or entirely replace it? Let me explain how I have replaced $50,000/year of income in just five years and how I plan to replace more than $200,000 of income within the next 10 years, all with passive investing.
And if you fit the description below, you are already well on your way to becoming a passive professional:
- You are an accredited investor (you make at least $200,000 as an individual or $300,000 with your spouse annually).
- You are already maxing out your 401k and have excess income that can go to work for you.
- You can save an additional $50,000/year for investing outside the stock market.
With a disciplined, steady investment philosophy, a few conservative assumptions, and 10–15 years before retirement, you can realistically supplement or replace your income as well. How can this be done? Let me show you.
First, private real estate funds can conservatively produce an average yield of 7% a year and an average IRR of 13% over the life of the investment. Although 7% may not be realistic in the first few years of a fund investment, it is quite likely over the lifetime of the fund. And a 13% IRR over the life of the fund is also a realistic, conservative expectation.
Say the passive investment opportunity has a six-year hold period. If you invest $50,000/year for six years into private real estate funds, a total of just $300,000, you can generate the income to replace more than $100,000 within 20 years.
Let’s look at the math.
- Year one: you invest $50,000, which earns a 7% yield or $3,500.
- Year two: you invest $50,000 plus the $3,500 you earned in year one; your $103,500 portfolio earns $7,245.
- Year three: you invest $50,000 plus the $7,245 you earned in year two; your $160,745 portfolio earns $11,252.
- Year four: you invest $50,000 plus the $11,252 you earned in year three; your $221,997 portfolio earns $15,540.
- Year five: you invest $50,000 plus the $15,540 you earned in year four; your $287,537 portfolio earns $20,128.
- Year six: you invest $50,000 plus the $20,128 you earned in year five; your $357,665 portfolio earns $21,537, but the first investment also closed and returned $78,468, netting a 13% IRR on the fund life. Now you’re done seeding your private real estate investments (unless you want to keep going; it just keeps getting better!). Your portfolio real estate holdings have now surpassed $400,000 with only a $300,000 investment.
- Year seven: you reinvest the $78,468 and $21,537, a total of $100,005; your $407,669 portfolio earns $24,792 and the second investment closes with a return of $83,961.
- The following year, you invest $108,753 that you earned. If you keep reinvesting, by year 10, your $665,283 portfolio will earn ~$50,000 per year. If you hang on another 10 years, your almost $2,000,000 portfolio will produce ~$135,000 per year. You have increased your $300,000 investment by 6.4 times.
If you simply double the $50,000 invested per year to $100,000, a $600,000 investment will earn more than $250,000 annually in year 20, and your portfolio will be closing in on $4,000,000.
That’s how I plan to become a full-time passive professional. I’m in year five, and I’m going to keep investing.