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TRANSCRIPTION
Travis Watts: Hello and welcome Best Ever listeners. I am your host, Travis Watts, on the Actively Passive Show here today. Theo Hicks is unable to join us for this particular episode. He’s on a personal day; he is well and good, he will be back next week with us. But today, since it’s only me, I promise I will do a fun, entertaining, straight and to the point, shorter episode than what we usually do, so hopefully there’s a lot of value in this for you.
And today’s topic comes from a question that I have been asked for years and years and years by prospective investors, by friends, family, colleagues, you name it… I used to ask the same question myself, for many years. The question is, “How much do I need to have invested to achieve my outcome of X, Y, and Z?”, whether that’s your retirement goal, whether that’s your early retirement goal, whether it’s just a goal for whatever it is, right? Everybody’s going to be different. And ironically, what’s so funny about this is what I hear all the time, is “I would love to have $10,000 a month in passive income.” “I would love to have $100,000 a year in passive income.” It’s like we all have the same goals circulating in our heads. I don’t know where that comes from.
But today, I just want to show you an infographic that I have created for you that can help simplify this for you. I’m not a financial planner, I’m not a financial advisor, I’m not licensed in these capacities, so please seek licensed professional advice when you’re actually going to do your investing. This episode is for educational purposes, to help enlighten you to the possibilities out there, what they mean, how they work… So, without further adieu, I will just pull up this infographic, and I will say this, for anybody who’s listening on audio… First of all, I think these get released first on audio, and then they go to YouTube on video. So it may not even be available right now on video, but if you’re watching on video, pretty straightforward, here it is. If you’re listening on audio, I will do my very best to walk you through what this infographic is all about. Sorry, let me just minimize this real quick. And there we go. Perfect.
Alright, so here’s the infographic. How much do I need to invest to receive $100,000 a year from cash flow? Two things I want to point out, right off the top; why $100,000 a year? Well, just the most common thing that I hear when people ask me this question or bring this topic up about their goals. Use your own numbers, right? Maybe it’s 80, maybe it’s 300; you plug in your own formula.
Cash flow. Why cash flow? I’m using the word cash flow as a general definition to describe yield, like dividends, or interest, or cash flow from real estate, you name it. I’m putting that all under the umbrella of cash flow, because this is the Actively Passive Show, and we are primarily real estate focused, so I use the real estate term. No other meaning but that.
So here is the infographic. I’m going to walk you through it first, again, for those that can’t see it, and then we’re going to dive into each of these categories, and what types of investments might fall into these particular categories to help you identify what makes the most sense for you. Or you can work with your advisors too to figure that out.
So the first one is, if you had a 2% annualized return – talking about yield, dividends, interest, cash flow – then you would need $5 million invested to get an outcome of $100,000 per year. Now, obviously, that’s going to be a conservative approach. We’ll get into it in a minute of what would fall into that category, but just so you know, I’m using a scale from two to 10%, because it’s where most people are going to land. Yes, it’s possible to get less than 2%, as it is more than 10%.
4% – it would take two and a half million invested; obviously, that’d be half, so 2.5 to get 100 grand a year. 6% would be 1.675, so almost one in three-quarters of a million invested. 8% would be 1.25 million, just over… And 10% year as a return would mean 1 million invested with that type of return, to get $100,000 per year.
So let’s dive into each category and I’ll share with you some things that come to mind. I’m not going to name any specific investments, or stock names, or real estate operators. I’m just going to give you categories. And again, highly opinionated, but hey, it’s based on the research, too. So 2% would be, let’s call it, government bonds, treasuries, interest from the bank… These things, they ebb and flow, right? But this is a more conservative approach. Maybe appropriate, possibly, for older folks or someone with lots and lots of equity to put to work. This is just more of a conservative aspect of the portfolio.
In the 4% range, you bump up to annuities, which is a very common retirement product that a lot of people buy into. Life insurance policies are very closely tied to that, whether we’re talking whole life, or things like that, where they have a — I don’t know if they use the word guarantee, but they kind of have a baseline return of sorts. It’s usually around 4% the last time I looked into them, which wasn’t that long ago. And CDs, possibly; you’d have to find a very high yield CD, and maybe a longer-term CD. It just depends on the bank and interest rate environment.
6% – we bump up into some types of real estate, possibly. It could be high-end, luxury real estate, it might be a conservative year one underwriting approach due to COVID, or trying to turn around the properties, so maybe have a little bit lower yield in the beginning. It could be corporate bonds, public companies, even private companies raising capital, that kind of stuff… Dividend stocks, blue-chip dividend stocks sometimes are in this range. Again, I’m not going to name specifics, but if you go look up some blue-chip dividend players online, you’ll find what I’m talking about.
8% – this is what comes to mind when I hear 8%. First and foremost, real estate. I don’t care if we’re talking about single-family, multi-family, whatever. In 2015, those that know my story, I switched from investing in single-family homes into passively investing in multi-family syndications. And for me at that time, I made what I call the 8% rule, which is just a personal thing… But I thought conservatively speaking, I could clip an 8% annualized cash flow coupon from these types of deals. Some are going to do better, some may do worse, so I’m going to kind of take the average or eight and live off the income, which we’ll get to in a few minutes. So that’s the first thing, it’s real estate, in any form.
REITs – real estate investment trusts are usually publically-traded; they could be private, but they’re just basically a real estate investment fund that has to distribute, I don’t know if it’s 90% or 90% plus of their earnings to investors. So it’s usually a higher yield, compared to like the blue-chip companies I mentioned in the 6% category. Notes, diversified pools of notes; I’m in a couple of funds like that. Tax liens might fit into this category; again, that could be higher or lower depending on the state, the rules, and the outcome.
10% – first thing that comes to mind there is hard money lending. So someone’s going to borrow your money for doing a fix and flip, or a construction project, or whatever, but they only need your money for, let’s call it six months. So they’re willing to pay a 10% annualized yield, because they know it’s not going to be a 30-year type situation, right?
Or even a 10 year, it’s going to be very short-term. So that’s hard money lending; you might get in those yields, possibly higher, possibly lower.
Professional real estate investments, specifically private placements that I mentioned – a lot of these could be in the 10% cash flow yield range; again it just depends on the deal, the operator, when you’re listening to this episode… There are so many factors, but I’m trying to give you some general categories to think about. So it gets a little more professional, starting at 10%, talking about specifically yield, and then going higher above and beyond that.
So that’s two through 10%. The point of this infographic is just simply, again, educational purposes to get your mind thinking, to think “What’s my risk tolerance? What makes sense to me, and what do I know and best understand? Where am I at? In my 30s, 40s, 50s, 60s?” And maybe this is just the beginning of you starting to plan your retirement. Or maybe you’re in retirement, thinking “I’ve got this 401k with a million bucks in it. What do I do now?”
This might be something to think about. So that’s really what I have for you today. I know that was a little bit high level, but hopefully, it was also impactful and educational for you. Again, we’ll have Theo Hicks back next week, my co-host. But for now, I appreciate you guys tuning in. Thank you so much, have a Best Ever day. Thank you, guys. We’ll see you next time.
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