Real Estate Investing with Kenny Wolfe

Freedom through Passive Income

January 11, 2023 Kenny Wolfe
Real Estate Investing with Kenny Wolfe
Freedom through Passive Income
Show Notes Transcript

Passive income can be a powerful tool and lead to a great amount of freedom in your personal life. 

My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out. 





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Passive income can be a powerful tool and lead to a great amount of freedom in your personal life. Let's dive in on this video. 

Welcome to Real Estate Investing with Kenny Wolfe, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name is Kenny Wolfe and I've been a real estate syndicator and investor for almost 12 years now, and in this time, I've built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe so you're notified when a new episode comes out. 

Let's quickly explain what passive income is. Passive income is any income that comes into your bank account without you trading hours for dollars. It can be anything from dividends, from stocks, cash flow, from your real estate investments, interest payments from bonds, or a whole slew of other options out there.

There is a little bit of upfront work that you'll need to do to make sure you choose the right investment returns, make sure you're paying the right price, and what are the risks to your capital. Once you do that, the passive income is on autopilot, coming back to you monthly or quarterly. Why does this need to be a part of anyone's portfolio? A lot of the personal finance gurus out there will tell a 20+ year old that they need to invest everything toward appreciation to grow their nest egg. Then slowly, over the next four decades, invest less in appreciation assets and more in cash flowing assets. Their heart is in the right place, and I even agree somewhat to the theory. I just think you should get some passive cash flow going as soon as possible. I've seen people retire in three to five years from their corporate job by investing for cash flow.

They definitely did not invest in mutual funds and put it all in the growth category. Those folks focused on cash flow and growth, with the aim to replace the W-2 income in that three-to-five-year timeframe. Think about how powerful that couple has just become. They have $6,000 to $10,000 of passive income coming in every single month. What would you do if you had that kind of money coming in every month outside of your W-2 job? If you love your job, and there's some of you folks that are out there, then you could keep going to work. But just knowing you could walk out that door at any moment-- that's an empowered person right there. Or, what if you want to try to take early retirement and then focus on your passions, or take a lower paying job that brings you much more fulfillment into your life?

Either way, having passive income rolling back to you will completely change your life. How do you start? You're not going to all of a sudden start raking in $6,000 a month in passive income. This is a marathon, not a sprint. You need to figure out how to create your first $500 to a $1,000 a month of passive income. Start there and see what works for you. What risk are you willing to take? Also, what investments do you understand? Knowing what kinds of returns you need to hit that magic monthly passive income number for you, and your family is huge. That has to be the first step. I always think setting achievable goals is the best way to go. Maybe the first major goal would be to replace one of the W-2's in the household. Say that person makes $75 K a year pre-tax.

Your aim is to create $6,250 a month in passive income. That monthly number is really lower if you use real estate as part of your passive income streams, but that's for another video entirely. Now, we have the $6,250 a month number and can work backwards. It's time to figure out what investment vehicles are going to get to you there in the shortest amount of time; keeping in mind that all these should be legal, and you have to weigh the risks. Today, the S&P 500 annual average dividend rate is 1.8%. If you were just drinking coffee and you spit it out, I apologize. Yes, a mere 1.8%-- that is a non-starter right there. Just to hit your monthly cash flow needs, you would have to have $4.17 million plus to get there. Now, I'm not saying all stocks are bad, and I personally have a stock portfolio that I've built that produces about 6.68% annual cash flow based off today's values.

I didn't pay near what the values of that portfolio are today, so the cash flow off my initial investment is really 8.4% plus annually. But, individually picking stocks is not for the faint of heart, and you really need to be buying those stocks when the market is freaking out. Say you could get 8% annual cash flow from picking stocks--that would mean you would need $937,000 working for you--much lower than the $4 million mark. My main investment vehicle has been real estate. Today, it makes up over 95% of my investment portfolio. The cash flow from these commercial real estate investments have been great over the past 12 years that I've been investing. Not only have I racked up some great cash flow, but the value gains have been incredible. Usually, we're hitting 8% to 10% annual cash flow over a five-year average for our investors.

Now, year one might be 5% to 6%, year two, 7% to 8%, year three, 8% to 9%, et cetera. At the end of the day, we're hitting somewhere between that 8% to 10% cash on cash mark for a year on average for cash flow. On top of that, our residents or commercial tenants are paying down our loans for us. That's typically another 4% to 8% a year return of equity buildup in the properties. Throw on top appreciation, which can range from 2% to 10% a year. We're making about 20% a year on our money, sometimes more and sometimes less. Again, you're trying to hit that $6,250 a month of income mark, and through real estate, you're getting a 9% annual cash flow rate. On top of that, you're getting your principal pay down and appreciation. Just through the cash flow alone, that means you're going to need to have an eventual nest egg of pay $833,000.

That's a big number to tear down when you're first starting out. Let's break it down--make it half that number so it's not so scary. You'll need $415,000 working to create $3,150 a month for you. Say you start with $50 K and invest in a cash flow/growth investment in a real estate syndication, which is a group of investors that get together and invest in a larger commercial property. By year three, your $50,000 investment has grown in value to $85,000. If you're a smart syndication group, then you realize you've created all this value and then you do a refinance on the asset. You get to pull out $45,000 in a tax-free manner as the investor. That leaves $40 K of your money making 10% to 12% a year or $366 a month because of rent growth. Take that $45,000 you pulled out of the investment, and you reinvest it into another real estate syndication.

This time you add another $25 K to your $45 K equity pullout to invest $70,000 and again, by year three of that investment, your value has grown to $120 K. You’re a smart syndication group and you do the refinance play again. You pull out $60,000 in the refinance, which leaves $60 K, making 11% cash flow a year or so due to rent growth, and the perform higher performance of the property every single year. That's another $550 a month of income, plus your first investment now is kicking off about $400 a month. You take your new investment, plus your first investment, and that's continuing to grow in cash flow and appreciation--on and on you go, until you create enough passive income streams. At the same time, you're growing the value of your investment-- you keep doing that until you reach that initial $3,150 a month passive income. Through continuing to invest in compounding your returns, that snowball effect takes over, and you start picking up steam where you can keep growing your cash flow, and your equity, to where you can hit that $6,250 a month passive income.

Get rich quick schemes are usually just that--schemes, but building up multiple passive income streams takes some upfront legwork for sure. Once you find the syndicators you like and trust and understand that their investment philosophy is truly a passive role, you get to enjoy. There's obviously risk when investing, and you can have delays or setbacks—remember, investing is a marathon and not a sprint. The power of having $3,000 a month and eventually $6,000 a month rolling in every single month, like clockwork, is huge. The hardest part is starting. Start taking those first steps to create the first $500 to $1,000 dollars a month of passive income, and you're well on your way. 

This has been Real Estate Investing with Kenny Wolfe. Thanks so much for listening.