My entire life I have been fascinated with the idea of earning passive income. I once read a quote by Warren Buffet, saying, “If you don’t find a way to earn money while you sleep, you will work until you die.” This really hit home for me because my dad died when he was only 52 years of age. When he died so did the income from his job.
I have spent years of my life researching the types of investments that would provide passive income for my family, charities and myself even if I wasn’t working. I wrote the characteristics of the investments so I could hone down to something I was comfortable with. The first requirement was to…
(1) secure the money I had earned,
(2) provide passive monthly income, and lastly
(3) increase in value over time.
I started studying stocks, dividend stocks, bonds, bank CDs, real estate, and other alternative investments. I quickly found most didn’t provide 1 and 3. I am a coward when it comes to investing and just simply can not handle the idea of losing what I have worked so hard to get.
And this is what got me so interested in real estate.
When you invest in cash flow producing real estate it is very difficult, almost impossible, to actually lose your initial capital because someone will always want to purchase the cash flow.
Unlike a home you live in, commercial real estate’s future value is determined by its ability to provide cash flow to investors. The future value of a stock is dependent upon many more conditions: politics, technology disruptions and developments, economics, market conditions, and more.
As long as you pick real estate in markets where rents continue to grow, the value of the property should do the same. Unlike stocks, real estate can provide monthly distributions to its investors. The best-known dividend stocks in the world: Coca-Cola, Walmart, & AT&T, pay quarterly, not monthly.
So, let’s do some real practical math to compare investing in stocks vs real estate. You can do the same math with bonds and bank deposits. Let’s say you want to earn $50,000 a year in passive income and want to know how much you would need to invest to do so.
Here is the math – Take your desired annual dividend income amount and divide by the dividend percentage.
Desired Income / Dividend Yield = Amount of Investment Required
Let’s say you want to know how much Apple stock you would need to buy to earn 50,000 in dividends.
Take the $50,000 and divide by the .0171 dividend yield to get $2,923,976 of Apple stock. Call your buddies at Merrill Lynch and send them a wire for 2.923,976 and cross your fingers and wait for the stock to go up.
Compare that to how much would you need to invest in real estate to earn the same $50,000?
At CardoneCapital.com we offer myself and accredited investors a 6% preferred cash on cash return.
To determine how much money you would need to invest with Cardone Capital to earn $50,000, simply divide the $50,000 by 6% = $833,333.
This is what hooked me on real estate, but it gets better than that. An even bigger benefit is that your $833k investment buys 3X the real estate or $2.4M. Because real estate provides stable cash flow, banks are willing to provide investors with leverage allowing you to buy 3-4X the real estate.
The bank knows the debt will be paid off by the real estate’s income paid by tenants. You typically can’t borrow money from the bank to buy stocks. You can buy on margin, but this is very risky. It’s crazy to think I can get a loan from Bank of America to buy real estate but not to buy Bank of America stock. (Let that sink in.)
When I realized I could buy three times the real estate through leverage, earn monthly returns and reduce my risk of loss of capital I made real estate my investment of choice. Warren Buffet also says, “Invest in what you know, nothing more.”
Clearly, real estate—like stock—can go down in value due to cycles or economic troubles, but if you don’t over leverage (borrow too much) and are still paid monthly from cash flow you can wait out the cycles.
During 2008, during the housing collapse, the cash flow from my apartments went up, not down, and got me through 2008-2009-2010.
Real Estate will be still be there when stocks can go to zero or the businesses are no longer relevant. Remember Circuit City, ToysRUs, Sears, Kmart, Lehman, Blockbuster, and on and on.
Now let’s do a little more math. That $833,333 you invested over ten years would have paid you 60% on your investment. 6% x 10 years assuming the rents never went up. And if the rents go up then the value of the property goes up.
My first serious real estate investment was $350k and I bought a property that was worth 1.9M at the time. I earned 12% per year and owned it for four years. By year four, the property had earned almost ½ of my investment in cash flow. A buyer came along and offered me $6M for the property that I had paid 350K for. My partner and I made more money on that one deal that we had ever made from my main job, but the thing I was most excited about…
I was paid passive income while I waited. This took the fear out of investing for me.
Let me know what your take-aways are or where I might have missed something. Certainly, if you had bought Google, Netflix, Amazon, or Bitcoin when they were first coming to market you would have made a lot of money, but this article isn’t about making money, it’s about how you can create passive income of $50,000 a year.
CardoneCapital.com is now open for accredited and non-accredited investors whereby we buy institutional quality real estate and allow the average investor to get access to extraordinary real estate typically owned by major financial institutions. For more information go to CardoneCapital.com
Grant Cardone is a New York Times bestselling author, and an internationally renowned speaker on leadership, real estate investing, entrepreneurship, social media, and finance. His 5 privately held companies have annual revenues exceeding $100 million. Forbes named Mr. Cardone #1 of the “25 Marketing Influencers to Watch.” He currently resides in South Florida with his wife and two daughters.
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