The Math Behind Passive Income Investing

Let's face it...

Living a good life costs money!

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While it's not always as much as we think, and the utility of having more money decreases after a certain point, the truth remains…

You need money to live comfortably.

Even if you lived a minimalist lifestyle, you'd still need to cover basics like food and shelter.

But does securing your financial future have to require an enormous amount of your time and energy?

Short answer: NO.

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Your Freedom Number

While the term "passive income" is often overused by get-rich-quick schemes, it is a real and achievable goal which millions of people are living proof of as you’re reading this.

Passive income allows you to front-load your effort into a productive asset that generates income, even while you sleep.

Your "freedom Number" is the point at which your passive income exceeds your monthly expenses.

Many people throughout the nation (who don’t need to be geniuses) are living on their own terms because of the passive income systems they've built.

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The Numbers Game: It's All About the Math

In passive income investing, everything boils down to the numbers. There are four key levers that influence expected returns:

Activity Required: More active investments typically yield higher returns, while more passive ones yield lower returns.
Skill Required: Complex, skill-intensive investments generally offer higher returns compared to simpler ones.
Risk-Reward: The riskier the investment, the higher the potential returns; lower risk means lower returns.
Difficulty to Sell: The more difficult it is to sell (liquidate) an investment, the greater its returns need to be to compensate.

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Benchmarking Your Investments

Investing revolves around benchmarks, with assets priced on a risk-adjusted basis. Investors use a "discount rate" to reflect the expected return for an investment with a similar risk profile.

Common benchmarks for U.S. investors include the "Risk-Free Rate" (10-year Treasury yield) and "The Market" (S&P 500).

Currently, the 10-year Treasury yield is around 4%, offering a return with no risk, activity, or skill required—serving as the minimum "real return" investors are willing to accept.

In contrast, the S&P 500 averages around 9% over the long term, with more risk due to market volatility.

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Comparing Investment Options

Let’s break down the numbers for different investment opportunities on a risk-adjusted basis, starting with the goal of generating $10,000 per month in passive income.

10-Year Treasury Yield (3% Return):
$120,000/year ÷ 0.03 = $4,000,000
You'll need $4 million invested to generate $10k/month, with virtually no risk
Dividend Stocks or REITs (6% Return):
$120,000/year ÷ 0.06 = $2,000,000
You'll need $2 million invested to generate $10k/month, with low risk.
Cash-Flowing real estate (12% Return):
$120,000/year ÷ 0.12 = $1,000,000
You'll need $1 million invested to generate $10k/month, with higher but moderate risk but significant passive income potential.
Private Business (25% Return):
$120,000/year ÷ 0.25 = $480,000
You'll need $480,000 invested to generate $10k/month, with significant risk and involvement.
Distressed Private Business (50% Return):
$120,000/year ÷ 0.50 = $240,000
You'll need $240,000 invested to generate $10k/month, with very high risk and involvement.

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The Case for real estate Investing

As you can see, the more risk you take on and the less passive the investment, the less capital you need to reach your goal.

The sweet spot for passive investors to maximize their returns while mitigating risk should shoot somewhere in the middle. (Like many things in life the truth lies somewhere in the middle)

real estate offers a unique balance. It sits in the sweet spot between risk and reward, offering relatively high returns with moderate risk, effort, and skill required.

With tools like Virtual Investor Pal, you can leverage technology to increase your capability for returns and lower your activity and skill requirements to find, close, and find a property manager to operate a great real estate deal.

With real estate, you're investing in an asset that not only generates consistent cash flow but also tends to appreciate over time.

This combination of income and growth, combined with the ability to leverage your investment, makes real estate the ideal choice for building passive income.

real estate also allows you to scale your investments over time.

Whether you're starting with a small portfolio or looking to diversify across markets, real estate offers a sustainable path to financial independence.

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Expanding Your real estate Horizons

real estate investing isn’t limited to just a passive income activity.

You can build an active business through strategies like flipping properties, wholesaling, distressed/heavy value-add investing, and development.

These approaches can generate significant returns by leveraging your expertise, effort, and market insights.

Whether you're focusing on passive income or building an active real estate business, our platform is here to support you.

We provide the data analytics and investment analysis you need to assess markets, evaluate potential rental properties, and invest confidently from anywhere.

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Final Thoughts

real estate offers a unique opportunity to build wealth, whether you're looking for passive income, active business ventures, or a combination of both.

By understanding the numbers and leveraging the right tools, you can create a stable, long-term source of income that aligns with your financial goals.

Remember, building passive income isn’t about getting rich overnight—it’s about creating a sustainable path to financial independence.

Whether you’re just starting or looking to expand your portfolio, the journey is worth it, and we're here to help you every step of the way.

Thank you for taking the time to explore the math behind passive income investing.

We hope this has inspired you to take the next step on your financial journey.

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Here's to your success in building the life you’ve always envisioned!

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Until Next Time,

-Nate

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