In 2012, the Super Bowl came to Indianapolis. My friend Dave and his dad owned a bar downtown just blocks from the stadium. They knew that during the month the Super Bowl was held, they were going to break all sales records at the bar. About 9 months before the Super Bowl, Dave, his dad, and I sat down to discuss a proposal they had for me to loan them money for the bar.
Dave and his Dad wanted to purchase a liquor license that would allow them to sell hard liquor in addition to the beer and wine they were already allowed to sell (in essence, going from a 2-way liquor license to a 3-way liquor license). They also wanted to add some cosmetic improvements to the bar. They were interested in borrowing $75,000 from me.
I was hesitant to loan money to a business without a lot of physical assets to secure my money. I also smelled an opportunity. I proposed to Dave and his dad that instead of an unsecured loan, I was MORE interested in having a 20% ownership in the bar that they could buy me out of at any time. I wanted to take on MORE risk, but not risk losing all of my $75k if the bar ultimately failed. But the flip side would be that I would MAKE much more in profit than I ever would as a creditor.
After negotiating back and forth for a few weeks, David and his dad agreed to make me a passive and silent partner who would be able to eat at the bar and be treated like every other customer. I wanted all of the transparency and upside of ownership but NONE of the headaches. Dave and his dad actually LOVED this idea because they had been concerned I would come in and want to run the show. It was actually just the opposite. I wanted there to be only one boss (Dave) whom I would hold accountable for his management abilities and ultimately RESULTS as a decision maker. What I really wanted was a COMPLETELY passive investment.
I have seen 7, 8, and 9 figure mentality investors OBSESSED with passive investments. They see their active investments as something that generates income FOR their passive investments, and to create new passive investments. You have the same 24 hours in a day I have. ACTIVE investments take some of that time. PASSIVE investments should take no more than 1/10th of that time. My $75,000 investment in Dave’s bar almost doubled over the next couple of years. I made almost 30% return a year on my investment. I didn’t spend one minute pouring drinks, washing dishes, kicking out drunk patrons, working nights and weekends, unloading beer kegs, filling in for sick employees or anything of that ACTIVE nature. In fact, I had the best seat in the house whenever I stopped by and Dave was there. All the employees knew me as Dave’s friend.
When I transitioned from high school teacher to full time investor, my vision was to:
- Buy 10 new houses to flip every month.
- Have 10 houses on the market to sell at the same time.
- Be working on 10 houses to get ready to flip.
To my horror, I found when I got close to achieving those goals, I had simply traded my rewarding and fulfilling career as a teacher for a stressful and mind numbing JOB as an ACTIVE income house flipper. I was making ten times more money, but working five times harder, and my life wasn’t getting any better.
The only way you will create more time for yourself and truly fire your boss is to embrace passive investments. I find many people understand rental properties as a great passive investment, so they buy a few and manage the properties themselves. Managing your own rental properties is STILL active income, and most people are now doing property management on their own properties for essentially $15/hour (that is what I pay a property manager starting out). I have one dentist friend who works in his dental practice Monday through Thursday and then, when his practice is closed on Fridays, does handyman work on his properties and collects rents from his tenants. I was teasing him about how dumb this was and said, “Let’s walk through the math. You work as a dentist 10 hours a day, four days a week, for 45 weeks a year. That’s 180 days a year. You make $600,000 a year—so based on 1,800 hours fixing teeth, your hourly time is worth $333/hour. Since you spend five hours on 45 Fridays as a property manager doing $15/hour work, you are really only saving $3,375 worth of labor. You would have to work only ONE EXTRA DAY at your dental practice a year and pay someone to manage your properties, and you could take the other 44 Fridays and go do something fun!”
He said, “When you put it like that, Aaron, I sound like an idiot for managing my own properties!” I laughed and said, “Your words, not mine; but you should really think about what your time is WORTH, and whether or not you are spending at least 80% of your active income time on high-value activities.”
7-figure net worth individuals focus on active income to invest in passive investments while dividing their day into high-value activities that maximize their earning power!
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