❓ 100% Passive Cashflowing With Funds - Your February Playbook

The only truly passive income? Enter, funds. Here's how to find, analyze, and invest.

Welcome to your February 2022 playbook.

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Episode 13 - Learning to analyze funds as deals for truly passive cashflow.

We talk about buying biz’s and investing in assets that require a LITTLE of your time and call it passive because it’s not your full-time job and you have other people to run it, aka operators. BUT for truly passive cashflow, like 100% hands-off and 0 time spent (other than DD), you need a different method. Here’s one we use… learn to find and invest in public and private market funds as deals. This month’s playbook is about how to assess the quality of private funds to know which to invest in.

Before I look to invest in a new hard asset class, I always invest in funds in that class first. Why? To get an idea about expected returns, terminology, and all in all, to get exposed to the asset without the full risk. That’s probably why I own some 50+ different fund structures and invest across asset classes as a GP (aka I run the deal) AND an LP (aka I invest in someone else’s deal).

Summary

One of the most fundamental ways in which the wealthy think differently about money is they don’t always have to work for it. Their money works for them by investing in assets that generate passive income through funds that allow them to remain hands-off while the GPs do all the work and you still cash flow as a minority investor.

These funds are investment opportunities that are offered and managed by third parties, such as syndicates or small private funds, across many industries and asset classes. Capital is aggregated from an array of investors and used to invest in specific deals.

Now not all funds are good, not all deals are good, not all “good” funds are even “good” for everyone. It’s a choose your adventure wisely. That said you used to have to be a qualified investor, or know someone to get into private RE, PE, hard asset funds. Now those minimums are rapidly dropping to even micro levels such as Fundrise for $100.

As always, with opportunity comes the responsibility to choose wisely. This segment is an attempt to take two deal analyzers and share our takes from investing privately so you can better screen where your money is going.

This idea has been seen across numerous service industries but with automation the game gets infinitely more efficient. We'll get into that.

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Interview

Our team sat down with Hans Box, a fund expert, former accountant, and active investor. Like myself, when he got started, he took a pay cut for an opportunity to learn from someone, AND to be able to participate in the deals. That paved the way to what he does now.

Hans shares his insight into how to find and vet funds, key terms, the basics of analyzing funds as deals, how he’d model out one version vs another, waterfalls, and more. Even if you don’t intend on investing in real estate or private funds, this interview will provide value because if you understand the detail required to analyze a real estate deal let’s say, then you can apply those skills when analyzing any other type of fund.

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Playbook

Step 1 – Understand the Players, Including Yourself

Investing in funds is just like any other deal, you gotta know yourself first…what you’re looking for, your investment thesis, and your risk tolerance. Remember the 5 R’s? Start there.

Some questions to ask yourself include:

• What is my risk tolerance, desired maturation date and total capital to deploy?
• How much time do I want to spend on this investment?
• Where is a market with a lot of potential upside?
• What do you want from a fund?
• What is the current composition of your portfolio and should you diversify?

Your decision will also be impacted by if this is your first investment, your budget, and other goals such as:

What sort of return are you looking for? How liquid are you? Does it make sense to leverage debt for investments? What’s the duration of return of principal you’re comfortable with?

​This guide will help you develop your strategy:​

Once you know these, you can narrow your search by:

• Small or large deal
• Target cash flow
• Long term vs short term
• Single asset or portfolio fund

Don’t get caught up on promised high rates of return. If something seems too good to be true, it likely is. While that seems commonsense it is not always common practice.

Your strategy will dictate your search and deal parameters but your deal flow will also largely revolve around your investor status and the networks you’re involved in.

Basically…DYODD. THEN determine the asset class you want to go into. There are a TON of sectors of funds, to name a few…

• Real estate like self-storage, Multi-family, Commercial, Senior Living, Mobile Home Parks (one of our faves)
• Franchises
• Small business
• Startups
• Online business
• Alternative assets
• Crowdfunding
• Technology

It helps to know where the macro trends are going, what industry the money is flowing into, what sectors are emerging. Ever wonder the most popular places the money goes? Us too.

Then, familiarize yourself with the deal players -

General Partner (GP) - investment professionals who are vested with the responsibility of making decisions and running the day-to-day…aka the sponsor. If you want to be a GP our very first playbook was on that, go check it out.

Limited partners (LPs) - invested the capital for a fund. They give the money…aka you in this instance.

Step 2 – Finding Funds: Private vs Public

Before you can find the fund you want to invest in, you have to know what category of investor you fall under to know what funds for which you will qualify.

There are two types of investors; accredited and unaccredited.

According to the SEC, an individual accredited investor is anyone who either:

• Earned income of more than $200,000 (or $300,000 together with a spouse) in each of the last two years and reasonably expects to earn the same for the current year, or
• Has a net worth over $1 million, either individually or together with a spouse (excluding the value of a primary residence).

This SEC press release goes into further detail as does this explanation of exemptions- Rule 506(b).​

Funds also fall under the categories of private and public. These terms define themselves but even then, you’ll still need to meet the fund’s accreditation terms to participate.

Here are some important distinctions between the two:

There’s no shortage of options to choose from. Funds are available for investors today largely across levels, industries, and budgets.

**To view the rest of the playbook and access your resources, visit the vault!**

Tips & Tricks

“You need to be very serious about this and almost treat it as your second job,” said Hans Box, Senior Director at Old Capital Lending. “A lot of people will spend months trying to figure out which 55-inch TV to buy, but won’t hesitate to throw $25,000, $50,000 into a deal.”

Once you have your investment, if you want to dive deeper into the industry, places like Pitchbook have developed guides for you to understand the state of funds, the big players, and the expanding markets.

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BONUS

We’ve given you the rundown of how to analyze funds to invest in, now learn what it takes to be the fund sponsor. If you ARE looking to raise, now you know what passive investors are looking for. Getting people to give you their money is what we cover in this webinar!

Stack cash and invest passively,

Codie