The Lifestyle Investor

1. Lifestyle Investing: Prioritize Cash Flow and Time Freedom

"Working because you want to, not because you have to is financial freedom."

Redefine wealth. Lifestyle Investing focuses on creating passive income streams that cover your living expenses, allowing you to choose how you spend your time. This approach prioritizes cash flow over building a large nest egg, enabling financial freedom much sooner.

Design your ideal lifestyle. Start by calculating your monthly expenses and determining how much passive income you need to cover them. Break this down into three stages:

1. Cover bare minimum expenses
2. Maintain current lifestyle
3. Live your dream lifestyle

By focusing on cash flow investments, you can achieve these stages progressively, gaining more freedom and control over your time and choices along the way.

2. Reduce Risk Through Strategic Deal Structuring

"Rule No.1: Never lose money. Rule No.2: Never forget Rule No.1."

Mitigate downside risk. Successful investing isn't about finding "sure things," but about structuring deals to minimize potential losses while maximizing returns. This involves:

• Collateralizing loans (ideally 2-3x the loan amount)
• Securing senior positions or first liens on assets
• Negotiating personal guarantees or stock pledges
• Including default interest rate provisions

Create win-win scenarios. Look for asymmetric risk/reward opportunities where your downside is protected, but you have potential for significant upside. For example, in the Dressbarn deal, investors received:

• 20% interest paid monthly
• Full principal repayment after one year
• 3% equity kicker per $1 million invested
• Collateral worth more than the investment

3. Find Invisible Deals by Exploring Emerging Markets

"The sky is filled with stars, invisible by day."

Look beyond the obvious. Invisible deals are often found in:

• Emerging markets and technologies
• Companies in reinvention phases
• Off-market opportunities
• Unconventional investment structures

Develop deal flow. Build a network of investors, entrepreneurs, and industry insiders to access opportunities before they become widely known. Cultivate relationships with deal sourcers and be prepared to move quickly when the right opportunity arises.

Example: Dressbarn acquisition. By separating the profitable e-commerce business from struggling retail operations, investors created significant value in an established brand that many viewed as obsolete.

4. Get Principal Back Quickly to Reinvest and Compound Returns

"If you could buy a house for $500,000, get all of your money back in two years, and be able to reinvest that money into another house while still benefiting from the equity from the previous house. Now imagine continuing that cycle."

Velocity of money. Aim to recoup your initial investment within 1-3 years, allowing you to reinvest and compound returns more quickly. This strategy creates a multiplier effect on your portfolio growth.

Negotiation tactics:

• Accelerated distribution schedules
• Preferred returns
• Equity kickers that remain after principal repayment

Real-world example: In a multifamily syndication deal, investors received:

• 10% preferred return paid quarterly
• Return of principal in 1.5 years
• Ongoing equity payments and appreciation
• Tax benefits through depreciation

5. Create Immediate Cash Flow for Financial Independence

"I'm a cash flow guy. If it doesn't make me money today, forget about it."

Prioritize immediate income. Look for investments that generate cash flow from day one, rather than relying on future appreciation or exits. This approach provides:

• Faster path to financial independence
• Reduced risk compared to speculative investments
• Ability to reinvest returns for compounding growth

Cash flow investment examples:

• Real estate rentals (e.g., mobile home parks, apartments)
• Private lending with monthly interest payments
• Royalty-based investments
• Cash-flowing businesses or franchises

Case study: Mobile home park. A $65,000 down payment on a mobile home park generated $2,000 monthly net income, providing a 36% cash-on-cash return in the first year.

6. Amplify Income with Negotiated Terms and Sidecar Agreements

"But wait, there's more!"

Always negotiate. Don't accept standard terms; look for ways to improve deals through creative negotiation. Common income amplifiers include:

• Equity kickers
• Warrants
• Revenue shares
• Liquidation preferences
• Advisory shares

Utilize sidecar agreements. These separate term sheets provide enhanced conditions for specific investors, such as:

• Discounted fees
• Increased preferred returns
• Higher profit splits
• First right to invest in future deals

Example: Franklin Mint investment. Investors negotiated multiple income amplifiers:

1. 10% monthly distribution of gross sales
2. Collateral worth over $100 million
3. 20% cash bonus at end of 3-year term
4. 6% equity kicker per $1 million invested
5. Guaranteed 2x return of principal within 3 years

7. Plus the Deal with Additional Income Amplifiers

"I constantly negotiate a deal until I feel comfortable with the terms and feel like my risk has been properly minimized or totally mitigated."

Stack strategies. Combine multiple non-obvious approaches to earn greater returns with lower risk. This may include:

• Utilizing specially designed whole-life insurance policies for tax-free growth and low-interest loans
• Negotiating accelerated distribution schedules
• Securing warrants or equity positions in addition to debt investments

Create multiple income streams. Look for ways to earn returns from the same capital in different places simultaneously. For example:

1. Invest in a whole-life policy
2. Borrow against the policy at a low interest rate
3. Invest the borrowed funds in a high-yield opportunity
4. Earn returns from both the insurance policy and the separate investment

8. Cut Out Unnecessary Fees and Middlemen

"The fastest way to make money is never to spend it unnecessarily in the first place."

Analyze value vs. cost. Evaluate all fees and middlemen involved in your investments:

• Financial advisors
• Brokers
• Fund managers
• Banks and financial institutions

Key questions to ask:

1. Do they win when you lose?
2. Do they have skin in the game?
3. Do they practice what they preach?
4. Where can you save time or money?

Direct investing advantages:

• Lower fees
• Greater control
• Potential for higher returns
• Faster deal execution

9. Use Leverage Strategically to Maximize Returns

"If you can find a way to improve that asset without writing a check, you improve and increase equity and increase cash flow as well."

Understand lending options:

1. Seller financing (preferred)
2. Traditional bank loans
3. Conduit loans (CMBS)
4. Agency loans (Fannie Mae, Freddie Mac)

Leverage strategies:

• Use non-recourse loans when possible
• Borrow against appreciating assets for tax-free income
• Utilize bank financing for capital improvements
• Negotiate loan terms with multiple lenders

Example: Mobile home park acquisition.

• 20% down payment
• 10-year note at 5% interest
• 25-year amortization
• Additional $150,000 loan for improvements
• Resulted in 41% cash-on-cash return in first year

10. Invest in Knowledge and Surround Yourself with Experts

"An investment in knowledge pays the best interest."

Continuous learning. Invest in your education through:

• Books and podcasts
• Conferences and seminars
• Mentorship and coaching
• Hands-on experience

Build a team of advisors. Surround yourself with experts in various fields:

• Attorneys
• CPAs and tax strategists
• Financial planners
• Industry-specific professionals

Learn from every interaction. When working with professionals, ask questions to understand their decision-making process. This approach allows you to:

1. Gain valuable knowledge
2. Make more informed decisions in the future
3. Potentially reduce future professional fees

By consistently applying these principles and commandments, you can create a portfolio of passive income streams that support your ideal lifestyle while continuing to grow your wealth and expand your opportunities.

Last updated: July 28, 2024