Traditional vs. Alternative Investing – What Could $1M Get You?

I’ve done share trading. I have options traded and futures traded. I have been an advocate for all styles of research and due diligence, everything around property investing, syndications, developments, buy and hold, and all that good stuff.

I definitely see myself as a student of life when it comes to investing.

But ultimately, what I feel I’ve learned over the last 10 to 15 years is that without alternative investments, the results that I would’ve achieved would’ve been mediocre at best.

The reason for it is that, predominantly in the world we live in right now, finding opportunities that deliver strong, predictable cash flow is hard, and what alternative does is solve that problem.

It’s a section of the market where you can find investments that deliver strong, predictable cash flow, often thought of as pretty boring bread and butter investments.

But what I love about them is that they have a very relatively low-risk profile. They’re much more immune to volatility. The asset class itself is very stable.

You don’t get the ups and downs that you get in a lot of those other market sectors. But above all else, it’s very much a private playground.

For those of you who know me, you’d understand that when I talk about alternative, I’m only talking about alternative investment creative strategies that are backed by real property because, as we all know, property is a very stable asset class.

That’s the quick overview I wanted to give you in the context of what alternative means.

Why I Call it “Alternative Investing”

Someone said to me the other day that I shouldn’t call these alternative investments because it conjures up all sorts of scary concepts and ideas.

I understand that, but I and the people in my world call them “alternative” because they sit outside the mainstream.

It’s tough to get access to great deals in this space. It’s tough to learn about this in a safe and structured way, so for me, an alternative is a good fit. 

I understand it conjures up all sorts of concerns, but people who understand and know this asset class giggle all the way to the bank because they realise that it is shrouded in secrecy. 

It is probably a plus from the viewpoint of continuing to access great deals that most people don’t even know about.

The Three Types of Deals 

I want to go deep today on this idea: if you had a million dollars in traditional versus alternative investing, where would that lead you and what potential outcomes in terms of passive income and growth could you expect?

Generally speaking, even within the alternative investing space, there are three kinds of deals.

You go into those deals predominantly because you want the cash flow.

At the other end of the spectrum, you’ve got deals you want to go into because they’re growth based.

And in the middle, you have a hybrid, meaning you get a little income and a little growth.

It’s, I guess, the place that most investors like to dabble because it gives you a little bit of profit at the end of the deal, but you’re also getting that regular income throughout the deal.

Given that there are three types of ways of looking at your objective with a particular strategy, I think it’s really important to point out that the main reason people go into alternative is that they’re looking for cash flow. 

So for the purpose of what I want to unpack with you today, I think let’s assume that people are going into the deal predominantly for the income, and we won’t worry about the growth or the other parts of it.

Client Case Study #1 

I want to describe it rather than showing it to you because, obviously, many of you are listening to this in audio form.

I have a couple that I want to talk about. I won’t give them names, but let’s talk about their scenario.

They earn $400,000 as a household income, which is a decent income. They need about $250,000 to live. They already love property as an asset class.

They have a property portfolio with a net worth of about two and a half million dollars. They have $1 million in cash reserves that they’ve been setting aside.

They are reinvesting or happy to reinvest their capital in alternative till their goal is met. I’m also assuming that their portfolio grows at a modest 5% average capital growth. That they’re the ones choosing the strategy and that their property portfolio is actually giving them no cash flow at all. It’s cash flow neutral.

The real question is, “What are their options?”

They understand alternative and they’re open to it but as I’ve talked about many times in my experience, I think the best way for you as an investor to make informed decisions about what you would like to do with your capital comes down to whether you understand your options.

I had a fabulous conversation with one of my newest clients this week. It was really interesting because he was going down the path of trying to be a developer to generate reasonable profits over and above what he could expect with a traditional buy-and-hold.

We went through the numbers and, essentially, the profit based on developing the asset versus not developing the asset was a negligible difference.

So the question then arose, “Well, why do the deal at all?” and the answer was that he didn’t have any other options 

What alternative investments really do is open up your world to a whole series of options that you may have never even considered before.

In this case, this particular couple is aware of alternative and they want to understand how alternative could alter their timeline to hit their financial goals.

It’s really important that rather than being prescriptive with advice and saying, “You should put your money here, here, and here,” we use numbers to illustrate what is possible.

I think when you can understand what is possible, then you don’t necessarily need someone standing over your shoulder saying, “You should do this.

The numbers tell a story. Provided your assumptions are reasonable, you can get a relatively clear understanding of what the ends of the spectrum look like from a financial point of view. 

Then, obviously, your decision as to what to do can lie anywhere along that spectrum. So in this case, and I’m going to go right to the top of the spreadsheet here, I’m going to assume that they’re 50 years old.

Both of them are 50 years old. They’re already investors in property, as I said, and they don’t necessarily want to mess around with the assets that they already have in place. 

They are in a situation where they’ve worked very hard to put their property portfolio in place. It’s worth a solid two and a half million dollars.

They like the idea of holding that property portfolio to have it as a safety net down the track. As that property portfolio grows, they’ll be able to have that capital in the future when they need it.

After having had this property portfolio for a period of time, they’re also already realising that it’s not really setting the world on fire as far as generating cash flow. 

So they’re really looking down the track of, “Well, if we keep doing what we’re doing, where will we be? If we adopt some alternative investments, where will we be? If we use the million dollars in capital that we have to reduce debt, where will we be?”

The scenarios that I’m about to describe will explore those different scenarios.

Scenario #1: Keep the $1M as a Cash Reserve

Scenario one for these guys is to keep the 1 million dollars as a cash buffer or as a cash reserve.

Especially given the current climate, in which some big stuff is happening in the world. So it’s understandable that there are a lot of people wanting to stockpile cash right now.

We’re heading into high inflation. There’s a lot of uncertainty in the markets. We’re sitting on the cusp of some pretty potentially big interest rate rises. 

The ripple effects of COVID in many industries are just starting to rise to the surface.

So there’s a whole bunch of reasons why it could be understandable that you want to keep really good cash reserves from a sleep-at-night perspective, even though you’re aware that things like inflation are going to be eroding that cash,

But let’s assume in scenario one, they decide they just want to sit on the million dollars’ cash as an emergency buffer, just in case everything turns to custard.

They’re going to keep their properties in place. We’re going to assume they’re generating a 2% net income stream from properties. 

We said close to neutral, but let’s assume that on the two and a half mil, optimistically, let’s assume they’re getting $50,000 in an income stream. 

Then when we roll those numbers forward, meaning the property values grow at 5%, the loan stays the same. 

They don’t pay down the loan, and the income stream grows each year with the value of the property. 

We can see if they said, “Look, for us to reach game over, we really need to have our living expenses of 250,000 dollars covered.”

Then if we extrapolate those numbers, essentially they will get to a game over in about year 24. 

So 24 years from now, their property portfolio, if it’s indexed at 5% each year, will have a net value of about 12.8 million. They’ll still have that loan of two and a half million dollars. 

If they assume that there’s no debt reduction and they allow their property portfolio to just continue to grow at a 2% net return, that’s going to generate an income stream somewhere between the 23rd and 24th year of around $242,000 to the $257,000 mark.

By the way, if anyone’s interested in getting a snapshot of this, please reach out or I’ll see if I can put a link in the show notes. 

Essentially, game over by my definition in this illustration is really when they can categorically say, “We have an income stream in place that more than covers our living expenses.”

So game over, in this case, is year 24. We’ll call it year 24 because it’s $257,000 in that year.

Scenario #2: Use the $1M To Pay Debt

Now let’s look at the second scenario: they use that million dollars to pay off debt. 

This is certainly another valid strategy. The most conservative investors that I’ve met use debt reduction as the primary way to grow their wealth, meaning they pay down debt and free up or create more equity. 

The hope is that over time, they’re not only de-risking their portfolio but also creating an asset base that will grow.

In my experience, if you have the luxury of a high income, that’s a perfectly valid strategy.

For those of us who may never have had a great income, paying off debt as your primary and only strategy is one of the slowest ways to build wealth.

I’m not expressing any advice here that you should be going to the other extreme. 

When I started out, I hustled and redlined my finances to get some traction because I never had a great income. But certainly, that behaviour doesn’t suit everyone.

So again, everything boils down to your sleep at night factor, and I can tell you that I lost a lot of sleep in the early days.

I probably did things that would be very uncomfortable for most people, so I’m not advocating that.

With the benefit of hindsight, I realised that I probably didn’t need to redline and hustle as much as I did. Some of those decisions paid off, and some of them didn’t. 

I’m bringing this up because I think a lot of wealth professionals strongly advocate paying off debt first before growing your wealth through new investments.

If you regard it as a bit of a spectrum, the truth probably lies somewhere between those two ends. 

In scenario two, let’s assume we’re looking at the idea of this couple taking their million dollars and using it to pay off the debt.

What happens is they’ve got properties worth 5 million, they’ve got a loan of two and a half million, and they’re going to pay off a million dollars of that loan.

As a result, their net worth will increase to $3.5 million in their property space.

Obviously, in having paid off a million dollars worth of debt, they’re able to increase the passive income, still assuming a 2% net return, from $50,000 to $70,000 a year.

Now, if we fast forwards to that scenario and say, “Great, they’ve actually paid off their debt.” 

Surely that has an impact on them hitting their game over or their required passive income sooner, but only marginally, so surprisingly. 

Assuming all the same things, your property portfolio grows at 5%, the loan remains at one and a half million for that period of time, then you will, in fact, shave an extra two years off your timeline and hit game over in the 22nd year. 

You’ve gone from 24 years down to 22 years. Again, these are very gross calculations and very simplistic.

I totally get it for those of you who are telling me that the world is becoming more complex.

But what I’m trying to point out here is that I’m trying to give you a flavour of what is possible rather than be detailed about the way that we map these numbers out.

Scenario #3: Embrace Alternative Investing

So that’s scenarios one and two. Scenario one is to keep your million dollars in cash reserves and simply let your property portfolio roll. You get there in 24 years.

Scenario two: you pay down some debt now with the hopes that you speed it up and you shave two years off your timeline. 

Now let’s go with scenario three. Scenario three is pretty exciting from my perspective.

Let’s assume that you want to keep your property portfolio in place. You’re happy to let it tick along in the background.

You don’t need to free up any capital because you’ve got a million dollars there and you’re going to use the million dollars and split it into two buckets, $500,000 and $500,000.

You’re going to put $500,000 into alternative investments, meaning that $500,000 might be broken into anywhere from 8 to 12 deals, all earning you, let’s say, a rate of return of 12%.

For those of you who understand and have listened to some of my other podcast episodes, typically from a cash flow perspective, we’re aiming for a net return after expenses of 8% to 12%, just on the cash flow side, that’s ignoring any growth.

So if we assume 12%, in the second year, you take your second balance of $500,000 and break that up again.

Effectively, what I would be advocating, regardless of the amount of money that you have, is that you don’t drop it into all of these different deals in one go, but you just do it piecemeal.

That allows you to gradually build your confidence and make sensible decisions like bed in one investment, then the next, then the next, then the next, and so on.

You’re consistently accumulating your portfolio over a couple of years. 

At the end of the second year, you’ve got your million dollars deployed in alternative investments. 

According to the very simple calculations that I’ve prepared here, what happens to your regular property portfolio is that it grows 5% at the end of each year, the same as before.

What’s really interesting is that because you’ve invested in these assets that throw off this really predictable cash flow that we’re looking for, by the end of year five, and I’m even going to say, it’s probably closer to the end of year four, you have reached your $250,000 in required passive income. 

At the end of year five, your local property portfolio here might be throwing off about $71,000 in income. By the end of that same year, your alternative investments will be throwing off something around the $200,000 mark.

So the combined passive income from your Australian property portfolio and your alternative is about two $71,000.

Why the Three Scenarios are Important

The emphasis that I want to have here is that we are now contrasting three very distinct scenarios. 

So when we just let our property portfolio run, sat on our cash, and didn’t do anything with it, we got to where we wanted to be in about 24 years. 

When we used the million dollars to pay off our debt, we got there in 22 years. 

And if we decided to embrace alternative and gradually deploy that capital over a couple of years, we get to a game over in between four and five years. 

This is such a powerful illustration of what’s possible scenario three gets you to your goal 4.8 times faster than the other two scenarios, which is not insignificant. 

Now the real question is, would you put a million dollars into alternative? That’s a question we can probably answer in another podcast episode, but I’m really advocating that you don’t have to have all of your assets in one asset class.

I think there are too many people out there saying there’s one way to build wealth, and I’m arguing that there are many ways to build wealth. 

But without a doubt, there are very few asset classes that I know of outside of alternatives that are stable, have a lower risk profile, and will build you a pipeline of passive income that you can bank on in the same way. 

Regardless of whether we played with some of the variables today, there’s no question that if you incorporate a small percentage of your portfolio into this asset class, you will reach your financial goals significantly faster than if you try to allow just straight compounding, which is awesome, by the way, for building wealth through traditional means, whether that’s property or shares or bonds, or whatever else, but you won’t get where you want to go anytime soon.

I’m becoming a stronger and stronger voice advocating for building financial freedom while you’re still young enough to enjoy it.

Final Thoughts

So I guess that’s where I wanted to leave it today. I know that there were a lot of numbers in here, so I’m not sure if I’ve gone too fast or too slow, but I really wanted to give you a flavour of the potential outcomes in terms of passive income. 

Obviously, if you then decided to go for those hybrid deals or add in some growth deals, your net worth could be significantly higher as well. 

But as I said, for today’s exercise, I wanted to show you that there’s a way of using alternative investments if you have cash, which means that you don’t necessarily need to liquidate or sell what you already have.

If you are fortunate to have access to equity, you can use equity and again keep your property portfolio in place.

But the idea is, how do you have your cake and eat it too? I’ve talked about this many times before: if you get the right thinking, if you associate with the right people, if you immerse yourself in the right networks, you can actually not only massively impact your timeline to financial freedom, but you can do it in a way where you don’t have to make big compromises or take hair-raising risks.

That’s really the game that I’m advocating and that I’m trying to play.

Anyway, guys, I hope you enjoyed this episode. I really, really appreciate you tuning in, and I look forward to catching up with you next time. Take care.

If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.

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