Passive Income / Regular Payouts

Passive income in general terms is defined by receiving regular earnings automatically with minimum effort on your part. These earnings could be paid monthly, quarterly, or annually, depending on the agreement. Passive income is a common financial model in the real estate industry. Cash-on-Cash return is a common metric used in this model to measure the investment performance of real estate. It is also known as the cash yield on property investment. It will provide you with an analysis of the business plan for real estate and the potential cash distributions over the life of your investment.

Debt / Interest

Investing in loans and other debt has attracted many individuals who seek high yields for their money. Bonds are the most commonly known debt instrument. In many cases, loans can provide investors with steadier income with less volatility than traditional stocks. Plus, debt is not as interdependent on economic fluctuations. Many companies seeking private equity, as well as real estate developers offer investors a financial investment structure based in part on interest payments for the capital provided. Payments are generally structured on a schedule at a pre-determined rate and can offer a solid source of passive income.

Asset Appreciation

Building net worth is a common goal for many investors and one strategy is to invest in appreciating assets. The biggest challenge is that while there are asset classes that traditionally grow substantially in value over time, there is no guarantee. By choosing to invest in appreciating assets, you allow the power of the financial markets and time to grow your net worth for you. There will be times these assets can lose value, but here are categories that typically stand the test of time: Real estate / REITs, Stocks / Bonds, Private Equity, CDs, Commodities, and Collectibles.

Start-up Equity

Investing in startups is high-risk and also high-reward. There are legendary tales of growing instant wealth by choosing a so-called “unicorn”. There is much to know beyond whether they have a unique proposition or disruptive technology. Understanding the terms of the investment and how and when the company plans to pay dividends is important. Is there an event-based structure that hinges on an acquisition or IPO? There are a few standard methods to determine the value of a startup and things to consider include the state of the MVP (minimum viable product), founder experience, and capital burn rate.

Shared Revenue

Revenue sharing is not new but is now being used in creative ways for private equity investments. It involves sharing operating profits or losses among associated financial actors including investors. Simply defined, it distributes profits to participating parties involved in a business alliance. The initial capital investment is labeled as a revenue-share deal when it is later repaid from a share in the revenue of the business as it grows. The concept is now gaining steam in the venture capital industry as well. An increasing number of venture funds are actively deploying revenue-share models within their financial structures.

Preferred Shares

In the world of financial instruments, companies usually offer two different kinds of stock: common and preferred. The major difference is that preferred stock functions more like a bond with a set dividend and redemption price and is often offered to early-stage investors with special pricing and perks. Preferred shares, as the name suggests, give investors the right to receive dividends before common stockholders and also means they get preference over common stockholders in getting back a specific rate of return. These are issued in many forms including callable, convertible, and adjustable-rate shares; each with specific redemption rules.

Syndication

Syndication is a group of investors joining together to combine their financial resources to invest in big-ticket properties. This financial model is common for large commercial real estate projects. As an investor, you can add to the pool of funds to buy properties without putting in much work and can produce passive income at potentially high rates of return. You get the benefits without needing the risk or cash to float the entire project. With syndication, capital is raised for a particular property vs. a REIT or Fund where investors have little control over which properties are purchased.

OTHER Private Equity Financial Models

As of 2019, around $3.9 trillion in assets are held by Private Equity firms, up about 12.2% from 2018. PE is defined as ownership in a company that is not yet publicly listed. It typically is funded by Accredited Investors with a high net worth as well as companies that buy stakes in private companies. Each and every PE deal is individually structured and the financial models vary greatly for each offering. It is of utmost importance for investors to study the financials to gain a full understanding of how earnings will be distributed.