Ahh, the elusive passive income… 

Who doesn’t want money flowing into their bank account without lifting a finger?

It’s the dream of financial independence – where your investments generate enough income to cover your lifestyle expenses.

But here’s the truth: for most people, passive income shouldn’t be the goal until later in your financial journey.

Although the classic tools to generate passive income such as bonds, dividend stocks, and REITs are accessible and reliable, they offer modest returns – in the single-digit percentages – which are insufficient for significant wealth building.

This means that achieving meaningful passive income requires a significant upfront investment. For instance, generating $100,000 annually at an 8% return would require an investment of $1.25 million –  not exactly mailbox money for most people starting out.

Instead of focusing on passive income immediately, the key is to prioritize accumulation.

In this article, I’ll explain why focusing on accumulation before passive income, through high-growth means such as business ownership, will properly set the foundation for financial independence.

 

Approaches to Passive Income: Public vs. Private Markets

But let’s start by covering the common approaches to passive income.

As already mentioned, the most straightforward options are public market investments like bonds, dividend stocks, and REITs.

 

 

These tools are accessible and reliable, offering lower-risk, income-based returns. However, the yields are often modest unless you fully commit to a dividend-focused strategy. Because of these lower returns, many investors use a 60-40 portfolio split – 60% in stocks for growth and 40% in income-generating assets – to boost overall accumulation.

In contrast, the private market offers more lucrative options, including credit funds, real estate, and syndications. Let’s break these down.

Credit funds are a way to invest in the debt side of deals, typically offering annual cash-on-cash returns of 9–14%. For example, an investment of $100,000 might yield $3,000 quarterly (12% annual return). At the end of the term, you get back your initial investment without any equity upside. While these returns are significantly higher than bonds or dividend stocks, they remain focused on income rather than growth.

When it comes to real estate, there are ways to make it passive even if you own the property directly. For instance, you could own an Airbnb or a multifamily building and outsource management.

However, owning substantial real estate holdings – like 4,000 apartments – is effectively running a business. Even if you’re not hands-on, managing the team and operations requires some degree of involvement. Real estate, in this sense, becomes a business you choose to own rather than a fully passive investment.

 

Source: The College Investor

 

For truly passive real estate investing, syndications are often the best option.

In a real estate syndication, you invest alongside others in a pooled fund used to acquire and manage properties. Initially, there may be little or no cash flow – sometimes for several years. Once cash flow begins, you might see an 8% annual return. For example, a $100,000 investment could yield $8,000 annually with minimal effort.

The real value, however, lies in the equity multiple, or the “kicker” at the end. By the time the property is sold – typically in three to seven years – you could see a 1.5x to 2x return on your original investment. That means your $100,000 might grow to $150,000 or $200,000 in addition to the annual cash flow.

 

The Spectrum of Investments: Income Investing vs. Capital Appreciation

Investments fall on a spectrum from income-focused strategies, like credit funds, to accumulation-focused strategies, such as patient capital investments.

Whereas income investing is where investors focus on generating regular income, capital appreciation is meant to increase the paper value of investments. The latter may produce little or no cash flow initially but target significant equity growth, often 3x to 5x over three to five years.

 

Accumulate First Before Focusing on Cash Flow

So if passive income shouldn’t be your first goal because the amount of passive income you might generate early on is too little to quit your job, what do you do in the meantime?

Focus on accumulation-focused investments first, before following income-focused strategies. 

 

Source: Finance Strategists

 

Additionally, to maximize the benefits of these investments, you need to reinvest your returns. With small returns like $8,000, it’s challenging to find new private investments to get significant traction in building wealth, especially after taxes. By the time you sell in five years, you’ve essentially built enough to make the next minimum private market investment.

Compounding growth is a powerful force, as demonstrated by the principle of reinvested dividends in the stock market. Whether you’re in your 20s, 30s, or 40s, reinvesting ensures that your portfolio continues to grow at an accelerated rate over time. This compounded growth, often misattributed to Albert Einstein as the “eighth wonder of the world,” is what makes reinvestment strategies so effective for long-term wealth accumulation.

 

Two Key Metrics in Private Investments

When evaluating the effective return of private investments, there are two key metrics you want to keep in mind: cash-on-cash return and internal rate of return (IRR).

• Cash-on-Cash Return: This measures annual cash income relative to the investment. For example, credit funds might offer a 12% return, while real estate syndications yield around 8%. For accumulation-focused investments, this number may be zero.
• Internal Rate of Return (IRR): IRR reflects the overall annualized return, accounting for reinvested cash flows and the final payout.

 

Source: Property Metrics

 

For example, although credit funds provide a 12% return, all cash is distributed as income, leaving no growth on the principal. Adjusted for inflation, the effective IRR might drop to 10%. Real estate syndications, on the other hand, often deliver IRRs of 14–20%, combining annual cash flow with an equity “kicker” upon sale, boosting overall returns.

 

How Acquisition Entrepreneurship Supports Wealth-Building

Achieving financial independence starts with a clear target. For example, to generate $280,000 annually from passive income at an 8% cash-on-cash return, you’d need $3.5 million in capital. This level of investment requires focusing on high-growth accumulation strategies with IRRs of 30% or more, with 35% or higher being ideal.

For example, at a three to four times earnings multiple, businesses often deliver an internal rate of return (IRR) of 25-35%, combining cash-on-cash returns and equity growth. One of my acquisitions achieved a 52% compound annual growth rate over four and a half years – a textbook Buy Then Build example. Businesses outperform conservative investment options, though they do require managing risks like business strategy and operations.

The point is: By prioritizing accumulation early, you can build wealth faster and later transition to passive income. Reinvest every dollar to grow your portfolio and leverage high-return opportunities like owning businesses.

 

One Business or Multiple?

You may have seen my video on fractional acquisitions, where I emphasize buying existing companies as a core strategy. When people see this, they tell me, “I want to buy eight companies right away, just like you.”

However, stacking multiple acquisitions in a short period is highly risky, requiring significant leverage and responsibility. Additionally, it requires an entirely different skill set from business ownership: capital allocation. Even if you have what it takes to be a successful business owner, capital allocation requires an entirely different set of skills.

 

Source: 10-K Diver

 

That said, acquisition entrepreneurship is also intense but incredibly rewarding. It’s how I earned my first million: acquiring companies, overcoming challenges, and building value. Acquisition entrepreneurship was my primary vehicle for strategic accumulation, which allowed me to transition to passive income in a meaningful way and ultimately contribute to my vision for financial independence.

That said, high rewards come with high risks.

Buying a business at a three to four times earnings multiple is a high-leverage move. You’ll take on principal and interest payments, and you’ll buy back your equity over time. Yet it’s one of the fastest ways to replace a six-figure salary. The business generates income you can use to support yourself, reinvest for growth, and steadily reduce debt.

Let’s talk about the ideal time frame to hold an acquisition to maximize returns. While selling the business after three to five years might be an option, it’s difficult to create significant value in that time. Holding a business for seven to ten years – or longer – is often a better strategy. In some cases, the business might evolve into your lifelong career or become a reliable cash cow you wouldn’t want to sell anyhow

Acquisition entrepreneurship is highly rewarding but demands full commitment. Running a business requires time, focus, and effort. You’re not just investing money; you’re investing yourself in its growth and success.

 

How to Achieve Financial Independence

Now, to transition to a passive income lifestyle, you need to determine the annual amount required to cover your living expenses. For simplicity, let’s use $280,000 as an example. Most people should be able to live comfortably on that, barring extremely high living costs in places like Los Angeles or Manhattan. If $280,000 is your target, you’ll need passive investments generating an 8% return, which first means accumulating $3.5 million in assets.

 

8% x $3,500,000 = $280,000 annually

 

The next question is: how do you accumulate $3.5 million?

Working backwards, if you aim for high-growth opportunities with a 35% IRR and 4x returns over a few years, you’d need an initial investment of $875,000. This may seem like a daunting amount, but breaking it down makes it achievable.

 

Initial Investment x Return = Final Amount

$875,000 x 4 = $3,500,000

 

This is where owning a business becomes a critical part of the wealth-building strategy.

By acquiring an existing company, you can use $100,000-$300,000 of your own capital to buy and operate a business. The business generates income to pay yourself, cover living expenses, and reinvest into growth. Over the next seven to ten years, aim to save an additional $100,000 annually through reinvestment and earnings growth. Over time, this can grow to the $3.5 million target needed for passive income investments.

Once you reach this point, your passive income investments – such as real estate syndications or private credit funds – can provide reliable returns to support your lifestyle. This approach focuses on maximizing returns during the accumulation phase, allowing you to transition to a passive income strategy and achieve financial independence faster.

 

Building Wealth is a Process

The key takeaway is this: working toward passive income from the start isn’t the most impactful strategy.

Instead, focus on high-return investments like owning and operating businesses, using it as a foundation to generate cash flow and build equity. Reinvest for growth and leverage opportunities with significant compounding potential. Over time, scale and diversify your portfolio to include passive income investments.

Accumulate first, then cash flow – this is the most direct path to financial independence.

Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.