Justin Donald Is the Investment World's New Warren Buffett 10 business commandments from lifestyle investor Justin Donald.
By Mike Koenigs
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The Holy Grail of investing is generating passive income, and I recently interviewed someone I consider to be the godfather of lifestyle investing. His name is Justin Donald, and he's perfected a system of low-risk cash-flow investing that enables tremendous financial freedom.
Just three years ago, Donald left his job as a division manager of Cutco and began investing in a few different areas, primarily real estate. Since then, he's amassed tens of millions of dollars in net worth -- all before his 40th birthday.
In our conversation, Donald revealed his 10-step system that's enabled him to generate true wealth with low risk, almost instant, passive earned income, a rapid return on his principal and massive tax advantages -- without a job or a business he's stuck working in. He also shared several case studies of how he discovers, structures and negotiates deals like these.
Donald focuses on cash-flow investing, which he defines as "investments where you make some sort of return on your money in the present." In other words, your investment provides cash flow today and with regular increments in the future. The common convention is to invest in companies where the payoff doesn't happen for a long time (if ever). Donald would rather make the investment now and get a return on that money in real time.
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Donald's perspective on investing is unique. "We all need to make enough money to live at a standard we're comfortable with," he says. "That's really important, but once you get to a point where you're not just trying to make enough money to survive, you're making enough that you can invest it gets really fun. And once things get fun, you look at money differently."
When your investment represents your livelihood, you tend to put more pressure on its return. Ideally, your lifestyle investing reaches a point where it doesn't matter whether a single investment performs well. You're still going to learn a great lesson from it, and the experience becomes more of a game than anything else. This mindset enables you to make much smarter decisions because you're less emotionally involved.
Donald has developed a specific ruleset for his investing. Here are his "10 Commandments of Lifestyle Investing."
1. Lifestyle First
Each investment must truly represent passive income, where your earnings don't depend on your time spent on it. Your income is fully independent of you and happens whether you're asleep or on vacation.
2. Reduce Risk
Structure each deal to minimize risk, so that a good return feels even better. For example, you can collateralize assets against investments so that your collateral is twice as much as the actual amount of the loan or investment.
3. Invisible Deals
Pay attention to emerging markets or unseen opportunities outside the mainstream, like new technology innovations or companies in a reinvention.
4. Get Principal Back Quickly
Part of cash-flow investing is replacing your earned income. Donald's goal is to get his money back within one to three years rather than five to 10 like most investments.
5. Immediate Cash Flow
The goal is to negotiate some form of cash flow at least on a quarterly basis, and ideally monthly.
6. An Income Amplifier
Donald typically finds one by negotiating preferred terms. He also sometimes amplifies a deal by using a "sidecar agreement" with a direct investment, so that he can bring in a second investor with specialized expertise or negotiate more lucrative terms.
7. Cut Out the Fat
Minimize exposure to banks, financial institutions and middlemen that charge you fees.
8. 'Plus' the Deal
Deconstruct the details of perks and terms to negotiate the best deal. There's always room to lower your risk or create a higher return.
9. Use Leverage
In some cases, financial institutions provide benefits that outweigh their fees. For example, a non-recourse loan can protect you if an investment fails. Instead of you owing the loan amount, the financial institution would simply take the asset as its collateral.
10. Every Dollar Gets a Return
Use financial, legal and tax professionals to educate yourself so that you can recreate an investment in the future without having to pay those people to do it for you.
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Donald has done more than 50 deals maximizing his commandments. One of his favorites was with a well-known franchise business in the fitness world that delivered a cash-flow return within the first month. In this case, he partnered with two operators with expertise in the franchise space. Since he wasn't interested in an operational role, it made sense for him to be a capital partner in the deal and advise with minimal time commitments. He entered the deal with out-of-pocket capital, repaid with interest on an accelerated schedule and has one-third equity in the operation. He expects to have his loan returned in one to two years with additional kickers around it.
To learn more about the new Warren Buffett of the investing world, including his upcoming book, podcast and advisory program, check out Justin Donald's website, and watch my whole video interview with him here.
