The Flywheel Effect: Building Your Business into a Passive Income Machine

I listen to a lot of business podcasts on my commute to work and the one that I have been listening to lately is Startups for the Rest of Us by Rob Walling and Mike Taber. Even though they have a software developers background, they still provide great small business information that can be carried over to real estate investing.

They mention the concept of the flywheel effect in several episodes. This concept, coined by Jim Collins who authored Good to Great, can be imagined as a large wheel that is very difficult to move without a great amount of strength. However, once it begins to move at a sufficient speed, very little energy is required to keep the wheel in motion.

Relating this concept to real estate investing, most people start their real estate business with a combination of low investing capital, poor credit, few real estate related connections and/or little knowledge. I’m sure a lot of people feel like they are doing this alone as their family and friends think that they are crazy. For most people this will be the hardest point in their business.

Starting Out

I remember this time period well. I had the firm belief early on that my business would help me reach my goals, financial and otherwise. This is what it takes to succeed when trying to get that fly wheel started: a strong and educated belief in your actions and a willingness to persist despite obstacles that WILL come up.

If you listen to the BiggerPockets Podcast, Brandon likes to ask each person he interviews:

What separates the successful investors from the ones who aren’t successful?

Time and time again, their answer is related to my previous statement about beliefs and persistence.

Building Momentum

This is the step we’re currently at. Our flywheel is moving fairly well but still requires my involvement on a regular basis. In other words, we don’t have a true passive income machine yet, but we do have a good team and systems in place.

It takes some experience but eventually your business gets in a rhythm where your acquisitions, repairs, and selling/renting happen in a systematic and predictable way. Surprises and obstacles still come up, but even those lessen as you see the same problems over and over.

I love the feeling of working all day at my job and coming home to see the business take another positive step without my direct involvement that day. The first time that happens is definitely a day to remember.

Changing directions, let’s talk about the opposite of the flywheel.

Hamster Wheel

This is the one that anybody with a full time job knows all too well. It’s easy to get the wheel started but once you stop moving, the wheel stops soon thereafter.

Most people are familiar with the “Rat Race” concept from the Rich Dad, Poor Dad books so I won’t elaborate any more on this concept.

However, I do want to mention using the two wheels together.

The Best of Both Worlds

The full time job is great for allowing you to learn this business while growing it at your own pace. This helps you make logical decisions instead of emotional ones, such as passing on a mediocre deal because you are not worried about when the next deal will come to pay your bills and feed your family.

Personally, I would have loved to jump into this business full time (and still would) to see if I could grow it faster and begin enjoying the benefits that everyone dreams of the day they leave the hamster wheel.

In my next post I will discuss a few uncommon advantages and skills learned with keeping a full time job.

Photo: Elsie esq.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.