If you’ve read my musings for a while, hopefully you’ve internalized the case for cash-flow-first investing (because remember, you can’t eat equity). Deploying capital toward cash-flowing assets is the argument I've made for years.
But not all cash flow earns its place.
Some of what you’re collecting could be quietly working against your wealth-building rather than driving it.
Round-trip friction
When you receive a distribution from a deal, that capital has to find its next home, assuming you don’t consume it to fund your lifestyle.
The “round trip” of these dollars carries costs that don’t show up in deal-level IRRs but show up in your portfolio’s effective return:
Cash drag. Even a large distribution like $10K doesn't immediately become a $10K investment. The next deal opens later, the minimum is higher, and maybe the timing doesn’t line up. Your cash sits in a money market at 4% (at best) in the meantime, barely keeping up with inflation.
Tax events. Distributions can trigger taxes in the year received. Capital that compounds inside a deal often defers those events until disposition.
Diligence cost. Every redeployment is another decision, another paperwork cycle, and possibly a whole new sponsor to vet.
Sponsor multiplication. Spreading distributions across new deals adds new sponsor risk on each leg.
None of these exist when capital compounds inside the deal you’re already in.
Allocating to deals built to retain and compound internally (value-add equity, growth-stage operating positions, etc.) prevents exposing part of your portfolio to these friction costs.
Inflation erosion
Fixed distributions are the inverse of fixed-payment debt.
With debt, inflation works for you. Your $3K mortgage payment in 2026 buys less of your future earnings each year, so the real cost shrinks.
But when your distributions are fixed, the math runs in reverse. Your $3K/quarter today buys less actual lifestyle in 2036, and the distribution doesn't grow with what it has to cover.
Your freedom number isn’t static. Expenses inflate even at the modest 2-3% baseline the Fed targets. Over a 20-30 year horizon, that compounds to real purchasing power loss.
The income that covers your expenses today won’t necessarily cover them in a decade unless something underneath is appreciating.
Pure-yield positions on assets that don’t appreciate are the long-tail inflation tax most LPs don’t price. Think a fully stabilized NNN lease at peak prices, or a fixed-coupon bond. They deliver headline cash, but because the payment amounts are essentially fixed, what they actually buy shrinks each year – and there’s no principal appreciation to offset this loss.
Post-freedom surplus
Once your passive cash flow exceeds your expenses, you’ve solved the income problem and met the Robert Kiyosaki definition of “wealthy” – congratulations!
But you may not realize you’ve inherited a different problem: you now have a surplus of cash flow…and it has to go somewhere.
Most LPs at this point don’t have a redeployment pipeline that scales with the cash they’re producing. Distributions arrive, drift into that money market account or T-Bills, and capital that should be compounding sits idle for weeks at a time.
The core issue is treating distributions as an end-state when they’re really a midpoint.
Cash flow you don’t need is still capital that needs to work. And often the most efficient way to keep it working is to never have it hit your account in the first place.
That’s why a large share of the investors in our real estate private credit fund elect to reinvest their distributions rather than take cash. They don’t need the income for lifestyle, and they’d rather have the capital compound at the fund’s rate than deal with the round-trip friction we discussed earlier.
What earns its place
Cash flow is still the metric for freedom.
But cash flow needs to earn its place in your portfolio – whether that’s covering your lifestyle, or (if it exceeds what you need) compounding internally or through efficient redeployment. And in either case, the asset underneath should be appreciating, so inflation doesn’t quietly eat the principal.