How to Stop Trading Your Time for Money by Creating Passive Income

by | Jul 22, 2020 | Passive Investing, Real Estate Investing 101 | 0 comments

Imagine a day in your life with me for a moment. It’s a workday. Your day began with the usual routine, but halfway through your morning, you received the news you’d been laid off.

For most Americans, that means zero income starting tomorrow morning.  But unlike your income, your expenses won’t stop.

Now, let’s pretend that during your employment, you leveraged your money.

“The rich don’t work for money. They make their money work for them.”

Robert Kiyosaki

Author of Rich Dad, Poor Dad

Three Types of Income

Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn residual or passive income. (Or both!)

Active Income

Active income is from your employment and requires activity in exchange for money. When you stop, the income stops.

Residual Income

Residual income means you receive money after the work is done. For example, after the work of writing and publishing a book, every copy the author sells provides residual income.

Passive Income

Passive income is earned with very little effort and continues flowing even when you aren’t working. Real estate investments are one of the most stable sources of passive income.

Remember the job loss scenario? Let’s pretend you’d built passive income on the side during your employment with that company.

Since being laid off, your earnings decreased by your monthly salary amount, but you still have income.

Financial independence is achieved when your earned passive income exceeds your expenses, and you don’t actually need active income to pay for them.

Investing in Stocks vs. Real Estate

Historically, the stock market returns about 8% annually (on average), which means $100,000 would produce roughly $8,000 per year. That’s only $667 per month.

To replace an income of $3,000 per month, or $36,000 per year, at the stock market’s average rate of return, you’d need to invest $450,000.

However, with real estate, $100,000 could buy a $400,000 rental home. How, you ask? Through the power of leverage.

The bank brings $300,000 to the table.

You put in 25%, the bank puts in 75%, and you earn 100% of the profits.

A $400,000 home renting for $3,100 with a mortgage of $2,100 would net you $1,000 per month. Theoretically, 3 investments of this size could replace a $3,000 monthly income. Plus, you’ll most likely have equity gain by the time you sell.

But I Don’t Want to Be a Landlord…

The numbers look enticing, but being a landlord…well, that doesn’t.

This is why, instead, you might want to join a small team to acquire real estate through a syndication.

When investing $100,000 in a real estate syndication, it’s feasible to earn $8,000 per year (8% return) in cash flow distributions, similar to the stock market.

However, the real opportunity lies in the sale of the asset. Syndications hold the property for about 5 years. During this time, building improvements are made and the land market value typically rises, especially if the syndicators buy in an appreciating area like we do.

Upon the sale, you might receive $150,000 (your original $100,000 investment plus $50,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $190,000, which is an 18% average annual return.

If you’re able to create passive income while you work, you’ll be less stressed when facing a layoff. You might even find yourself celebrating unemployment!