Last Updated on July 5, 2020 by Mark Ferguson
I love passive income because it is money that you make without working. Examples of passive income are cash flow from rental properties, stock dividends, interest from loans, royalties, money from businesses, or other investments that you are not spending time on. A lot of people will argue that there is no true passive income because it takes some amount of work to create any type of passive income. Even the kid who inherits a billion dollars must do some work to not completely piss off their parents and become disowned. I agree that almost all passive income takes some work, but I still think the idea of passive income exists. To me, passive income is an investment or business that might take some front end work to set up, but once it is running, there is little to no work needed to keep the money coming in.
The great thing about passive income is it reduces stress because you know you don’t have to work all the time, it can allow you to be more aggressive with investments or business because you have something to fall back on, and it can help you live the lifestyle you want because you don’t have to worry about running out of money.
Why is passive income important?
A lot of people think someone is rich based on how much money they make per year. That is one way to judge if someone is rich, but if they lose their job, are they still rich? Did they have investments, or were they totally dependent on that income?
I think of someone as rich when they don’t have to work and can still live the lifestyle they want to live. They may continue to work because they love it or need a challenge, but they have passive income coming in that will pay for all of their expenses and then some.
I made a lot of money as a real estate agent selling foreclosures from 2007 to 2013. While I was making a lot of money, I was also stressed out. I did not have as much money in my bank accounts as I thought I should have. I was spending a lot, and things always cost more than you think they should. I knew I had to invest my money better, and I did by purchasing rental properties. I started to have passive income come into my accounts without working! Just the thought that my hard-earned money was now making me more money instead of wasting away reduced my stress. It also gave me the confidence to pursue my goals and more aggressive strategies because I had a safety net of passive income.
I also knew that if I built enough passive income, I would not have to work anymore. I could essentially retire knowing I would have a certain amount of money coming in every month, and that money would increase with inflation. I also knew that if I got sick or lost my income, I had money coming in to keep me going. It was not the end of the world.
When I have passive income, I do not have to worry about getting sick, missing work, or going on vacation.
Why did I choose real estate?
I looked at many businesses and investments before choosing real estate. Yes, I was a real estate agent, and it may seem like the obvious choice, but I purchased my first rental property in 2010 right during the housing crash. Most real estate agents told me I was digging my own grave investing in rental properties.
I researched every investment I could because it was my money, and I wanted to make it grow as fast as possible. I did not want to take the easy way out. Real estate kept coming back as the number one choice for a number of reasons:
With every good rental property you buy, it should bring in a decent amount of cash flow or profit each month. I was seeing properties that would make me around a 15% cash-on-cash returns. That was a great return and really caught my eye.
The cash-on-cash return is high on rental properties because you can leverage real estate fairly easily. That means I can get a loan for most of the purchase price. When buying an owner-occupied house, I can put as little as nothing down! On investment properties, you usually need at least 20% down, and that is what I was basing my 15% cash-on-cash return on. By using leverage, it increases your returns on the right properties.
Real estate has some amazing tax advantages, like the tax-free gain on a personal house or the ability to depreciate a rental property. You can also sell a rental tax-free using a 1031 exchange or using an opportunity zone.
Buying below market
Another huge advantage to real estate is that you can buy properties below market value. A house could be worth $100,000, and I can buy that house for $60,000. It may need some work or none at all. It is not easy to find deals like that, but it is possible and a massive advantage when it comes to building wealth.
Is real estate really passive?
I hear all the time how people do not want to be real estate investors because they don’t want calls from the tenants at 2 .m. or they do not want to change out toilets. Guess what: I don’t want those things either, and I do not have to do those things. I have a property manager who handles all of that, and it leaves me time to do other more profitable things. Once I get a property set up, it is very passive.
While it is passive owning rentals after they are set up, it takes some time on the front end. I have to find the deal, which takes time. I might have to have repairs made to get the property rent ready, and I need to get financing lined up. All of these tasks take time. Once the property is ready to rent, I can hand it over to a property manager. In some cases, you may be able to find a property manager that will handle many of those things for you.
I will admit that using real estate for passive income can be more time consuming than investing in stocks or other investments. The reason I love real estate is that I make more money than investing in those asset classes because of the advantages I listed above.
How did passive income change my life?
I made a lot of money in real estate, but I felt stressed because no matter how much I made, I did not have much to show for it. When I bought rentals, I created instant net worth and passive income that would always be coming in. In fact, passive income allowed me to buy many things that I am passionate about, the big ones being exotic cars.
In 2014 ,I bought a Lamborghini Diablo, which had been a dream of mine since I was a kid. I felt comfortable buying the car because I had more than $5,000 a month coming in from rentals. That $5,000 a month was not enough for me to live on, but it provided a safety net, and coupled with my income, it allowed me to buy a dream and not feel bad about it. The car was well worth it and has helped my business in many ways, as well as doubling in value since I have owned it! I have since bought a few more cars: 1981 Aston Martin V8, 1998 Lotus Esprit V8, 1994 Supra 6 speed twin-turbo, and I had a couple of other cools ones before I bought the Diablo.
The great thing about passive income is that you make money when you sleep. I don’t have to constantly struggle to bring money in. My money works for me by making more money. If I keep investing that money I make, then the passive income grows and turns into a snowball that gets bigger and bigger. It can be tough saving the money to invest, and finding the right investments, but the effort is worth it!