Let's talk about passive income, so I think passive income is like this holy grail right. It's this thing I think that most of us have in the back of our head that we all wish we could figure out how to gain passive income.
We’re so tired of trading our time for money and we want to find a way to take that money that we’ve accumulated and allow it to grow on its own without me having to do the heavy lifting, without me having to actively build a business, run a business, sell a product, you know really passive income doesn’t even exist. Well, here’s what I thought passive income was. I thought passive income was - I go buy a house or a condo and I either rent it out or I run it as a short term rental and I outsource everything and I make money and it pays itself off and I have this asset and someday I’ll have this nest egg for retirement.
Okay, so we started doing that okay, we bought a condo at a golf and ski resort and it’s great. We love it. It’s in a place that we love to go so it’s like this perfect thing and so we’re gonna get this passive income from this short term rental. We can rent it out through the resort and we’ll have this extra source of income and it’s gonna be amazing as it change our life and here’s the reality, it does pay for itself but what we’ve found is we don’t get to keep that much of the money. We.. it rents out pretty well most of the year but there’s several months where it sits empty. It doesn’t get rented at all so we have no income coming in during those time so then we’re dipping into our savings to pay the mortgage. And just last fall we though you know, the furnace went out so we have to replace the furnace so that was 5000 dollars so now what we thought we had this extra revenue source that was going to positively impact our life where it was kind of starting to drag us down and don’t get me wrong, I’m happy with the investment. It is paying for itself and that’s great. It’s appreciated.
We have a nice amount of equity in it now but it’s not passive income in the sense that we all think about passive income where it’s really money coming in that can help change the course of our life. Without us having to do anything for it so what I now know passive income to be is now that I have that understanding that I have to find ways for my money to grow on its own without my work and make it significant, right. We work hard for our money, we bust our ass to get to a place where we’ve actually been able to put some money aside to invest so we better put it into something that’s really gonna be impactful to our lives. Make it worth the effort that we put into being able to make that investment.
So here’s a few ways that people try to create passive income. Number one that I hear people do is they take this chunk of money, they put it in a money market account and they have this theory that they’re gonna put their money in a bank account and it’s gonna grow, it’s gonna collect interest and it’s gonna turn into more and more money over time. Well, the fact to that especially today is that - even if you’re fortunate enough to get into an account that you have, that you’re making 3 or 4 percent interest on it, on your money - inflation is completely negating everything that you are trying to do. And we all know inflation is so high right now. It’s been reported at 7 or 8 percent but the reality is it’s probably more like 10 or 12 percent so if you’ve got your money sitting in an account that’s growing at a rate of 4% and inflation is going up by 10%, you’re actually losing 6% on your money sitting in that account. You have to look at what the net gain of what you’re investing in. So you are passively investing but you’re passively losing your money. The next thing that people do is they invest in the stock market and the stock market has been proven over long periods of time to be a place where you can really make passive income. It does work. It’s proven that over long periods of time, you will make gains in the stock market. And it is passive, you put your money in and the companies that you’re investing in or the funds that you’re investing in are growing the money but it’s volatile. It goes up, it goes down. It’s not something you can just jump in and jump out of easily. It’s something where you need to leave your money for a long period of time to see the fruits of that labor to really make some money on your money. So that takes us to real estate. We already talked about short term rentals and there’s definitely money to be made there and I think there’s people out there doing very well in short term rental properties. They probably had a much better plan than we did when we bought ours. But again, it’s not so passive. You have to manage your property, you have to manage your cleaning crew or you’re spending a lot of your money on the marketing and the management of that property. And you’re not getting that great return like we thought we were.
And so let’s talk about single family investing, right, and we talked about this before. You know you can buy a few properties and you have that cash flow and it’s great but how passive is it because you’re getting those calls at 2 o’ clock in the morning and you know the sewers backing up or there’s you know some repair that needs to be done with the property. It’s floods, the roof has a problem. This is not a passive way to make money and it’s not a place where you go in to be able to multiply your money rapidly. It’s great like I said I love the fact that property pays for itself, I love the fact that it got some cash flow and it’s probably appreciating over time as well and these are all great and it’s almost passive but you always know in the back of your mind somewhere there’s going to be active participation by yourself. So let’s move on to multi-family and you know how much I love multifamily investing and this is where I really found out what passive investment is all about. This is where you truly have a passive investment. Okay. you invest your money in this property and you have nothing to do with it. You don’t get called in the middle of the night. You don’t have to go to the repairs, you aren’t responsible for doing the rehab of the facility, you aren’t collecting the rent, you aren’t dealing with evicting tenants, you aren’t dealing with damage done by tenants or issues with the community around you. You know, you’re not dealing with anything. It’s a true passive investment. Number one thing that I love. Number two is it is a cash flowing opportunity, we were invested passively in a property in Texas and we get quarterly deposits in our bank account. Again, never lifted our finger, we sent once what we invested in our money, we seat back and we collect that cash flow every three months. It’s a beautiful thing. Money in the bank, real money in the bank too. Again, we’re gonna give it appreciation on that property so depending on the business plan and the business model of who you’re investing with and the type of property that you’re investing in typically what we invest in are called value ad, rehab investments and what that means is that we’re going to do things to the property to raise the value so things like older units are going to get updated and we’re going to put nice granite countertops and give updates there. We’re gonna add more amenities to the property and all these things help to appreciate the value of that property so that when that property is sold we’re able to multiply our equity that we have in that investment.
And then you know, the big difference always between multifamily and single family real estate is the scalability and being able to be invested - this property that I’m thinking of has 212 doors. So it would be really difficult for me to get invested in 212 different single family homes and think about all of the hunt again - active opposite of passive - all the activity that it’s gonna take for me to manage a portfolio like that. I don’t have to do that. I’ve got 212 units under one roof and it is there making me money, cash flowing, appreciating and we have all of these units all together, working together to again put more bang for our investment buck back in our pocket. So passive income, let’s make sure it’s really passive. We’ve got to stop living in this world where we’re trading our time for money. Start letting our money do the heavy lifting, invest it with people who know what they’re doing, who have a track record, who are going to grow our money with a real plan in place, a real track record of success in business and let’s sit back and let’s actually reap real rewards for the efforts that we put into to make that money. Let’s be honest, it’s not easy to accumulate a pile of cash to invest in something. So let’s do it with intentionality that we’re going to get the biggest return with the absolute minimum in effort.
I'd love to connect with you and discuss how we can find true passive income for your portfolio! Here's how you can find me:
jake@doingtoday.co
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