By Joe Firmin 4-minute read
Let’s say that your workday began with the usual routine. Morning SBUX or DD, then a nice full inbox to make you glaze over.... Then, halfway through your morning, you receive the news you’d been laid off. Boom. For most Americans, that means zero income starting tomorrow morning.
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 (Best-Selling Author of Rich Dad, Poor Dad)
Three Types of Income
Most people’s income is active, which means it’s from a consistent paycheck or they are self-employed. But wealthy people typically earn Residual or Passive income (or both!).
Active income is from your employer and requires activity in exchange for money. When you stop, the income stops. This is where you work for money. No work, no money.
Residual income means you receive money after the work is done. For example, every book an author sells provides residual income. This is money working for you. You worked and received money later.
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, true mailbox money. Let's come back to this...
Remember the job loss scenario? This time let’s imagine you’ve built passive income, on the side, during your day job. Since being laid off, your earnings decreased by your monthly salary amount, but you still have income. You may not have to take the first job offer that comes your way because you can sustain your lifestyle. Financial freedom is achieved when your earned passive income covers your monthly expenses.
Investing in Stocks vs. Real Estate
Historically, the stock market returns about 8% annually, which means $50,000 would produce roughly $4,000 per year. That’s only $333 per month. You typically won’t see any of this until you retire, and even then, it likely be taxed up the wahzoo!
To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000.
However, with real estate, $25,000 could buy a $100,000 rental home. How? The bank brings $75,000 to the table.
You put in 25%, the bank puts in 75%, and you earn 100% of the profits.
A $100,000 home renting for $1,000, with a mortgage (including taxes and insurance) of $600 you would net $400 per month. Theoretically, 8 investments of this size could replace a $3,000 monthly income.
The total rental income plus $24,000 in additional equity (based on 3% annual appreciation) equals $62,400, or 31% return in just one year. An additional benefit of real estate investing is that you’ll often pay little to no tax on the earnings. This is how the government thanks us for flowing money through the economy and providing housing.
“But I Don’t Want to Be a Landlord”
The numbers look enticing but being a landlord does not. No one wants to be sitting on the beach, brewski in hand when they get a call from a resident notifying you that there is no hot water. I’ve been there before and it’s not fun.
This is where, instead, you join a small team to acquire real estate, where the management is covered by a 3rd party company.
When investing $50,000 in real estate syndication (group investment), it’s feasible to earn $4,000 per year (8%), similar to the stock market.
However, the real opportunity lies in the sale of the asset. Syndications hold the property for about 5-7 years. During this time, building improvements are made and the land market value typically rises.
Upon the sale, for the example above, you receive $80,000 ($30,000 in profit). This, plus the passive income of $4,000 per year (totaling $20,000 over 5 years), equals $100,000, which is a 20% average annual return.
If, while employed, you’re able to create passive income like this, you’ll be less stressed when facing a layoff or a difficult financial situation. You may even find yourself celebrating unemployment.
Commit to getting at least one alternative source of income within the next 60 days.
This helps reduce your risk in case your company gets bought out, sold, there’s headcount reduction or you need to take some unpaid time off for a medical or family event. Sure, the stock market is nice, but rarely do you get checks each month off the earnings, and it sure isn’t tax free! Drop us a line and let us know what you’re alternative revenue stream is.
If you would like to learn more about passive real estate investing with True Freedom Capital please click HERE.