How To Stop Trading Your Time For Money And Start Creating Passive Income
Imagine a typical workday that began with the usual routine. However, halfway through your morning, you receive the news from your employer that you have been laid off.
For most Americans, that means zero income starting tomorrow morning.
Now, let’s pretend that during your employment, you leverage your money by investing it.
The rich don’t work for money. They make their money work for them. – Robert Kiyosaki
Three Types of Income
Most people earn active income, which means that the income comes from a consistent paycheck. However, it is important to consider that most wealthy people also earn Residual or Passive income (or both!).
Active Income
Active income is from your employer and requires you to directly exchange your time and efforts for money. If you want to earn more, you either have to exchange more time for that income, or invest more effort in hopes of increasing your hourly compensation. On the other hand, the moment you stop working, the income stops as well.
For my wife and I, this was a life-changing realization. Despite having a stable, well-paid job in healthcare, if something were to happen and I could no longer go into work, that income would immediately stop coming in and put the well-being of my family in jeopardy.
Residual Income
Residual income means that you continue to receive money after the work is done. For example, every book an author sells provides residual income through royalties, the same goes for YouTube creators who post content.
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 were building passive income streams on the side during your employment.
Since being laid off, your earnings may have decreased by your monthly salary amount, but you still have income.
We encountered a similar situation during COVID, where the operating rooms were forced to cancel all elective surgeries until further notice. As an anesthesia provider, this meant that we were forced to take an unpaid leave of absence or use our accrued PTO. Luckily for my wife and I, our passive income surpassed our living expenses, which meant that we were able to take unpaid leave without worrying about paying our bills.
Financial freedom is achieved when your earned passive income supersedes your active income.
Investing in Stocks vs. Real Estate
Historically, the stock market returns about 8% annually, 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, you’d need $36,000 per year, which would be 8% of $450,000.
However, with real estate, $100,000 could buy a $400,000 rental home.
How?
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 $3,600 with a mortgage of $2,100 would net you $1,500 per month. Theoretically, 2 investments of this size could replace a $3,000 monthly income.
The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year.
But, I Don’t Want to Be a Landlord
The numbers look enticing, but being a landlord does not.
However, you don’t have to be a landlord to take advantage of the benefits of real estate investing! Instead, you join a small team to acquire real estate.
When investing $100,000 in a real estate syndication, it’s feasible to earn $8,000 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 years. During this time, building improvements are made and the land market value typically rises.
Upon the sale, you receive $160,000 ($60,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return.
If, while employed, you’re able to reinvest some of your hard-earned dollars to acquire passive income streams, you’ll be less stressed when facing a layoff or any unexpected event that life throws your way.
In fact, you may even find yourself celebrating unemployment.
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