what is passive income

I was lucky, I don’t know why, but for some reason I picked up on the concept of passive income at an early age. At 9 years old I used to consistently beat my parents at Monopoly. At 9, I was just happy to be better at something then the grown ups, but I was subtle learning an important lesson. Id giggle as each time they landed on one of my properties I was slowly taking their money one faux hundred dollar bill at a time, and my pile of money would grow strong until the game ended. Today I know this, was a rough concept of generating passive income.

What Is Passive Income?

Passive income is payment you recieve on a consistent basis, with very little to effort required to maintain it. Contrary to active income, in which you trade your time for money, passive, or residual income is created generally by investing in assets, or putting in a lot of time up front that produce a monthly income.



Why is passive income important?

Passive income is important because, it is not directly related to the time that you spend. You make educated investments that create a steady income stream. Because you are not spending time, passive income investments are a good way to plan for retirement. By gaining more and more income producing assets, you are in direct control of growing your wealth.

Some Passive Income Examples:

I have dabbled in a few of these, but I’ve been able to create the majority of my income with rental properties, as you recall with house #1 and house #3. Rental properties have allowed me to achieve financial independence, and I am currently growing this business.  I am a big believer in diversification, I’ve always been an advocate of diversification, and no one way is better than the other. I recommend that people experiment on a small scale to see which methods interest you the most

Passive income is not FREE money. All forms of passive income require the following:

  • An initial financial investment – An examples of up front financial investments would be purchasing dividend producing stocks.
  • An initial time investment – An example of up front time investment would be. Creating a hit song and receiving residuals, or royalties on a monthly basis.

What Makes Passive income so powerful?

What makes passive income so attractive, is that once you lay a foundation, the residual income get easier build. With traditional active income there is a limit to how much time you can dedicate to working. With 24 hours in day and a general work shift being 8 hours of your day, it’s virtually impossible to find time for more then a second job, not to mention how brutal of a lifestyle that is. With passive income, you are not bound by the time restraint, and letting your money work for you. As long as you are generating enough income you can create as many passive income streams as you like.

The best thing about passive income, is when you don’t have to be at work, you get to actually live life. The majority of us are stuck in a position, where we need to work to keep things in order in our life. Jobs determine: when you go to sleep, when you wake up, what you eat, how you dress, and what you drive. Passive income allows you to spend your days doing what’s most important.



How To  Generate Passive Income In The Beginning?

  • In the beginning you need active income – Unless you come from a wealthy family, you will need capital to build your passive income empire. Theres no way to shortcut this part, you need to have a primary means of income to get started.
  • Be Frugal – Think of this as the time of sacrifice, this may seem unreasonable but, stop spending so much money. Try to find economic ways of entertaining yourself. Cut down on food budgets, try not to eat out too much and cook at home. Here are some yummy ideas of what frugal people eat! 
  • Create a plan. A big part of creating passive income is having a strategy. Have answers and procedures for every conceivable scenario.
  • Determine how much passive income you need – Figure out how much residual income you need to make to live your life comfortably.
  • Set realistic short term financial goals – It’s ALWAYS great to shoot for the stars, however creating short term goals that can be reasonably achieved. An example of a good short term goal is saving up for a down payment on a rental property,

Achieving financial freedom is not easy to achieve, but by setting goals, saving, and frugal living you can begin on your journey to residual income. After laying this foundation, by the time you are generating enough income to live off of, you will have definitely earned it.

Investing in real estate young afford everything

Investing In Real Estate Young

If I could go back in time, to my senior year of high school, with the financial knowledge I have now….I would have retired years ago. It hurts my head to think how uninformed, and uneducated the school system leaves our youth after earning your diploma. All those years chasing grades, learning formulas, and a plethora of other things, yet no talk of rental properties, building passive income, or even the financial basics. Unfortunately, this scenario is all too common. I was in my mid-20s by the time I accidentally started building passive income.

 

The average person graduates high school and college. After college they have incurred student loan debt so they get an entry level job, they rent while dating, get married then search for the dream house. The couple applies for mortgages, they purchase the dream house at the top of their budget. And the cycle begins. This is the point when you stroll up to the starting line of the rat race.

 

Your living arrangements are your biggest expense, for this reason, I recommend beginning savings for your first house right out of high school. Once you establish stable employment or hone your hustling skills, rather than renting, the best way to start investing in real estate, is to find a local duplex or a cheap single family home. In order to find a good deal, you may have to sacrifice, and consider living in a low-income area. Low income doesn’t necessarily mean dangerous, but do your research. There are benefits to each strategy.

 

The benefit to buying a cheap home is that you can pay it off fast. In my area, I can find a 2 bedroom home in a low income, but safe area around 50k. If you concentrate your income on paying this off, you can own this house in under 3 years. By paying off your primary residence, you have eliminated what is generally everyone else’s biggest expense. You now only have to cover your property taxes and insurance. This means now it’s easy for you to save, what would be rent/payments for your next investment. Imagine how fast you could save up for rental if you didn’t have to pay rent.

 

The benefits of buying a duplex as first investment slightly differ in this strategy. The idea here is to find a well-priced duplex. My criteria is that the duplex cost less than if I was buying 2 separate houses. Using the example above, if the average 2 bedroom was 60k, I would be looking at duplexes with a comparable amount of bedrooms per unit for 110k or under. Once purchased, find a good tenant to rent out one side. Make sure the rent you charge is enough to cover the mortgage as well as your bills. At this point, you have your own place, and your living rent free. Continue to save money as if you did have rent and apply this to the mortgage. If you continue this in a few years, you’re going to have the duplex paid off free and clear. Now when you receive your rent payments, they are mostly profit. You can now save up for a down payment on your next place, then replace your old side of the duplex with a new tenant. The income from having 2 new renters will be profit and you will own real estate.

 

By investing in real estate young, by the time you’ve paid off the property In either strategy, you’ve already aggressively taken a large step towards passive income and getting a clear view of the finish line that is the rat race. Once you move out and have either completely paid off and rented, you are now able to buy more rentals, or at the very least you have an asset generating enough monthly passive income to cover your new mortgage payment. Without having to worry about rent\mortgage payments you can begin a fast paced savings plan, that will allow you to grow your portfolio and subsequently, your rental income . The younger you are when you star investing in real estate, the sooner you can start building up your rental portfolio.



start building passive income

How I Accidentally Started Building Passive Income.

House #1

I moved to Florida back in 2010 on a whim, I had a little money saved up, and I wanted to make sure my family had a gauranteed place to live. We were staying with my finance’s cousin until we could get on our feet. I spent my days looking for deals on property. After a few weeks I came across a private seller with an 3 bedroom home. The owner needed quick money, and only wanted 21K.  He was renting the property to tenants who were about to move. The tenants were very messy, and had about 5 pets.  The home had roaches and part of the floor coming up in the kitchen and all the carpet smelled like urine. I paid cash for the home and suddenly I owned property, this was house #1.  After purchase my fiancé and I ripped up the carpet and put some cheap carpet in it, we replaced the kitchen floor with some peel and stick tiles, and painted the walls. I wasn’t thinking about building passive income, but rather how much it was going to cost me to fix up.

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I think at the time I spent around $2000 on making the home livable. The house did what it needed to, it provided gauranteed housing for my family and I, the exterior was ugly and it was located in what could be described as an industrial area, and not very attractive. I loved the fact that I had a home, that I didn’t have to pay a mortgage on, all I had to worry about was the taxes which were low. We lived here happily for 2 years.

Fortunately the ambition in me always pushes me to want to upgrade things. I knew on the market I could sell the home for around 35K, and the type of house I wanted to upgrade to was around 65K. I began searching for houses again for about a month before I came across a gem in Clearwater, FL, in a super convient location, close to the Tampa bridge and the major highway in the area. It was a nice looking home with a for sale sign that read 69K with contact info. I called while I was sitting in the homes driveway, and spoke to Phil, who flipped homes for a living. Phil explained he bought this home in a lot of 10 houses from the bank, and that he was looking to sell immediately. I arranged to check out the inside, and was viewing the house the next day. It was a little outdated but I loved it. The location was PERFECT. I had about 30K saved up and I knew I could get close to 35K for my current house, so I immediately listed my home for sale and told Phil I wanted to make an offer of 57K. I figgured listing my primary home cheap it would sell fast, the same day that it was listed I got a call from a gentleman, who appeared to be interested in buying my house, what luck. The buyer told me he wanted to come take a look at my house immediately, and he did the following day. After his walk through he made a verbal offer of full price, luck was on my side.

Now before you rag on me for accepting a verbal offer, I want to just say in my defense, at this point I was new to this, no one ever thought me anything about real estate. But back to the story, the guy who was buying my home arranged to meet me the following Monday to sign the contract, I set up an appointment with a title company and was excited that I was a bout to move into my dream home. Unfortunately, my luck doesn’t usually work out as well as it appears, when Monday rolled around I did not hear from my buyer, I gave him a ring and was sent to the voice mail. WTF! He was just talking to me all every day. I called over the next few days probably somewhere near 30 times, this guy was obviously avoiding me. I hate unreliable people. Saddened, I decided to call Phil and tell him that I wasn’t going to able to get my dream house. Phil asked why, I explained to him what I had been through. Phil then suggested getting a loan, “my credit sucks” I said, but Phil had an answer for me, “what about a hard money loan?”. A hard money loan as I learned, is private loan through and doesn’t involve banks. Phil had a hard money lender named James that he introduced me to. Phil told me as long as I had 20% down  he would approve me and didn’t care about the credit. I just had to make interest only payments and I had 3 years to make a balloon payment. I could come up with the rest in 3 years, this sounded like a good plan. Now I wasn’t relying on selling my old house and I was able to move, but what was I going to do with two houses. The answer almost came like clock work, I could rent it out to cover the monthly payments while I saved up for the balloon. I didn’t realize it then but I was laying the pavement to the road to retirement. I listed my home on craigslist for rent for $650 and found a prospective tenant immediately. I made sure to take the right steps to find a good tenant.  I was happy I was now generating $650 per month without doing anything. I was building passive income. The payments rolled in like clock work and I was able to cover my payments which were $475 a month and still saving $175 toward the balloon without any work. This random chain of events was crucial and a staple in the beginning of my career as a real estate investor, this is how I accidentally started building passive income. My home was now an income generating asset, and no longer a liability.

This is around the time I had just finished up reading Rich Dad, Poor Dad, by Robert T. Kiyosaki which is an excellent read, frankly the man is a genius. If you are interested in building passive income, I highly recommend reading it if you are looking to get into real estate investing. The book itself isn’t going to teach you any real estate methods, however it changed the way I thought about home ownership vs owning properties that allowed me to begin building passive income.