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Passive Income

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Much of what I write about in this web log will relate to a concept that I believe is critically important for everyone looking for financial security, to consider…MULTIPLE STREAMS OF INCOME. Specifically, I am talking about PASSIVE INCOME. Passive income is income that is generated even when you are sleeping. Passive income is income that is NOT traded directly for time.  The classic example of passive income is rental income generated by the landlord of a multifamily apartment building. The rent comes in month after month and is not dependent on the landlord’s time at the office. He or she can be on vacation for a week and the rent still gets paid by the tenants resulting in money in his or her pocket. Whenever I talk to my high wage earning friends about this, they usually roll their eyes at me. They say things like, “I don’t have time for stuff like that” or “I have no business skills”. The reality is, establishing multiple streams of passive income does not necessarily require that much time. In fact, establishing multiple streams of passive income early in your life can actually give you a tremendous amount of financial security and freedom in your future.  And… you might actually have some fun with it.

If you are about to stop reading…humor me for a moment. Let’s go back to the scenario where you are a successful professional making a good salary. Ten years into it, you have to stop practicing…regardless of reason (ie. Boredom, injury, etc).  Now you are in transition and thinking about what to do with your life. You are living on your finite savings. What if you had some passive income streams in place. Say 6-7K per month that comes in regardless of whether you work or not. Now you’ve got some freedom, right? Or… say you are nearing retirement. Suddenly there is another stock market crash and you don’t want to start tapping into your funds when the market is down. What if you had accumulated 10-12K in passive income per month that was essentially infinite. You might never have to really tap into that IRA.

The point I am trying to make is that we are programmed to believe that our investments have to  be something we hand over to a broker and watch once a month to see if and how much it has grown. Eventually, when we start tapping into it, it is essentially a finite amount of money. Passive income is not a discreet amount of money. It is the gift that keeps on giving. You can live off of it forever AND pass it down to your kids.

Let’s go back to the example of real estate…my favorite type of passive income. Again, don’t stop reading. It is an absolute fallacy that owning real estate is risky or that it is a lot of work. Here’s an example.

An immigrant from India arrived to the US in in 1967 as a graduate engineering student on scholarship with his wife and children. He worked his tail off with multiple part time jobs to earn extra money to achieve the “American dream”. He and his family lived in a duplex building where they occupied one of the two units. This hard working guy eventually had enough money to put down a down payment on the building he and his family lived in and bought the duplex in 1974—a year after his third and final child was born. Suddenly, he realized that he was essentially living for free since the other unit was bigger and brought in more rent than he was paying. Then it occurred to him that this might be a pretty good business. After all, everyone has to live somewhere and as long as he planned it so the mortgage and payments were less than the rent, there was not a lot of risk. He actually continued to do that for years. In fact, he realized that he didn’t really like being an engineer anymore and just started buying houses and buildings for a living. The passive income he was generating was more than his engineering salary anyway. 35 years later, he was making over a million dollars per year in passive income. The only financial scare he had was when he decided to try his hand in the stock market in the nineties and lost millions of dollars in tech company investments. After that, he realized that there was nothing better and safer for him to keep buying real estate.  He enjoyed being involved with the business but also took lots of trips back to his native land and never really worried about money again.  He didn’t have to field calls from angry tenants if he didn’t want to. He had a property managers who did that for him. Everything was automatic. Over the previous three decades, the economy had gone up and it went down but people always needed to live somewhere. In fact, when the economy was worse, his buildings were even in more demand because people always need to a place to live even if they could not buy houses. He also was lucky in that he was pretty conservative in the way he bought buildings. He never speculated and he never trusted variable rates, arms, etc. As an engineer, he solved many complicated mathematical problems but this was basic arithmetic. Bring in more rent than the cost of the building and you come out ahead.  Does this story sound too good to be true? Well… it’s my dad’s story.

Real estate is just a phenomenal way to build perpetual passive income and wealth. You will hear a lot more about it in my other posts.

However, understand that there are many ways to create multiple streams of passive income. If you can get yourself to think this way, it will change the way you invest and, ultimately, the way you will live. So, what keeps you from investing in things that create passive income? Doesn’t it make sense? Please comment and I will be happy to reply to you.