What Is Passive Income?

What Is Passive Income?

Today’s guest post comes from Johnny Bravo over at AffordEverything.com. If you like his article on passive income, check out his Facebook page as well!

Without further ado, Johnny will take it away:

What is Passive Income?

Simply put, the ability to generate income on a consistent basis, with minimal and quite often no involvement. This is money that flows in your bank account no matter what you have going on in the world. So why do we need passive income? For some it’s a way to shift your life focus towards your passion, others want to spend more time with family, or take a spur of the moment vacation to Fiji.

Whatever the case, building passive income allows you to stop trading your time for money.

There are different ways to generate passive income, such as blogging, CD’s, annuities, purchasing a preexisting business or renting and holding real estate.

When I accidentally started building passive income, I was new to the rental game. I didn’t know it yet but I would soon grow to love the extra monthly income. Everything I had ever heard about being a landlord in the past was always negative. Stories of the, “tenant from hell,” or the idea that I’d be getting calls to fix a leaky water heater at 2 in the morning were what I thought being a landlord was all about.

The truth is it’s not difficult if done properly. Your first line of defense into creating a passive income stream, is to hone your ability to find a good tenant. Once you have a good tenant in place, the income will flow and the rest is very light maintenance.

When you first start off generating passive income, it’s important set financial goals. Think about how much you need to retire. Think about how much you need to generate to be able to maintain the type of life you want to live. This number will different for everyone, however I believe that this number should not only fund your living expenses, but also allow for savings for other investments.

Know what rentals in the areas that you invest in can fetch per month and calculate how many houses you will need to hit your monthly goal. For example if you need 60k a year to retire comfortably, and the average 2 bedroom in your area rents for $1000 per month, or 12k annually, you would need 5 house fully paid off to achieve this goal.

I find that a lot of new investors set a monthly income goal, then as they turn into seasoned investors and hit this goal, that 60K has turned to a 120K goal. I think that investors should not only look at living expenses, when planning a retirement goal, but also make sure you are generating enough to save. By creating a dedicated savings nest, this allows you to purchase a new property and increase your income stream.

This is why I find it is best to stay employed or have steady income especially in the beginning stages of creating passive income. I’ve found for me it’s worked best to pay houses off sooner rather than later. A lot of investors suggest, that you should treat the difference between your mortgage payments and rents as profit. I prefer to put this extra money back in to paying off the rental, I would also save my work income like a madman to speed up this process. My number one goal is to pay these houses off before I can transition into a full time investor.

The number one thing I tell prospective landlord is that, they should be molding their rental business to be as hands off as possible.

For this type of investment the ability to make this as passive as you like is up to you. In the beginning, I tried to do a lot of the repairs myself. Over time I’ve made relationships with local handymen, whom I can call should I need them, that offer me discount pricing because I’m a consistent customer. It’s always good to build relationships, in different repair related fields.

Once you have built your rental portfolio, many investors find property managers to handle the minor upkeep. Property managers allow you to be as hands off as possible. Some landlords may want to screen their own tenants, while some may not want to be bothered as much. A landlord buddy of mine has given his property management company strict instructions not to concern him for any repairs under $100. That means if something minor like a clogged drain, or the AC needs to be recharged, it’s get handled without any effort from him. It’s important to do your research on the property management company you employ. These are the people making the major decisions about how your house is run. The best way to find a good property manager, is via another investor in your area. Picking a property manager with proven track record, will give you peace of mind.

Do you invest in real estate with the intention of becoming a passive builder of wealth? Are you considering buying a 2nd home as part of a new real estate empire?

For more info about building income streams with real estate. Please visit my blog AffordEverything.com or like us on Facebook.

16 comments… add one
  • The Green Swan Aug 31, 2016, 6:46 am

    Thanks for the guest post and intro, I look forward to checking out your site Johnny!

    I guess at this point I have a couple streams of passive income. My brothers and I run a couple small businesses together and I also have my investment portfolio which consists entirely of stock mutual funds. I haven’t purchased any investment RE, but wouldn’t be opposed to it one day.

    • AffordEverything.com Aug 31, 2016, 8:03 am

      I’m glad you enjoyed it, stocks are a good way to build passive income, I have been holding sbux(Starbucks) and Pfizer stocks for 3 years, I have also dabbled in swing trading. For me RE has been the most profitable way, however RE is also a very expensive method to obtain passive income.

  • Ms. Montana Aug 31, 2016, 8:10 am

    I love our rental income as well! It’s fun to push the appreciation with renovations (and increase the rent amount.) Our rental income covers all our fixed expenses, plus our food bill at this point. I wouldn’t mind adding 1-2 more over the years.

    • AffordEverything.com Aug 31, 2016, 10:01 am

      Sounds like your on the road to having a great financial future, renovations are the most fun/stressful days ever.

  • The Financial Panther Aug 31, 2016, 9:48 am

    We’re definitely planning to rent out our house if we ever move. We aren’t in a position yet to actually become rental investors, so for now, we’ll probably have to become landlords if we ever move out of our home. No plans to sell it if we can help ourselves. The ultimate thing would be if we could pay off the mortgage we have now before we ever got a new house, then use the rent from our current house to pay a mortgage at any new house we live in. That’d be amazing. But too far down the line to know if we can do that.

    Definitely need to work on building up passive income though. Most of our non-regular job related income comes from side hustles, which obviously aren’t passive.

    • AffordEverything.com Aug 31, 2016, 9:59 am

      I always find it better to pay off your house aggressively, this is why I always advise new investors, to pick a cheaper house when they first start investing, this way you can pay it off completely in a few years.

  • Jon @ Be Net Worthy Aug 31, 2016, 6:52 pm

    I love the idea of owning rental properties, but I keep going back and forth on it in my mind. Here’s the issue. I make too much money to be able to take advantage of the depreciation tax benefit. That is a huge financial benefit as I’m sure you are aware. It makes me think that my time and capital would be better spent pursuing other passive income streams.

    What are your general thoughts on looking at rentals when you don’t get that tax benefit?

    • AffordEverything.com Aug 31, 2016, 6:58 pm

      Hey John, I guess the way I look at it, the tax depreciation benefit is an added bonus. For me the main benefit of owning rental properties is the monthly cash flow, especially when paid off. I tend to look at depreciation as cost of doing business essentially. I think it’s important for landlords to save a dedicated portion of rents every month to set aside for future renovations to keep your properties up to date.

  • Vicki@Make Smarter Decisions Aug 31, 2016, 7:55 pm

    We own many rental properties and although we do all of the management and maintenance ourselves at this point, we planned a transition to part-time management too. Our rentals are our insurance policy for the future. We have two pensions (one now and one coming in 5 years) – so the rental income supplements those. I like your point about making sure you have enough to save too. New investors get into real trouble the first time a roof needs replacing, etc. when they have cut their margins too thin.

    • AffordEverything.com Aug 31, 2016, 8:59 pm

      Your right about that, that’s like the number one reason, people try to tell others not to do rental properties, the “dreaded roof repair”, but honestly if you set aside $100
      A month by the time you need a roof it will just feel like routine maitenence because you were prepared

  • Gail @The_KnittyKitty Sep 1, 2016, 8:12 am

    Thanks for the post Johnny! I’ve just started building my passive income. I have some investment portfolios that generate a little bit of money, but nothing spectacular. I’d love to get into renting property but I’d need to get more of my financials in order first (trying to knock out my school debt in 3 years). With a bit more research and capital I think RE could be for me!

    • AffordEverything.com Sep 1, 2016, 8:20 am

      I’m glad to hear it Gail. I know school debt
      Can be killer. If you aggressively pay down your mortgage like you are tackling your school debt, then this will be an easy venture for you.

  • Physician on FIRE Sep 1, 2016, 10:51 pm

    Passive income is great, but blogging and landlording are far from passive. I’ve done both and earned active income from both, but the only income I would consider passive are the returns on my equities. I suppose the definition of true passive income remains elusive, but I like to think that passive means without effort.

    Best,
    -PoF

    • AffordEverything.com Sep 1, 2016, 11:00 pm

      I think the term passive is subjective, for example for someone who loves to write blogging isn’t work. Therefore any income derived from it can be considered passive. As for landlording, I spend less than 2 hours per month managing my properties, having procedures ready for every scenario helps me reduce time spent.

  • Finance Solver Sep 2, 2016, 9:45 pm

    I am so going to buy a rental property in the next 5 years. Have to get educated in it first and know the city that I want to invest in. Don’t want to get burned by buying a house from someone who’s smarter than me. Hopefully the real estate market cools off a bit until then.

    • AffordEverything.com Sep 2, 2016, 10:47 pm

      The best way to buy a house from a distressed seller, you have more leverage to negotiate, and you can get some really awesome deals!

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