Passive income has become a buzz word of sorts in the investing community. Many people think mistakenly think that passive income is simply putting your money blindly into an investment and then sitting on a beach. However, the reality is that no income is entirely passive and there are several considerations that the new investor must be aware of if they want to be successful. Today's article speaks to three of these points on passive investing.
No income is completely passive
Passive income is often defined as income that is made independent of time spent. The concept being centered around having your money do all the work to generate more money instead of using your own time and effort. Many new real estate investors make the mistake of believing that all real estate is a passive investment which requires no effort once placed. I believe however that a more accurate answer would be that the passivity of investing is a spectrum which ranges from minimal effort (such as passively investing in a syndication) all the way to a tremendous amount of effort (being a landlord or an active syndicator). It's important to understand this concept because each investor should make sure that their investment strategy fits the level of passivity that they expect. It's important also to note that even in a very passive investment like being a limited partner in a syndicator there is still effort required. This is includes initially educating yourself about how the investment works, meeting deal sponsors who you eventually come to know and trust, and then actively monitoring the reports from your investments after they are made. Just to be clear, this is significantly more passive than other forms of investing or working, but it is important to understand that is not entirely hands off either.
Passive income is less consistent than salaried income
One major difference between the income that you receive from a salary versus a passive investment is that the income from passive investing can be less consistent. First of all, distributions from multifamily projects are typically made quarterly. Learning to budget on a three month basis instead of a biweekly or monthly basis and take some adjustment. It is also important to always have personal reserves as a passive investor. An unexpected roof replacement or situation like COVID can cause distributions to be temporarily withheld so it's ideal to always have reserves should they be needed.
Passive income is a wise pursuit
Despite the two points above which almost seem to suggest that passive income might not be all that it is hyped up to be, we believe that passive income is an important pursuit. Of course while the term passive income might be new to many the concept of it is in fact anything but recent. Pensions and retirement programs have been providing Americans with passive income for many years. The two things that are new however is the idea that it might be necessary to pursue passive income outside of your employer's retirement program (many employers don't offer pensions today) and that you can begin building passive income long before reaching the age of retirement. The reason we believe that building passive income at even a young age is important is because it provides financial security in the event of a personal challenge (such as sickness or loss of job) and because it ultimately allows you to live life on your own terms without having to make decisions about work solely based on the money that you will earn. This can provide a more fulfilling and freeing life for those who are willing to dedicate the time to learning how to invest and then being disciplined to make investing a priority.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.