What is passive income?
How would I define it?
Passive income is money that’s earned with minimal activity and minimal ongoing management or oversight by the investor.
That could be putting money in the bank in a savings account or a CD, or buying a T-bill or bond – where the rates of return are set and the investor just receives the interest.
You put the money into something, and you get the returns back without any effort on your part – other than filing your tax returns.
There could be different levels of passivity as well. I do a couple of different kinds.
One is a blind fund: I invest money into funds where there’s a manager who invests that money into the actual assets and does the oversight and due diligence – he monitors the investments, and decides which investments are good.
This can work as long as I trust that person and I know them well – that's the key here.
But as long as I do that, I can be pretty passive and still get really good returns in real-estate.
Syndications are similar, but instead syndications pool money.
You put your money into a syndication as a member of an LLC, and then you have a manager and deal sponsor who goes and acquires the asset (commercial property of some kind) and then manages it and pays back the investors based on the participation agreements therein.
In real estate, there can also be investments with a higher level of activity, and this is where I think the word “passive” falls outside the realm of passive.
It’s active. One such investment is buying rental properties, or the fix and flip.
Some people try to do that outside of their profession as a side gig.
And as a side gig, if you’re buying rental property and doing fix and flips, I’d consider that active.
In fact, that’s very active.
And there is nothing wrong with that – just realize it is not passive.
When you’re young and you have more time than money, then you’re going to be a more active investor than you might be a little bit later in life.
So that’s the nuts and bolts of it, as I see it today.
Determining where you want to be on that scale of active to passive all depends on you – your risk tolerance, how much time you have, and who you know.
If you want to learn more about the fundamentals of passive income for practitioners, I’m hosting a two-day workshop September 6-7: https://www.freedomfounders.com/sep-workshop
To your freedom!
-David
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