102: Real Estate Investing—Passive vs. Active Income
Episode Transcript
Welcome to episode two of season one of the Growing Empires show. In today's show, we're going to talk about the concept of real estate investing, passive income versus active income, and how to choose which one is right for you.
00:35
So passive income versus active income. What's the difference? Since we're talking about passive income this season, I'm gonna start with that one first. Passive income is income that is generated, essentially, while you sleep. It is income that does not require a lot of your time or attention, and in many cases may require none of your time or attention, if done right. Active investments are just the opposite. Active investments do require some form of your time, whether it be in analyzing deals, taking care of the day to day operations, or going out and actually acquiring properties or looking sourcing the deals, but it does require some of your time. Deciding which one is going to be the best for you, it's really just up to your personal situation. It's up to you whether or not you have the time to invest, whether it be sourcing deals or not.
And after you have an investment property, do you have time to deal with the day to day operations? Owning residential rental properties can be a combination of passive or active and it just depends on what team you organize after you buy the investment property. And we're going to go into great detail about that a little later on in this episode as well as later on in this season. So let's identify what are active investments. So active investments, which generally take a great deal of your time are going to be things like flips, wholesales, and again potentially buy and hold properties. So property flips are things that you buy, you do a significant amount of renovations to, then you put it back on the open market, and you sell it for a substantial profit, hopefully. And flips take a great deal of time between you finding the actual property, doing all the sourcing of all the contractors and vendors that may be providing services to your property, then managing the process as the property is being renovated, and then you're going to have to hire a real estate agent to put the property back on the market to sell it to your end user, which is typically an owner occupant. Those are rental property flips or property flips.
Then we have wholesales, which is typically another term for that is called contract flipping. So essentially what happens in a wholesale is that you the investor are really good at sourcing deals. So you locate a seller that potentially is in distress, or is in a situation where they just want to get rid of the property. And that could be for a variety of reasons, but you source this property, but it's not necessarily a property that you want to keep or hold onto. So you are now going to find a buyer for this property. And essentially what you're doing is you're creating a relationship between the seller and the buyer, right? You're the liaison between the two. So in this particular situation, you locate the property. After you've identified the property, you put a contract on the property, and then you flip that contract essentially to another buyer, potentially another investor. The difference between what you acquire the property for what you sell the property for on the back end is your profit as a wholesaler.
And a lot of times you don't even need to own the property for a great deal of time. As a matter of fact, you may not own the property at all, you're just actually flipping the contract. So it's a very quick way to make money. But it does involve a lot of your time, which is why it's in the category of active investments. The other type of active investment could be a buy and hold property, a residential rental property or commercial property that you want to have your hands into. So maybe you're going to handle the day to day operations maybe you're going to handle the actual management or the accounting or the oversee the general repairs and maintenance of the property. That would make this an active investment. If it's going to require a good amount of your time, you can consider this an active investment. Passive investments on the other hand, as we discussed, do not require any of your time.
04:25
The episode will continue in just a moment.
04:30
It's true passive income from real estate investing is the secret to building wealth. However, portfolio development takes a great deal of time and experience to be successful. It's important to protect your portfolio so that it remains strong and can continue to provide you with passive income you desire. I help investors bulletproof their investments by developing a portfolio strategy that hedges economic cycles and provides for consistent income growth. I can do that for you to. Start by scheduling a call with me at growingempires.com. Whether you're a new investor or have several properties that need better management, I can help schedule a consult today at growingempires.com, that's growingempires.com and we'll make your portfolio stronger than ever.
05:17
So there's quite a few types of passive investments you can invest in a private equity fund, you can invest in a hedge fund or REIT, a syndication, any of those would be considered passive vehicles for investing. A private equity fund is typically a fund that invest in companies for higher profits over a longer period of time. Hedge funds or investments in assets that yield a good return on investment and typically over a shorter period of time. Though hedge funds are typically three to five years, and then the assets are sold. REITs or real estate investment trusts are companies that make debt or equity investments in commercial real estate. So essentially the investor buys a share of the REIT and earns an income from its debt and equity investments in the form of dividends. And then last but not least, we have a syndication, is typically where investors pool their money together to invest in a larger project, or a much larger property that you could not otherwise own on your own or afford on your own.
And then there's one other way to really have passive income, and that's to buy a residential rental property, and have a good management company, a great management company, to handle the day to day aspects of that rental property. And if this is done right, you will find that rental properties can actually be a very passive vehicle, but it's all in how they're managed. It's all in how much time you as the investor have to invest. So again, going back to what we were saying before, the difference between passive and active is really just how much time do you want to spend? Are you the type of person that really needs to have your hands involved in everything? Do you really just have to know the nuances and deal with the day to day aspect to really feel like something's good? Or are you going to be able to at some point back up and release control to somebody that you trust to oversee your investments? We're going to talk a lot about passive investments, because passive investments are typically for the majority of the population.
They're for people that have full time jobs. There for people that, you know, have families and they want to be able to spend more time with their families, but they want to be able to be making income that will allow them to retire early, go on good vacations, save for college, or you know, whatever you decide that that's what you want to do with your money. But passive investments are really the key to financial freedom. If you choose to go down the path of a private equity fund or hedge fund or REIT or syndication, chances are you're going to be given a sum of cash over to somebody else to invest it for you. And you're going to have little to no control but you also will have little to no involvement in anything that has to do with the reinvestment of your money. If you choose to buy and hold properties, residential or commercial rental properties, and you hire a great management company, these properties can also be passive income. But it's going to come back to it really depends on which way you choose to invest in real estate, you're going to need varying amounts of time beginning capital, knowledge and patience. And how you identify which path is best for you, is really going to depend a lot on your current situation.
If you have a job that requires you to spend more than 40 hours a week, you're going to have to make a decision whether you can have real estate as your second job. If you have a family that may not be feasible. So when we talk about passive investments, we're talking about, “how can I achieve additional income above and beyond my current job without requiring a great deal of my time or energy?” And that's when you're going to sort for passive income investments. So if that is something that sounds great to you, passive investments are the way to go. If your job doesn't require a great deal of your attention, and, you know, maybe you work from home and maybe you have a little bit more flexibility, and you can source your own deals, then maybe you want to think about some type of active investment or an investment where maybe you start small and then do some of the day to day operations yourself.
But again, it's all going to come back to how much time do you have? And what do you want to do with that time? Great passive investments allow you to make money while you sleep. I'm happy to help you identify which path is best for you whether you're investing in this local area or investing somewhere outside of the state. But it's important to keep in mind that diversifying your portfolio is going to help you shield yourself from risk and shielding yourself from risk in general means that you have another source of income that does not require your time or attention. Because if you were injured today or lost your job today, would you be able to continue life as you know it now? And if the answer to that question is no, then you desperately need a source of passive income. Make sure you tune in to episode three where we talk about how to get started building a real estate portfolio.
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