- August 1, 2021
- Posted by: Jin Wang
- Categories: new investors, passive investing, syndications
When COVID became a very real thing in Spring of 2020, all of our lives were disrupted. I remembered going into work on Wednesday March 18th, it was a typical work day in the Finance Department. I was catching-up with my emails, responding to yet another urgent request, when in the middle of the work day, we all got called into the CFO’s office. We were told that we will all need to prepare to work from home starting next week. We were all in shock, this was unprecedented. We were such a paper based non-profit organization that it didn’t seem possible that we could work from home. In hindsight, that week was pretty much the end of normalcy as we all know it.
For many people, I know they didn’t fare as well that week, or subsequently to COVID being a real thing in the US. Imagine that instead of your boss telling you we’re all packing up and working remotely from home indefinitely, that halfway through your morning, you received the news you had been laid off. For most Americans, that means zero income starting the very next morning.
Now, let’s pretend that during your employment, you leveraged your money. What does that mean? Robert Kiyosaki put it this way:
“The rich don’t work for money. They make their money work for them.”
Three Types of Income
Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn Residual or Passive income (or both!).
Active Income
Active income is from your employer and requires activity in exchange for money. When you stop, the income stops. It’s the typical W-2 income. It fully depends on you being healthy and able to perform your job. If you’re lucky, you can paid sick and vacation days.
Residual Income
Residual income means you receive money after the work is done. For example, every book an author sells provides residual income.
Passive Income
Passive income is earned with very little effort and continues flowing even when you aren’t working. Real estate investments are one of the most stable sources of passive income.
Remember the job loss scenario? Let’s pretend you’d built passive income, on the side, during employment. You worked hard, saved your money, and invested in a few cash flowing rental properties.
Since being laid off, your earnings decreased by your monthly salary amount, but since you have rental properties, you still have income.
Financial freedom is achieved when your earned passive income supersedes your active income. At this point, you have the leisure to decided do you want to work because you like and enjoy what you do for a living, or is there something else you’d rather do with your time?
If you’re like me, you probably want to see an example of how the numbers would need to play out in order to achieve your freedom number.
Investing in Stocks vs. Real Estate
Historically, the stock market returns about 8% annually, which means $100,000 would produce roughly $8,000 per year. That’s only $667 per month, and that is granted you sell your stocks. If you keep in in your portfolio, you have an appreciated asset yes, but no real cash in your hand yet to show for it.
To replace an income of $10,000 per month, you’d need $120,000 per year, which would be 8% of $1,500,000.
However, with real estate, $100,000 could buy a $400,000 rental home. How?
The bank brings $300,000 to the table.
You put in 25%, the bank puts in 75%, and you earn 100% of the profits.
A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month. Theoretically, about 7 investments of this size could replace a $10,000 monthly income.
The total rental income plus $20,000 in additional equity (based on 5% annual appreciation) equals $38,000, or 38% return in just one year.
But I Don’t Want to Be a Landlord
The numbers look enticing, but being a landlord does not.
This is where, instead, you join a small team to acquire real estate.
When investing $100,000 in real estate syndication, it’s feasible to earn $8,000 per year (8%), similar to the stock market.
However, the real opportunity lies in the sale of the asset. Syndications hold the property for about 5 years. During this time, building improvements are made and the land market value typically rises.
Upon the sale, you receive $160,000 ($60,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return.
If, while employed, you’re able to create passive income, you’ll be less stressed when facing a layoff. You may even find yourself celebrating unemployment.
Want to Learn More?
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