What is Passive Income?
Passive income is defined as earnings derived from a rental property, business, or enterprise that requires little day-to-day involvement. Also known as “residual income,” it generates cash flow with minimal ongoing work once an initial investment of time, money, or expertise is made.
This contrasts sharply with active income that demands ongoing time and effort to maintain. Salary from a traditional job is active income. You must show up daily and complete specific tasks to continue earning.
The Allure of Flexible Wealth
It’s easy to see the appeal of passive income. Financial security with the freedom to live life on your own terms is an alluring concept, but most believe it is unattainable.
However, Tyson Miller, former IT professional, would say otherwise. He worked a W2 job for 25 years before learning that there was a better way that would enable him to have a higher quality of life. Read about his story here. He now spends his time on his terms and is able to spend more time running, driving his kid around and traveling.
Defining Financial Independence
Passive income serves as the cornerstone for every financial independence plan. Financial educator Robert Kiyosaki, author of “Rich Dad, Poor Dad” emphasizes that passive income and cash flow are essential for escaping the rat race that dominates American culture and gaining financial freedom. Generating enough monthly passive income to cover your expense gives you options and control over how you live your life.
Bestselling author and entrepreneur Timothy Ferriss defines the minimum threshold for financial independence as 25x your annual living costs invested in income-generating assets. With a 4% annual return, this provides yearly passive income equal to yearly expenses. At this crossover point, you gain the option to stop regular work while maintaining your lifestyle strictly via passive income streams.
Financial Independence Vehicle: Passive Real Estate
While stocks, peer-to-peer lending, dividends, ebooks, patents, and online businesses can generate healthy passive income, few wealth-building vehicles rival real estate.
Real estate features unique tax advantages, leverage options, wealth preservation attributes, cash flow potential, ease of entry, and prospects for appreciation that make it a favored asset class for passive income seekers.
Private Real Estate Syndications
This fast-growing real estate investment niche offers accredited investors access to large institutional-grade apartments, office buildings, storage facilities, and other commercial assets typically only available to ultra high net worth investors.
Sophisticated operators source high quality properties in advantageous markets, oversee teams to operate them skillfully, and sell ownership shares to investors under the same roof. This aligns incentives effectively to maximize returns.
Syndications allow capital from multiple investors to be combined in special purpose vehicles to purchase large real estate investments under one roof. This consolidation of resources allows for acquisition of institutional assets otherwise inaccessible to everyday investors.
Each investor owns a percentage of equity in the asset. They get passive income distributed from ongoing rental profits in proportion to their ownership share. Typical cash-on-cash returns run from 6% -10% per year before appreciation.
Mitigating Risks
The benefits of passive income models using leveraged real estate seem almost too good to be true. Where are potential pitfalls?
According to this article, the most important document in a real estate syndication deal is the Operating Agreement since it lays out the “Money, Power, and Responsibility.” The article explains what to watch out for while moving through the process.
Get Started on the Road to Passive Income
Unlocking the leverage, wealth generation capacity and longevity benefits unique to income property, real estate syndications stand out as a favorable asset class for busy professionals too time-starved to manage rentals directly but eager to tap into outsized profits institutional investors enjoy. Get started by joining a group of like-minded investors who have been successful in passive investing. Left Field Investors has a wide range of resources, including articles, networking opportunities, discussions with experts and deal analysis.