What is Passive Income?
Imagine returning home from a week-long vacation with your family and going to check your mailbox. The mail carrier has jammed the box full of catalogs, flyers, and bills – you know, the usual stuff. Then, you see something exciting – a check! You’ve just earned money while on vacation! That’s passive income – money you make without spending precious time working for it. Now that’s the dream! Wait – this is not just a dream; this is already the reality for our investors!
Passive income is the money you make without spending precious time working for it. Tweet It!
Passive Income = Financial Freedom
Now, imagine those passive income checks surpassing your current W-2 income; giving you the option to retire early or finish that project that’s been gathering dust – the time and money to do the things you want to do! This is an attainable goal, and real estate investments can get you there!
What would you do with an extra $500, $1,000, or more arriving in your mailbox each month? How could that improve your quality of life? Maybe your family has been dreaming of taking a cruise, buying a second home in some other climate, or maybe you would like to secure your kids’ college tuition. Perhaps you would simply enjoy the feeling of not depending on an insecure J-O-B.
Who Needs Passive Income?
Passive income can help anyone meet their financial goals, regardless of their age or situation. Some are looking toward retirement and realizing they’ve saved too little – the traditional 3-4% bond route just isn’t enough. Others may be looking to create multiple revenue streams to diversify their monthly income. Whatever the reason, those extra quarterly checks in your mailbox are a welcomed sight.
There are many options out there for creating passive income. I believe you’ll find it hard to beat real estate as a passive income vehicle – especially when you compare your time investment to the returns available. With commercial real estate, you can have your cake and eat it, too!
Why Real Estate for Passive Income?
There are four reasons that commercial real estate is one of the best passive income vehicles. Each one truly deserves their own blog post; but, for now, here is a quick explanation:
- Cash Flow
Cash flow is the amount of money moving in and out of a business. Positive cash flow is money that is left over after the mortgage and other bills are paid. This excess is then accumulated and paid to investors. In regards to real estate, the positive cash flow is also passive income because the investment is paying the investor! Passive income is the primary reason we invest in real estate.
- Principal Pay Down
Principal paydown occurs when we pay our monthly mortgage payment. As real estate owners, our tenants and residents pay rent monthly. Part of that rent payment goes toward the principal amount of the loan – reducing our outstanding debt on the property. We firmly believe that “good” debts are those that others are paying for you! Principal paydown is a great tool for building long-term equity in a property.
Appreciation is the increased value of an asset over time. In commercial real estate, this is primarily due to increased Net Operating Income (income after expenses are deducted). The best ways to secure appreciation are to “buy smart” (I.e. don’t overpay) and to buy an asset that will be worth more in the future than it is at the time of purchase.
- Tax Shield
Investors can “shield” themselves from taxes by claiming allowable deductions like the depreciation of real estate. This deduction can offset taxable income and reduce your tax payment. The benefits of a tax shield are an incentive to hold assets longer; you may have to recapture depreciation (pay back) when the asset is sold. Please talk to your CPA about the benefits of real estate shielding taxes.
Finally, these four things are what allow you to live off of the cash flow (without spending precious time working for it), have others pay down your existing debt, reap the rewards of appreciation, and have most of that cash flow (perpetually) shielded from taxes.
That’s ultimately why we use real estate to generate passive income and build wealth for our investors here at Wolfe Investments. We pride ourselves on helping our investors reach their financial goals and turn their far away dreams into everyday realities.