By Ronnie Thompson
The definition of passive income is revenue that’s generated in a way that doesn’t involve significant or ongoing labor, energy, or time to earn or maintain. In other words, it’s basically what’s referred to as “making money while you sleep.”
With very few exceptions, most passive income still requires some work, but it can be relatively hands-off (say with money from an inheritance) or require a burst of upfront effort before passive income is generated.
Developing passive revenue streams is important for several reasons: First, it’s a great way to establish financial security for yourself or for a business. Passive income is also important to grow and scale a business: Having a steady trickle of passive revenue coming in to cover costs can allow time and energy to be actively directed toward efforts that add value to and grow a business, like creating content and developing additional features in response to member feedback.
There are THREE MAIN ways to generate Passive Income; buy rental real estate, start a business that involves limited effort or invest in the market. Rental Real Estate is almost always the consideration or what most people believe is the way you create passive income. As with any “opportunity” there always comes weighing the PROS and CONS of something before embarking on making that decision.
Buy Real Estate
When it comes to real estate, I have found what attracts people to this form of passive income is the same reason that ultimately leads to an urgent exit strategy, the management. In a perfect world rental income can be extremely powerful but we do not live in a perfect world and often when it comes to real estate the world is rarely if ever perfect. Lack of Liquidity (access to money), Rising Taxes and Insurance Premiums, neighborhood decline, unfavorable tax code changes, landlord Role/Management, and difficult tenants are just a few of the cons to real estate that are both out of your control and unpredictable.
Start a Business
Starting a business of all the options to establish income involves the most management and work making it the least passive option. The evolution of technology has provided a unique environment that allows for business’ to be much more passive than in the past. Online based business’, sales and or the ability to virtually outsource the work of traditional employees have created a much easier way to build a passive business. When it comes to starting a business, it is important to understand that 9 out of 10 business’ fail in the “startup phase” making the loss of any capital infused to create that business and the business itself extremely high.
Traditional Investments
Traditional investments are another form and passive income and for most I have spoken to about passive income they never looked at this as a passive income option.
Traditional Investments compared to all other passive income options demands the least amount of involvement and if done correctly involves the least number of aspects outside of your direct control and in turn the least amount of long-term risk. If you were to invest 1.5 million of your capital into a MODERATE diversified investment model (50% stock and 50% bonds/fixed income assets) your long term annual average return would be somewhere around 6%. That rate of return would provide 90,000 of passive interest income on an annual basis. Traditional investments also give you the unique ability to decide how you want those investments to be taxed depending on the structure and the buying and selling of the investments within the model.
Passive income can be an incredibly powerful tool within anyone’s financial plan. Weighing the pros and cons to any decision is important when it comes to developing passive income is important to identifying what option is best for you and your individual goals and objectives. Passive income is often discussed and in turn “sold” to us by the “rich and famous.” Whether it is “come to my seminar” guy or “buy my program and become a millionaire for the low low cost of (insert unreasonable price here …. )” infomercial, be mindful and diligent when it comes to the pitfalls that often are left out of the presentation.
Ronnie Thompson and Steve Wilbourn are investment advisory representatives of and provides advisory services through CoreCap Advisors, LLC. True North Advisors and CoreCap Advisors are separate and unaffiliated entities. Securities trades are not accepted through email, voicemail or fax. Please contact your representative at the number listed above to place any securities trades. This e-mail message and any attachments are solely for the confidential use of the intended recipient. If you are not the intended recipient, notify us immediately by return e-mail and promptly delete this message and any attachments from your computer. These independent views and opinions expressed are those of Ronnie Thompson and Steve Wilbourn and are not necessarily the opinions of CoreCap Advisors. Investing involves risk and investors may incur a profit or a loss. Any information should not be deemed a recommendation to buy, hold or sell any security. You should consult with a licensed professional for advice concerning your specific situation. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
