Imagine with me, that your workday began with the usual routine, but halfway through your morning, you received the news you’d been laid off. For most Americans, that means zero income starting tomorrow morning.
Now, let’s pretend that during your employment, you leverage your money during your working days by investing in cash flowing assets such as passive real estate.
The rich don’t work for money. They make their money work for them. – Robert Kiyosaki
Three Buckets of Income
Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn Portfolio 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.
Portfolio Income
Portfolio income means you receive dividends and distributions from stocks, bonds, ETFs, mutual funds and other financial products.
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.
Since being laid off, your earnings decreased by your monthly salary amount, but you still have income.
Financial freedom is achieved when your passive income streams are greater than your active income.
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.
To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000.
However, with real estate, $100,000 could buy a $400,000 rental home. How does that work?
The bank brings $300,000 to the table.
You put in 25%, the bank puts in 75%, and you earn 100% of the profits.
Let’s take a look at a hypothetical example to think this through.
A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month.
Theoretically, two investments of this size could replace a $3,000 monthly income.
The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year. Wait, what? Seems too good to be true.
The fact is that real estate pays you 5 different ways: Appreciation, Cash Flow, Loan Paydown by your tenant, Tax Advantages, and Inflation-Profiting.
On the other hand, stock market investing pays you in different ways such as quarterly dividend income (that can be re-invested) and capital gains from appreciation in value.
The biggest difference, in our opinion, is that the stock market has a lot more volatility and can make larger moves faster than real estate does. This is because stocks are valued “marked to market”, meaning they have a bid/ask price every second of the trading day. Another factor to consider with stocks and other equity investments is that they are more liquid than real estate.
Real estate is only truly “marked to market” during a capital event such as a refinance or sale and moves much more slowly than the stock market decreasing the volatility that many investors fear. Real estate syndications are also illiquid, meaning that you cannot sell and close your position at any given time. Rather, as a passive investor, you cede control over the sale (or refinance) of the investment to the operators (or general partners).
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 through a real estate syndication.
When investing $100,000 in real estate syndication, it’s possible to earn $8,000 per year (8%), similar to the stock market. However, the real opportunity lies in the sale of the asset.
Syndications may hold the property for about 5 years. During this time, building improvements are made and the land market value typically rises.
Hypothetical situation for a passive investment:
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. Not bad!
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.
To find out more about the passive investment opportunities that Cityside Capital is working on sign up for our Passive Investor Club here.
