This guest blog is contributed by Jeremy Roll, a professional real estate investor who serves as an advisor to RealtyMogul.com.
I have been a passive income investor since 2002 and it has changed my life in many ways. Not only did passive income enable me to leave the corporate world in 2007 but, perhaps more importantly, it has also provided me with peace of mind during challenging times. For example, while the stock market was plummeting in 2008, my passive income investments were on their usual schedule, paying on time and with the certainty that I knew I could count on. I could watch CNBC and hear about the stock market crash while knowing that 10 minutes later I would fall asleep without great financial worries. This peace of mind was particularly nice during that period, as it was the Dot Com Crash that initially motivated me to find a better way to invest to avoid future stock market crashes. More recently, my wife and I experienced family health challenges that required at least one of us to be in the hospital day and night (24/7) for 1-1/2 to 2 months straight -- and this happened twice during a 6-month period. During those challenging times, our income continued to come in, as expected, and allowed us to focus on our urgent matters rather than worrying about having to take unpaid leave from a job. I am quite convinced that our passive income streams saved us from accumulating significant credit card bills during these times.
If this sounds too good to be true, then I would highly recommend that you research passive income investing further, as there are many ways to invest for income and I have nothing to sell you – except for a change of mindset. While most financial advisors continue to push stocks and bonds, both of which aren’t income focused and have great uncertainty associated with them, many passive income investors have learned that earning stable 10%+ annual income returns (typically paid monthly or quarterly) can be used to pay for living expenses, retirement, and/or reinvestment, and, in many cases, can also have great tax advantages. Making the change from speculation (i.e. stocks and bonds) to income can not only put you on a better path for the long run, but can also be much more lucrative than the 8% historical annualized return of stocks and, in many cases, with equal or even less risk. While 10%+ income returns are better than 8% historical stock market returns, the 10%+ figure doesn’t include additional components of returns in many income investments, such as pay-down of principal (if mortgage debt is involved) and potential appreciation. A typical lower-risk income investment that contains passive income, debt repayment, and modest appreciation is often projected to yield 17-20% annualized -- or more than twice the historical long-run return of the stock market. As a Wharton MBA who knows many financial advisors, I can tell you this is a secret that many financial advisors don’t want you to know because, in most cases, their earnings are directly tied to how much of your money they manage, so their goal is to manage as much of your money as possible – not necessarily to maximize your returns. And investing in passive income opportunities is one of the ways the wealthy like to invest, as they don’t usually “roll the dice” on stocks and bonds with the majority of their savings (like the majority of middle and upper-middle class Americans) and they benefit from the significant tax advantages that many income opportunities offer.
If you’re a relatively low-risk investor and a conservative person (like me), then you’ll probably appreciate some of the benefits of passive income investing, as it can enable you to:
- Earn more predictable returns than the stock market (with equal or less risk in many cases)
- Earn better returns than the stock market (with equal or less risk in many cases), resulting in a higher net worth for you and your family in the long-term
- Better plan for your future by being able to predict your future returns with more certainty
- Have access to your income for living expenses, retirement, and/or reinvestment, allowing you to spend or reinvest without encroaching on your invested capital
- Sleep better – or at least with less worries – during today’s economically volatile times!
Although income investing is a key focus from my perspective, passive income investing is a more specific approach that makes income investing more accessible, easier, and worthy of consideration. In essence, most passive income opportunities are managed by experienced operators who earn fees that are typically aligned with investors. This approach results in investors simply collecting income from the opportunity, typically on a quarterly or even monthly basis, without any additional effort. This strategy is synonymous with “hiring experienced operators” on your behalf and it’s the strategy that I have successfully employed since 2002 with great results.
Passive income investing is definitely not for everyone, as it involves handing over control to the operator, as you count on the operator to make all of the decisions related to the investment. This type of investing also requires that you find honest and capable operators to work with due to possibility of fraud and mismanagement (these risks can be somewhat reduced by performing background checks and with the right investment structure). Passive income investments are also typically much less liquid than stocks and bonds, as an investor’s shares cannot easily be sold. But if you’re careful when choosing your investments, including conducting thorough due diligence for each opportunity and diversifying across many operators and investments, then I can tell you first-hand that passive income investing can change your life.
In summary, passive income investing can be a good fit for investors who don’t have the time to actively find and manage their own investments or for investors who simply prefer to hire experienced operators on their behalf (like I do). It can also lead to a more predictable financial future that allows you to sleep well with less financial worries. It’s also how the wealthy like to invest, thanks to the considerable returns and tax advantages that it can offer. If this sounds intriguing to you, then you might want to investigate this method of investing in more detail, as I wouldn’t expect your financial advisor to make the recommendation to you anytime soon. Otherwise they might be out of a job!