A few days ago, I was discussing active and passive income with my friend. I was surprised that he barely has any level of passive income coming in.
I couldn’t really comprehend that, but I just smiled and nodded (didn’t want to stir the pot). As many of you readers probably feel, I don’t want to work a corporate job forever.
I like the freedom to do what I want and go where I want and take time off when I want. As a result, building passive income is a really big goal of mine.
In fact, I have focused a lot more on passive income than actually building net worth.
Active income vs. passive income
Over the past year, I have been trying to invest all of my active income into passive income sources.
Let’s define those active and passive income first.
Active income is income earned from providing a service. For example, you get paid a salary or hourly wage from working at a corporate job.
With active income, you are effectively trading time for money. If you don’t work, you don’t make money.
In contrast, passive income still generates income even after you perform the work/service.
To reach retirement, it is important to have a large source of passive income. I would highly recommend having 5 – 6 different streams of passive income to retire.
After all, retirement should be enjoyed, not where you do more work!
Investing active income into passive income
How can I generate more passive income? That’s one of the most common questions I get asked.
In general, if you invest your active income into passive income you will be able to increase your passive income substantially.
Since passive income is recurring, that passive income stream will generate even more passive income and the process repeats and compounds.
Let’s go over a real estate example. Real estate is a great way to take your passive income (i.e. from your day job) and invest it into a passive income source.
Let’s say you found a nice rental property for $100,000. This property requires 20% down and you put up $20,000 to buy this beauty to rent out.
This property brings in $200 a month in rental revenue (or $2,400 a year). This means in about 8 years ($20,000 / $2,400) your rental property will generate enough income to buy another $100,000 rental property with 20% down!
That’s the great thing about passive income…it can compound (and active income can’t).
How to invest Active income into passive income?
In today’s world you don’t need a ton of money to invest into passive income streams.
Here are 4 ways you can invest your active income streams into passive income:
1. Dividend investing: Dividend stocks are great way to generate passive income. Most companies pay quarterly dividends, although some companies (like Realty Income-ticker symbol: “O”) pay monthly dividends.
Dividends are an amazing source of passive income. Most of the work is actually done researching a stock before purchase.
Sure, you do have to keep up with the news flow and quarterly results, but the bulk of the work to generate this passive income stream is done up front.
Best of all? Some companies pay and increase dividends over multiple decades. This means your source of passive income will increase too! Some companies like AT&T have paid and increased dividends for over 20 years!
Imagine getting a raise every year! Dividend investing is one source of passive income that can increase every single year.
2. P2P lending: Peer-to-peer (P2P) lending is another way to diversify your passive income streams. Peer-to-peer lending allows you to lend money to other people for a variety of reasons including:
- To pay medical bills
- Financial hardship
- To start a business
- For a personal loan…and so much more!
P2P lending can be risky, but if you diversify your loans across many people, it is possible to generate a consistent mid-to-high single digit return.
And P2P lending can offer better returns than traditional fixed income investments (like government bonds).
3. Rental real estate: A rental property is the poster child for passive income. And why not? It’s a great source of passive income for many reasons.
First, the income stream is very predictable (you’re getting paid on a monthly basis). Second, you can also make money on price appreciation!
Rental estate isn’t for everyone though. It does require a ton of upfront work to scout the right property, negotiate with the owners, get a bank loan, perform necessary repairs, and finally find tenants!
However, it is a great way to diversify your passive income streams.
4. Real estate crowd funding: If you’re not too fond of dealing with tenants, let me introduce you to a new innovation in real estate investing. It’s called real estate crowdfunding.
Developers are basically looking to fund their real estate projects through a crowdfund system. RealtyShares allows you to invest in these opportunities for as low as $2,000.
This is a great way to have someone professional manage a real estate portfolio for you. Not only that, but you can get access to commercial properties, something you wouldn’t be able to do by yourself!
Are you investing your active income?
By investing active income into passive income, you can really grow your passive income streams significantly in a short amount of time.
Right now I’m mostly focused on dividend investing, real estate crowd funding, and looking into a real estate rental property.
Readers, how are you building your passive income streams? Do you have any unique ideas to generate passive income? Let me know in the comments!