Passive Income, Earned Income, and Portfolio Income
As many of you may know, I have a full-time day job. I would guess that most of you reading this also have a full-time day job. As hard as we may work at our job, that magical day that we call retirement is getting incrementally closer, day by day, month by month, and year by year. For many of us, having the financial where-with-all to enjoy our “golden years” don’t look too golden.
The Internal Revenue Service categorizes income into 3 different types:
- Earned Income which is the income we earn from our jobs, is by far the most highly taxed income. And with Federal, State, County and City governments looking for more and more revenue, the burden placed on paying taxes will only increase, leaving you with less and less income for your personal expenses. If you look at your paystub, you note that the system has it for you to pay taxes first, then live of what remains.The other issue with Earned Income is this type of income is the result of performing services and labor (and time) in exchange for money. If you don’t work you don’t get paid.
- Portfolio Income is income resulting from your investment. This is generally the income derived from your investment in stocks, bonds, mutual funds, typical IRA’s and perhaps a 401k through your employer. While these vehicles are designed for growth, the generally require ongoing attention and offer very few options relative to long-term income.
- That leaves Passive Income, which is the domain of business and real estate. While opening a new business may not be a viable option, incremental investing in real estate can produce results for your income. Many people take the route of obtaining the actual real estate and the tax benefits and income from that. For me, the options with investing in promissory notes secured by real estate is a natural.
I don’t want to be a landlord. And if you have followed what is happening to landlords, you see my point. However, being the bank or mortgage company is a viable alternative without the worries of tenants, toilet and termites.
I have found 5 advantages that stand out to make real estate, and in my case notes, hands down the most rational and attainable investment opportunity to produce a passive income today for my retirement tomorrow.
- Passive Cash Flow ~ if income generation is your objective, then promissory notes offers that solution. When you are receiving the monthly mortgage payment from a homeowner, you have a classic passive income depositing into your bank account. No commute necessary. With promissory notes, you can purchase that note at a discount, and over time, can accumulate a sizable portfolio with a modest amount of capital. I my model, I’m purchasing notes at anywhere from 40% to 55% of value. My plan provides for growth over a 2 – 3 year scenario until my passive cash-flow meets or exceeds my current day job income.
- Leverage ~ Now, how much money do you need to buy $100,000 worth of gold? Answer, $100,000. How much money do you need to buy $100,000 of stock? Answer, $100,000. How much money do you need to buy $100,000 work of promissory notes? Answer, $50,000, $35,000, sometimes $25,000. Yes, some capital is needed. Leverage, in the traditional sense, means supplementing our money with those from others to obtain an asset. There are multiple ways to do this to acquire promissory notes. Soon, we’ll talk about how to legally pool money to buy larger quantities of notes at significant discounts and accelerate returns and income.
- Inefficient Market ~ Real estate, and in my case notes, is an inefficient market that has a major advantage: the price of the note is a function of the meeting of the minds between the seller and the buyer. The seller has a respective need to sell the asset, and the buyer has a respective reason to purchase that asset. The values in finding the right sell/buy price can be a moving target based on their respective circumstances.
- Availability of Product ~ Living in Portland, OR, there is a major shortage of available real estate to purchase. If you are a “mom & pop” real estate investor, finding a home to buy to fix and flip or a new rental home is almost impossible. Plus, as mentioned above, being a landlord in Portland, and Oregon itself, is a daunting task. With notes, I don’t have that same issue. My issue is blocking the time to complete due diligence to drill down to a couple assets that meet my acquisition criteria. If you have capital to deploy, the availability of promissory notes offers that avenue.
- Infinite Growth Potential ~ As stated above, with the vast availability of assets provides the opportunity for measured growth. This isn’t a get rich quick scheme. Notes provide the growth potential to systematically grow a portfolio, and eventually replacing the income from the job, over and above. Notes allow me to be a fundamental investor in the business of acquiring income-producing assets for long term use.
When you think about it, all of us want the same things out of life. All of us want to love and be loved. All of us want to be useful and helpful to those around us. All of us want to know that our children and grand-children are healthy and that their future is awash with opportunity. We were all given an internal calling, or bent, that really moves us. Exchanging our time for a paycheck limits our ability to pursue that calling. Passive income provides a way to pursue our gifts and callings.
Finally, the house pictured above is an opportunity for you to passively invest in a promissory note. This homeowner is behind on their house payments, but all indications show they would like to remain in the home and get back on track with their payments. I am looking for a passive investor seeking a great return on their investment and a passive income secured by this home. I highlighted this house on a previous emailer, but if this makes sense to you and the time is right, please contact me and we’ll see if this fits for you.
I know this mailer was a bit long. I hope you find these informative. Mostly, I hope they get you to think. The magic day of retirement will be closer tomorrow, and doing something today will help to prepare.