Maxwell

What Does it Take to Build Passive Income and Why Doesn’t Everyone Do It?

passive income brad zackson
Passive income is something that you can allow to grow and use as a vehicle to reach early retirement. What is passive income? By definition, passive income is the income related to a regular cash flow that doesn’t require much, if any, effort to cultivate.

What is Passive Income?

Believe it or not, passive income isn’t simply a buzzword or means of retiring early: the Internal Revenue Service distinguishes three kinds of income by defining income as active income (e.g., job income), passive income (e.g., affiliate marketing), and portfolio income (e.g., interest and dividends).

Some forms of passive income will require some initial effort, like getting a rental property or online blog up and running, but be self-sustaining at a certain point and help you to earn passive income consistently every month.

Two Distinct Types of Passive Income

The Internal Revenue service says that passive income can come from two, admittedly, broad sources: rental properties or a business in which one does not actively participate in the day-to-day operations. The latter is especially open-ended and can include selling information products and peer-to-peer lending.

Rental Properties

If you already have some cash saved up or money that you’ve earned from a business, then you might want to explore the possibility of consistent monthly returns in the form of passive income from rental properties.

The upside to passive income from rental properties is that there’s a very consistent return from one month to the next. The downside is that rental properties can straddle the fence of being passive income in the sense that some properties require active management and occasional maintenance.

The solution is to pick a property that shouldn’t need much maintenance for the next few years and selecting a property in a low-tax area. Another thing that you can do to increase your returns and lower your involvement is hire a property manager to take over control of the day-to-day operations of the property that you choose to invest in.

Consider hiring a real estate agent with experience in the area to connect you with a property that’s squarely within a thriving area. The more than the area thrives, the more that you’ll have potential buyers to snatch up the apartments or condos and help you with generating passive income.

A real estate agent can also clue you into developing issues about a particular property – e.g., escalating property tax or gentrification that may put you in touch with a different set of future renters. For more control, consider steering clear of a real estate investment trust. You’ll have more passive income by independently trailblazing your own course.

Sell an Information Product

An information product could be an online course or, more commonly, an app or e-book that you can host on your e-commerce website for years to come. There’s a lot of effort required upfront with course creation, but if you have something to say then you might want to consider hosting your content on a website like Coursera or Udemy. There’s an element of actually edifying whole communities in their learning process if you go this route.

Peer-to-peer Lending

This is a passive income option similar to the rental property route insofar as you’ll need some initial capital to make this idea work. Peer-to-peer lending is essentially as it sounds – a personal loan between you and an eligible borrower intermediated by a third-party website like LendingClub.com.

You can make this idea generate serious passive income by spreading around your risk and generating interest on multiple loans. Just make sure that you vet potential borrowers on a website like Prosper.com by scrutinizing the potential borrower’s history with the website. Too many defaults is a red flag. You might want to think twice about extending an unsecured loan to such a borrower.

Why Doesn’t Everyone Do This?

Why doesn’t everyone generate passive income? Most people assume that it will take more work than it does. While passive income could requite initial capital (e.g., rental properties) or effort on your part (e.g., creating a blog), the amount of subsequent effort can be minimal if, for instance, you employ a property manager or hire a digital marketing company.

Five Great Passive Income Sources

When it comes to making money, there are two options. The first is active income. This is the money that people go out and earn through the sweat of their brow. In effect, active income involves trading time for money. On the other hand, it’s possible to obtain money passively. This is the money that invested time or capital can return. Here are five great passive income sources.

Certificates of Deposit

Few investments are as free from the risk of capital loss than CDs. To earn passive income from a CD, you’ll have to first obtain a bit of capital. Some banks require as little as $500 to open a CD, while others will want savers to put more money away. CDs come with variable terms, generally from 30 days to five years. A longer term will generally lead to a higher interest rate, but there is the risk of lost purchasing power if the interest earned does not keep up with inflation.

Bonds

Like CDs, investing in bonds requires some capital up front. Bonds come in a variety of denominations, and most brokerages have bond funds that have a lower barrier of entry. Bonds pay out a fixed amount of interest for a given period of time, and then the investor will get their principal back once the term is up. Bonds provide a steady stream of income, but when rates rise, the price of bonds goes down. In this instance, investors who want to sell before maturity could see a drop in the price their bonds will fetch.

Real Estate

The passive income that comes from real estate investing comes from the payment of rents to the property owner. Real estate investors can seek for residential or commercial properties. As long as an investor can find a good tenant, monthly rent payments should provide a steady stream of passive income. When the properties have a mortgage on them, the passive income will only grow when the property is paid off.

Dividends

Stocks can also be a great source for passive income. Many companies pay out quarterly dividends to their investors. These dividend payments hopefully come from the income that a corporation can generate. Some companies have been able to grow their dividend payments for 50 years or more. This growing stream of dividend income is a great offset against inflation, and companies that grow their dividends tend to grow their income. Growing revenue and income generally leads to higher stock prices, and the capital gains are another source of passive income.

Creating Products

In the world of the Internet, it’s possible to create products that people will buy. A couple of leading options are courses that teach people a marketable skill or e-Books. There is work required to create the product, but once the word gets out, it could return a steady stream of sales if the product is popular. Those sales require no additional work on the part of the creator.

Passive income is the best form of income around. It’s possible to replace a working income as passive income grows over time. While it takes quite a bit of work to create the product or the capital that’s necessary to build a passive income, the benefits are well worth the effort.

Tips for Financing Investment Properties

Real estate investing is one of the most lucrative investment activities you can participate in. Many investors will take full advantage of the benefit associated with leveraging their investments by using real estate loans for their purchase. However, these loans can directly impact your return on investment with income-producing rental properties. With this in mind, it is important to follow a few key tips when choosing your investments and setting up your loans.

Understanding the Benefits of Real Estate Investing
With many types of investments you make, such as buying stocks, mutual funds and more, you must pay 100 percent of the investment price up-front. With real estate, you can leverage the purchase with a real estate loan. For example, you may obtain a 75 percent investor loan on a residential property, and this means that you only have to contribute 25 percent of the value of the investment. However, your equity rate of growth, property value appreciation and more will grow based on the full value. More than that, on rental properties, your tenants will essentially pay the mortgage payment for you. This means that they are contributing to your total investment purchase over time. These are benefits that are simply not possible through most other forms of investments, and this is why real estate continues to be a great investment option to consider.

What to Look For in Real Estate Loans
If you have decided to leverage your purchase of investment properties, you need to focus on a few factors when searching for loans. First, focus on the loan-to-value. Banks typically want investors to make at least a 25 percent down payment on an investor property, but this varies by property type, loan amount and market. Use a mortgage payment calculator to estimate the monthly payment of a specific property you are considering, and crunch the numbers to ensure that the property will cash flow sufficiently for your monthly needs at the loan amount you desire. If not, consider making a larger down payment or searching for a different property. In addition, pay attention to the interest rate and term on the loan. These will impact your monthly payment as well as equity growth. Cash flow investors generally want a longer term while equity investors typically want a shorter term to pay the property off quickly.

Ensuring That Your Financial Goals Are Met
Because financing on your investments will play a considerable role in your overall return, you must select your investments with care. Always obtain current rental information, lease start and end dates, operating history and more on the properties you are interested in. Ensure that the property can generate enough income to support the loan you need or want. Crunching numbers up-front is critical if you want to make a smart investment decision.

Investing in real estate can be incredibly lucrative, but financing is often preferred or required. Put these tips to use as you choose your investment properties and set up the right loans for their purchase.

Understanding The Complexities Of A Commercial Lease

brad zackson lease guide
The commercial lease is traditionally a complex document consisting of pages and pages of riders and addendums in legal terminology. Once signed, a new or existing tenant of an industrial or commercial property is legally bound to abide by the terms set forth in the lease. It, therefore, is extremely important that the tenant and the landlord fully understand exactly what they are agreeing to before executing a lease.

Interpreting An Industrial Lease

The parties of a commercial lease agreement are signing a multi-year commitment that can frequently exceed 10 or even 20 years or more in term. So, in the best interest of everyone involved, it is recommended that you take the time to understand the implications and the consequences in the event of any future non-compliance issues with the lease. Both the landlord and the tenant will benefit from equitable lease terms that are written to best protect their own interests. If you are working with an experienced commercial real estate agent, he or she can help you to interpret the lease. The agent can also be helpful during the negotiations of the lease terms, such as the lease options and rent increases.

The Many Different Types Of Leases

One of the most confusing legal aspects of an industrial lease is the determination of who pays for what, and at what point is an expense a landlord’s responsibility or a tenant’s responsibility.
The industrial lease is most commonly drawn up as either a gross lease or a net lease. When only one tenant will occupy the entire property, a net lease or a modified net lease can be deemed appropriate. The use of a gross lease, or a variation of it, is sometimes considered more appropriate for use in cases where there will be more than one tenant occupying space in the same building or complex.

Other Charges Above And Beyond The Base Rent

The terms of a gross lease in which the landlord pays the taxes, property maintenance, property and building insurance premiums, and some or all of the utilities is called a full-service lease. The tenant is obligated to pay the rent each month to the landlord. After year one, or what is commonly called the base year, the tenant pays his share of the increases in insurance, taxes and other expenses to the landlord. These types of additional charges due the landlord are included in the lease agreement, and they are known as pass-throughs.

A gross lease can be modified, and in such cases, some of the above-mentioned expenses become the tenant’s responsibility. In a triple-net lease, all of the operating expenses are passed through to the tenant. This type of lease is frequently used for industrial leases. Net leases can also be variable in nature, and the tenant can be held responsible for certain operating expenses.

What To Know Before Investing In Real Estate

real estate investing

Investing in real estate can be exciting and lucrative. Unfortunately, some investments are the result of bad decisions. A bad real estate investment can be avoided if an investor thoroughly researches the market and approaches proprieties objectively. Knowing how the property will be managed is also important in selecting the right property.

1.) Learning The Market

Every city is different, and areas within a particular area of the city vary significantly. An investor should narrow the focus and learn as much as possible about the area of the property they are interested in. In doing so, the investor will know the true value of the property. Additionally, vacancy rates and rental prices will be reflected more accurately. Keeping the research of the market focused will also help avoid surprises. For example, some areas have big-scale future developments, and it’s important to know what impact if any they might have on the investment property.

2.) Professional and Systematic

It’s a challenge to expect a beginner investor to be a professional real estate. However, with a systematic approach and criteria in place, the investor will have a good system for screening properties. One of the risks for new investors is falling in love with a specific property and overlooking many faults. By having criteria that are applied to all potential properties, the investor will be positioned to make an objective decision. Simply devise criteria and apply them objectively to each property. This systematic approach will reduce emotions which can be exhausting.

3.) Property Management

There are two options for an investor with regard to managing the property. The first option is that they can manage it themselves, and the second option is to hire a property management company. Knowing who will do the managing is extremely important because it will have a big impact on the property. If the investor manages the property then they must be well-informed of what is required. If a property management company will manage the property then the investor must be aware of how much it will cost. The cost can be significant and can decrease the investor’s profit so it should be calculated when determining future investment income.

The real estate market undoubtedly has gems in it. Many people have made a lot of money by investing in properties. What they have in common is that they chose winners. The path to making a good investment begins with understanding the market. Once the market is understood thoroughly, the investor then should systematically scrutinize each property. Following these two steps, and knowing how the property will be managed will result in a good real estate investment.