Why I Believe Striving to Build Passive Income is Overrated

[Don Konipol]

Why I Believe Striving to Build Passive Income is Overrated

This may seem like a disingenuous statement coming from a passive income guy, BUT, I believe that those looking to build sustainable look term wealth would be better off to downplay passive income.

Passive income has a role, a large role, but one best utilized when a certain level of wealth has been achieved, and the holder of said wealth is looking to preserve capital and live off the income generated by passive investments.

I hear many relatively new real estate investors say that their goal is to acquire enough real property to replace their earned (W-2 or 1099 or Sch C) income with the income be generated by their investments.  The problem with this is that they tend to place INCOME as the main feature of any investment they’re currently considering, and their decision making process centers around how a particular investment will fit into their ULTIMATE portfolio, the one that is large enough to generate all that income which will replace their earnings, and still grow enough to offset inflation.

In my opinion, what the investor in this situation should be doing is concentrating on WEALTH BUILDING, not passive income.  The investments should be chosen based on increased wealth, so that an investment in land, providing no income, but likely to triple in value in 24 months, would be chosen over a office building throwing off 12% income, but unlikely to increase in value.  Both these investments may be good; but for the “wealth accumulation” stage the land that triples in value is clearly the better choice. (This is obviously a simplification; one must consider risk, personal comfort, ability to manage, etc.).

The wealth builder should always consider selling or trading his property for a property that will increase his net worth FASTER.  Investors tend to fall in love with certain properties they own, and stick with them even if something better comes along.  The wealth builder should be agnostic about property; the BEST investment is the one that brings them closer to their wealth building goal the fastest. 

Now, somewhere along the path to wealth accumulation, it may be proper for the wealth builder to place a portion of their assets in passive investments throwing off significant income, if only for portfolio diversification. And we need to distinguish between passive income investments and passive investment that strive for capital gains and or increasing value.  So for the wealth builder, a projected 20% return on a passive equity investment is better than a 10% income return on a passive debt investment.  

Here’s my bias in general terms. First $50k of investment capital should go into a money market fund or similar.  Next $500k should go into real estate equities, active or passive.  Next $1 million split between income and equity.  After that it becomes very personal depending on investors goals, abilities, interests, etc. 

What do you think?

[Jay Hinrichs]

Agree the idea that one can live off of rental income long term is nice but not too common.

to me passive income is a place holder to allow you to control the property while is goes up in value over time and once that happens then decide if its a keep or roll into something else.

So to me  you either make transactional income in the RE bizz while you grow your passive portfolio or you keep your chosen career while you grow your passive portfolio.

The idea that Hey I get to 10k a month and I am quitting and will live the rest of my life on this money to me is not a long term strategy that will play out..  over 20 to 30 years 10k a month is not going to cut it.. it seems to me those who think it will are younger and have had jobs that maybe pay 80 to 100k a year so they are just replacing those.. And most folks dont truly understand what its really like being Self employed.  Then of course depends on your lifestyle and where you actually live some places are much more expensive to live than others..

I have spent the last 24 years helping folks build their rental portfolios doing BRRR deal for them and everyone of them still needs some transactional income so they don't rob their rental portfolio those that tried to live on rents alone end up struggling. Of course there are those that are very good with money and live very frugal lifestyles that can pull it off. But folks tend to spend more as time goes on then you have inflation and your rent income does not grow as fast.

[Eric James]

Yes. I started out focusing on rental income but after a few years I changed my main goal to be increasing net worth. 

[Chris Seveney]

@Don Konipol

I agree. I focus on wealth building and doing what I love. Many say they want to leave their w2 but then have no idea what to do or what makes them happy. Where most focus on passive income is getting started as you mention with a percentage of your portfolio but really the main goal most look for is to have income when they retire outside of social security that can continue to allow them to retire.

For most this is not at 30, 40 or 50 but much later in life.

If you build the wealth when you can it will give you a lot more flexibility and options later in life as it’s a marathon not a sprint

[Carlos Ptriawan]

Quote from @Chris Seveney:

@Don Konipol

I agree. I focus on wealth building and doing what I love. Many say they want to leave their w2 but then have no idea what to do or what makes them happy. Where most focus on passive income is getting started as you mention with a percentage of your portfolio but really the main goal most look for is to have income when they retire outside of social security that can continue to allow them to retire.

For most this is not at 30, 40 or 50 but much later in life.

If you build the wealth when you can it will give you a lot more flexibility and options later in life as it’s a marathon not a sprint

 Totally 

in fact it is better to eradicate this passive investing mentally into  active investment wealth building slowly ….

[Chris Seveney]

Quote from @Carlos Ptriawan:

Quote from @Chris Seveney:

@Don Konipol

I agree. I focus on wealth building and doing what I love. Many say they want to leave their w2 but then have no idea what to do or what makes them happy. Where most focus on passive income is getting started as you mention with a percentage of your portfolio but really the main goal most look for is to have income when they retire outside of social security that can continue to allow them to retire.

For most this is not at 30, 40 or 50 but much later in life.

If you build the wealth when you can it will give you a lot more flexibility and options later in life as it’s a marathon not a sprint

 Totally 

in fact it is better to eradicate this passive investing mentally into  active investment wealth building slowly ….

I agree if it is a strength of yours. For example, I suck at stock investing, so I would be passive and rather have someone do that for me (just so happens my significant other is good at that). Also you do need time to be active, and some people do not have time if you are raising a family and have a W2 (but I believe you can still make time, but it is not easy). 

But I agree, for those who want to get ahead quicker, the more active you are the better off you typically will be in the long run.

[Mike Dymski]

Those who say you can't buy groceries with equity are describing what they can't do, not what many of us actually do.

[Bruce Woodruff]

Another yes here. Appreciation vs cash flow is an easy choice (for me)...I know some would say otherwise but based on my own experiences (some even accidental) I know what works for me.

Now the ultimate goal is do have BOTH going for you....if possible....and sometimes it is.

[Jerryll Noorden]

Exactly.

I am selling a high-ticket course, and it made me a lot of money but the grind is unreal. 

Then our students were having a crazy hard time with the current leading website provider and I had to come in and fix a bunch of crap that was wrong with said internet hosting and template provider so much so that they stopped offering our students support due to "custom code" on our websites.

So I said fine. I will build my own. 

Little did I know,  that is producing FARRRRRRRRR better results in the passive income department than buying a Godamn $400K house just to make 100 dollars passive income a month.

It is REDICULOUS.

Now, I get 2 people to subscribe to my subscription-based products and voila, little risk, little overhead true passive income.

SAAS is where it's at folks when it comes to passive income. NOT Real Estate!

[V.G Jason]

Passive investing should just be at the buying govt debt, private/public equity level.

The real focus should be active investing, and how you can learn to manage teams to create it for you. Passive income won't make you significant amount of money, if it did then where are you actively placing it?

[Jeremy H.]

I agree 100% - part of the problem is a lot of RE investing these days is marketed as a get rich quick scheme where you'll be able to buy a few rent houses, make monthly passive income, retire and travel the world. And there's a ton of social media influencers pushing this fake narrative - rented cars, houses, jet interiors to take pictures/videos etc - some of them are pretty good at making it look real. The essentially throw the bait out there. 

So initially I think it looks really good to new investors. Then pretty quickly they'll find out that you'd need A LOT of houses to do this. This means A LOT of deals, A LOT of capital, A LOT of time etc.

This was actually my initial thought process, that's what got me interested. I invested in the stock market prior. 

Now I primarily use RE for diversification, the tax benefits (down the road, I have to pass them on now), appreciation and equity capture at the buy. I have a few relatively high cash flowing properties but they also have higher repairs/maintenance. Then add in the capital expenditures if you keep the property long enough. Add in property management. Add in vacancy. the list goes on. The cash flow is nice but it isn't THAT great (ie: it's overrated) even when it looks good on paper.  

The equity capture at the buy is not talked about enough - a lot more people interested in cashflow and section 8, than buying a property at a 20%+ discount. My last one I purchased for 150k, put about 10k into it - it'd sell for 210k in 3 days. It cashflows about $500/month - take out PM, now were down to $340, take out repairs ($150/mo), down to 190, take out vacancy etc and it probably does a little better than breaking even. It cost me 40k (20% down and 10k rehab). But I made 50k in equity, Day 1. Great neighborhood, great house, schools etc. Maybe should've been a flip but I think it does awesome over the long term because of the location. 

If I were to take the cashflow I made per year and the equity capture at the buy - the equity capture would blow it out of the water in most cases. This is where the real wealth is generated. Then let it set and appreciate over the next 10 years and I think you end up with good diversification. Does it beat the stock market - maybe, I don't really know to be honest. I'm probably 60/40 for stocks/RE right now. 

I have a handful on rentals now and I genuinely enjoy doing them, but I think I'll be switching to something else in the next year or so. The full-time W2, kids, regular life combined with running a company, managing rehabs etc is getting tiresome. In the end I think I'll sell them all, take the cash to invest in one business and be done. 

[JD Martin]

Part of the fallacy in the thinking, I believe, is the idea that real estate is passive in the first place. Other than maybe investing in a REIT, very little of it is really passive, especially since a lot of the advantages of real estate relative to other investments revolve around the fact that you can *actively* participate in some fashion and end up with better returns than other, more passive investments (a mutual fund, for example). I suppose you could buy and sit on land, and that's relatively passive, but beyond that virtually anything else is going to require some level of financial inputs (maintenance, capex, value add) and time inputs (DIY, managing the manager, etc) in order to realize the best returns.

For whatever reason I think the idea got out there that you get $10k, buy a house, refinance all the money out of it, and end up with a portfolio of 10 houses leveraged at 80% or more and just sit back and watch the bucks roll in and quit your job. I tell people all the time I worked at least as hard, if not harder, on my RE business than on my W2 job back before I retired. In fact, when I retired from the W2 I told people I was downsizing to one full-time job (my RE). 

My only plan when I started this was to earn a better return than anywhere else by using my comparative advantages (high knowledge of construction, DIY abilities, intimate knowledge of my geography, location in a cheap but growing area) to affect my return in a way that was impossible in other arenas. I never fancied quitting my job, so I never did, and didn't need to live on any of that money, so eventually I ended up with a pretty lucrative business. But I always tell people today who ask me how to go about this to go find a job they really like first, that pays really well, and build this on the side. Any business you build you need to plow all the profits back into the business for years before it can sustain itself and yourself.

[Rodney Sums]

Quote from @Don Konipol:

Why I Believe Striving to Build Passive Income is Overrated

This may seem like a disingenuous statement coming from a passive income guy, BUT, I believe that those looking to build sustainable look term wealth would be better off to downplay passive income.

Passive income has a role, a large role, but one best utilized when a certain level of wealth has been achieved, and the holder of said wealth is looking to preserve capital and live off the income generated by passive investments.

I hear many relatively new real estate investors say that their goal is to acquire enough real property to replace their earned (W-2 or 1099 or Sch C) income with the income be generated by their investments.  The problem with this is that they tend to place INCOME as the main feature of any investment they’re currently considering, and their decision making process centers around how a particular investment will fit into their ULTIMATE portfolio, the one that is large enough to generate all that income which will replace their earnings, and still grow enough to offset inflation.

In my opinion, what the investor in this situation should be doing is concentrating on WEALTH BUILDING, not passive income.  The investments should be chosen based on increased wealth, so that an investment in land, providing no income, but likely to triple in value in 24 months, would be chosen over a office building throwing off 12% income, but unlikely to increase in value.  Both these investments may be good; but for the “wealth accumulation” stage the land that triples in value is clearly the better choice. (This is obviously a simplification; one must consider risk, personal comfort, ability to manage, etc.).

The wealth builder should always consider selling or trading his property for a property that will increase his net worth FASTER.  Investors tend to fall in love with certain properties they own, and stick with them even if something better comes along.  The wealth builder should be agnostic about property; the BEST investment is the one that brings them closer to their wealth building goal the fastest. 

Now, somewhere along the path to wealth accumulation, it may be proper for the wealth builder to place a portion of their assets in passive investments throwing off significant income, if only for portfolio diversification. And we need to distinguish between passive income investments and passive investment that strive for capital gains and or increasing value.  So for the wealth builder, a projected 20% return on a passive equity investment is better than a 10% income return on a passive debt investment.  

Here’s my bias in general terms. First $50k of investment capital should go into a money market fund or similar.  Next $500k should go into real estate equities, active or passive.  Next $1 million split between income and equity.  After that it becomes very personal depending on investors goals, abilities, interests, etc. 

What do you think?

 There's nothing wrong about what you said. There is a lot of fact.

The investor's lifestyle choices has much to do with how well passive income can serve them.

For example 5k/mo passive income may not do much in California but may be more than enough if they relocated to a country with a lower cost of living, spent less than they earned and continued to invest the change.

great perspective on your part!

[John Morgan]

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

[Scott Trench]

I’ve observed that those who actually seem to have time freedom achieved through real estate have done two things:

1) Built up a $1.5-$2M portfolio at minimum.

2) Paid off said portfolio.

It’s the accumulation of wealth, yes, but also the lack of leverage that, per my observation, seems to be the source of real, lasting freedom.

Sure there will be plenty of exceptions, but most who aren’t in this spot are simply working in the business of RE, in some form or fashion. Not living off their portfolio.

[Marcus Auerbach]

Those who have it in them to actually pull it off and achieve enough passive income to live on it are not content doing nothing. 

And the ones who dream about living on passive income and would love to just do nothing with their lives will never get there. They don't have what it takes.

[Jay Hinrichs]

Quote from @Marcus Auerbach:

Those who have it in them to actually pull it off and achieve enough passive income to live on it are not content doing nothing. 

And the ones who dream about living on passive income and would love to just do nothing with their lives will never get there. They don't have what it takes.

A dose of reality !!!!!!!

[Nicholas L.]

@Jeremy H.

I think you hit the nail on the head here - the problem is 1) the deliberate marketing, plus 2) the genuinely well meaning content from 2016, when prices and interest rates were lower.  So those two things put together has gotten us to where we are.

And also to your point, my portfolio generates an OK amount of cash flow, plus a FANTASTIC amount of monthly mortgage paydown.

And to @Mike Dymski's point - if I want to convert that equity into groceries, there are a couple of ways to do it.

[Carlos Ptriawan]

Quote from @Jeremy H.:

I agree 100% - part of the problem is a lot of RE investing these days is marketed as a get rich quick scheme where you'll be able to buy a few rent houses, make monthly passive income, retire and travel the world.

the best way to "get rich quick scheme" is to work for a company that can print money for you/for a company and that amount keeps increasing while you are not doing anything more. that's the actual secret lol

RE is more like get-rich-very-slow-while-work-on-RE-more-than-your-W2-scheme.

[V.G Jason]

Quote from @Scott Trench:

I’ve observed that those who actually seem to have time freedom achieved through real estate have done two things:

1) Built up a $1.5-$2M portfolio at minimum.

2) Paid off said portfolio.

It’s the accumulation of wealth, yes, but also the lack of leverage that, per my observation, seems to be the source of real, lasting freedom.

Sure there will be plenty of exceptions, but most who aren’t in this spot are simply working in the business of RE, in some form or fashion. Not living off their portfolio.

It's eliminating expenses. You can make more money two ways; earn more money or reduce costs. The latter everyone fights against, especially if you bring leverage into the discussion of costs. Leverage is costs on steroids; it's really risk piled on costs. 

If the average american person did not seek immediate gratification then a lot of problems would be solved. 

[V.G Jason]

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

[Carlos Ptriawan]

Quote from @V.G Jason:

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

 And the best way to do that is to have 9 to 5 that prints money continuously for them, so these idea of one that wanna replace all income from just rental is hard to execute for majority of the people.

[V.G Jason]

Quote from @Carlos Ptriawan:

Quote from @V.G Jason:

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

 And the best way to do that is to have 9 to 5 that prints money continuously for them, so these idea of one that wanna replace all income from just rental is hard to execute for majority of the people.

Keep your W2 and get better at it. People are running amuck with this financial freedom crap. Go get your own health insurance and retirement funds started. You'll be behind the 8 ball quicker than that Indiana fella that fled the BP thunderdome. 

If you're making $75k in your W2 with a 3% 401k match. Keep grinding, maybe get a higher role elsewhere. Aim to keep up with 80% of inflationary growth in annual wage, and stack away. You will regret departing it too soon.

[Carlos Ptriawan]

Quote from @V.G Jason:

Quote from @Carlos Ptriawan:

Quote from @V.G Jason:

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

 And the best way to do that is to have 9 to 5 that prints money continuously for them, so these idea of one that wanna replace all income from just rental is hard to execute for majority of the people.

Keep your W2 and get better at it. People are running amuck with this financial freedom crap. Go get your own health insurance and retirement funds started. You'll be behind the 8 ball quicker than that Indiana fella that fled the BP thunderdome. 

If you're making $75k in your W2 with a 3% 401k match. Keep grinding, maybe get a higher role elsewhere. Aim to keep up with 80% of inflationary growth in annual wage, and stack away. You will regret departing it too soon.

Correct , just maximizing one's DTI til the end of productive age. Can't be easier than this ….

[Peter W.]

At 6% cash on cash you need 2.5 million to make 100k/yr.  That’s the math. 
when you are early in the journey what matters is the amount of money you can invest. When you are late in your journey it’s the total return you get.

[John Morgan]

Quote from @V.G Jason:

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

10k/month was good enough for me to help supplement my lifestyle. And I think a lot of people feel that 10k/month would help them a little. But I agree, 10k/month in 20 years won’t be much at all due to inflation. But I think rent will go up over time with inflation. Hopefully!  Especially when you have a vacancy and can fill it at market rent. I’m closer to 18k/month net with my rentals now after investing in RE 9 years ago. Definitely not enough to retire on now, but it should go to 23-25k/month in 7-9 years when some of the 15 year mortgages are paid off. And if I pick up a few more rentals with the equity I’ve got, 30k/month net seems doable and might be enough to retire on. But I think 10k/month net for noobs is a good goal. They can achieve that in 5-10 yesrs with buy n holds. Maybe sooner if they hustle.