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?