Investor · San Diego, CA · Member since 2012 · 10 posts · 4 votes
A plea to my community of Real Estate Investors: Can we drop the term "Passive Income"??? It seems to me to have negative connotations and to promote negative impressions of the business and its practitioners! It seems to me a better term would be "Proactive Income". There is really nothing passive about my real estate income, as I am proactive about finding properties, securing the financing, purchasing them, rehabbing them, finding good tenants, and doing all the tasks required to maintain the property. If I sit back and collect checks without being bothered by any work, it is because I was proactive and worked hard to make a property sound BEFORE the tenant moved in! It is because I was proactive and performed preventative maintenance sweeps twice a year. Please, Fellow Investors, lets raise the profile of our business and use a positive term for our income.
Investor · Baltimore, MD · Member since 2012 · 1k+ posts · 655 votes
12y
I don't see it as negative at all, matter of fact that's what I'm striving for. Yes it took you work to find, buy and get them rented but like you said if you did it right you're just going to sit back and collect checks.
Unless something was handed down most passive income will require some upfront work. JK Rowling can sit back and collect checks for the rest of her life without lifting a finger but she still had to put in the initial time/energy to write and get the books published. A person who invents something can sit back and collect passive income but they too had to put in initial time and effort developing the product, get a patent etc.
I think it's a great term and I'm sure most of us here want that, even though some of us here will never truly be able to sit back and be hands off.
Denver, CO · Member since 2013 · 409 posts · 105 votes
12y
I agree that "passive income" is an inappropriate term. It is my observation that it is most often used by people that do not own any rental properties. But I can not say I am a fan of 'proactive income" though. I don't have a better term to offer.
I would be most impressed if you could convince the taxman real estate investment income is not "passive income". "Passive income" in Canada is taxed at a higher rate than "earned income".
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Ummm, well...
The good news is, you don't have to create a new term. One already exists. It's called "active income". In your case, the "work" you are having to put into properties is what leads to the passive income.
No real estate investment is 100% hands-off. The difference between passive and active income is whether or not the checks come in regardless of whether you work or not. Theoretically, rental property income will come in if you take a day (or month or whatever) off. If you are flipping, the income will not come in without that work. Yes, there is a lot of room for 'what ifs' and 'buts' and whatever, but there's no need for that right now. Fact is, there is a clear differentiation between what is considered what. You are clearly earning more active income than passive because of how much work you are doing. There are ways to fix that.
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
12y
There is passive income and then there is PASSIVE INCOME.
The term has been popularized and misused by "gurus" to convince potential "mentorees" that they can lay back on the beach in Antigua and have it all financed by their non participatory ownership of rental property in Indianapolis.
However, real passive income in real estate does exist. Investors in my funds and mortgage pools have no managerial or operational responsibility; their monthly checks are passive income. Taking it a step further, the owner of a triple net leased property leased to a credit tenant for a long period of time has passive income. People that own hotels that are managed under an operating lease by a major hotel operating company have passive income. Years ago I acquired a small ownership stake in an office building in lieu of a real estate cash commission. The office building was net leased to a operator for 2 years before we sold it. We collected a monthly rent plus a percentage of overage. This was passive income.
Almost everything else in real estate described as passive income isn't. However, I can see how somebody in the business of fix and flip would consider managing a rental property for long term rental income passive - at least in comparison to his fix and flip business.
I would be most impressed if you could convince the taxman real estate investment income is not "passive income". "Passive income" in Canada is taxed at a higher rate than "earned income".
Canucks are all kinds of backwards aren't you? Heavier taxation on passive income than earned income? Come on, are you guys trying to redistribute wealth and keep the middle class or what? Oh Socialism.
</snarky comments on the difference between Canada and the US>
I realise your are trying to be funny more so than insulting, but you may want to read-up a little on world politics and demographics.
Canada is a long, long way from socialism - our current Prime Minister and government walk the same path, if not a little to the right, as your Republicans.
I could provide you with more information, but this is not the forum.
Back on-topic, and a clarification to my prior post. Passive Income to a corporation in Canada is taxed at the full corporate tax rate. So technically, it is not that it is taxed higher than active income, but that it does not qualify for the Private Corporation (read: small business) tax reduction - and other deductions - afforded to operational (active) income. [Note: There is a caveat here: if the corporation employs 5 or more full-time positions, then the income would be classified as "active" and would be taxed accordingly].
When rental property is held by an individual, the net passive income (or loss) is added to that individuals other income and taxed at the corresponding marginal tax rate.
Troy, Canada's taxation incentivizes work while the US's incentives investment.
Jon:
It use to be that way, but over the course of the last decade+, policy has been remodelled to incentivize plundering by large multi-nationals at the expense of small business and individual tax payers.
@Troy Fisher
I realise your are trying to be funny more so than insulting, but you may want to read-up a little on world politics and demographics.
Canada is a long, long way from socialism - our current Prime Minister and government walk the same path, if not a little to the right, as your Republicans.
I could provide you with more information, but this is not the forum.
@Roy N. -- Ooof. I was hoping that putting the </snarky> would be enough. I think that America has in the past over incentivized passive income over earned income, and that perhaps our gentle neighbors to the North are more right, more often, than we care to admit. I mean common Toronto elected Ford! How awesome is that? I know Canada is a long way away from being socialist. They have a long way to go to get close to the Democratic Socialism of the Scandinavian Nations.
@Jon Klaus -- Yes. And thank goodness for that. I enjoy the passive income which is a majority of my income being taxed way less than my W2 income. While I enjoy it, do I think it's right? Yes and no, and to illustrate that I tried to be a little snarky to at the expense of our Friends from the Great White North.
In summation and in regards to the OP other people have said it -- Passive Income is a term used by the IRS to define a W-2 Income versus Investment Income. It doesn't actually mean it's passive, but I definitely don't work 40+ hrs to make that money. And I definitely don't have a boss who gets upset if I decide not to be at work at 9am, or if I take a 3 hours lunch.
Investor · Knoxville, TN · Member since 2015 · 24 posts · 9 votes
11y
Meghan....I agree. Every time I hear that "passive income" I cringe. IMHO...if you are "passive" with your real estate, you're not getting the most out of it. I put in a lot of hard work even when things are running smoothly!!!
Those that are "passive" in the rental business usually have crummy products, or low margins, or are letting their assets go to crap.
Glad someone else thinks the same as me. There was nothing "passive" about looking, rehabbing, taking on debt, putting the deal together, managing tenants, mowing the yard, etc etc etc.
Meghan....I agree. Every time I hear that "passive income" I cringe. IMHO...if you are "passive" with your real estate, you're not getting the most out of it. I put in a lot of hard work even when things are running smoothly!!!
Those that are "passive" in the rental business usually have crummy products, or low margins, or are letting their assets go to crap.
Glad someone else thinks the same as me. There was nothing "passive" about looking, rehabbing, taking on debt, putting the deal together, managing tenants, mowing the yard, etc etc etc.
So you never intend to be able retire on the beach or enjoy cruising, because you will be too busy still putting in that hard work - until you die?...
An investor, I know, invests in condos. The condo association handles exterior building maintenance and grounds maintenance, as well as the swimming pool and tennis courts, as well as interior maintenance for common areas. There is an onsite property management company that an owner can use or not use for property management. The PM office is open 6 days a week, plus has an emergency after hours phone service. The PM shows the properties, answers tenants calls, collects the rent, recommends fixes to the owner and deposits the money in the owners bank account.
With the combination of the condo association and the PM, there is very little for the owner to do. The owner could be remote, live in another state, vacation a lot to other continents, or do what ever they want.
This is about as passive as it gets.
But wait.... There's more!
Another real estate investor I know owns hundreds of acres of wood land, that he has selectively timbered once every 10 years. There are no buildings or other "improvements" on the land. By selective cutting trees over 16 inches in diameter, after 10 years have passed there are new trees now over the minimum threshold, that 10 years ago were too small to cut. He uses a forester, a professional trained in sizing (they have this specialty tape measure that gives the diameter, when you measure the circumference, saving math computations.), species identification and marking and totaling the number of tress by species and board feet. So ONCE every 10 years he makes 1 phone call to a forester and says, "I'd like to do a selective timber cut of my land now." Not quite 100% totally passive, after all making that phone call is an active function.
And of course there is triple net, also known as NNN. That means that the TENANT pays all expenses including taxes, insurance, grounds and building maintenance, and the rent paid to the owner is net to the owner. The gross rent is the net rent because there are no expenses paid by the owner. Used a lot in commercial properties, but not very much in residential, especially smaller units. A person that I know of had a business that was doing ok, but not great. He was surviving. He owned the land and the business was in a building set back off the road, so that there was lots of space in front of his building. He was approached by McDonalds, who first wanted to buy, the owner wouldn't sell. And then McD wanted to lease the land. He negotiated a lease for 30 years (actually 29+ years) for the land. McD built the building, maintains the building and the owner negotiated a lump sum payment NNN, one time payment of rent in advance of $3,000,000.00 So he receives 1 check for all the rent for the next 30 years, and the tenant pays all the expenses for the next 30 years. That's almost 100% passive, though there is the endorsement and depositing of the 1 check!
Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes
11y
Active income is actively working for money. If you stop working u don't get paid. Rental income is passive income because you are not working for money, your money is invested in a property that is generating a return. Of course there are expenses (unexpected and expected) but that comes with the territory.
Of course real estate investing can become a J O B! Especially if you are actively growing your portfolio and self managing your properties. If you are flipping or wholesaling, that is not passive income period. You are working for money.
REI is hard work. Many people I know that try it are gun ho until they realize its hard work. They go from talking about it all the time to never mentioning it again!
There is a difference between active and passive income. The financially intelligence know that by giving each dollar a purpose you are creating wealth. IMO I could care less about what others think. Those that work towards building wealth know it takes hard work to get there. If it didn't everyone would have a 1000 units living on a island drinking a mai tai.
Jacksonville, FL · Member since 2015 · 18 posts · 15 votes
11y
I think OP was talking about the connotation/perception. There's people who are genuinely interested in real estate, and then there's people that want to lay on a beach in Bali and read emails for 4 hours a week. And some of those people see real estate as the means to that end. I get tired of hearing people sell leisure as a life purpose and "passive income" is the easiest, laziest way to fund their playboy lifestyle. Don't get me wrong, leisure is important, but some of these people (maybe marketers) make it out to be the goal, to the exclusion of anything else meaningful.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
11y
Perhaps stocks, reits and NNN are truely passive investments. I know the IRS has their own definitions but average rentals properties might not be so passive when you factor for known realities. The condo example above might offer some more passive options for sure.
I will agree this is mostly a marketing scheme when the term passive is used for run of the mill rentals. I would also agree if you are not active in some way you could suffer in the returns part. Whether that be managing the manager or doing market research you should expect some level of participation if you are keeping it real. If you have to write checks actively( capex,vacancies) that is not actually passive in my book. Some marketers will still use the term loosely as a sales tactic let's say.
