5 Passive Income Investment Traps To Avoid

5 Passive Income Investment Traps To Avoid

Passive income investments are critical. Far more important than just trying to save a nest egg of cash. Yet, there are traps to avoid.

1. The Risk of Low Returns

Risk and returns are a balancing act on a scale. Too much risk and you may never see the returns or get your capital returned. Go too heavy the other way, and you won’t see enough returns. That is a whole other type of risk which is often ignored. If yields are too low, any promised returns could be eaten up by inflation and taxes, actually leaving you in a net negative situation.

2. Not Truly Passive

Some types of investments are promoted as being ‘passive’ but are far from it. Single-family rental homes and Airbnb condos are a classic example of this. If you are managing them yourself, being a hands-on landlord is actually a ton of work. It’s nights, weekends and holidays. It’s stressful and intensive. If you are already working 100 hours a week, then it may be a nice break and a bigger paycheck, but it may not give you passive income.

3. Delegating to Inexperienced Management

The above can be fixed by choosing a turnkey real estate investment or participating in a real estate partnership. It all comes down to the experience of the managers and their ability to execute and deliver on the promised returns. They have to be good at marketing units, leasing and dealing with tenants daily.

4. Lack of Diversification

Diversification is essential for consistency in passive income. If you only have one massive rental home in The Hamptons which rents for the summer season, that is a lot of risks to take on. You are held ransom by the weather, fashion trends, transportation costs, and more. If instead, you had a piece of 100 rental apartments for the same capital investment, you may be 100x more likely to bring in income in any given month. Geographic diversity is important too. By spreading your capital across investments in several markets, you’ll never see all of your income sources hit at the same time.

5. Not Maximizing Tax Saving Opportunities

Investors who are not taking advantage of the tax savings the IRS has offered are just throwing away money every year. Missing out on the compounding potential of that investable capital can quickly scale to millions of losses over the years. Money that will have to be made up with hard earned income. There are plenty of tax saving investment tools and breaks the IRS expects you to make use of. Don’t ignore them.