Definition of Passive income

What is passive income anyway? A very simple definition, as many of us know, is that there are many other forms of income. We have also heard about active income. You may have also heard about portfolio income. Many of these definitions come from the Revenue Code but what is passive income? Passive income is that income, think of it very simply. This does not mean that you are uninvited in a generation or its creation but it does mean that you do not have to do something all the time to create or build it. Therefore, you are more passive in its construction than actually being active. 

Most of us are knowledgeable about active income. When it comes to active income, this is when we get up, we go to our jobs. We go to work We do something where we are paid time for it and it is complete. Portfolio income usually requires using more capital or cash to make something, usually a stock they will pay some dividends or things of that nature. This is what we are talking about portfolio income. Passive income usually means that we have tied our labor in such a way that we no longer have to work every day for this, but we have sold our labor, we have sold our intellectual property or out of the market and It continues to come back to us in these small streams of income over time.

Here is some quick math I want to share with you. Let's pretend what you wanted to do because it would give you the power of passive income, well, let's do it right now, at your job, which you make $ 2000 a month. So if you earn $ 2000 in a year, 12 months in a year, therefore $ 24000 is what you earn during the year. But it is an active income. How many hours do you work in the US to get $ 24000 a year? On average, you are going to work 160 hours a month and you are going to multiply by 12 and that is 1920 hours. So you are going to invest in 1920 hours for $ 24000. Obviously, 

In this example, I'm not talking about taxes and all that stuff right now. Right now, I am trying to give you an example of passive income. Here is one thing. Before I give you an example of passive income because it is active? So, now, I am going to talk about the portfolio. Portfolio income is income that is usually meant to use a whole bunch of cash, you stick it anywhere and it pays you interest in dividends over time. So, for this example, let's use a bank CD to give you an understanding that it can take the same bank CD that is capable of producing $ 24000 a year. 

So what are we going to do here? We want to end up with $ 24,000. This is what we want. We do not know how much money we have in the bank at an interest rate of 2%. Suppose the bank is willing to pay us 2%. I want to know how much money I have in the bank right now, today I can earn $ 24,000 in a year. Mathematics is relatively simple. All we're going to do is $ 24000 divided by 2% and we're going to come up with a number. This gives us $ 1,200,000. Well here is the good news. You only have to earn $ 1.2 million, give it a stake in the bank, don't touch it, find a bank that will give you 2%, and then you will be able to live on $ 24000 on an annual basis. Now, again we are not talking about taxes and all that stuff yet but again, it is portfolio income. 

Here is one of the things I love about real estate, especially apartment buildings because it is one of the things I like to do. Is it possible for an apartment building to be able to produce $ 2000 per month? Obviously, the answer is yes. So, let's check it out. What will the apartment building be like? Let's keep it simple as a simple goal. I like that I try to net $ 100 / door/month, trying to hit is a simple goal. So if I wanted $ 2000 per month, it would mean that I am looking for a 20 unit building and after all the expenses, I want $ 2000 to come in. There is good news about real estate here. 

Based on the market you are in, what is the cost of 20 unit building? For some people, a 20-unit building can only be in the neighborhood of $ 400,000 or less. Now for some of you, if you are in California, this building could easily be $ 2M, where it is located. Now here is the power of fun and passive income. First, here you have to spend 1920 hours to get an active income of $ 24000. Here, you have got to earn $ 1.2M because it is easy to say that it will probably take you more than 1920 hours to do it. The question is: what will it take - let's use the expensive side, assuming the asset is $ 2M, but what you want to do is be able to control it so that it produces $ 2000 per month. 

When you go to buy real estate - and that is one of the big things I love about real estate, being able to use leverage, also known as OPM. Here is the thing. In some cases it is a $ 2M property, it is possible for you to just be able to do the math below 20% and keep things simple so that in this case, what you need to do is $ 2M multiplied by 20% and you come up with a number Which is $ 400,000 as a downpayment. Now, I am excluding escrow fees. This is just a simple illustration because I want to show you the power of passive income. 

This is representative of the $ 400,000 downpayment. So what happens here is that the $ 400,000 that was invested and what comes out of the other end is $ 24,000 from income. $ 24,000 over $ 400,000 is going to give us a new ratio of 6% so far. This is a cash amount at 6% cash return which is good in a way, something to think about in this particular case if that is for some time over $ 400,000, because in real estate it is very possible that $ 400,000 too Do not come from you. And if it doesn't, it's great. 

Sometimes, it is possible to be able to use that $ 400,000 in very creative ways and more importantly as a basement for $ 400,000 which then creates a completely different situation. But here's the thing. How many hours does it take to put it together? Is it less than in 1920? Is it less than the time it takes to earn $ 1.2M? I think you understand that the answer is yes. Let us assume that it will take a month or 2 months to complete it. Now, what does this mean? Same $ 24,000? And if you work 40 hours a week for 2 months straight, the same $ 24,000 that you did in 320 hours would come to $ 75 per hour, which is not so bad. And by assuming that you put in $ 400,000 and more importantly, it actually took you so long to complete the deal. Like cases, it does not take that much time.

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