real estate investment

[Jane Maria]

One of the keys to getting rich and creating wealth is to know different ways in which income may be generated. It's often stated that the low and middle-class benefit money whilst the rich have money benefit them. The important thing to wealth creation lies in this simple statement real estate investment.

Imagine, as opposed to you employed by money that you instead made every dollar meet your needs 40hrs a week. On top of that, imagine each and every dollar employed by you 24/7 i.e. 168hrs/week. Figuring out the very best ways you possibly can make money meet your needs is an important step on your way to wealth creation.

In the US, the Internal Revenue Service (IRS) government agency in charge of tax collection and enforcement, categorizes income into three broad types: active (earned) income, passive income, and portfolio income. Anything you ever make (other than maybe winning the lottery or receiving an inheritance) will fall under one of these brilliant income categories. In order to understand how to become rich and create wealth it's vital that you learn how to generate multiple streams of passive income.

Crossing the Chasm

Passive income is income generated from the trade or business, which does not require the earner to participate. It's often investment income (i.e. income that's not obtained through working) but not exclusively. The central tenet of this type of income is that it can get to continue whether you continue working or not. As you near retirement you're most surely seeking to replace earned income with passive, unearned income. The secret to wealth creation earlier on in life is passive income; positive cash-flow generated by assets that you control or own.

One of the reasons people find it difficult to help make the leap from earned income to more passive resources of income is that the whole education system is really virtually designed to show us to complete a job and hence rely largely on earned income. This works for governments as this type of income generates large volumes of tax but will not meet your needs if you're focus is on how to become rich and wealth building. However, to become rich and create wealth you will soon be necessary to cross the chasm from depending on earned income only.

Real Estate & Business - Sources of Passive Income

The passive form of income is not influenced by your time. It's influenced by the asset and the management of this asset. Passive income requires leveraging of other peoples time and money. As an example, you may buy a rental property for $100,000 employing a 30% down-payment and borrow 70% from the bank. Assuming this property generates a 6% Net Yield (Gross Yield minus all Operational Costs such as for instance insurance, maintenance, property taxes, management fees etc) you would generate a net rental yield of $6,000/annum or $500/month. Now, subtract the price of the mortgage repayments of say $300/month out of this and we arrive at a net rental income of $200 from this. This is $200 passive income you didn't have to trade your time for.

Business could be a source of passive income. Many entrepreneurs begin in business with the thought of starting a small business so as to sell their stake for many millions in say 5 years time. This dream is only going to become a fact in the event that you, the entrepreneur, will make yourself replaceable so the business's future income generation is not influenced by you. If you are able to do this than in ways you've created a supply of passive income. For a small business, to become true source of passive income it needs the proper kind of systems and the proper kind of individuals (other than you) operating those systems.

Finally, since passive income generating assets are usually actively controlled by you the master (e.g. a rental property or even a business), you've a say in the day-to-day operations of the asset which could positively impact the level of income generated.

Passive Income - A Misnomer?

In some way, passive income is a misnomer as there's nothing truly passive about being in charge of a group of assets generating income. Whether it's a property portfolio or a small business you have and control, it is rarely if truly passive. It will require you to be concerned at some level in the management of the asset. However, it's passive in the sense that it does not require your day-to-day direct involvement (or at the least it shouldn't anyway!)

To become wealthy, consider building leveraged/passive income by growing the size and level of your network as opposed to simply growing your skills/expertise. So-called smart folks may spend their time collecting diplomas and certificates but wealthy folk spend their time collecting business cards and building relationships!

Residual Income = A Kind of Passive Income

Residual Incomeis an application of passive income. The terms Passive Income and Residual Income are often used interchangeably; however, there's a simple yet important difference between the two. It's income that's generated from time to time from work done once i.e. recurring payments that you receive long after the first product/sale is made. Residual income is generally in specific amounts and paid at regular intervals. Some exemplory instance of residual income include:-

- Royalties/earnings from the publishing of a book.

- Renewal commissions on financial products paid to a financial advisor.

- Rentals from a property letting.

- Revenue generated in multi level marketing networks.

Usage of Other People's Resources and Other People's Money

Usage of Other People's Resources and Other People's Money are key ingredient necessary to generate passive income. Other People's Money buys you time (a key limiting factor of earned income in wealth creation). In a feeling, usage of other people's resources offers you back your time. When it comes to raising capital, businesses that generate passive income usually attracts the biggest amount of Other People's Money. The reason being it is generally possible to closely approximate the return (or at the least the risk) you can expect from passive investments and so banks etc., will often fund passive investment opportunities. A great business plan backed by strong management will usually attract angel investors or venture capital money. And real-estate can often be acquired with a tiny down payment (20% or less in some cases) with nearly all the amount of money borrowed from the bank typically.

Tax Advantages of Passive Income

Passive income investments often permit probably the most favorable tax treatment if structured correctly. As an example, corporations may use their profits to purchase other passive investments (real estate, for example), and avail of tax deductions in the process. And real-estate may be "traded" for larger real-estate, with taxes deferred indefinitely. The tax paid on passive income will vary on the basis of the individual's personal tax bracket and corporate structures utilized. However, for the purposes of illustration we're able to claim that typically 20% effective tax on passive investments would have been a reasonable assumption.

To sum up:

For valid reason, passive income is usually regarded as the holy grail of investing, and the main element to long-term wealth creation and wealth protection. The major advantageous asset of passive income is that it is recurring income, typically generated month after month with no lot of effort by you. Building wealth and becoming rich shouldn't be about extracting every last bit of your personal energy, your own personal resources and your own personal money as there's always a control to the extent you are able to do this. Tapping in to the effective generation and usage of passive income is a critical step on your way to wealth creation. Begin this part of you wealth creation journey as early as is humanly possible i.e. now!

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