What Is Passive Income?
Many people are interested in developing passive income. However, I think the term ‘passive’ is both a misnomer (a false name) and a relative term.
For example, a type of income that people often refer to as ‘passive’ is rental property income.
This is where passive is a misnomer. If you have enough rental property income to pay your bills then you also have a lot of management responsibility.
1. Someone needs to take care of things when they break.
2. You still have to take care of your property taxes.
3. You still need to have some insurance against catastrophe link the notorious ‘black mold’. – Getting rid of it can be VERY expensive.
The basic point here is that there are still problems to be handled.
It is true that you can hire a property management company to do it all for you – provided you can still keep enough income to take care of your lifestyle.
A few disasters can cause you some serious problems though and potentially disrupt your passive income. Perhaps not all of those disasters will show up in the form of ‘natural’ phenomenon.
A Real Estate agent I knew had a LOT of rental property. The problem for him was that he owed a lot on those properties in the form of mortgages. Since,
many of those properties were rented out to lower income families, when the economy got rough, many of those families left.
This left him with limited income but tons of liability in the form of those mortgages. I’ve lost touch with him, but I do think it didn’t go well.
Don’t get me wrong though, Real Estate is a great form of passive income. It’s just that the concept that it won’t be any work, as implied by the term ‘passive’ is just a little off.
Are There Better Examples of Passive Income?
This is where the term ‘passive’ is relative in my mind. Truly passive income is to me a false concept.
In the above example, my friend ran into some serious problems that I think he ultimately was not able to solve. That means he probably had to give up some or all of that property in the end. If there is no one to rent to, there is no income.
Of course, not all people who own rental property owe money on it. If you own the property outright, that is the best possible situation. Leveraging, complicates things and can lead to problems.
Now consider a different scenario. Instead of having your income rely solely on a handful of renters – or a few dozen – what if your income was stabilized by earning a LITTLE money from a WHOLE LOT Of people.
For example, if you were earning a few dollars from thousands of people instead of hundreds of dollars from a dozen or so people, wouldn’t that be better?
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