Real Estate Investing

My colleagues and I have been tossing around newsletter ideas this past month and have decided our next issue will describe how to create college savings for your children and grandchildren through a home purchase.  To this end, another agent just handed me an intriguing list that details the benefits of investing in residential real estate.   This list has five benefits, while most other investments offer only one or two.

1. Cash Flow.  The rent provides income.  A wise real estate investment will pay for itself on a monthly and annual basis, while paying the note. Your ultimate goal is to own property “free and clear,” which creates maximum cash flow.
2. Leverage.  You can own $150,000 worth of real estate with only 15-20% cash. You can borrow cash from one property to buy another. Your short-term goal is to use leverage to acquire a portfolio of real estate. Your long-term goal is to pay the loans off and own your properties “free and clear”
3. Debt Reducation.  Real estate is one of the few investments where someone else will make your payments. In essence, the tenant makes the payments and reduces your debt.
4. Tax Savings.  You are allowed to depreciate the house and write off your expenses in order to reduce your taxes*.
5. Appreciation.  Over time the value of houses and condos have risen. The average value of home has traditionally doubled in value every 15 years**.

*Consult your accountant or tax attorney to specifics related to the tax benefits of investing in real estate.

** The government Office of Federal Housing Enterprise and Oversight figures appreication rates for Metropolitan Statistical Areas around the county. Check this site to see what appreciation rates have been in your area.

Coming Soon: How to buy a home to pay for college on behalf of your children and grandchildren.

Photo from here.

A recent reader question started us down the road of passive income. One of the most popular types of passive income is the latest and greatest trend of Internet advertising. Weblogs, or “blogs,” are a goldmine for this type of revenue. Blogs are ever increasing in popularity and are updated frequently with fresh content, so readers check back often. Advertisers pay big money to have their products or companies seen on those blogs.

Google Adsense is one of the most popular Internet ad networks for web publishers. Many people take ad revenues and pay someone to write the blog content articles. That way, the blog stays updated and the blog owner keeps the net ad revenue as profit. Although ad revenues are considered “passive income,” maintaining a blog is far from passive work. Even if a person is not writing the content for the blog, they must market the blog to increase visibility, readership and advertising revenues.

Real estate blogs are tremendously popular, particularly when they cater to specific housing markets. For instance, there are more than a dozen blogs catering specifically to Las Vegas real estate. Who is backing these blogs? Particularly with local blogs, catering to specific markets, it is primarily realtors and property investors.

Income from being a realtor or flipping property is not considered passive, but both can be supplemented by passive income off advertising revenues from a real estate blog that may be managed simultaneously. This type of passive income could also supplement passive income from being a landlord. A person who owns enough rental property and manages a real estate blog or two could generate enough passive income to be self-sustaining. But this is a prime example where the term “passive income” could be misleading, because as author Lisa Moren Bromma said, rental management is hard work. Of course, just as with blog management, the task of rental management can be hired out.

Passive income can basically be broken down into two types of income - residual and leveraged income. Residual income involves a one-time effort that brings in revenue repeatedly over a period of time, without any additional work required. Leveraged income is when one person profits from the actions of another.

Examples of Residual Income

Sales rep who earns commission each year when customers renew their subscription to a product or service.

Business or franchise (or property or blog) owner who hires a manager to run operations.

Artist royalties from the use of a song or other artistic work.

Examples of Leveraged Income

E-book authors who sell their books through affiliates on the Internet. No interviews, no promotional tours, just sales coordinated by someone else.

General contractors who profit from the work of sub-contractors. This can still be quite hands-on work, but site supervisors are usually hired to handle mundane, everyday management tasks.

Business owners selling franchises in other areas. This is one of the most profitable forms of passive income, along with being a general contractor, being a landlord and earning artistic royalties (depending on the popularity of the song).

The concept of passive income has been more heartily embraced by recent generations. It is a different time with rapidly changing media. Income options have become much more diverse as a result. The traditional view of wealth involved working hard, putting your nose to the grindstone, pulling yourself up by your bootstraps and any other cliche one can think of, today’s generation favors working less and earning more. It makes sense, and a little innovation can create ways to apply passive income techniques to many different fields in groundbreaking ways.

We recently received a question from a reader on passive income.

What percentage of American income earners make over $100,000 yearly on passive income alone?

-Luther Wilson, Wichita, KS

Luther, to my knowledge nobody has really tracked that yet, so the exact answer is difficult to define. It may not be long before somebody studies it, however, because opportunities with Internet blog advertising have made “passive income” the new buzz phrase. With all the other types of passive income out there, it is easy to imagine a scenario where a savvy earner racked up six figures each year. In fact, with a little innovation a person could create a scenario where there is limitless income.

Passive income basically consists of any earnings a person receives from a venture in which that person is not actively involved, like rental property for instance. It is important to keep in mind, however, that the term “passive income” is a bit misleading. Every type of income requires some amount of work, at least in the beginning (though sometimes the work is done by others). Although we can’t specifically answer your question, we’ll use this as a launching point for a discussion on types of passive income and how to earn it. Specifically, we’ll discuss a scenario that could net more than $100,000 in passive income.