There is a saying that goes something like this: The rich get richer while the poor get poorer.
I would challenge that saying and suggest that anyone can increase their wealth through investing in real estate with the intent to produce a residual income.
I just want to focus on the how the rich get richer here. That reason has to do with the focus of those with money and how they intend to earn more. That focus is something called residual income.
Active Income Does Not Bring Wealth
We all know a person or have heard the story of someone who made a ton of money and is now broke. How does this happen? Lack of planning, or believing it will never come to an end. Active income happens because of efforts you put forth. Most people with jobs have an active income. You put in a certain number of hours and get paid for your work. If you are an hourly employee, you know exactly how much you make each hour.
It is possible to earn a lot of money with active income. Many company CEOs or sports professionals do well. But earning high active income takes a lot of work and dedication. Effort equals income.
However, there is a flaw in the idea how active income will lead to wealth. This flaw is time. Everyone is limited in the amount of time they have. So, no matter how much money you get paid an hour, you only have a limited number of hours to earn that money. If you don’t show up to do the work during those limited hours, then you don’t get paid.
Residual Income Is Different
Residual income continues even when you are no longer doing the work. Think about actors or actresses who continue making money on royalties long after the movie has been released. Residual income is made by working hard on the front end to build an asset. The asset will then produce money after the work is completed. This can be done with real estate.
Please do not think residual or passive income means no work. This is simply not true! Residual income still takes work. The point is, you will not need to be involved in all day, every day. Think about it like this. If you rent out a house, you may need to deal with a plumbing issue or roofing issue but you’re not working it like a full-time job.
Why Would You Want Residual Income?
Think about it. What would you do with your time if you weren’t working a full-time job? Some people see themselves sitting on a beach sipping a drink. If that is for you, then go for it. However, most people see themselves with free time to pursue other opportunities to create more residual income. In fact, this is the main reason the rich get richer. They get money coming in; use that money to create additional streams of money coming in, and before long, they have several streams of income that do not require day-to-day involvement!
In general, having residual income offers two main: freedom and financial security.
- Freedom: You will have the time to be involved in the things that bring you the most joy. This could be another income opportunity, a hobby, family, travel, or a host of other things. You will get to determine what you want to do and how you want to do it for as long as you wish to do it.
- Financial security: Residual income keeps coming in regardless of things going on in your life. If you get sick, the money doesn’t stop. If you need to take a month off for personal reasons, the money doesn’t stop. Residual income flows even when you are not able to do the work.
Benefits of Using Real Estate to Create Residual Income
Many people, including myself, use real estate as the vehicle for the following reasons.
- Monthly Income – With rental property, you know exactly how much money is coming in every month. It is something you can count on, especially if you remember to figure in vacancy and repair rates.
- Low Rates – Interest rates are low. This makes it very easy to borrow money from banks or people.
- Other People’s Efforts – Every morning, your renter will get up in the morning, go to work, and then pay you for the privilege of living in the property you own. Their efforts, not yours, will pay off the loan you have for the property.
- Limitless – With property, there are no limits. You can use residual income to supplement your income, replace it, or exceed it, depending entirely on your goals.
Building A Residual Income with Real Estate
The key to creating a residual income is something called leverage. With real estate investing, you can leverage both other people’s time and other people’s money to create a residual income. But how should you get started?
- Buy a rental that generates cash flow: A rental property “cash flows” when the taxes, insurance, and mortgage payment is less than the rent you can get from the home. The way to do this is to find a lower-priced home in a high rent area. Over time, your tenant’s will pay off your mortgage and you will still own the property and collect rent.
- Rent a room in your current house: If you already own a home, you might be considering renting out the basement or a room. You might also consider building a small mother-in-law type apartment on your property which will allow you to collect higher rents. This is a good way to learn to be a landlord since the tenant is easily monitored. It is also an easy point of entry into being a landlord. You may even end up renting all the rooms out of your house or condo and then you could go buy another one and do it again.
In the end, the decision is yours. Do you want to be someone who secures financial freedom? What would your life look like today if you had the freedom and flexibility to do what you want? And finally, how can you include real estate’s residual income abilities as part of your plan?
About the Author
John Trautman is founder and CEO of the Real Estate Knowledge Institute (REKI). An author, entrepreneur and longtime real estate investor, he is committed to inspiring and helping other aspiring real estate investors who have an interest in everything from home flipping to buying and selling rental properties to earning passive income through various real estate investments. REKI is the fulfillment of Trautman’s ambition to act as a credible and responsive expert who is available to mentor and counsel individuals about the fundamental rules of real estate investing in an intelligent and straight-forward manner.