What is passive income?
Passive income is defined as a stream of income earned with little or no effort in terms of time and skills by the individual receiving the passive income. The time and effort required to earn passive income from your asset is almost negligible after you acquire it. Unlike Active income (typically one’s business, businesses or regular job or additional part time jobs) is a direct exchange of your time and skills for money.
Examples of passive income include real estate rental income, stock dividends, fixed income/bonds, book royalties, peer-to-peer lending, and stock photography royalties.
Why is Passive Income Important
The answer is actually simple, It is a relationship between time and money. Time is the most valuable commodity. There are only 24 hours in a day. Time is the greatest equalizer & constant because no matter who you are, we all have the same amount of time. It can never be recreated or re-spent. It exists once, then it is gone. This is precisely what makes passive income so important — because time is more valuable than money.
Unlike money, which can be earned, saved, spent, invested, squandered and lost, we can’t tuck away minutes on a clock. We can’t expect dividends on seconds or hours in the bank, or invest the time that we didn’t use on something else. Considering that most of the free world needs to work for a living, consuming much of the time they do have, this precious commodity needs to be prioritized.
How to get Rich
Now that we know that the only constant in our equation is time. Rest is easy to understand as most world lives in accordance to an active-income credo. They earn only based on the time that they work. The wealthy, however, operate on another set of standards, which involve a detachment of their physical time for the money that they earn.
With passive income, you make money while you sleep. You also make money while you’re awake. It’s automatic and simply keeps coming in. With only limited time on hand, the only way you can create wealth is to find out ways to find ways to make money without putting constraints on your time. It is harder to build but once done there is no other income source which can beat these returns.
Advantages of Passive income
If you are looking to be rich over night than this may not be for you. Passive income can help you in many ways and the impact can be felt much more than a source of income such as:
- Passive income gives you the freedom of time.
- It reduces your stress, anxiety and fear of the future.
- It allows you to pursue doing the things you love rather than what pays the bills.
- It gives you the ability to live and work from anywhere.
- It provides a platform for financial stability and growth.
Active vs Passive real estate investing
“Real estate, not equity, has been the best long-run investment over the course of the last 150 years”
But not all real estate investments you earn are passive, some of them need your time, decision making and skills. Others can be more passive, thus giving you the leverage in the time you have.
Active real estate investing
Many people envision buying plots, trading them or renting out houses or commercial plaza as passive real estate investing. They view this as passive income because, as they imagine the investment playing out, they will simply buy a piece of property, rent it out, and then collect checks every month from the tenants. But this is not passive real estate investing.
At a minimum, you will make regular decisions about when to sell, what to buy or if your property is rented out you will be facing tenancy issues, whether to fix or replace a broken water heater and when to re-carpet or paint the property. If the investor chooses not to outsource these operational tasks to a property management company, they will have to manage the day-to-day responsibilities of owning the property themselves. This is active real estate investing.
Passive real estate investing
Passive real estate investing is where you place your capital into a real estate venture that you will not have any direct responsibility for managing. The safest and most lucrative passive income has always been in real estate. The rewards are twofold when it comes to real estate. Not only do you get a rental income, but you also have property that can be increasing in value year after profit producing year.
You can passively invest in real estate in several ways — such as by investing in a managed rental properties such as serviced apartments or Malls alternatively you can also invest in Real Estate Investment Trusts (REITs), which are companies that pool inves
tors’ capital to invest in large real estate deals.
It is also one of the safest ways to invest. It offers good protection against fluctuations in the market as property prices generally increase by at least the level of inflation.
Buying an investment property and joining the world of real estate is exciting! Finding the best property is the hard part. Once you have done that, you can sit back and reap the rewards of your passive income.
The 2016 downtrend in real estate has taught us one thing, it is repetitive, real estate goes around in cycles. A few years down and a few years up. Speculative trading in plots for short to mid term or rental generating properties in long term have been the biggest winner.
Long term holding of plots for some passive income still works but not very impressive. The short or mid term speculative trading may be very rewarding but comes with its own risks. A lot of investors end up forced to hold properties for long periods of time, spoiling rate of return. Besides that its a full time commitment and requires time and experience.
For the 90% of the investors out there, entering into rental generating properties is the best alternative. Even better if it is passive real estate investment in ventures offering rental management. By not involving yourself 24/7 into real estate, you are getting a lot in return, specially your precious time.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1616160 ( WhatsApp)
Captain Shahnawaz Bhatti (Retd) is the founder and CEO of Imlaak which is based in DHA Lahore. He has represented a large number of investors in a wide array of real estate transactions. With more then 8 years experience in commercial real estate, marketing and real estate project management, he has a proven track record of guiding national and multi-national clients with their real estate portfolios and asset management. He is also an active real estate blogger and offers free advice through his articles. Imlaak handles real estate transactions valued at well over 9000 million every year. Our specific area of expertise includes strategic planning , transaction management, asset trading, partnerships & venture capitalist with experienced business owners, entrepreneurs, inventors & some proven-concept start-ups. In a very short time, Imlaak has introduced a new vision of professionalism, transparency and hard work in the real estate industry. ‘There is no better time to invest in real estate than today’ Captain S. Bhatti