We don’t buy homes or invest into complexes because we expect to work forever.
Automated income, as it relates to you doing nothing, is a real potential in real estate.
It’s one that I’ve achieved.
Dedication in this business starts when you don’t see better options to invest in. A passive investor looks to real estate because they know that, with the right property, they’ll make money while sleeping.
Freedom is why some choose passive investing. I chose it because living the life you desire starts only when you have the time to. Wealth building is how I lead people into real estate and what I want you to keep a focus on.
Being an accredited investor is great, but your financial decisions are as critical as your lifestyle ones.
Keeping these in mind, you’ll need to know how your net income and future distributions work. In general, net income is tallied as your investment returns minus any fees in generating that income.
How do Passive Investors Earn Financial Freedom?
Passive investors generate net income by first setting a “preferred return” based on their total investment. This preferred rate is how much, being in the form of a percentage, that they’ll receive. The income you set as your preferred rate is paid out residually. That is, there is no work required on your end to generate this income.
Wealth building is a lifelong commitment to financial excellence however.
No one makes great financial decisions all the time, so we need income diversity to balance our lives with. To grow money passively, you must think about your lifestyle alongside the distributions we pay out. Distributions, being the route that passive investors earn through, is what makes your freedom lifestyle possible.
Distributions—How They Work
Regarding property ownership, accredited investors receive their preferred return on a set time scale. Whether yearly or monthly, the income earned by a property investment gets “distributed” to all investors. Those who invested $200,000 with a preferred return of 12% will earn $24,000. This is paid out yearly or monthly.
A monthly distribution payment from a $24,000 return equals $2,000. Distribution payments can even come to you in larger amounts than your scheduled monthly or yearly quotas. Agents who you invest with must provide advanced payments in the event of them selling your investment property. “Cash-out refinancing” also occurs when a new loan is taken out on a property that’s already owned but has a profit margin in equity that you can partake in.
*Doing More with Distributions
Distributions aren’t the sole promise we give our investors. The quality of their lives is just as important as their ability to choose their net incomes. My goal is to keep investors aware of their responsibilities in balancing their lifestyles as much as their money. Following are some key points to help you live out both to their fullest:
Making Your Life Complete
Accredited investors receive their gains as net income, which is their realized profits from passive investments. Passive income, as it relates to financial freedom, is a type of residual income. It is a taxable sum, but we must first subtract your fees and losses from it. The total amount of your net income is based on your preferred rate. Investment losses are even tax deductible, yet taxes don’t apply to deferred investments.
Properties can be placed into IRAs, for example, and in doing so, you defer tax payments.
Only when you use or prematurely take out your net income will you encounter taxes. As a general rule however, the net income tracked from your scheduled distributions, when withdrawn, is taxed at a rate of 3.8% to 20%. Investors incur a rate of 20% depending on their income or level of distributions received.
Is Passive Income the Same as Active Income?
Active income, which is what you earn from “material participation,” is not labeled as capital gains.
Net income and capital gains are the same, but “capital gains” is a term used primarily within taxes. Any taxes on capital gains, which is net income, can be deferred or delayed by reinvesting it. Net income comes from passive earnings while gross earnings come from wages and salaries. The IRS says that as long as you don’t operate a business, your stake qualifies as a passive investment, being that all you did was invest.
*Which Deductions Can Be Made From Net Income?
You can, based on profits and losses, make deductions from the following:
– Any requirements needed to create your royalty income—i.e., fees
– Any investment expenses that arose miscellaneously
– Any loss due to state taxes on income
– Any casualties related to a property
What is it About Passive Investing Anyway?
A passive investor is someone who realizes their need for financial diversification.
These investors want to put their money to work without lifting a finger. The science that keeps investors “betting” on property investments is saturation. Even in times of peril, people will buy homes, pay rent and travel lodging. With an experienced agent helping them, there’s no season or natural disaster that calls for a passive investor to labor.
Property markets inspire these investors with the idea of long-term incomes.
Here are some key reasons to keep your investments diverse and passive:
1. Time in Your Hands—No Work on Your Mind
Being a financier enables you to use your personal time for diversification. As you put money into one asset, you are free to then research more investments without losing your initial one. In most investments, however, we’re required to give a lot of attention to them.
2. A Future to Look Forward To
Though short-term investments do work for passive financiers, we look at passive income as a long-term strategy. If you want to retire early, then look at the passive income of investment properties. The opportunities you find do promise a real future—not just a quick payday.
3. Investments That Last a Lifetime
Wealth is about building strong foundations within your finances. We choose passive assets because they’re built on the concept of longevity. Tomorrow, people will still be looking for residential, commercial and industrial properties to buy. Just don’t settle for an asset that pays you quickly but once. Investments that last lifetimes pay you indefinitely.
Do You Ensure Consistent Net Income for Investors?
We position our investors for steady profits in net income through the following:
Watching Market Conditions—We don’t need market conditions to tell us if we should invest into property ownership. We watch market conditions in order to know when. Being a long-term asset, investment properties are always worth considering. Since most economic pullbacks are temporary, a long-term hold on a property often brings you back to your profit level or higher. Additionally, finding properties at bargain prices is best done when you take advantage of market conditions as they arise.
Profiting Strategies—Steady profits are a result of good investing strategies. Finding a reliable asset is good, but knowing how you’ll purchase it, when and then where you’ll get out is how you create a strategy. Our entry point must always be when prices are low or favorable. The final step in an effective strategy is in knowing when to get out. We don’t need to anticipate failure, but knowing how to leave minimizes loss.
Using Due Diligence Each and Every Time—Every investor in a property market needs research to guide their decisions. Around the country, millions of people enter this industry, and their work makes competition a big factor. Entering a property investment should only occur once you research the details of its market.
Investing and Pushing Your Net Income Higher
It’s our desire for you to thrive as a wealthy individual. It’s our desire to also share a warm warning. If you think that success as an accredited investor doesn’t relate to your work in tracking net income, then you’re sadly mistaken. Through a property market, you have a real potential of making passive income to support your entire life through. The benefits of passive investments, however, are meaningless if you haven’t set your preferred rate of return.
Now is an ideal time to think about your wealth. How will your money go to work for you now that you know how? Thank you for being supportive throughout our relationship up to now. The favor I want to return comes from my passion to see you achieve more. Money management, financial and self-control are still major factors in your life of freedom.
Follow us as we guide you into the rate of net income you seek.
About the Author:
Joe Fairless is the co-founder of Ashcroft Capital, a fully integrated multifamily investment firm with more than $2.7 billion in assets under management, and the founder of Best Ever CRE. His podcast, the Best Real Estate Investing Advice Ever Show, is the world's longest-running daily real estate podcast with more than 500,000 monthly downloads.