What is Passive Income and How To Make More of It!

What is Passive Income and How To Make More of It!


Hi. J Massey with CAshFlowDiary.com with another
quick tip about real state and business. Today we’re going to talk about one of my
most favorite subjects, passive income. What is passive income anyway?
A very simple definition as many of us know is there are many other forms of income as
well. We’ve also heard of active income. You also have heard possibly of portfolio income.
A lot of these definitions come from revenue code but what is passive income?
Passive income is just that income, think of it very simply. It doesn’t mean that you
are uninvolved in the generation or the creation of it but it does mean that you don’t have
to literally do something all the time to create it or make it happen. So, you are more
passive in its creation than you are actually active.
Most of us are very, very familiar with active income. When it comes to active income, this
is when we get up, we go to our jobs. We go to work. We do something, where we’re paid
one time for it and it’s done. Portfolio income typically requires using more capital or cash
to go out there to create something, usually a stock they’ll pay some dividends or things
of that nature. That’s what we’re talking about portfolio income.
Passive income usually means that we’ve bundled our labor in such a way that now we don’t
have to labor every day for it but we’ve sold our labor, we’ve sold our intellectual property
or ingenuity out into the marketplace and it continues to come back to us in this small
streams of income over time. Here’s some quick Math that I want to share
with you. Let’s pretend that what you wanted to do, because this will teach you the power
of passive income right here, let’s pretend that right now, at your job, what you earn
is $2000 a month. So if you earn $2000 a month, 12 months in a year, therefore $24000 is what
you earn over the course of the year. But that’s active income.
How many hours do you typically work, at least, in the US to get to $24000 in a year? On the
average, you’re going to work 160 hours on a month and you’re going to multiply that
by 12 and that’s 1920 hours. So you’re going to invest 1920 hours for $24000. Obviously
in this example, I am not talking about taxes and all those other things right now. Right
now, I’m just trying to give you an example of passive income.
Here’s one thing. What would it take, before I give you an example of passive income because
this is active? So, now, I am going to talk about portfolio.
Portfolio income is the income that tends to happen usually use a whole bunch of cash,
you stick it somewhere and it pays you interest in dividends over time. So, for the sake of
this example, let’s use a bank CD so that you can have an understanding of what it would
take that same bank cd to be able to produce $24000 annually. So here’s what we’re going
to do. We want to end up with $24,000. That’s what we want. What we don’t know is how much
money do we have to have in the bank at an interest rate of 2%. Let’s say the bank is
willing to pay us 2 %. What I want to know is how much money I have to have in the bank
right now, today, to be able to earn $24,000 a year.
The math is relatively simple. All we’re going to do is take $24000 divided by 2% and we’re
going to come up with a number. That gives us $1,200,000. Well here’s the good news.
All you have to do is earn 1.2 million dollars, stake it in the bank, don’t touch it, find
a bank that will give you 2% and then you will be able to live on $24000 on a yearly
basis. Now, again we’re not yet talking about taxes and all those other things but again,
this is portfolio income. Here’s one of the things that I absolutely
enjoy about real estate, particularly apartment buildings because that’s one of the things
that I like to do. Is it possible for an apartment building to be able to produce $2000 a month?
Obviously, the answer is yes. So, let’s look at it. What kind of apartment building would
that be? Let’s keep it simple, like a simple goal is that I like to try to net $100/door/month
is a simple target to try to hit. So if I wanted $2000 per month, that would typically
mean I’m looking for a 20 unit building and after all the expenses, I want $2000 to come
in. Here’s the good news about real estate. Depending
on the market you’re in, what does a 20 unit building cost? For some people, a 20 unit
building may only be somewhere in the neighborhood of $400,000 or less. Now for some of you,
if you’re out in California, that same building could easily be $2M depending on where it’s
located. Now here’s the fun and power of passive income.
First, here, you’ve got to spend 1920 hours to get $24000 of active income. Here, you’ve
got to earn 1.2M dollars because it’s easy to say that that’s going to take you more
than probably 1920 hours to do. The question is this: what would it take — let’s use the
expensive side, let’s say that the property is $2M but what you want it to do is be able
to control it so that it would produce $2000 a month.
When you go to buy real estate — and this is one of the big things that I love about
real estate is being able to use leverage, also known as OPM. Here’s the point. That
$2M property in some cases, it is possible for you to be able to only put 20 % down to
keep the Math and things simple for myself so that in this case, what you have to do
is you take the $2M times 20% and you come up with a number that’s $400,000 as the down
payment. Now, I’m going o exclude escrow fees. This is just a simple illustration because
I want to show you the power of passive income. This $400,000 is representative of the down
payment. So what happens here is that the $400,000 is what was invested and what you
come out with on the other end is $24,000 from the income. That $24,000 over the $400,000
is going to give us yet a new ratio of 6%. That 6% is a cash on cash return which is
kind of nice, something to think about in this particular case is what if that $400,000
come from, for some time, because in real estate it’s very possible that even that $400,000
didn’t come from you. And if it didn’t, that’s great.
Sometimes, it is possible to be able to use that $400,000 in very creative ways and more
importantly as the cellar for the $400,000 which then creates a completely different
situation. But here’s the point. How many hours does
it take to put this together? Is it less than 1920? Is it less than the time it takes you
to earn $1.2M? I think that you understand that the answer is yes. Let’s just assume
it takes an entire month, or even 2 months to put this together. What does that now mean?
That same $24,000? And if you work for 40 hours a week for 2 months straight, that same
$24,000 you did in 320 hours, that would come out to $75 per hour, which isn’t so bad.
And that’s assuming you put in the $400,000 and more importantly, it actually took you
that long to put the deal together. In like cases, it doesn’t take that long.
If you like information like this and you want more of this, feel free to go ahead and
subscribe to our YouTube channel. You might even want to check out a couple of videos
as well while you’re here and look forward to talking to you soon.

16 Comments

  1. oseme thompson says:

    I wish you focused more on how the potential buyer gets the 400k for the down payment. Great video

  2. Jrock Davis says:

    Awesome Example. Great way to leverage finance to keep it moving.

  3. Claus Mevik says:

    2+2=4-1 that's 3 quick maths

  4. George Warner says:

    Did he mumble the name Jizz Nasty? Whatever he mumbled it sounded like Jizz Nasty!

  5. Vijayalakshmi Anbalagan says:

    If I bought a house renting it will give me passive income or selling it will give passive income?

  6. Ryl Win says:

    Cheers for this, been searching for "the meaning of passive income" for a while now, and I think this has helped. Ever heard of – Qonmily Passive Formality – (do a google search ) ? Ive heard some awesome things about it and my work buddy got cool results with it.

  7. Hektor Valdes says:

    This was great, been searching for "passive income philippines definition" for a while now, and I think this has helped. Have you ever come across – Qonmily Passive Formality – (do a google search ) ? Ive heard some awesome things about it and my cousin got great success with it.

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  9. Ethel Suarez says:

    This was great, I have been researching "passive income news" for a while now, and I think this has helped. You ever tried – Qonmily Passive Formality – (should be on google have a look ) ? Ive heard some unbelievable things about it and my colleague got great results with it.

  10. Michael Rodrerick says:

    I got lost if i make 24 k a year and pay my rent and food and gas when do i will have the 400k to give as a down payment to make the same 24k a year 😫

  11. joseph cassar says:

    great explanation thanks and bless

  12. Eladio Mora says:

    This is glorious, I been tryin to find out about "passive income or loss" for a while now, and I think this has helped. You ever tried – Qonmily Passive Formality – (do a search on google ) ? Ive heard some unbelievable things about it and my partner got cool results with it.

  13. Carmel Duchan says:

    Many thanks, I have been researching "smart passive income" for a while now, and I think this has helped. Ever heard of – Qonmily Passive Formality – (do a google search ) ? Ive heard some super things about it and my mate got cool success with it.

  14. John says:

    school does not teach us this wow … what a slap in the face the government is eh.

  15. Shatau Platau says:

    This person has no idea about property investment OBVIOUSLY! He forgot about the $1.6 Mill left over that needs to be paid for out of the $2 mill …ask any top investor and they will tell you nothing is simple but only to stupid people who pretend to be the top investors.

  16. John Cool says:

    The government wants you to be poor even if you go to college you’ll be in debt

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