Multiple Streams of Income – How To Make Money In Real Estate
Are you where you want to be in your financial journey? Most doctors and other high-income earners that initially join the Passive Investors Circle typically don’t seem to be.
Why? For the most part, they haven’t taken the time to evaluate their investments. To be more specific, they don’t have a financial plan or have a clear set of financial goals they’re trying to accomplish.
“I’d like to retire someday” is just NOT going to get it.
Too many of us get up each morning and go to our jobs. That’s right it’s a J-O-B. Because without us going in and doing the work, no money would come in.
That’s what is called active income.
Unfortunately, if you continue down this path, you’ll be working a lot longer than you may want.
And hopefully nothing happens to your health along the way.
In the past, we’ve talked a great deal about how to create passive income.
Here’s a few articles in case you missed them:
- 4 Reasons To Create Passive Income With Multifamily Syndication
- How To Create Passive Income With Note Investing
- How To Start A Blog To Create Passive Income
- 3 Ways To Make Money With Passive Real Estate Investing
Today I want to get into some specifics about creating multiple streams of income and the four ways you can accomplish this using real estate.
Multiple Streams Of Income
There have been many books that have studied millionaires. Two popular ones are:
Most of the research shows that millionaires have an average of seven streams of income.
It seems that the millionaire understands the importance of multiple income streams.
Without them, who knows, they may have never broken the million dollar mark.
Why should we create multiple streams of income?
How many times have you gotten stressed out at work because the money coming in slowed to a trickle?
In my area, we usually see a drop in the patient load around the end of August when kids go back to school and shortly before the Christmas holidays.
Who wants their mouth operated on for Christmas, right?
Experiencing slow times without multiple streams of income can create a great deal of stress.
You should be building multiple streams of income so when one stream decreases or completely dries up you still have other ways to make money.
Should You Get A Second Job?
More than likely your main income source is your primary job. I’m a periodontist so each year I focus on becoming better and more proficient doing what I know best.
I do this as this is my main source of income so I want to continue to grow it to fund the multiple streams of income I continue creating.
The same should hold true with you too. You’ve probably heard the phrase “we should invest in ourselves first.” I totally agree with this as the more active income you make the more passive income streams you can build.
When it comes to making more money, most people start by creating more active income. Sometimes they choose to get a second job. Depending on where you are in your career, this may not be a bad option.
In Jonathan Clements’s book, How To Think About Money, he suggests we do all we can early in our careers to save as much as possible…whether we like our jobs or not.
By doing this, he recommends that we use that savings to purchase investments like stocks and real estate to create future passive income.
Active income is the money you make in exchange for your time. However, to get to seven income streams or more, you must have passive income streams, too. It’s the combination of the two that gets you true wealth.Join the Passive Investors Circle
Passive Real Estate Income
I’m at the point in my career where taking a second, third or fourth job is not on my radar. I’m still trading time for money but don’t want to increase that with more work.
Instead, I’ve set a goal to continuing to add multiple streams of income via passive real estate syndications each year.
I’ve already discussed the 7 steps to get started in syndications in the past.
The more flows of income I build, the quicker I’ll reach financial independence which will allow me to work if I choose to.
Whether you invest in passive real estate or direct ownership, there are 4 ways to make money in real estate:
#1 Cash flow
One of the first places I learned about cash flow was from the book Rich Dad Poor Dad. I love cash flow as it helps me to eliminate the fear of running out of money during retirement.
Financial advisors typically want us to focus on building a huge nest egg in hopes of not depleting it until the dirt is thrown on us.
With positive cash flowing assets, you’ll be able to rest easier knowing your expenses will be paid.
So what is cash flow? It’s nothing more than what’s left over from the money coming in via rent tenants pay minus expenses.
- Positive cash flow = a surplus
- Negative cash flow = a deficit
If you’re invested in an apartment complex that collects $10,000 a month and expenses are $8,000, then your cash flow is $2,000 each month.
If you’re a home owner, then you’re probably familiar with appreciation. Especially if you’ve sold a home owned for several years.
If that’s the case, then more than likely it sold for more than you paid for it.
That’s appreciation in a nutshell. It’s the concept of a home’s value increasing over time.
Typically the overall value of homes seems to increase at a rate at least in line with inflation (around 3-4%). That’s passive appreciation as a result of time.
There’s something else that called forced appreciation. In all of the passive syndication deals we’re currently in, forced appreciation is achieved due to the fact that the deals are value-add.
This is where improvements are made which help to increase the value of the property.
Ways that this can be achieved are by updating counter tops, appliances and lighting. By doing this, rents are able to be raised thereby increasing the overall net operating income.
This, in turn, increases the building’s value.
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#3 Loan amortization
Amortization is the process of paying off a debt (in this case, a mortgage) over time through regular payments.
A portion of each payment is for interest while the remaining amount is applied towards the principal balance.
An amortization schedule is determined by the percentage of interest versus principal in each payment.
Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.
What’s great about this is that the tenants are actually paying down the mortgage each month so you don’t have to take out a huge loan to cover the property.
#4 Tax advantages
The IRS loves for people to buy real estate and for this reason, they offer many awesome tax breaks.
Some common deductible expenses are:
- property management expenses
- insurance premiums
- property tax
Over time, wear and tear lowers the value of rental property and its contents. This process, known as depreciation, is tax deductible.
The deduction can be taken for the expected life of the property, but it must be spread out over multiple years.
You can obtain a cost segregation study to help which identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.
You can also take advantage of a 1031 exchange which may allow you to defer taxes from any sale indefinitely.
Are You Ready To Start Creating Multiple Streams Of Income?
If you’re ready to start learning about creating passive income through real estate, join the Passive Investors Circle today.