May 30, 2016
Pattie Lovett-Reid: There’s nothing passive about passive income
ANALYSIS: My brother just retired. He was an entrepreneur his whole life. He has made a great living buying real estate — primarily apartment buildings — and has assumed the role of landlord, property management, and the list goes on. He has grown accustom to collecting rent each month while sitting on an asset that he knew he would one day sell to fund his retirement. That day has come and he now faces the challenge of creating an income stream that sustains his lifestyle through the balance of his life. Not an easy task for someone who considers himself to be risk adverse. His goal: To create a stream of passive income. But the question is, how can he get it?
Passive income refers to any income acquired on a regular basis with little effort to maintain it. Some people have the time to invest in creating passive income, and others have the money to invest in creating passive income. While it is usually one or the other, it can also be both. Depending on the resource you have (time vs. money) each of us may find a stream that works for us.
Passive income is not easy income. It takes work – and here are a few ways to generate some:
1) Rental income: This requires the capital upfront, yet is a popular choice that requires both time and money. It may seem like easy money, but rental property is a lot of work. However, it can work depending on the location, the tenant and your ability to be a handyman when required. To earn passive income from rental property, you must determine three things: the return on investment you want to have, the property's costs and expenses, and the financial risks of owning the property.
2) Investment income: The reality is no one can become wealthy through their day job. People usually become wealthy through money that’s put away and invested. Sitting in cash after taxes and inflation means you actually lose money each year. An option would be to become a shareholder of dividend-yielding stocks that receive a payment at regular intervals from the company's profits or reserves. Since the income received from the stocks isn't related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money. The tricky part, of course, is choosing the right stocks. Consider exploring ETFs, which are investments that hold stocks, commodities and bonds but trade like a stock. Similarly, real estate investment trusts are another good choice for passive investors to consider.
3) Get entrepreneurial: You could write books, develop a product or consider a blog. It takes a massive amount of work. It's often touted among Internet marketing gurus as an easy, surefire way to create a passive-income stream. To make good money from it, it has to be great. There's no room for trash out there. It has to be something people are willing to talk about.
4) Consider a P2P loan: This is a personal loan made between you and a borrower, facilitated through a third-party intermediary. As a lender, you earn income via interest payments made on the loans, but because the loan is unsecured, you face the risk of default. So, if you choose this route be sure to diversify your borrowers with smaller amounts involved and then manage the task of investing the interest payments.This all takes time and money.
Passive income is a bit of a misnomer. There is really nothing passive about it, as it always takes time and money to make money.
As the Chief Financial Commentator for CTV News, Pattie Lovett-Reid gives viewers an informed opinion of the Canadian financial climate. Follow her on Twitter @PattieCTV
