Imagine for a minute, you show up for work as usual. Grab you morning coffee, talk about the football game with your friend down the hallway…..you know, the usual routine. Then, halfway through your morning, you get “the email”; you just were laid off.
For many Americans, that means zero income starting tomorrow morning or maybe after a short two-week severance period.
Now, let’s pretend that during your employment, you leveraged your money.
Three Types of Income
Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn what is called Residual or Passive income (or both!).
Active income is from your employer and requires activity in exchange for money. When you stop, the income stops.
Residual income means you receive money after the work is done. For example, every book an author sells provides residual income.
Passive income is earned with very little effort and continues flowing even when you aren’t working. Real estate investments can be one a stable source of passive income.
So, remember the job loss scenario? Let’s pretend you’d built passive income, on the side, while you were working your job. Sure, since being laid off, your earnings decreased by your monthly salary amount, but you still have income from your passive investments.
Financial freedom is achieved when your earned passive income supersedes your active income.
Investing in Stocks vs. Real Estate
So, every year is different, and this last year has been a bit of a “one of kind” scenario. But historically, the stock market returns somewhere around 8% annually, which means $100,000 would produce roughly $8,000 per year. That’s about $667 per month.
To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000.
However, with real estate, $100,000 could buy a $400,000 rental home. How?
Well, a bank would loan you the other $300,000.
You put in 25%, the bank puts in 75%, and you earn 100% of the profits.
A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month. Theoretically, 2 investments of this size could replace a $3,000 monthly income.
The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year.
Of course, those are waaayy oversimplified examples and every case is very different. So, think about the example as, well, a way to get you thinking about it.
But I Don’t Want to Be a Landlord
Maybe those numbers look enticing but being a landlord does not.
This is where, instead, you might join a small team to acquire real estate.
When investing $100,000 in real estate syndication, it’s feasible to earn $8,000 per year (8%), similar to the stock market.
However, the real opportunity lies in the sale of the asset. Syndications often hold the property for about 5 years. During this time, building improvements are made and the land market value typically rises.
Upon the sale, you receive $160,000 ($60,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return.
So, here’s the punchline. If, while you are employed, you’re able to create passive income, you’ll be less stressed when facing a layoff.
You may even find yourself celebrating unemployment!
Prevail Innovative Real Estate Opportunities, LLC., (PREO) is affiliated with Prevail Wealth Advisors, LLC (Prevail IWA) and Prevail Strategies LLC., because they are under common ownership and control. PREO was formed to provide real estate investment opportunities for high-net worth investors looking for diversification. Prevail Wealth Advisors, LLC., is a federal registered investment advisor. Registration with any securities authority is not an endorsement of the services offered by the investment adviser. Fixed insurance products and services are offered through Prevail Strategies, LLC., a licensed insurance agency. Any investment by a Prevail IWA client into a PREO sponsored real estate investment would be without the involvement of Prevail IWA and should be not seen a s a recommendation by Prevail IWA. Additionally, Prevail IWA clients should realize that any capital they invest in a PREO-sponsored real estate investment would be completely outside of their advisory relationship with Prevail IWA and not part of their Prevail IWA account going forward. Finally, there are material differences between the type of investments PREO may offer and the investments on which Prevail IWA provides advice in terms of risk profile and liquidity, and the compensation PREO earns from a real estate project in which Prevail IWA clients invest may be materially different than the investment advisory fees Prevail IWA charges its clients.
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