3 To Dos On Your Road To Passive Residual Income
Isn’t it interesting that the road to passive income requires so much NON passive activities? In fact activity is the primary path to get to the passive income. I always remind investors that the passive income, regardless of what your investment vehicle is, should always include extreme diligence up front.
First do the leg work
To get the maximum ROI on your investments you must first do the leg work. Whether it be stocks or commodities or real estate, it is imperative to know exactly what you are doing, why you want to do it and when is the best time to strategically enter the investment. If all you did was to write a check and expect returns, you would indeed then be paying someone else to take on those tasks. This is not a one time pay for task service, but instead it’s an ongoing expense in the form of lower return value.
Why invest in real estate?
Most investors in real estate invest because of the lower volatility to the investment. This is because the need for housing will always be there and the need continues to grow as the population grows. The multiple streams of income generated from investments are also in high demand for investors. The combination of these benefits create a passion for many investors and the eagerness to generate a great passive investment portfolio makes the work less like work and more like an investment of time that offers great residual rewards.
Once the investment is made, the residual income kicks in and the passiveness of the investment takes over. The brunt of your work now is simply monitoring property management and the market cycles shifts. For this particular investment you can now pretty much sit back and enjoy the residual income you were able to generate for yourself. As a great investor, you now want to repeat this success and find the next great passive investment.
Following 3 basic steps to building a passive (residual) income
Set up your legal entity
What separates serious investors from the hobbyist is that seasoned investors tend to run their investments like a business. They want liability protection and they want in lots of cases anonymity. To accomplish this they set up a trust or most commonly an LLC to hold the real estate. There are often tax benefits to setting up an entity to structure as well.
I always highly recommend that investors to talk to your attorney and or your tax professional to assist with this matter. Every person’s goals and financial situation is different and there are a number of ways to structure these entities.
Establishing what works best for you should be one of your first quests! Now a bit of advice based on an “AH HA” moment I got early on. Your accountant will often give you different advice than your attorney. It is important to understand the frame of reference they are coming from. An attorney tends to consider your liability protection while an accountant is considering your tax implications. Because of this I found confusion in their non-congruent responses to me.
What I learned to be most effective is to meet with the two at the same time. Perhaps you can arrange a conference call. The objective here is to share your short and long term objectives and collectively your think tank can now arrive at the best tax and liability protection for you.
Research best markets and best properties
Spending the past 15+ years working with real estate investors, I see another huge distinction between seasoned investors and the hobbyist. The hobbyists always start their endeavors by looking at property that is listed cheap.
The seasoned investor knows that there is no merit in any investment until they research the market for long-term sustainability. Once they are sure the market they choose to invest in will be best suited for them they then research to find the best and most sustainable property to fulfill their investment objectives. Seasoned investors know that to build passive investments that will give them sustained residual income it requires them to be very diligent on the market and property research.
Work with top talent
The real estate power team that you assemble will be extremely instrumental in your ability to sip your favorite beverages while relaxing on the beach (worry free).
During your investing career you want to always be scouting talent. Accountants, Realtors, tradespeople, and most important superb property management. The property manager can make or break a successful investment. I can speak from a position of strength on this one as I have had my portfolio put through the wringer by hiring cheap or inexperienced property management.
Perhaps the best way to learn is through experience. Scratch that. The very best way is to learn though the experience of others. You can learn the same thing, but for a whole lot less headache and expense. Through my challenges with property managers I have learned how to hire great managers. I developed this property management questionnaire which covers the entire A to Z process. When a property manager can fill this out to my liking and comfort, I always have great property managers.
I have found as well as my investor clients that following this simple process and then repeating will allow you to build a solid investment portfolio of passive income that will provide residual income for as long as you own the investment. The key is to not become complacent. You still want to monitor market cycles (or have your power team monitoring market cycles) so you can ride the wave of economic prosperity and then reposition your assets into the next best market.