In this blog, I'm going to explain exactly what passive income is and how that
- Online Course
- Affiliate Marketing
- Flipping Real Estate
- Dropshipping
- 401(k) distributions
or other bright idea you heard of is NOT passive income.
The main point of passive income is that it must be passive. That might sound overly-simplified, like saying a square is a square, but a lot of people still miss it. Passive income means you don't have to lift a finger to earn it. It should be cash-flowing and give you regular checks in your bank account. These checks should be actual profit generated from the passive investment, not a return payment of the initial principal invested.
At Wealthward Capital, we spend a lot of time educating people on how to build portfolios that generate real passive income and it can be frustrating with so many mixed messages. It's not their fault. A ton of false information is floating around out there with more being produced every day..
Because of this confusion, I've started using a new word: Investment Yield. This means income that your investment actually makes. In other words — profit. And that profit should come to you in the form of regular checks.
When investors make a private equity investment, they become a Limited Partner (LP) in the investment. This means you are not involved in the day-to-day activity. The IRS uses the term "materially involved" to determine if income is passive. In other words, when the customer's computer breaks, you're not the one they call. You can just continue sipping your margarita on the beach somewhere while your money works for you and someone else takes care of business.
When a Limited Partner receives an Investment Yield check, they are truly earning a passive income.
This is the type of return that institutional investors and family offices look for as a priority because they are the best investments around at the moment, especially because of the recession.
High Net Worth Individuals (HWNI) know that passive income is defined as Income Yield received as a Limited Partner.
What is the best investment for passive income?
The best investment for passive income is real estate and alternative investments. America's wealthiest families have fifty percent of their wealth tied up in these asset classes.
There are four ways that real estate can generate passive income:
- Appreciation
- Equity Paydown
- Tax Breaks
- Regular Cash Flow Payments from Investments
Real estate when bought below market value can deliver asymmetric returns, meaning it is a steady boring investment that pays you checks.
More FAQs about the Best Kind of Passive Investments
Here is some more information on the best kind of passive investment.
What is the most passive investment?
Every investment is different but real estate investments offer distinct advantages if they are managed properly. They can be incredibly lucrative as passive investments.
Wealthward Capital takes a "done for you" approach to our real estate syndication and other real estate investments in our portfolio. Our purpose is to ensure that there is regular cash flow for you.
Our investments are truly passive. We do the due diligence upfront and then walk you through it so you know precisely what you're going to be investing in. We show you why we have invested in something so you understand it completely.
Our company doesn't act as a "broker" but as a team member whose sole purpose is to ensure your investment sends you regular dividends.
What is the best investment to get monthly income?
At Wealthward Capital, we define income as investment yield. And the best investment for this is real estate when it is properly structured.
I don't consider selling stock as "income" — at least not the kind of stock I want in my portfolio. Our investments are geared entirely toward passive income. If investment yield isn't passive, you might as well just get a second job and earn those additional monthly funds as employment income.
Commercial properties provide numerous opportunities for generating passive income. But these properties are difficult for an individual investor to finance. A financial institution simply wouldn't extend the enormous loan required for this to an individual, even if that individual is an accredited investor.
This is where real estate syndications play an important role. A real estate syndication is a form of real estate investing composed of multiple investors who pool their money to fund large-scale real estate purchases.
What is the safest investment right now?
Every investment contains some element of risk and determining the "safest" investment includes knowing how competent your financial adviser is. That aside, some investments do make more sense than others right now.
This is not financial advice, but I'm personally quite bullish on mobile home parks at the moment because they're currently scarce. Low supply equals high demand, and in a recession that demand gets even higher. At the moment, I think this is an excellent investment to look into, and Wealthward Capital has several in its portfolio.
The debt side of things is also interesting to consider. During a recession, the cost of debt goes up and so there might be some opportunity to earn income there if you take on first-position debts. We're currently exploring options on this for our passive investors.
How can I make a passive income of $2,500 a month?
Unfortunately, $2,500 a month isn't nearly enough for you to survive on. Ideally, your goal should be to earn passive income that you can live well off.
There's an old saying that you need money to make money. This is certainly true in the world of investment. And Wealthward Capital's investments are only open to accredited investors. People should never invest more into anything than they are willing to lose.
By focusing on diversification, it's possible to build a real estate portfolio that leverages tax benefits that are only available when you earn a passive income.
In the United States, the IRS takes a very favorable approach to real estate investments because real estate builds infrastructure and is good for the economy. As a result, it's possible to offset your passive earnings with passive losses and so keep more of what you make.
For investors who are not accredited, crowdfunding and REITs (Real Estate Investment Trusts) might be an option to look into.
How is passive income taxed?
Passive income is taxed according to the type of income (such as rental income versus business income). But it is generally taxed at the marginal income tax rate.
The benefit of passive income is that you can offset passive losses against your gains and so you end up keeping more of what you make. Numerous paper losses can be used to reduce your overall tax bill. The reason for this is that the IRS provides tax breaks to entities that invest in property because of the economic benefits for the country.
Passive losses can also be carried over to the following year. This makes passive income an excellent choice for retirement revenue, and possibly even as a substitute for your savings account.
Securities and stocks income (also known as share income) obtained from the stock market is not passive and so does not benefit from passive losses. This type of income is taxed as portfolio income.
How can I make passive income?
To earn passive income, you have to understand what passive income is. We define passive income as investment yield because it is truly passive.
This point of "what is passive income" is one of the most widely misunderstood aspects of investment. We run up against it constantly, and it's one of the things I'll be talking about in depth in my upcoming ebook, “Becoming a Passive Investing Pro”.
But the primary thing to understand is that passive income must be passive! It should have a high rate of return (actual profits) that gets paid out regularly to you in hard cash.
Wealthward Capital achieves this routinely through a series of high-return, cash-flowing properties on our portfolio that we have done our due diligence on and actively manage for our investors.
What is one disadvantage of the passive strategy?
Passive investing risks depend on the type of passive investment you put your money into. In any passive investing strategy, you run a small risk because you give away control.
This risk is relative. If you invest in a company or fund that you've done your due diligence on and can see that it is reliable, trustworthy, and managed by competent entities, your risk is lower.
But if you're putting your funds into an unknown company or sponsor and can't get your questions satisfactorily answered, your risk will be higher.
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This is unfortunately one of the primary risks of crowdfunding. The sponsors of those programs are usually not entirely known. You also don't typically know as much as you could about the property before the crowdfunders invest in it.
One of the things we pride ourselves on at Wealthward Capital is the degree of transparency we provide for our investments. We walk all our potential investors through the properties on our portfolios and show them the due diligence we performed so they know what they are investing in.
No one can do anything about sudden market changes but real estate tends to weather those changes better than many other asset classes.
Why are passive funds better?
There is another concept called a passive fund which means that the investor is investing in stocks that are managed by someone else. This is not treated as passive income by the IRS!
Passive income is income that is generated by passive activities and does not include investment income where you earn dividends, such as through a passive fund.
This might get confusing for new investors. But it becomes simple when you look at how the IRS defines passive income. It says that passive income is:
- “net rental income” or
- "income from a business in which the taxpayer does not materially participate”
Investing in a real estate syndication is done through an LLC. You invest in the business and thereby own a piece of the property. And you become a Limited Partner of that business entity. Because you are not materially involved in the day-to-day running of the company, the income you earn from it is passive.
The same applies if you earn rental income from real estate.
Income earned from a portfolio of stocks — whether passively or actively managed — is always portfolio income because you are not investing in a business but in stock market shares.
Which is an example of passive investing?
Passive investing in our sense means investing in a real estate syndication that generates passive income that can be offset by passive losses.
Entities that promote "passive investing" as investing in an index fund that is managed by someone else are actually talking about portfolio income. (See the previous answer.)
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Wealthward Capital's passive investing opportunities
Wealthward Capital has built a portfolio of high-yield real estate investments that are cash-flowing and bring in truly passive gains to investors who invest in them. Our returns range from 4% to above 22%. The portfolio is structured specifically to help high-earning tech employees make their money work harder for them.
This demographic is near and dear to my heart. I was previously a tech employee myself at two companies that helped to take public. I know how hard tech employees work. Wealthward Capital began as a solution for me to solve my own difficulties in getting out of the "Golden Jail" where you earn well but aren't living the life you dreamed of. Once I solved the problem for myself, I wanted to share the solution with others.