Why You Should Start Thinking About HOW You Earn Money (Not Just How Much You Earn)

by | BiggerPockets.com

Last weekend, I was blessed to be one of the facilitators of an SIA (Strategic Investor Alliance) Wealth Building Mastermind meeting in Philadelphia. During a full day of purposeful planning, one of the concepts that we talked about was, “Where does your income come from, and why is that important?”

One thing that I discovered is that the type of money earned may start to dictate what type of investor you are and how you approach risk. For example, if you’re a high income earner, you may have less time available to commit to investing, and you may opt for more passive income with more security.

How to Invest in Real Estate While Working a Full-Time Job

Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.

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So, How Do You Earn Your Money?

For most of us, we earn money by being an employee. Don’t get me wrong; it’s great to have a job, and many of us love our jobs, but at the end of the day we’re trading time for money. But that’s only part of it. The real bad news is that earned income, the kind you make at a job, is taxed the highest.

The next way folks earn money is by being self-employed. This seems better than being an employee because now you can control your schedule by being your own boss as an independent contractor, but in some ways you just own a job. Sure you’re still trading time for money, but you do have more opportunities to take some business deductions off of your earned income. The downside is that oftentimes, your business revolves around you, and it can be difficult to replace ourselves, especially the higher and more specialized the position is. Think of a professional athlete or an eye surgeon, as these types of positions can become tough to replace.

Then you have business owners, who start to earn their money off of the work of others, thus leveraging everyone. As J Paul Getty says, “I would rather earn 1% off the efforts of 100 people than 100% of my own efforts.” The good news is your income is not dependent on your presence. Many business owners also have the benefit of running the bulk of their expenses through the business as well.

Related: Why Investors Should Create Multiple Streams of Income Within Real Estate

Then, of course, you have investors, who make money by letting their money work for them (think dividend and interest income or positive cash flow from rental properties).

As Robert Kiyosaki says, “The main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money but never learn to have money work for them.”

And then you have people like me who make their money in a combination of the ways mentioned above. Although I’ve made money in all of these ways, as an employee, a self-employed independent contractor, a business owner with many employees, and even as an investor, it wasn’t until much later in my life that I realized the power of synergy between utilizing leverage, tax-saving strategies, and the compound effect of investing.

Tax Implications

Tax implications can have a huge impact on your overall wealth creation. For example, if you asked me if I’d rather have a salary of $100,000 or $100,000 in positive rental income, the answers is easy. I’d rather have the hundred thousand dollars in rental income, as it is more favored in the tax-code (excluding FICA and unemployment tax). This can make a big difference over time.

The last thing one needs to consider is what type of income do you have right now, and what type of income do you want to have in retirement?

Related: The 4 Pillars of Wealth: How to Retire With More Income Than You Ever Made at Work

From a general perspective, it’s easy to say we want as much passive income as possible and that we want as much as possible to be tax-free.

For me, through purposeful planning, I look to increase my more favorable types of income, like passive and portfolio income, and decrease the higher taxed, employee and self-employed types of earned income. Right now, one of my goals is to have more passive and portfolio income in retirement than earned income now.

I’ve learned that it’s really not what you make but how much you keep that counts.

So, what are your goals for income in the future?

Let me know with a comment!

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


  1. Mikael Winkler

    FANTASTIC article. As I was reading, I was thinking, “this sounds a lot like Rich…”. Then I saw the Kiyosaki quote! I started with Richdad priciples, which led me here to BP (by way of the Ken McElroy podcast), so it’s great to see the two come together. Thanks for the great piece! While I’m an E currently, I’m continuing my education to transition to a B and I 😉

  2. Daniel Kenney

    One key/obvious positive of a W2 is NOT having to rely on the passive income for personal expenses. Keeping passive investments and related income in a silo, constantly reinvesting (debt paydown, additional property, etc.), creates a snowball that can grow at a remarkable rate if you make sound investment decisions. Everything changes once you need to rely on that passive income stream so timing of that decision is critical…

  3. Clint Bolton

    Great article Dave. I’ve experienced the “being employed” right out of college. For the last ten years it’s been self-employment, business owner and making the transition toward straight passive income as well through my business as well as using fix and flip to build capital to add more rental properties to my portfolio. I’ve yet to enter the note investing arena but I may be in touch with you to learn about that one day. It definitely interests me. Neat to see that you started as a Realtor as well. I began full time as a Realtor 10 years ago and now I own a brokerage and do lots of rental and fix and flip investing. The self employment tax HURTS these days so I’m definitely wanting to move more toward a lesser taxed position!

    • Dave Van Horn

      Hi Clint,

      It’s funny we have a very similar history, and that path actually is what led me to notes.

      If and when you want to learn more about notes, DM me here and I’ll be sure to send you an advance copy of our e-book on the note industry.


  4. Jesenia Rodriguez

    Wow this seems very over whelming! I’m really interested in learning about Flipping houses and eventually having a steady flow of income through Rentals but I feel there is so much to learn on the terminology end. I really need to look up what all this means. Seems like i have a long way to go before I can ever think about looking for property…I want to know what I am speaking of to present myself properly. Do I need to attend College and major in Real Estate? This is a desire i have built in me for many years but its now that I’ve been taking the initiative to invest in the knowledge. Can someone please tell me what are the main things i should focus on? Help!! I appreciate any feed back…

    • Dave Van Horn

      Hi Jess,

      I’m glad to hear you’re interested in getting started in real estate investing, and Bigger Pockets is
      definitely a good place to start. Although you can attend college for real estate, speaking from experience it certainly isn’t a requirement, and it many collegiate programs may be more geared towards business with a real estate focus.

      To start, there are two books I would recommend reading. The first is by Robert Kiyosaki, who I quote in this article, and it’s called “Rich Dad, Poor Dad”. I recommend this book to everyone, not just real estate investors, because it’s a great introduction to the philosophy of money and investing. The second book, which is geared more specifically toward flipping houses which you mentioned possibly having an interest in, is called “Buying Real Estate without Cash or
      Credit” by David Finkel & Peter Conti. This not only explains a lot of the terminology but really gives you great information on how to actually buy houses (i.e. what to buy, where/when to buy it, and how), with little to none of your own capital. Great place to start for those new to the business.

      I’m sure other people here on BP have great recommendations as well.

      Hope this info helps!


  5. Justin R.

    @Dave Van Horn The one downside to having that $100k in rental income (rather than earned in come) is that we’ll miss out on whatever social security benefits there are by the time we retire. Have you ever calculated the present value of those benefits? Wouldn’t cancel out all of the tax benefits we get in REI, but for intellectual completeness I wonder what the value of that is.

    • Dave Van Horn

      Hi Justin,

      You’re correct, if you only had rental income and never had any earned income, then you wouldn’t have paid into social security benefits, and you also wouldn’t be able to take any earned income tax credits.

      That being said, $100K in rental income would probably require owning 30-40 units. At that point, most folks are a little older and have already paid into some social security benefits, and with that many units, they would have all of those income streams that would most likely far outweigh what they would receive through social security.


      • Justin R.

        Just for fun, maybe one day I’ll calculate the IRR of those FICA contributions.

        $2600 of monthly 100% passive “guaranteed” (quotes intentional) income would equate to a non-trivial REI investment in a portfolio. Not to mention the value of disability and Medicare insurance. Hmm.

        Point taken that there’s no reason people can’t work enough to get some of those benefits while also building the portfolio.

  6. karen rittenhouse

    Multiple steams of income is key. “Don’t put all your eggs in one basket” as the saying goes.

    Multiple streams is great because almost every single market is cyclical and, with multiple streams, the strong ones always protect the ones that are down.

    Never stop learning. Never stop earning.

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