Personal Finance

Here’s Why You Need to Set Up Passive Income Now

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
230 Articles Written

Why is passive income such a big deal?

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

In general, there is a lot more of awareness (and talk) of passive income — and passive-income producing investments — than there used to be. Yet, many people still don’t fully appreciate the critical benefits it provides — and the urgent need for it. Why is it so important? Why is it so vital to lock in as early as possible? Here’s why:

Changing Income Dynamics

Passive income changes the dynamics of your income and expenses. Passive-income investments aren’t just for later on, for retirement, or the extreme long term. Generating additional income now elevates earning potential, and that can turn the tide in your favor when you go to balance your bank account each month. It can help you find the finances to both pay the bills and live a little.

Related: How to Make $5,000/Month in Passive Income Using Real Estate: A Case Study

Income When You Can’t Work

Most accept that there will come a day when they will need to retire. At that point, passive income is a must for covering living expenses. Yet, we never really know how soon that day will come. Almost 70 percent of the U.S. population stops working by the time they are 65 years old. Many retire much earlier, which may become more popular as tech replaces more and more jobs. At some point, all of us will probably need time off work due to health issues, injuries, or family emergencies. How will you keep the money coming in during these down periods? Passive income can close that gap and deliver money while you are sleeping.

Tax Benefits

Real estate comes with many organic tax benefits, breaks, and write-offs. However, once you get started, you’ll realize that active income from real estate (i.e. flipping houses) can be taxed at very high rates. Tax rates on passive income and long-term capital gains can be much lower, which makes a big difference in net gains. Buy-and-hold investors can also use vehicles like 1031 exchanges and self-directed retirement accounts to pay even less taxes.

Freedom

Life is short. Studying and working for 65 years in the hopes of surviving in retirement doesn’t make for much of a life. Unfortunately, most people have less than $100,000 in their savings as retirement rolls around. It is very difficult to retire and live comfortably with such a small amount of cash. Passive income means you’ll be able to live, travel, and spend your time wherever you like — without being tied to an expensive location or commute for one of those old-school jobs.

Related: The Part-Time Investor’s Guide to Truly Passive Rental Income

Succession Planning

Passive income is a great succession planning tool. Many wealthy individuals are more interested in passing their income on to support their heirs, rather than stockpiling a big nest egg that they may wind up blowing.

Summary

Securing and generating passive income is important and necessary. However, not all opportunities and investments that claim to create passive income really do (like being a DIY landlord). Make sure you look for truly passive investments. 

How do you achieve passive income? Let me know in the comments below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
Read more
    Art Tapera from washington, District Of Columbia
    Replied about 3 years ago
    I like your mindset. There is wisdom in your words. Did you spend the early years flipping to build cash reserves for multi unit buy and hold opportunities? How much cash would you recommend an multi unit investor start with? Thanks for your insight
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    Yes, to answer your first question. To start out in multi-family you personally do not have to have all the cash to purchase the deal. You can raise what is needed from others. Hope that helps.
    Art Tapera from washington, District Of Columbia
    Replied about 3 years ago
    Thanks Sterling, How much minimum reserve cash do you recommend? Before buying a property with positive casflow large enough to justify the investment? Thanks for your help.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    The property itself should produce enough cash flow on its own to allocate funds to reserve. If it does not then it is best to find another deal that does.
    Art Tapera from washington, District Of Columbia
    Replied about 3 years ago
    Sterling Thanks again. What criteria do you use to evaluate a property? What metrics do you trust? What metrics are unreliable? Thank you very much for your help.
    Erin Spradlin Real Estate Agent from Denver, CO
    Replied about 3 years ago
    100% agree and I don’t know why people aren’t set up to think about this more. The sooner you can establish lines of passive income, the better off you will be long term and to your point, the bigger your retirement long term. We’re realtors and we worry about how an app could eventually replace us. One way we’ve found to hedge this is to invest in properties- which, luckily, cannot be taken over by apps or automation.
    Christopher Denne Investor from Arcadia, California
    Replied about 3 years ago
    I’m thinking about getting in to flipping properties to raise cash for other deals. I thought that the value added to a property on a flip (after rehab costs) would be taxed at the capital gains rate. Am I wrong? Thanks.