What numbers to use when counting passive income?

Question

Just curious, when people say that they have $5k passive income from real estate for example, typically is this number just a pure cashflow after setting aside the reserves (vacancy, cap-ex, repairs) , or is it cashflow plus reserves?

Jaspreet Baveja · Answer

Account Closed - Once you know what the investment strategy is, it will make all the difference between Gross & Net. If they're Limited Partners in a Syndication vs Active Buy & Hold rental investors, each of those will come with a different set of "expenses" from the Gross return. For me, as a Private Lender, there ARE no expenses or reserves or anything of that nature. Just a simple - Money Lent out, comes back with Interest and my earnings are: Inbound - Outbound. The ONLY thing I need to account for are Taxes - almost like a W-2. So, yes, TRULY passive investing does exist, at least 90 - 95% passive. Best of luck and stay safe guys!

Basit Siddiqi · Answer

Actually, you may have expenses - it depends how often you originate loans. If you originate loans often, you may be deemed in a trade or business of lending. It actually doesn't take too many loan origination within a year to be deemed in the trade or business of lending.

Daniel McNulty · Answer

Account Closed

Frankly its often gross of everything else. It is hard to know exactly what your monthly cash flow is until you average it out over a number of months / years.  Reserves or otherwise, RE expenses are lumpy, so it only makes sense in hindsight.

Be smart and make your calcs net and you'll be ahead of the curve...

Bryan Hancock · Answer

If you have to do more than click a few buttons online to trade into a passive index fund you're unlikely to be generating "passive income."  Holy wars have been fought on this topic on Mr. Money Mustache and other forums.  A lot depends on how you define the term *passive.*

The better question is....who cares?  Figure out a way to maximize your wealth situation without a built-in excuse mechanism.  Are you really good at generating W2 income?  Do that and figure out a way to invest it more passively.  Are you really good at attracting investors?  Do that and generate fees and upside for people you can share in.  Are you really good at finding distressed sellers?  Do that and sell off your contracts and cherry pick the best ones for your rental portfolio or to rehab on your own.

Design a business around that which you're good at, like to do, and can generate nice returns in.  Be active in that business.  If that business is selling your time to someone else for a given set of skills do that and ignore the hype machine that touts passive income as some panacea that will cure all that ails you.  If you look at 99% of these so-called passive income businesses they're anything but passive and fail to account for risk well.  Many also fail to account for an imputation of time in the eye-popping returns they brag about.

Jaspreet Baveja · Answer

Thanks @Basit Siddiqi, I meant in the sense of rental real estate management. Toilets, HVAC maintenance, Flooring replacements etc... But yes, I most definitely have Notary... Wiring Fees... Doc prep fees, BPOs, and many other costs of doing business that can be used as "Expenses" on my tax returns. My statement was more towards a fixed cost of lending vs unforeseen expenses of Property Ownership.

Roni E. · Answer

It should what is coming in your pocket. So lets you invested $100k and you received $5k and should be net so you made a 5% Cash on Cash Return that year.

Ellie Perlman · Answer

it depends on the context. When investing in multifamily syndication, you can get 7%-8% cash on cash, which is $7K-$8K net income/profit a year on a $100K investment.

What numbers to use when counting passive income?

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