An active income is one that requires you to do something. For most, this is working a job, either for an employer or for one’s self. Active income encompasses more than just working a job though. It can include active investing, building businesses, teaching, or even travelling.
Passive income is income that doesn’t require you to do anything. Common types of passive income include income from investments like real estate, stocks, and even investing passively in businesses.
There are investments that can either be active or passive, depending on how you manage those investments. Real estate is a good example. If you are living in one unit of a duplex and renting out the other, then chances are that investment isn’t totally passive. You will likely be collecting rent, paying utilities, managing tenants, showing and leasing the property, hiring contractors for repairs, paying taxes, shopping insurance, etc. This structure is hardly passive.
Al alternative model would be hiring a property manager to take care of all of those things. You would simply review your monthly statement from the property manager. This is a much more passive approach.
So why do we concern ourselves with active vs. passive income anyways? If you can build passive income streams, that require little to no time to manage, then you can use that time to build more and more passive income streams. Whereas, active income streams you are limited with your time an energy. There are only so many hours in the day you can work and spend energy doing.
Passive income and active income can be compared using the analogy watering your garden. Your garden is your life. Watering is the fuel to your life.
Active income is carrying buckets of water to that garden every day. If you don’t carry water, your garden goes unattended and left on its own.
Passive income is setting up a sprinkler system that automatically waters your garden every day, whether you are attending to it or not.
So, are you carrying buckets or setting up sprinkler systems? You can ask yourself this question for more than just investing. It applies to your finances, diet, exercise, education, etc. Are you building processes and systems that will work for you? Or are you doing the same work day in and day out, wondering how you could accomplish more?
Real estate investing is one of the areas where you can set up your own sprinkler systems. If you are investing in real estate but are still carrying buckets, then what’s the point? Here are some areas in which you can set up sprinkler systems in your business.
- Searching for deals – this is perhaps the most time consuming task of any full time real estate investor. Finding deals is a process that requires constant work. You can find a deal, purchase it, rent it, etc. then you’re back to square one searching for the next deal. Rather than doing this one by one approach, you could instead build a pipeline of deals that come to you. There are tons of different strategies on lead generation – from direct mail campaigns, to bandit signs, websites, etc., just to name a few. Building systems and processes that create a constant stream of deals is perhaps your most important sprinkler system. Without deals, you have no investment.
- Analyzing deals. Starting out it can take hours to analyze a deal, and with one wrong assumption you can derail the entire analysis. Setting some criteria and using some rules of thumb can filter how many deals you look at in depth, leaving more time to analyze the deals that fit your investment criteria. Rather than doing napkin math on every deal, find a good calculator you can use. I like to use the rental property calculator on BiggerPockets for small multifamily rentals.
- Raising capital. Raising capital is not something everyone does. Some investors only grow their real estate portfolio on their own, using their own capital. No matter who you are though, you, as a real estate investor, will eventually run out of your own capital to invest, especially if you have a strong lead generation pipeline set up. So if raising capital from investors is the route you want to take, then it’s better to start building those relationships now. Like everything else, building a sprinkler system for this component is just as important. If you can create a reputation as someone who is investing in real estate, then people will be drawn to you, rather than you having to go find investors, one by one. You can start a blog, a social media page, a YouTube channel, or even a podcast just like this one. By doing so, you are seen as an expert in your space, and people will be drawn to you.
These are just a few areas where you can set up sprinkler systems in your business. Doing these things will allow you to grow and scale your business. Instead of working in your business, work on your business.
So, what areas of your life could you build sprinkler systems where you’ve been hauling buckets? Find these areas, and automate where you can. Work towards that passive lifestyle. Soon enough you’ll have built a real estate empire that you can step away from and live the life you want.