Passive Takes Work

The title of this post has nothing to do with being lazy or taking it easy.

This post is about passive income but, unlike most articles, books, and blog posts about passive income I’m going to tell you that passive income is difficult, it takes work.

There are a lot of financial bloggers who promote real estate as a panacea for wealth creation but I’ll tell you they’re wrong. At the same time I’ll say that real estate has been a great success for me. That sounds schizophrenic but the reality is that for real estate to generate income it takes work and smart decisions, there is no easy way and while some people will have great success with real estate others will struggle or lose everything. More on real estate in a minute.

Dividends are another type of passive income that some people portray as easy but it takes a lot of invested money to generate enough dividend income to live on. This post updates some of the dividend numbers in a post titled Manage Your Money Don’t Let it Manage You. In 2016, my dividends and interest accounted for 16.56% of my gross income. That’s a high number, imagine making an extra 16.56% of what you make right now — it would be nice, right? It’s also important to point out that this number can vary widely over the years and here how’s its gone for me: 2007–12.59%, 2008–7.08%, 2009–3.45%, 2010–5.57%, 2011–10.15%, 2012–9.68%, 2013–14.74%, 2014–18.67%, and 2015–17.12%.

Those numbers look impressive but in 2007 I had been advancing in my career, increasing my income, saving aggressively, and investing for 13 years. Now in 2017 I’ve added 10 years and multiple streams of income and still those dividends and interest aren’t even close to covering my expenses.

Passive income, yes, but it is highly variable and you can see that the recession years had very low numbers that reached a low in 2009 and have been (mostly) growing since. Let’s also not forget that you may owe taxes on those dividends and if you reinvest those dividends (which you should) you’ll have to come up with that money yourself. I say may owe taxes on the dividends because it’s only true if the stocks, bonds, mutual funds, or ETFs that generate the dividends are in taxable accounts. Most of our dividends come from our retirement accounts, 401k and IRA and therefore are not taxed.

Over the years I’ve read a lot of self help books especially with a financial bent but most weren’t very helpful which is why I wrote my own. One book, however, stuck with me. It’s called Your Money or Your Life and puts forth the concept of passive income through dividends and interest eventually replacing your salary allowing you to retire. But it takes a while and requires aggressive savings. I liked the idea so much that it is a major part of my retirement plan but as you can see, even with my aggressive savings, I’ve got a long way to go.

Now to real estate. In the same post I referenced above I pointed out that in a typical year, my rental properties represent 6.11% of my income but they also account for 9.09% of my expenses. In other words I’m losing money on the real estate. Not to mention the time I devote to overseeing and renovating those properties. Anyone who has rental real estate knows the income is anything but passive, it takes a lot of work. But there are several things going for me: first, I get to use those properties while I’m there to oversee and renovate them (they’re vacation rental properties and so are a literal pleasure to visit), second I will be able to deduct the money spent on renovations, repairs, and improvements when I sell the property (income limits called passive income rules prevent me from doing so now), and third, and maybe most important is that the properties have increased in value over the years and I’ll be able to sell them for more than I paid. Like any investment these are long term commitments.

When people start talking about passive income like it’s easy, when they want you to take their latest class or webinar on how to make money without working, come back here and read this for a little balance.

Do you have experience (good or bad) with passive income? I’d be happy to hear your comments.