How to Build Passive Income...The Right Way.
Interested in building passive income? Watched a few (or maybe a hundred) YouTube videos by people who seem to have it all figured out? In this episode of the podcast we dive into passive income. What's real...and what's not. We cover:
What is passive income?
Types of passive income
How to build passive income from creative assets or intellectual property
Building passive income when you aren't creative :) or don't have IP
How to think about passive investments, including real estate when you build a long-term strategy
Transcript:
Hello, listeners at the Six Figure Investor podcast. We're excited to have you back today. We're here in the headquarters, the global headquarters of our Far-Reaching Global podcast. Yes. Ready for world domination on this beautiful day. Maybe we should do our next podcast recording outdoors. I don't think that people would appreciate all the background noise cuz we live, it's probably true. Kind of close to the airport. At least one airplane plus two people cutting their grass. And then the garbage truck guys. And three dogs.
Yeah, two babies and five frogs. . It'd be a great show. We do have a great show in store for you today though. Today we're gonna be talking about passive income, right? Brian? Building passive income. That's what we're talking about today. Building. Building passive income. I, it's a topic that comes up a lot, I hear from friends, from clients.
Like social media, even sort of regular old school media is filled with people talking about passive income. Like it's this unique thing waiting to be discovered for everyone. So I, I thought it would be good to get some real, financial planning perspective on what passive income is, what it looks like to build it, what it can do, what it can't do what mistakes people make and where you get started if that's something that you're interested in doing.
So that's kind of what we. I feel like everybody wants to build passive income these days. It's like I see it everywhere on social media and people talking. They wanna make money with no money without any work. Yes. Is that how passive income works? No, it's not how it works
But in the show we'll talk about how it actually does work and how it can be helpful
All right. Well, why don't we start with the basics For those who haven't been through the 704 videos on how to make money with no money without doing any work on social media. Yeah. And talk about how we are gonna define passive income for today.
So passive income is simply income or profit that you earn without having to show up and work. You aren't trading time for money. So I'll say that again. You're not trading time for money. You own an asset and other people are paying you to use or consume that. That doesn't mean that work is not involved.
Right. So I want to like start right there. That doesn't mean that there's no work involved. It just means that the relationship is not, you show up somewhere and someone pays you to be there. Yeah. Right. It's not an hour for a dollar or whatever. The relationship. Yeah, exactly.
so there's two forms of, of passive. Probably the first is assets that you create through your own labor. But then they can be used over time with your, without you being involved. So think of the best way to think about this is the old school author example, right?
So think about it like selling a book. The author invests a tremendous amount of time and money upfront, but they don't do anything when you buy the book and read it at the store, right? So they invest in creating. Intellectual property in content that you're interested in consuming. And then, you know, in the old school world, you go to the bookstore you know, now maybe you just download it on your iPad or you know, have it shipped via Amazon to your house or whatever, right?
But, the time was invested up front, the intellectual property was created and then there's no time involved as that scales over time. In today's world, people create online courses. They create YouTube channels, podcasting, blogging. They even publish old school. So those are all ways that you can create some sort of intellectual property that does require work.
You have to do the work and do the research. Particularly if it's something that is like an ongoing, like, hey, doing a podcast, right? We do things to make this thing go. But it does require some work, but there's not a a time for money trade off. I heard that people call used to call that mailbox money.
Mailbox money, yeah. Yes, because it just used to come in the mailbox every time someone played your song or bought your book or whatever the case may be. My hypothesis is that 70% of people in Nashville survive off mailbox money. Off mailbox money. That might be true. . The, the thing that I, I think though is, is important to understand is it takes a long time to build that.
You've gotta build really good intellectual property. You've gotta have something to share, right? If you're a creative or if you're, if you've got expertise in something. So I think most people that start those endeavors end up not making a ton of money doing them, or they're really kind of supplemental.
Not everyone that you know is making millions of dollars on, on YouTube. So the YouTube payout ratio, for example, is like 12 cents for every view. So that means if you can make a video that a thousand people watch, that's $122. And if you can make a video that 25,000 people watch, It's about 3000 bucks. And so you've gotta create, if, if you're gonna create content, you've gotta create a lot of content.
And you've gotta create content that a lot, a lot of people want to watch in order for you to actually make money doing it, because it's not free to do it. You're gonna have production costs and things like that if you're gonna create something that lots of people are gonna watch. So so I just put that out there to kind of, to, to put some framework around, you know, like how much money can you make in some of these, in some of these channels.
You definitely can make money doing some of this. But it takes a long time to build an audience and it takes a really sizable audience in order for it to pay out in a, in like a significant way. So that's thing one. That's creating content that people consume, whether it's books or whether it's like more modern media stuff.
That's the first thing. That's the first thing. Mailbox money. So the, the second thing then is assets that you acquire through saving over time. All traditional financial assets kind of fall in this category. Stocks, bonds, real estate are all asset classes that are ways to generate passive income.
The way that this works is sort of the time tested methodology that people have been using for years. You spend less money than you make you save money, right? For a long time, we call this retirement planning, right? But you're just spending less than you're making. You're accumulating financial assets and then you can use the savings to buy things over time.
Real estate is a really common asset that people own. And the reason for that is, is not because real estate in itself is, is special or has better return characteristics than other financial assets, but you can generally it doesn't. No. So if you look over time at asset returns so stock market obviously is the, yeah, but I over long periods of time is gonna produce the highest return rate.
Real estate will be number two. And then bonds will be a kind of a distant third, and then there's other things get kind of fall in the middle there.
I think a lot of people who have property, like it is a sizeable part of their total portfolio. I think that's, that's true. Don't know. That just seems like a mistake that people make when it comes to passive income owning too much real estate. Or just, I guess doing it off of what the 7,243 videos on passive income on YouTube say that you should do, or, which is by real estate. Huh? Which is by, well, the answer is always real estate.
The answer is always multi-family real estate. Yeah. So, a couple of things, right? So real estate is a common asset that people own, and a lot of that is because it's easy to lever it. So, and what we mean by that, right? Is, is when we buy a property, typically we borrow a lot of the purchase price.
Maybe we put $20,000 down, a hundred thousand dollars down, and then we borrow the rest of the money from the bank, right? And then you know, our tenant who's, if we're, if we're in a rental house, for example, our tenants making, you know, rent payments every month, and we're using some of that to pay on the mortgage.
And then some of that, perhaps if it's more than, than what the mortgage is, then, then we're, we can pocket the difference, right? Or, or build, you know, use that to invest in other. . People tend to use leverage less when they think about publicly traded assets like stocks and bonds.
That doesn't mean that you can't and that those aren't, those aren't options or that you should. But I do think that people over-index on real estate just because you can use you can use leverage. I do think that one of the mistakes people make is they own too much real estate when they're trying to build passive income.
And just like anything else, you need to be diversified because if something happens to the housing market and all of your net worth is tied up in real estate, you're gonna be in trouble. The other thing that I think is important is, even if you are using a sort of a real estate heavy strategy, you're investing a lot in real estate.
Single family rental properties are not the only form of real estate. I think it's really important to think about and, and we help clients with this all the time. You've gotta think about real estate outside of just what happens if I buy a rental property down the street, right? There's commercial real estate.
, there's retail. You can own pieces of a shopping mall. You can own a shopping mall. There's warehouse space. Hospital space and healthcare space and doctor's offices. And there's all kinds of different kinds of real estate outside of just residential rental properties and like Airbnbs, which is where I think people people tend to tend to gravitate.
And I think if you , pigeonhole yourself into one or two popular categories those things often go through booms and busts because they get really popular people pile into them and then they kind of bust when when the demand isn't isn't actually there for particular property types.
So even within a real estate portfolio, it's important to stay diversified. Are there any other mistakes that people make? I think the second thing is assuming that passive income is a, is a get rich quick strategy or that it's actually passive. Or well, the, or then it's actually passive.
Maybe that's the third thing. So I see like countless ads for seminars and strategies to help people build wealth through passive income. And what's funny about a lot of that stuff is usually the participants are contributing to the host own passive income strategy more than they're actually learning anything about building their own passive income.
Building passive income requires living below your means, saving, using your free time, and the dollars that you're creating by not spending what you're. To invest. Just because it's not easy, doesn't mean it's not worth doing, but it is not easy and it takes time, right? You have to save enough money to buy that first house, or you've gotta save money to invest in the stock market or whatever you're gonna do.
To build your passive portfolio takes time to do. The third thing, like you said, is assuming that it's, it's truly passive in the sense that it doesn't require any effort. Rental properties require a lot of work to maintain. You've gotta find tenants or you've gotta pay somebody to do that work for you.
When things break down, obviously they have to be fixed. Again. You've either gotta pay somebody to do that work or you've gotta do it yourself. And it doesn't matter, what kind of assets you own. There's, there's going to be work require, even if you're investing in sort of like publicly, Stocks and bonds and things like that, you've gotta manage those portfolios.
So j so just because it's passive in that we, we sort of remove the, the direct time for money relationship doesn't mean that it doesn't take any time. Well, knowing that it does take some time, if I haven't really gotten started on the passive income stream and I want to, how do I do that?
So I think the first step is to figure out whether you have any intellectual property that could be useful. So when we, when we talked about the different types of passive income streams at the beginning, do you have something where you could start a blog, a podcast, write a book, something like that? If you have intellectual property, you might be able to start on building passive income without actually sort of changing your monthly budget or your financial circumstances. What's important though, is as you earn income from your intellectual property, you need to start investing in financial assets because even your creation probably has a shelf life and it's not gonna continue to pay off forever.
Right? Books that are written this year, obviously bring in a lot of money, but then year two, year three, year four, that starts to go. . So you, you, you've gotta even think about your intellectual property as something that's gonna decrease over time. And so you want to take that excess, that excess set of dollars that you get and start funneling that into something that's gonna have more lasting value.
If you don't have any really valuable intellectual property, that's okay. Then that's where you start saving. And you live below your means so that over time you can buy financial assets that produce income.
And then once you've started to accumulate savings, then you develop your investment strategy, whether that's real estate, different kinds of real estate, a mix of real estate, stocks, bonds, other types of assets that you buy. Once you've got a pool that you can work with, then you can start buying things.
They're gonna continue to produce value over time. So that's the strategy. So I think in summary, I, I would just offer a, a few thoughts. One, passive income is not easy to build, and it takes a long time, and it does require, , but it is about removing yourself from the trading time for money. That's more associated with a sort of traditional labor market, employment, having a a day job, all those kinds of things.
When you go to build assets with your savings, it's really important to stay diversified. If you're gonna buy real estate, you can focus on different kinds of real estate. Think commercial properties, industrial properties, certainly residential, right where everybody starts, but stay divers. And then lastly, if you don't have any intellectual property or, something that you think is creative that, that folks will consume, that's completely okay.
For you. The, the place to start then is spending less than you make, starting to build a pile of savings that you can use to buy financial assets over time. So if you're looking for guidance on passive income, I hope you find this conversation helpful. And maybe some perspective, that's a little bit different than some of the.
Quick hitter get rich quick videos that are out on online. Hopefully this brings a little bit more weight and a little bit more perspective to the conversation on building a a passive income. If you'd like to talk, obviously you can find us, the capital stewards.com. We'll put some links in the show notes and you can look there as well.
And we will talk to you next time.