Generating Passive Income
Whatever your goal is, be it traveling, retiring early, or spending more time with family. The largest obstacle and the place you will spend more of your waking life than anywhere else if your job. The only way besides winning the lottery or inheriting a large sum of money to really break free from your employer is to build a strategy to generate passive income.
Passive income by definition is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it. A few common forms of passive income are dividends from stock ownership, rental income, business income where you are a passive owner, advertising revenue and many more.
My favorite forms of passive income are dividends and rental income. They are the most reliable & can provide an income stream in both an up and down market. It's important to keep in mind that investing in real estate or the stock market can be done speculatively. For example purchasing a rental property in a down market like 2008 and planning to sell it in 5 years in 2013. You are betting that the housing market will rebound and you will be able to sell it for more than you bought it for. I see this type of investment while it is passive it's really gambling. You are playing the market. Now take the same scenario and instead of looking for a rental property that you think will appreciate in value. Look for one with a high rental price relative to the purchase price. This investment is much more stable and better for cash flow. You know how much rental income it will generate every month. Compared to hoping that the value of the property increases 5 years in the future.
Diversification is important while building your plan to break free from employment. Owning one high end rental property that generates $5,000 per month might sound great, but what if it's vacant for 3 months or more in between tenants? It would be better to have 5 properties that rent for $1,000 a month because you are spreading the risk. If one is vacant at any time it's not as big of a deal since you still have the other four.
Keep in mind that diversifying in the same market isn't really diversifying. Owning 5 rental properties on the same street in the same city isn't enough. Find locations even in different states, but don't stop there. Also invest in solid dividend paying stocks that will continue to pay dividends in any market. Some high yield stocks pay close to 10%, so a $100,000 investment could generate $800 per month! Choose established companies and also look at utilities. Many utilities have decent dividend yields and who doesn't need electricity right? As regulated monopolies it's a fairly safe bet that the local utility will continue to generate profits for the long term.
Check out some of the other articles for strategies to start generating passive income and finally being free to focus on your passions outside the office.