Is passive income, a myth?

The short answer is no, absolutely not. But the term “passive income” has been co-opted as a marketing phrase by an entire online industry, usually selling courses for producing passive income that in reality are far from passive. On this week’s episode of the Truly Passive Income podcast. That’s what we’re going to talk about.

Timestamps

[00:00] Intro

[00:47] Neil Henderson’s Background and Journey in real estate investing

[02:20] Clint Harris’ background and experience in real estate

[04:30] The Myth of passive income and the reality behind it

[07:05] Wholesaler progression and the need for truly passive income sources

[09:08] A brief overview of various truly passive income strategies

[11:15] Real estate syndications as a passive income option

[13:48] The benefits of investing in real estate syndications

[15:43] Limited partners in syndications and passive investment opportunities

[18:25] The rising number of syndication opportunities in the current market

[21:32] The importance of calculated risk and networking in real estate investing

[22:13] Wrap-up and plans for future episodes

Key Take Aways

  • The myth of passive income: The hosts discuss the misconceptions around “passive income” and explain that many so-called passive strategies still require time, effort, and expertise.
  • Wholesaler progression: The typical journey of a wholesaler, from hustling for deals to realizing the need for passive income, and eventually exploring multi-family properties and syndications.
  • Truly passive income strategies: The hosts list various truly passive strategies such as savings accounts, bonds, stocks, mutual funds, REITs, and real estate syndications.
  • Real estate syndications explained: A brief overview of real estate syndications, where a group of investors joins together to invest in larger assets they couldn’t afford individually, like apartment buildings or self-storage facilities.
  • Inflation protection with real estate: The hosts highlight the benefits of investing in real estate syndications, which can offer some protection against inflation due to long-term fixed-rate debt.
  • Quote: “Eventually every young person with hustle has to get to the point where the time is worth more than the money and they’re looking for passive investments.” – Clint Harris, explaining the need for truly passive income sources.
  • Syndication opportunities on the rise: Clint mentions the growing number of syndication opportunities in the current market, with more access to networking, deal identification, and market demands than ever before.
  • Limited partners in syndications: The concept of limited partners, who contribute capital to syndications and are passive investors, expecting returns from the project’s success.
  • The importance of calculated risk: The hosts emphasize the difference between taking on risk and taking calculated risks, especially when investing in businesses or syndications.
  • Quote: “The day you stop working is the day you stop getting paid.” – Clint Harris, highlighting the importance of creating passive income sources for long-term financial stability.

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Transcript
Neil Henderson:

Is passive income, a myth? The short answer is no, absolutely not. But the term "passive income" has been co-opted by an entire online industry, usually selling courses for producing passive income that an our estimation are anything, but passive. On this week's episode of the Truly Passive Income podcast. That's what we're going to talk about. But just before we do, I need to tell you to give you a little reminder that if you're interested in pursuing truly passive income, you can sign up for our passive investor course, absolutely free at trulypassiveincome.com/freecourse, now, let's discuss whether passive income is a myth.

Clint Harris:

Welcome to the Truly Passive Income Podcast. I'm Clint.

Neil Henderson:

And I'm Neil.

Clint Harris:

Let's go. All right, Neil, this is the the very first episode of the Truly Passive Income Podcast. We've had a lot of time and effort go into the preparation for this, and I think the first place that we should start is, why don't you tell me what is your definition of truly passive income?

Neil Henderson:

First of all, it's important to understand that the term passive income has been co-opted by a lot of people that are selling products online that claim to be passive income that are not. and it's not to knock those ideas, and we'll get into that. But for us, we're purists when it comes to passive income. And for me, truly passive income, is a financial reward you get from the labor of others. And all it requires is your capital, meaning your money. And your trust in the team that you're investing with. and we're gonna get into some really hard truths about passive income. If you were somebody who came here because you saw the title Passive Income, and you're like, oh, I wonder if they're gonna tell me about, the latest, Amazon drop shipping business, that's not what this is. And we're gonna really get into some hard truths about what all that is. But, what is it for you?

Clint Harris:

Yeah, I agree with you. I would start off with saying the biggest thing I think is what passive income is not. and for me, I had ideas and visions of grandeur at one point of I've got a short-term rental portfolio and different, mostly real estate investments that the idea was that they were going to be passive income for me, and over time you determine, through trial and error that a lot of those things really are not, like you said, we're gonna get into some of that, but at the end of the day, it forces you to get clarity on what that definition is for you. and for me, passive income or what, as we call it, truly passive income, is just that. It is income that you invest either your time, experience, or money, to put a system in place that is completely hands off it's mailbox money, or you wake up in the morning and that revenue is coming in one way or the other. Over time, it typically gets to the point where in order to become location independent or time independent, the amount of effort you have to put into that investment, just like you said, it boils down to usually. You put money into something, you're trusting in someone else's ability to run and operate either a business or an investment strategy, and you get a return on that. And in that situation, besides the initial effort of vetting the deal, it is truly passive.

Neil Henderson:

So some of the things that, we talk awful lot about, as we said, passive income term has been co-opted by an entire industry of people, teaching people how to generate "passive income." I'm gonna sit here and go down some of the ideas for what people sometimes consider to be passive income. Uh, and we're gonna talk a little about it. A drop shipping store on Amazon. creating a print on demand store, selling digital products, teaching online courses, becoming a blogger, selling handmade goods, running an affiliate marketing business, selling stock photos online, becoming an Instagram influencer, I love that one. buying rental properties, which you and I have both done, investing in the stock market, renting out your spare room, which you and I absolutely have done. renting out your car, lending money to peers, earn while shopping buying and selling websites, starting a YouTube channel, investing in REITs, stake cryptocurrencies, which I don't even know what that means, selling designs online, investing in businesses, which you and I have both done. Mm-hmm. renting out unused space, selling NFTs, creating a job board, creating no code apps, writing a digital guide it's endless, but ultimately what it comes down to. Is of those things that we just mentioned, Clint, what would you say are the ones that are only truly passive?

Clint Harris:

the funny thing is that they're often all advertised online as being passive and people usually trying to sell you something along the lines of what actually is. I would also go along to say that even though there's a handful of things on this list that are or can be truly passive investments, there's also situations where if you don't do it correctly, they're not, but typically looking at a long list that you just walked through, what we typically think of as passive investments are things like investing in the stock market, investing in REITs, which are real estate investment trusts, investing in businesses as a silent partner. Now, the returns that you get on those investments are gonna change based upon your level of risk, uh, and also how much you trust the person you're investing with if you're investing in a business and things like that. Those are situations where you can put money. Set a strategy, walk away get, you have a given timeline that you've determined ahead of time and you should get a return on that investment. Now, if it's something like the stock market, you have no control over that. It's gonna go up, it's gonna go down. And over time in the long run, the stock market is gonna have a 10% average over a hundred years. A business that you invest in with somebody else could go up, could go down. Things like Covid could affect it. There's a lot of different factors that go into that. You could have a partner that runs it into the ground, but at the end of the day, those investments do have potential to be truly passive investments, for you and I or other investors out there. For most of these on here, if it requires any amount of work, and any amount of time or dedication to a certain location, I would argue. And our firm belief is that that is not truly passive income.

Neil Henderson:

Absolutely. and it's, again, it's not to knock those ideas, I have friends, I have a friend who's making a killing, with a YouTube channel. But it is far from passive. It is an enormous amount of work. You and I both know people who are making money, doing short-term rentals. Short-term rentals are not in any way passive. What it comes down to is that, For it to be truly passive what it really requires is capital. And that's the hard truth is for it to be truly passive, you had to have already generated that money. If it's something that is still requiring your ongoing efforts in any capacity, to generate the money, then it's really just a side hustle. Now, it can be, an outsized income based on your level of input, but it still requires your input.

Clint Harris:

Sure. And there's nothing necessarily wrong with that because at this point in our careers, you and I both have passive income investments, but we also have had a lot of active income investments over the long run, and frankly, several of those for each of us started as side hustles. So there's nothing wrong with that and in fact, the list that we just read through is, where a lot of people do start. At some point in your investing career. And I mean the collective, we, we all are looking at what we're doing to generate income and we're trying to reach some level of, call it financial freedom. Now, personally, I think financial freedom by itself is a little shallow. We also need to try to reach a location and time independence as well. But any of these things that you're doing as a side hustle, even if it eclipses your normal day-to-day job and gets you out of the rat race, that's great. What you've really done is created another job for yourself and that's okay. But if you take one of those side hustles, the end goal should be to not continue to scale that unless it's something you love. But at some point, Take that money and that capital and invest it in what can be truly passive income, uh, investments so that you get to walk away. Because at some point you're gonna decide that you don't want to do that job anymore, or you don't want to get out and hustle or whatever it is. If you've taken money from those side hustles and things like that and invest it into things that are truly passive income investments, it gives you freedom of choice and freedom of purpose to decide what you want to do and how you wanna spend your time..

Neil Henderson:

I was actually gonna ask you to expand a little bit on that, about what you mean, sort of, and it gets down to sort of what, what's the big why? The whole idea of, of that freedom of time, place and purpose.

Clint Harris:

To speak to that, I kind of need to speak to my background a little bit, is that I've got a career in medical sales selling and implanting pacemakers and defibrillators for years. I knew I didn't wanna do that forever. and so as a side hustle, my wife is in real estate, we started short-term rentals. We originally started with a house hack. We had one property that paid for the property that we lived in and it was great. We continued to scale from there and got to a small portfolio of 14 Airbnb listings. And boy, you talk about the realization of. An investment strategy not being passive. It was wildly time consuming, even with the ability to streamline and automate and things like that. It got to the point that it was not passive at all. And that led to over time, with some partners building a property management company so that. It could be completely passive for us. So we walked away. We don't have anything at all to do with the management of those properties. The company manages those and about 75 others, and we have operating partners and employees that's specifically what they do is run that business. Because what I realized was that we had just generated another job for ourselves, and that's not the freedom that we wanted. Because, going through that process, I had to clearly define for myself what that freedom was that we were looking for. And this is what I came up with, is that financial independence on its own. in my opinion, is extremely attainable, especially given the way the world has changed in the last 10 to 20 years with social media and everybody having access to a phone and to networking and things like that. Financial independence by itself is a little shallow to me if you're tied in a certain location or have to spend a certain amount of your energy in front of a computer screen or operating a business or anything like that. So financial independence. to me, needs to come along with location independence and time independence, because those things together give you independence of purpose. Independence of purpose is where you go, where you want, when you want, and you do what you want. You spend your energy focusing on the things that are important to you, whether it's family or travel, or fishing or skiing or teaching or whatever it may be. Financial independence can't necessarily give you that freedom of purpose unless it comes with time and location independence as well. So for me, that's the definition. And freedom of purpose is something that people usually don't think about until they've hit a level of financial freedom. Oftentimes that comes from their investments. If their investments have not been truly passive investments and on some level they are active investments, then typically even by the point that they reach financial freedom, they have to stay where they. And continue to dedicate a certain amount of time to those investments to get the return that they want. And if they are trying to back out of those responsibilities, usually the return goes away with it. And the only way to fix that is to, at that point, it's hard to make a pivot and take an active investment portfolio and convert it to a passive portfolio. It's a lot of work versus trying to recognize that upfront, and take money from those businesses or employment or wherever your capital's coming from and invest it in truly passive income investments specifically, like white coat professionals or high earners and things like that, they get locked into these jobs. It's really important in order to have an exit strategy from that, the highest and best use of their time is to continue doing what they are doing, and continue to make that money. But the day that they stop working is the day that they stop getting paid. So the important thing is at some point, realize that in order to have success with any real estate investing strategy or business strategy, you have to have time, experience, and money. If those people have a lot of money because they're high earners, but they don't have time, and without time you can't get experience, you have to make a pivot at some point in identify other passive investment strategies that you can put your capital in and somebody else can take care of the time and experience.

Neil Henderson:

Absolutely. So a couple things you said there that, that really resonate with me is one is that time is our only non-renewable resource. You can never make more time. There are only, 24 hours in the day. And if you're somebody who's earning, a hundred dollars an hour, there's only so many hours you can work. At some point, you're going to either run out of time or your own energy in order to put in the hours to create the income. And so you always need to be searching for ways to put that money to work, that doesn't require your continued efforts. And that's really what it comes down to, and that's what we're talking about here. What are the truly passive income opportunities that are out there?

Clint Harris:

A lot of times the passive income strategies that are out there for us a lot of times tend to be more real estate centric. There's different opportunities out there, like we said, investing in businesses, but civically, businesses that you are owner in that you have nothing to do with the day-to-day business on. And I'm one of those business owners, but it took a tremendous amount of effort to get there. And for us, it was by necessity because we needed. To free up that time and that dependence on having to be locked in there. So it took us about 18 months to build a company that would do that for us. And frankly, it's not something I would recommend to anybody unless they're passive about what they're doing. We didn't want to unload our Airbnb properties that we had worked really hard to acquire. So in order to have them run the way that we wanted them to be run, we had to build a system around that. Building that system was very labor intensive, but it allowed us to back ourselves out. Now we give up some of the return by doing that, but at some point, In any investor's journey, the time becomes worth more than anything else. And there's kind of a lifecycle of a traditional investor, specifically like a real estate investor that you and I have talked about before. if you talk about someone that's young and is getting started, that's like a wholesaler. We've all driven around town and we've seen these signs, the "We Buy Ugly Houses." Well that's usually a young guy who's trading hustle for money. This is a young guy who goes out and he sends mailers, he gets on the radio, he's on Facebook marketplace. Hey, we will buy any house. we'll pay cash. We'll close quick, and he'll go find some rundown house that somebody in the family inherited and they're trying to unload, and he'll get it under contract for 70 grand. And then he turns around and he finds a buyer for 80 grand. And then he assigns in the contract and then they close on it. And at closing, one person pays 80, the seller gets 70 and he gets a check for $10,000 and it's great and life is good and he's 23 years old and he's, he's rocking, right? So he keeps on scaling from there. Well, he's trading hustle for money. What happens is that guy typically, As they have more and more success and start doing better and better, they start realizing that they're passing on a lot of good deals. They pass those off to house flippers a lot of times, and the house flipper is buying them and fixing 'em up and turning around and selling them, and then the wholesaler realizes, wow, I've got some good deals here. I could flip some of these myself. And so he does, he flips one or two of them, and then he realizes a lot of times, oh, well I could save 6% on selling it, if I get my real estate license, or whatever it may be. And there's a natural progression. But at some point, he makes the realization that as a wholesaler, or as a realtor or as a house flipper, that the day you stop working is the day you stop getting paid. Right? So if you stop wholesaling, Tomorrow you don't have another paycheck, and at some point they make the realization. Oh, I need to start building up some passive income. I'm gonna do that through investment properties. So they start keeping some of those properties as rental properties. Then they realize it's really, really hard to scale to any reasonable size with single family homes. Eventually that guy. 10, 20, 15, sometimes years down the line is gonna make a conversion to multi-family properties, eventually, a lot of times into apartment complexes. Eventually they are going to find things like syndication, self-storage, multi-family syndication, RV parks and things like that where you have the opportunity to put money in and it be a truly passive income because eventually every young person with hustle has to get to the point where the time is worth more than the money and they're looking for passive investments and that's, that's a fast forward of 20 years of what happens to a lot of those investors and on some level or another. It happens to all of us in our lives of when we get to the point of, um, look, I made a realization that the day I stopped working is the day I stopped getting paid. And so, you know, you usually, if you wait until it starts raining to build the Ark, it's a bad situation. And so that's the purpose of this podcast, is we want to dive in and really educate ourselves and, and our listeners on what that means and create a roadmap to where you can make that conversion and make that realization earlier in your own to help you, you change the outcome.

Neil Henderson:

Yeah. A lot of the truly passive income, strategies that are actually truly passive, that we believe are truly passive are things like savings, putting your money in a savings account, bonds, stocks. Mutual funds, money market account, REITs that we mentioned, business ownership as a silent partner and real estate syndications. Now for those of you who are not familiar with what a real estate syndication is and I hate to assume that people do cause most people don't, is a real estate syndication is a group investment when a group of investors join together to invest in a larger asset that they could not ordinarily invest in on their own, like a large apartment building, like a self storage facility, a mobile home park, and it's usually with the efforts of what is called a sponsor. Someone who, they're an expert in the field. They've got the time and the experience, and often they also have the money, sometimes they don't have the money and that's why they bring in the investors. They put the deal together, they bring in the investors as silent partners, and that's the way you invest it. And it's similar to owning a business, being a silent partner in a business, you are buying into a self-storage business, a apartment building business, a retail business, what have you the issue with so many passive investments is the returns are not great. I mean, if you've got your money in a savings account right now, you're not anywhere close to keeping up with inflation. Right now we're recording this in December of 2022. if you've got your money in the stock market, You're having a tough time keeping up with inflation.

Clint Harris:

The rate of inflation is almost 9%.

Neil Henderson:

So yeah, I mean, it's just absurd. Now, that's not gonna last forever. but one of the powers, one of the reasons that you're gonna hear us talk about real estate syndications a lot, is that, with real estate, you have some inflation protection in there because you're investing with long-term fixed rate debt and so a lot of times your expenses stay the same, but your income continues to rise. We'll go into more detail on this stuff, in a future episode but that's generally what we like to invest in. and it really comes down to how easy it is to invest in a savings account, is also going to be equal to how little your return is gonna be. As your risk profile goes up. So to, does your return on investment.

Clint Harris:

Sure. But even inside of that, it's, there's difference in risk versus calculated risk. A lot of the times, if you're investing in something like the stock market, you're investing in other people's ability to operate their business the way that it should be operated. Which doesn't always happen and you can lump it together with mutual funds and things like that and have some insulation, but also your personal timeline as to when you need access to those funds is gonna dictate how good of an investment that is for you. If you've got a three year, or five year, or a 10 year plan, like over the long run, that's a fairly safe place to put money. But depending on the maturation date for you and when you need access to that, it depends on if the market's up or the market's down, versus investing in a business, you're investing in something that to some degree you feel like you can control or you feel like you know the partners and you know, the business model. But there are always things that can happen up or down, like they can anywhere. a great example you bring up in syndication is if you, everybody here is driven around town or you, maybe you're driving through one right now and you're driving past a nice apartment building. Very rarely, if ever, are those owned by one person. It's a group of investors, usually accredited investors or people that are high income earners that have money, and they lump it together to take on projects bigger than what they could do on their own. And then for the sake of the person that knows how to operate, the developer for the sake of scale, usually fairly quickly outgrows the amount of capital that they have, and so they raise capital from a group of people for a dedicated return, over a fixed period of time, and that's something that you very much can control, and it's very different than the stock market in that you have dedicated dates of when it's gonna mature, things like that, and you get to pick the projects that you're investing in on. yeah, that's a, that's a great example. And specifically something that in the current market, We're seeing more and more of them we ever have in the last 10, 15, 20 years. This has been going on for forever across, countries around the world, but specifically the access that we have to networking, to identifying different demands, identifying different needs in the market and development opportunities. There's more syndication opportunity now than there ever has been specifically. With blurring the lines in different asset conversions and things like that. So that's something y'all are gonna hear us talking a lot about. it's a truly passive income strategy for people that go in as limited partners, which means they just put capital in and then, vet the deal and watch it come to fruition.

Neil Henderson:

Great. You and I could go on, on, on for like, you could sit here and listen to Clint and I talk about this stuff for a couple hours, but we want to be respectful of your time and keep these episodes to a reasonable length. so I think we'll wrap it up here and tell you that we'll go into some more detail about our backgrounds and things like that and the different investing strategies that we're currently involved in at a later episode. But for now, thanks for joining us. Thank you so much for listening to this episode of the truly passive income podcast. If you liked the show, if you think it would be useful for someone else that greatest compliment you could give us would be to share the episode with a friend and leave us an honest review wherever you listen to podcasts. If you have any questions, please don't hesitate to let us know on Twitter @trulypassive. And remember with truly passive income comes freedom of time, place and the freedom to pursue your higher purpose.