Passive income is often touted as the holy grail of financial freedom. The idea of earning money with little effort is alluring, but what actually qualifies as true passive income? Residual income is what most people refer to as “passive” income, but true passive income, on the other hand, solely requires the investor to contribute capital while the active work is done by others. Neil Henderson and Clint Harris, hosts of the Truly Passive Income podcast, break down the real definitions of passive vs. residual income and explain how real estate syndications offer a path to true passive income.

Not All “Passive” Income Lives Up to the Name

In the episode “Distinguishing Between Truly Passive Income and Residual Earnings”, Neil and Clint explain that many so-called “passive” income streams actually require significant upfront effort and continued labor to maintain. While they may appear passive to an outside observer, they do not align with Neil and Clint’s strict definition of passive income.

As Neil explains, “There is a whole industry that’s developed around pitching ‘passive income,’ and I think for our purposes it’s very important to make a clear distinction between what we believe are the two types of income when it comes to that.”

So what are those two types of income? Here is how Neil and Clint define them:

  • Passive income is the financial reward you get from the labor of others when all you need to do is invest your capital and trust the team to do the work. Think investing in businesses through stocks, mutual funds, REITS, or Real Estate Syndications.
  • Residual income is the financial reward you get from your own past labor on a product or service that continues to generate income long after the bulk of the work ends. Think Affiliate Marketing, Amazon Drop-Shipping, and owning and operating Short-term rentals.

Residual income is what most people refer to as “passive” income. However, as Neil and Clint point out, there is usually significant labor required upfront to create residual income streams. The income only appears passive because of the hard work that happened in the past.

Examples of residual income include creating an online course, selling digital products, or building a business with systems and employees to run it. All require substantial time and effort to set up initially.

True passive income, on the other hand, solely requires the investor to contribute capital while the active work is done by others.

The Challenge of Earning Enough Income

For many people, the roadblock to generating passive income is not having enough capital to invest in the first place. As Neil points out, “If you aren’t a hyper fugal person and you live in a median cost of living place, I think your target income should be $240,000 a year” in order to properly save, live well, and invest for retirement.”

Unfortunately, pensions are disappearing and being replaced by self-directed retirement accounts like 401Ks and IRAs. This means the average person can no longer rely on a lifetime job with a company to fully fund their retirement. They have to save and invest on their own.

So what can you do if you are not yet earning $240k per year? Here are the options Neil and Clint suggest:

  • Increase your skills to earn a higher income
  • Drastically cut expenses to increase savings rate
  • Explore creative strategies like house hacking to lower housing costs
  • Develop side income streams, that are NOT passive with clear goals for investing the proceeds into passive investments

Ultimately, the goal should be to accumulate enough capital that you can begin investing in truly passive opportunities like real estate syndications.

For high-income earners already making over $250k per year, Neil and Clint advise against starting side businesses unless it aligns seamlessly with your current work. The hourly rate from your main income source is likely far higher than what you could earn from a side gig. Continue excelling in your career, save aggressively, and invest the surplus in truly passive investments.

Real Estate Syndications Offer True Passive Income

For those focused on pursuing true passive income, Neil and Clint are adamant that real estate syndications are one of the best options available today.

In a real estate syndication, a group of passive investors provides the capital for an experienced sponsor to purchase a large commercial or residential property. The sponsor takes responsibility for overseeing the business plan, property management, and all day-to-day operations. The investors simply contribute funds and receive equity and predictable passive cash flow in return.

Neil explains that real estate syndications represent investing your money with an experienced management team. That team is using their time and experience to run the business and generate a return for their investors. This aligns perfectly with the definition of true passive income.

Clint adds, “You have a small group of people that invest in something big that’s been around forever. The difference is the opportunity that we have to access that because of the way the world has changed.” Online networking platforms now enable sponsors to connect with accredited passive investors more easily than ever before.

For anyone seeking true passive income, real estate syndications offer an optimal blend of potentially high returns and completely hands-off involvement.

Start Your Passive Income Journey Today

If you are eager to learn more about generating passive income through real estate syndications, be sure to download the Truly Passive Income Passive Investor Toolkit for free.

You can also listen to the full “Income Definitions” episode to hear Neil and Clint’s insights on passive income vs. residual income and how to strategically increase your earnings.

The path to true passive income requires dedication and a clear plan. But with the right roadmap, you can minimize active work and maximize returns. Real estate syndications provide an exciting hands-off opportunity. All you need to do is invest and let the money work for you.