Living off passive income is the holy grail of investing.
Enjoying a life where we can do whatever we want, whenever we want while the cash register effortlessly rings in the background is just insanely appealing.
The problem is most people don’t know how to actually get there.
And if they do understand the basics, they realize that, while true passive income does exist, it doesn’t pay all that much.
You’d need a massive pile of money to invest to achieve the desired result.
This is where most folks just give up, resign to grinding out their active income (a W2 job they hate), and delaying retirement for far too long.
I refused to do that. And so should you.
I’ve been building my passive income since 2019. And I’m now looking ahead at the next 5+ years and planning to make it even more passive.
So how am I doing it? What’s my plan?
That’s exactly what I’m going to share with you.
Not All Passive Income Is Created Equally
But first, let’s talk about some important things when it comes to these income designations.
When we’re looking at passive income vs active income most of us can distinguish the difference.
But a lot of folks will sneer at calling real estate investing a passive income source.
They’re missing the point.
Real estate investing is not passive. I’ll never make that argument.
But it is far more passive than a W2 job.
And that’s what we’re ultimately driving at. Remember, we’re not trying to flip a switch and go from active income to a life of totally passive income.
It’s a progression, and it’s going to take time.
The best we can do is start moving along the passive income spectrum so we can gradually retire away from purely active income sources.
And the argument can get far more nuanced within passive income segments. For example, within real estate investing there are plenty of strategies that have widely differing effort levels.
Short term rentals are far more active than long-term rentals. Investing in syndicates is much more passive than buying your own investments.
But we’re more concerned with these four buckets: W2 Income; Real Estate Investing; Online Income; Dividend Investing.
These are the key drivers I look at when analyzing my own path and journey. So let’s look at each in detail.
W2 Income Will Be Your Passive Income Engine
When it comes to passive income vs active income there is nothing more active than your W2 job. And it should be your top priority… at least at first.
That may seem counterintuitive but you simply aren’t going to make much progress with a low-paying W2 job.
Strive to maximize your income here while continuing to live below your means. Then you can start creating a pile of money that you can use for phase II.
I was personally terrible at this step. I’m simply not the type of person that makes a good W2 employee.
My first two years out of college I played poker for a living.
Then I got a job as a trader at a hedge fund in Chicago. I lasted about 1.5 years there before deciding to attempt to strike out on my own and trade for a living.
That didn’t work out as I’d hoped, so I bounced around a couple more W2’s for a few years before starting my own company. It did well for a while, but ultimately failed.
However, when it was going well I managed to create a little pile of money and started my real estate investing journey.
Real Estate Is Your Passive Income Foundation
When it comes to comparing passive income vs active income we all know real estate investing is not actually passive. But if you’re investing in long-term rentals for cash flow, it’s a huge step in the right direction.
And when it comes to passive income streams, rental properties offer much higher returns than alternatives. Unlevered returns in cash flowing markets like Detroit are still offering 10-12% cash-on-cash returns.
That’s phenomenal!
And if you’re savvy or work with a team that is, you can do exponentially better by working through BRRRR deals.
Shameless plug: This is exactly what I help people do with our turnkey real estate company.
In 2019 I began aggressively building my Detroit rental portfolio. It now produces a bit more than $16,000/mo in gross rents but I’m no longer building as aggressively as before.
I’ve shifted gears into a more “opportunistic” buyer. I’ll pick up maybe 1-2 deals per year if they make a lot of sense.
I’m also building a large ADU at my primary residence that will get my family financial freedom.
I still love real estate, but the less I need to rely on my active income because of it, the more it feels like a lot of effort.
Funny how that works, right?
And I recognize that the day may be soon approaching where I completely kiss my active W2 income goodbye and the real estate REALLY starts feeling like a lot of work.
Online Income Offers Flexibility & Scale
As I look toward that future I’m increasingly starting to toy with the idea of, and experiment with, potential online income streams.
I struggled a bit with how to depict online income on my passive income vs active income chart in terms of activity level versus earning potential. This is what I came up with:
Depending on how you approach your online income strategy, it could be more or less active than a W2 job.
For example, if your online income plan is to offer consulting services, you’re still selling your time for money. I’ve considered this, but I’m not completely sold that it’s the right move for me.
It feels like a step backward.
That said, you can probably make much more per hour offering consulting than you can at your W2. Perhaps you focus on offering consulting before you start investing in real estate.
But when I think of online income I’m generally considering things like digital products and courses, or affiliate partnership. These types of online income allow you to create once, maintain every 6 – 12 months, and make sales in your sleep.
That’s pretty darn passive!
But you also need to build an audience to be successful. This is the active element. And if you’re able to do this, it definitely scales and can be more lucrative than a W2 job.
Done successfully, and your online income could be quite passive but earn you far more than active income sources. Someone I really look up to that’s crushing it with this is Justin Welsh.
I’m still learning a lot in this space but it’s largely about providing value consistently over time.
Eventually, I realize I may get tired of this as well. Perhaps I decide in 10 – 15 years I just want to travel the world and enjoy life.
If/when that time comes I want to be able to live it up without having to worry about where my next paycheck is coming from or dealing with rental properties, writing a weekly newsletter, etc.
That’s where dividend investing comes into play as the ultimate passive income source.
Dividend Investing Returns Are Lower But Super Passive
Unfortunately, dividend stocks don’t provide massive returns.
True dividend growth stocks might pay less than a 0.5% annual dividend. Some are obviously much higher.
But it’s best to find a balance, and that usually falls in the 3-4% range.
That’s a far cry from the returns I can do with real estate, and you can see why this is our last stage. It takes a lot more money to earn the same amount of passive income.
The appeal here though is that it can be literally passive.
You don’t even have to pick the stocks.
Just throw your money in a strong dividend focused ETF like $SCHD and let the managers do the work for the low fee of 0.06%.
It’s hard to compete with that kind of passive investing.
But again, at a yield of 3.13% you’re going to need about $3,200,000 invested to earn $100,000 annually.
That’s a big mountain to climb for a lot of folks, and if you’re like me, you may very well be shooting for significantly more than $100,000/year in income.
That’s why it’s important to gradually build your passive income through things that offer higher returns before just shoveling money into dividend stocks.
Today, I’ve slowly started a modest dividend portfolio.
Last year I managed to invest ~$30,000 into a handful of dividend stocks, and I’m hoping to double that by the end of 2024.
I imagine over the coming years I will start accelerating that a bit. But the more I think about my goals and priorities, I’m not in a massive rush to go all in on dividends yet.
Every Passive Income Path Is Different
You’ve probably realized by now that I am currently working on all four phases of the passive income path. But I’m also in an extremely fortunate position where my W2 income is insanely intertwined with real estate investing.
Most people don’t have that luxury.
It’s a lot of work to do all of these at once. I’m not suggesting you tackle them in unison. But I highly recommend starting the next phase well before you feel like you have to.
You don’t want to get to the point where you hate your job and NEED to take big risks in real estate.
Start when you’re still enjoying your work and use that W2 income to fuel the real estate. Then, as the real estate income grows you can start looking at ways to build online income streams.
The important thing is to stay ahead of your burnout. Today, I absolutely love investing in real estate and helping others do the same.
But that could easily change.
I don’t want to regret not thinking about the next phase sooner. It’s much easier if I can start setting it up now so that I can easily transition if/when needed.