You’ve read a lot on this blog about how to create passive income with little or no money, and I’ve suggested several ways to start the trickle of multiple streams of income into your pocket; but where is all of this headed? In our quest to create passive cashflow inexpensively, we’ve been forced to make certain tradeoffs for a lack of capital investment.

In the case of bulk candy vending, the tradeoff is labor and potential. Bulk candy requires at least a day or two’s hard labor a month to maintain the flow of money. Also, earning potential is limited by the number of locations you can find and maintain.

Monetizing creative online content is a great way to create an income stream with almost no upfront investment, but the tradeoff (once again) is time. It takes a tremendous amount of time to create the amount of content that will eventually produce a decent stream of passive income.

Network marketing is probably the easiest way to create wealth out of nothing because you can use regular expenses as your investment, so it’s no new money. The power of leverage can mean serious income for those who excel, but the tradeoff is: you still have to manage your income stream. If you pick the right company with a high retention rate, you can keep your management time to a minimum, but you can’t completely let it go like you can with real estate.

Real Estate

The foundation of any long-term generational wealth is real estate. Businesses and fortunes rise and fall, but smart investors stash their profits in real estate to preserve their wealth.

Done correctly, real estate investing offers a stream of cashflow with the least amount of maintenance and highest long term potential of any stream discussed on this blog.

The tradeoff is money. Real estate costs lots of money to get into. While there have been many books and seminars devoted to acquiring real estate with no money down, the deals tend to be risky and hard to find. I personally have acquired property with nothing down, but prefer a strategy of putting 10 – 20% down on properties to reduce the risk of leverage and increase cashflow.

Movin’ on Up!

My passive income philosophy is to acquire multiple streams of passive income inexpensively with the purpose of eventually rolling the profits into real estate. If you can build up to about $1000 a month in passive income from inexpensive sources, you can then roll $12,000 a year into real estate. This means that you could purchase one $120,000 house with 10% down per year.

Buying one piece of cashflowing rental property per year will make you a multi-millionaire within 10 or 15 years.

The Power of Real Estate

Explaining the entire topic of real estate investing would take volumes, but I’d like to highlight a few of my perspectives on why real estate is such a great investment.

Limited and Lasting Resource

If you paid attention in macro-economics 101, you know that the value of a resource is based on the factors of supply and demand. To get high prices, you need one of two things: low supply or high demand.

iPods, for example, make a lot of money because everyone wants one (high demand), so Apple can charge a premium. Gasoline prices are higher than ever because refining capacity is low (low supply) and oil is a limited resource (low supply).

Real estate is unique because the amount of land available on the earth will basically always remain the same. New York City is my favorite example because it’s an island. More and more people want to live in New York every year , but the expansion of the city is limited on all sides by the water.

Since they couldn’t expand outward, city developers expanded upward; and since that still didn’t provide enough supply for the demand, the price per square foot of real estate in Manhattan is astronomically high.

Demand in the real estate market as a whole will continue to increase as long as the economy expands, and history has shown that over the long run, our economy grows steadily. There may be markets within our economy (such as rural areas) that see real estate downturns, but smart investors will always be able to find good markets.

Tangible Asset

Real Estate is much more than a monetary asset like a stock certificate. You can touch, feel, breath, and experience a piece of land. Land can be a part of a family’s history and a part of who you are.

Like I said before, fortunes will be made and lost, your house might even burn down; but the land beneath it will almost certainly always be there.

Solid Stream of Income

A point of clarification: when I talk about passive income streams from real estate, I’m talking about a long-term buy and hold strategy, not flipping. I think there’s a time a place for making a quick buck on property, but over the long-run, your fortune will be made with solid streams of income.

Let me give you an example: Let’s say you buy one house worth $120,000 with a 10% down payment and a 15 year fixed rate mortgage. Let’s be pessimistic and say that when all expenses are said and done, including an allowance for vacancy, maintenance, and management fees; you just break even on the rent.

While this isn’t a very sexy situation to a flipper, watch what happens over the long run: Let’s say you are getting $1,200 a month in rent, which just covers your expenses, but you intend to raise the rent 3% per year. Here is what your monthly cashflow will look like for the next 15 years of that mortgage:

Year Rent Cashflow
1. $1,200 $0
2. $1,236 $36
3. $1,273 $73
4. $1,311 $111
5. $1,350 $150
6. $1,391 $191
7. $1,432 $232
8. $1,475 $275
9. $1,520 $320
10. $1,565 $365
11. $1,612 $412
12. $1,661 $461
13. $1,710 $510
14. $1,762 $562
15. $1,815 $615

$615 a month cashflow isn’t bad, but the best part comes in the 16th year! Since your mortgage will be paid off (by your tenant), you’ll have an instant jump in cashflow. If your mortgage was $800, cashflow in the 16th year would be $1,469!

Starting in your 16th year, you’ll have a steady, increasing stream of income of about $1,500 a month, or $18,000 a year; all from a $12,000 initial investment! It would only take a few deals like this for you to be set for life.

Patience

The secret to real estate is patience. You can’t get greedy or you’ll end up hurt. Wait for the right deal and make sure the numbers work.

By the numbers working, I mean rental income exceeds all expenses including an allowance for maintenance, vacancy, and management. You have to establish enough discipline to resist the temptation to veer from this path.

A lot of people are sour on the real estate market now that areas of the country are seeing a downturn, but rest assured that the deals are still out there. Look in the suburbs, or in another state. The midwest and south might present some good opportunities.

Get Started

If you are just getting started in real estate, I would highly recommend Weekend Millionaire’s Secrets to Investing in Real Estate by Mike Summey and Roger Dawson.