Active VS Passive Income: What’s the Difference?

People often refer to the money you make from real estate investing as passive income. And it is…sort of. In order to understand how, you first have to understand the difference between active income and passive income. Here’s the way I see it.

Active income is what comes from performing a task in exchange for money. So this could include your salary, any commission you might make, tips, etc.  If you have a traditional job you’re more than likely earning active income.

Passive income is different in that you are earning money from something that you have little day-to-day involvement in. This could be investment income, residual payments from a previous job, royalties you earn on something you created and so on.

An easy way to look at it is if you have to call in sick you’re probably making active income. If you can take some time off with no one noticing, it’s likely passive income. I’m being a bit flip, obviously, but put it this way – I’ve never once called in sick to one of my rental properties!

The term “passive income” is a little bit misleading when it comes to real estate investing because – especially with rental properties – there is quite a bit of work required to start earning that income. With rental properties, you have to purchase the property, get it ready for renters, do some regular maintenance, manage the tenants, and so on. However, once it’s rented the money will keep landing in your bank account whether you spend time actively working on the property or whether you take time off.

With passive income, you keep collecting money after the work is done, or at least with very little maintenance after the fact. Income you receive from investing (no matter what type of investing it is) is usually considered passive income.

More Types of Passive Income

As far as I’m concerned, investing in properties is the best way to make money in real estate. But buying a property is not the only way to earn some passive income. If you love real estate but aren’t prepared to make a large investment consider another way to make passive income from real estate.

Start a real estate blog. A blog can be started in just a few minutes, and depending on your site and design, can be done for less than $100. Allow people to leave comments on your posts and get some conversations going. It’s a great way to share your passion with others and hopefully learn along the way. By including ads and affiliate links on your site you can begin to earn some revenue.

Set up a Youtube channel. Tons of people have had success in creating their own videos and posting them to Youtube. And the beauty is that your videos can be about almost anything, so you can keep it simple and speak directly to the camera, interview real estate experts, do house tours, whatever. You can enable ads that, if clicked, will make you money. And if you can manage to find an audience and get a lot of subscribers even more advertising opportunities will come your way.

Rent out a parking space or garage. If you have extra space somewhere go ahead and rent it out. If you’re in a city where parking is difficult, renting out a parking space can bring in a lot of extra cash. As can renting out a garage for storage. In a city like Toronto a downtown parking space can generate over $30,000 a year. It’s all about location location location.

Invest in a REIT. A REIT (Real Estate Investment Trust) is like a traditional mutual fund that pools investor capital for the purpose of investing in a portfolio of assets managed by professionals. A REIT invests in income-producing real estate so that you can invest in office buildings, apartments and commercial real estate without the same time commitments as traditional real estate investing.

These are only a few examples of many. If you can think of more please leave a comment below. I’d love to hear them!

Passive Income and Income Tax

Just because your income is passive it doesn’t mean you’re exempt from paying income tax. However, depending on where you live and how much you make the rules can vary. I highly recommend working a professional accountant into your business strategy and budget so that you know you’ve got all your bases covered. The last thing you want is an unexpected tax bill eating into your profits at the end of the year.

When it comes to making passive income it’s important to remember that it doesn’t come quickly or easily. When I first started investing in income properties there wasn’t anything passive about it. I worked hard every day.  But while I was doing all that work I was setting up a system that would go on to generate income for decades. I still have most of the properties I purchased in my first few years as an investor, and in the almost 20 years that have passed, the mortgages have been paid, the values have gone up, and I’ve made millions of dollars.  Not bad for a few years’ work, right?