No matter how you slice it, investing your money is one of the best ways to grow your wealth and secure your future. But there’s more than one way to get there! This piece will be breaking down some key differences between passive and active investing so you can choose the right path for your goals.
What is passive investing?
A passive investment is a path that requires minimal (if any) input from the investor. I like to refer to this as “mailbox money” – as in, check the mail once a month and there it is!
The first example is a dividend-paying stock. Every quarter, just by owning the stock, you’re going to get a dividend deposited in your account or a check in the mail.
Another example is cash-flowing real estate. Let’s say you own a condo, triplex, sixplex, and so on. After you receive all of the rent, if you have cash flow left over
after paying your expenses, that’s mailbox money!
Some people argue that’s not a true passive investment because you might have to deal with maintenance or complaints from tenants. That might be true – but if you have a management company in place, you no longer have to deal with day-to-day operations, which very much makes it a passive investment.
What is active investing?
An active investment is something that you are very much involved in.
Doing a BRRR strategy, for example, would be very active. This can entail negotiating with tenants, hiring contractors, overseeing construction, re-renting the units,
negotiating with banks, and so on.
Flipping a home is the same thing – very active. You go in, you source the deal, you strip the property, you renovate it entirely, then you put it back on market.
Owning a business or being employed are considered active income because they require you to be there every day (or weekly, monthly, etc.) in order for you to get paid.
Between the two, passive income offers certain benefits that most people associate with being “financially free.”
These types of investments will allow you to be on the beach with your family, or vacationing wherever you like, and still have income coming in. In order to be able to retire at some point and maintain your quality of life, you need passive investment income to get you there.
So, the big takeaway here is: if you want to retire earlier, if you want to maintain the same quality of life and not have to worry about living off a fixed amount of savings, you need to make sure you have passive investment vehicles. If you’re looking to be more hands-on and potentially make real estate into a career, you might consider active investments too!
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