January 05, 2019

"Passive income" is a lie. There is no such thing.

Caroline and I bought a rental building earlier this year. The place was a good deal numbers-wise, but definitely a fixer-upper: sunken sidewalks and busted electrical breakers, among others. We're barely above water spending 2% of value each year on maintenance; in the long term, the place's age, appliances, and a few big capital projects will probably push it closer to 4%/year. More than I expected, in any case.

As we prepare to buy one more place this year, I've been thinking about "passive income", and how one can earn money "without working". And how flawed that idea is.

The truth is, it's all just leveraged labor.

We've all got the same 24 hours in a day, 7 days in a week, 365 days in a year. 60-70 years to live, maybe 90 if we're lucky. Then it's all over.

Passive income is never truly passive. Rental buildings have to be managed. Sure, outsource the management; then, you can spend your days sourcing deals, evaluating opportunities, building financial models, setting up LLCs and corporations, yelling at insurance brokers, tracking market fundamentals, approving leases. Keeping the books and filing taxes.

And making sure your manager is doing a good job. "Passively".

Maybe your "passive income" is a business. Go ahead, sit on the beach; your hired CEO will run the place just fine, never ask for a raise, and work hard while you chill out. Your board will run itself, meeting infrequently, with little conflict. You'll never fight your siblings or spouse, who wish you'd take more money out so your kids can go to a better college. Your competitors will sit idly, watching from a distance as your firm enjoys monopoly profits, year after year.

Maybe your jam is securities; long-term investment in stocks, or bonds. Your eggs are in a basket, but are you watching the basket? Do you know which direction interest rates will move?

Are your investments keeping up with inflation? Are you structuring things propertly so you don't get eaten alive in taxes?

Are your bonds yielding more than zero? I hope you aren't in Europe.

The key idea is leverage, not passive income.

We're all just monkeys running around with tools. Leverage comes from tools.

"Passive" or "active" income, credentials, degrees, employee, owner, your time or other peoples', which social media/blogging/influencer platform you use, venture-funded, your money or others'.


Just figure out the best tool, and get really, really good at using it.

← Previous

Next →