Imagine with me, your workday began with the usual routine, but halfway through your morning, you received the news you’d been laid off. For most Americans, that means zero income starting tomorrow morning. Losing your job is probably one of the most stressful and emotional events you could ever go through.
As we’ve recently seen in March of 2020, the Coronavirus pandemic sent shock waves through the global economy. Hundreds of thousands of businesses were shut down to prevent the spread of the virus. Within a week, over 3.3 million people filed for unemployment in the U.S.
I was laid off early in my career. I had just returned from a month-long trip traveling in Thailand and China with my boyfriend. We spent the month scuba diving and trekking through the jungles of Thailand, hiking the Big Wall of China, and enticing and teasing our taste buds with dumplings and “pe KING” duck in Hong Kong. I was stress-free, relaxed, and floating from the wonderful memories… then I got the news. How could they let me go? I was shocked and my ego was hurt.
Fortunately, I was young when this happened. I knew I would survive. Growing up, I had watched and learned from my father, who worked as a blue-collar welder for over 30 years. He saved every hard-earned dollar to support our family of 7. When I lost my job, I was financially prepared. I had saved enough reserves to last over 6 months, and my expenses were very minimal.
Now, let’s pretend during your employment, you leveraged your money.
“The rich don’t work for money. They make their money work for them” – Robert Kiyosaki, author of Rich Dad Poor Dad
Three Types of Income
Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn Residual or Passive income (or both!).
Active Income
Active income is from your employer and requires activity in exchange for money. When you stop, the income stops. Would you be prepared if you got sick and/or lost your job and couldn’t work anymore?
Residual Income
Residual income means you receive money after the work is done. For example, every book an author sells provides residual income.
Passive Income
Passive income is earned with very little effort and continues flowing even when you aren’t working. Real estate investments in a syndication, which are essentially group investments, are one of the most stable sources of passive income.
Remember the job loss scenario? Let’s pretend you’d built passive income on the side, during employment. Since being laid off, your earnings decreased by your monthly salary amount, but you still have income. Financial freedom is achieved when your earned passive income supersedes your active income.
Looking back, I’m glad I experienced a job loss early in my career. It motivated me to find a passive stream of income as soon as I found a stable job. I eventually found a position working for an international non-profit.
The CEO of the non-profit used to joke, “We were keeping up with the Nguyens”. I was in my 20’s when I began my path towards financial freedom. I saved and quickly built my reserves back up. Within a few years, I bought my first home in a wonderful beach town. It was a 3 bedroom townhouse in a desirable community. I learned how to become a landlord by “house hacking” or renting out the two available rooms.
Real estate investing isn’t a get rich quick scheme. It’s a stable, steady journey towards financial freedom by creating streams of passive income.
Investing in Stocks vs. Real Estate
Historically, the stock market returns about 8% annually, which means $100,000 would produce roughly $8,000 per year. That’s only $667 per month. To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000. However, with real estate, $100,000 could buy a $400,000 rental home.
How does this work?
The bank brings $300,000 to the table. You put in 25%, the bank puts in 75%, and you earn 100% of the profits. A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month.
Theoretically, 2 investments of this size could replace a $3,000 monthly income. The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year.
But I Don’t Want to Be a Landlord
The numbers look enticing, but being a landlord isn’t always fun. Imagine earning passive income without having to deal with tenant issues, leaky toilets, or house repairs. Real estate syndications are an incredible way to scale quickly and create wealth. This is where, instead, you join a real estate syndication where a group of investors pool money together to acquire a larger piece of real estate. Through a syndication, you’re able to leverage and buy commercial property that you typically wouldn’t be able to buy on your own.
You save time and money. Imagine how many years it would take to find, finance, and purchase 100 single-family homes? Think about all the roofs and toilets you would need to repair…no thanks. You spend the same amount of time to find, finance, and purchase one single-family home as you do with finding, financing, and purchasing one large apartment complex with 100 doors or more. The economies of scale, allow you to spread the expenses among the number of units in the property and hire a property manager to manage the entire complex.
When investing $100,000 in a real estate syndication, it’s feasible to earn $8,000 per year (8%), similar to the stock market. However, the real opportunity lies in the sale of the asset. Syndications typically hold the property for about 5 years. During this time, building improvements are made and the land market value generally rises. Upon the sale, you could receive $160,000 ($60,000 in profit plus your initial capital back). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return.
If, while employed, you’re able to create passive income, you’ll be less stressed when facing a layoff. You may even find yourself celebrating unemployment.