When you hear the word “income,” you likely picture money received in exchange for your time and services — typically in the form of a paycheck. This is considered active income. But there’s an entirely different type of income that, when used successfully, helps investors build significant wealth and time freedom. 

Here’s a look at the importance of passive income, and how to start incorporating passive income investments into your portfolio.

Why Is Passive Income Important?

Passive income is also referred to as “unearned income” by the IRS because it’s income you do not need to work for in order to earn. Many investors like to say it’s money you “earn in your sleep,” since you are not actively involved.

Passive income generated from investments helps your earned money stretch even further.

Relying only on active income is limiting, especially for those with significant financial goals. There are only so many hours in the day for someone to work, and the market dictates how much others will pay in exchange for your time, goods, or services. Though you may be a high earner, your active earning potential is still limited.

For this reason, passive income is the “secret weapon” you can use to build wealth. It does not present limits, as active income does since it doesn’t rely on an exchange of your time for money.

Educate Yourself

We never recommend putting your money into something you don’t fully understand. 

A general rule of thumb to follow is this: If you can’t explain it to your grandparents, a coworker, or a teenager, you either shouldn’t be investing in it or you need to do more research. 

A great example is Bitcoin and cryptocurrency. Many people are intrigued and want in on the “future of currency,” yet how many investors understand what blockchain is? Maybe you have some discretionary funds (or “fun money”) that you don’t mind putting toward something like this (and potentially losing). But if you’re looking to invest hard-earned money as a way to achieve your long-term financial goals, it’s likely going to be better to invest in something you understand and feel comfortable with.

Know Who You’ll Be Working With

There are many moving parts to building a passive income portfolio, and you’ll likely want to seek out the assistance of several knowledgeable professionals. 

Some examples include:

• Sponsor: This refers to the firm (such as Belrose) that is actually offering the investment opportunity.

• Attorney: You’ll likely want to review any contracts or subscriptions with your general counsel before signing.

• CPA or accountant: Tax laws change often, and your tax professional will help you manage your tax strategy.

While these are the most common professionals to work with, the list doesn’t end there. You may need to work with insurance providers, estate attorneys, financial planners, IRA custodians, and others to address all aspects of your financial life and passive income investments.

Research Opportunities

Not all investment opportunities are created equal. Doing your research on the benefits and considerations of each can help you decide which avenues may best align with your needs.

Even in the world of commercial real estate, the options vary greatly. Multifamily properties (like an apartment complex) can be lucrative investments, but they’re subject to high overhead costs and strict tenant laws. On the other hand, self-storage facilities have comparatively low overhead costs and aren’t subject to housing regulations, though they may have more tenant turnover.

When researching opportunities, whether in the commercial real estate space or elsewhere, you may find it helpful to consider the three primary objectives of investing:

Security: This refers to the level of risk associated with the investment. Is it possible your investment could lose all value overnight, as is possible with cryptocurrency or tech startups? Or is it a hard asset with intrinsic value, like real estate?

Income: How much passive income will the investment produce? Most traditional investment vehicles don’t generate regular income, but some alternative investments like self-storage can.

Growth: Some investments, like bonds, offer security but generate very little growth. If you have aggressive wealth-building goals, you’ll likely want an investment that has the potential to produce optimal returns (like self-storage facilities).

Clarify Your Objectives

Beyond just building wealth, determine why you’re interested in creating a passive income portfolio. Identifying your “why” is the first step in creating an investment philosophy and strategy.

Consider what it is you’re hoping to gain, as well as what sort of opportunities would not align with your objectives. It’s natural to pull from your values and use the three core investment objectives we mentioned above (security, income, and growth). 

For example, if security is one of your biggest priorities, investing in a brand-new SaaS (software as a service) startup may not meet your needs. Should the company take a turn for the worse, there are often no tangible assets with value to help recoup your investment.

Setting objectives allows you to establish a framework for distinguishing between good opportunities and what you may choose to pass on. Without those clear priorities and objectives, this can be extremely difficult to do.

Take the First Step in Building Your Passive Income Portfolio

When trying to build significant wealth, the key is to work smarter, not harder. That’s where passive income comes into play.

At Belrose, we present self-storage opportunities to investors who are interested in using alternative investments to achieve their goals of security, income, and growth. Join our investor portal now to access premium content and learn more about upcoming investment opportunities.