The Myth of Passive Income

I’m coming to you on location from the 17th annual investor summit at sea. This annual event is like no other. Every night, I’m seated with a new group of investors at my dinner table. One of the frequent questions that I ask people at my table is “What are your goals?”

The typical story goes something like this.

They have a full-time job. They like what I do, but I’m ready to change careers in favour of something with passive income. So They’ve started buying a few rental properties. They haven’t figured out how to scale up beyond a few properties. Each of the properties are a lot more work than they anticipated. They don’t have the investment capital to buy a larger multi-family project by themselves.  

In talking with a number of people at length over an extended period of time I’ve noticed a few trends. I can broadly put the investors on board the summit at sea into four major categories. 

1. there are the beginner to intermediate investors who are still working as employees in their day job and moonlighting with a small rental portfolio, trying to figure out how to transition from their current life to one where passive income has replaced their employment income.
2. There are investors who have decided to become the full-time operator of the business. They have traded their day jobs for the role of a small business owner. They have recognize that owning a portfolio of properties is not a passive endeavor. It takes a lot of work. They have reached the limits of scalability not only based on capital but based on time. They’re still on the hamster wheel, running faster than ever before with a larger number of the small projects.
3. Number three there are full-time investors and developers who have decided to focus on larger projects. He’s larger projects or afford the possibility of hiring dedicated full-time staff in all of the critical roles that are necessary to operate the business on a daily basis. The focus of time and energy goes into managing the project but not the day-to-day operations. The time and energy is put into growth of the portfolio. Once the projects are complete and they are on auto pilot the dedicated staff manage the daily operations with little to no intervention from the business owner. If at some point in the future I decide to take my foot off the gas and either slow down or stop growing the portfolio, it will be a flow of residual and passive income. My role as the business owner focuses on making sure the right people are in the right roles. I’m focused on building the organization. This is not that different from a senior role in corporate America.
4. The fourth and final group have figured out that managing all these projects is a ton of work. We have decided to focus their time and energy on selecting a handful of high-quality operators who they trust the building management portfolio. And that you to invest passively in private syndications. These are the same types of projects and investments that large family offices of the wealthy and ultra wealthy invest in.