Imagine with me that your workday began with the usual routine, but halfway through your morning, you received the news that you’d been laid off.

For most Americans, that means zero income starting tomorrow morning. 

Now, let’s pretend that during your employment, you leveraged your money.

"The rich don’t work for money. They make their money work for them." – Robert Kiyosaki

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. 

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 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. 

Investing in Stocks vs. Real Estate

Historically, the stock market returns about 8% annually, which means $125,000 would produce roughly $10,000 per year. That’s only $833 per month. And that’s during a good year. We all know plenty of months go by when the stock market returns nothing.

Even during a good year, to replace an income of $3,000 per month, you’d need to invest $450,000 per year in the stock market, which would return $36,000 per year at 8%. 

However, with real estate, $125,000 could buy a $500,000 duplex rental home. How? By using leverage!

The bank brings $375,000 to the table.

You put in 25%, the bank puts in 75%, and you earn 100% of the profits.

A $500,000 duplex 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 Hunt For Deals Or Be a Landlord

The numbers look enticing, but hunting for cash-flowing properties and then becoming a landlord does not.

This is where, instead, you join a team to acquire and manage real estate investments. 

When investing $100,000 in real estate, it’s feasible to earn $8,000 per year (8%), similar to a good year in the stock market. 

However, more opportunities lie in the sale of the assets. Rental properties can be held for multiple years, and even through drops in the market cycles. If you were to hold a property for 5 years, you may also choose to have some improvements done. With even minor renovations and market appreciation, the value of the real estate typically rises. 

Upon the sale, you get back your initial $100,000 investment, plus any additional increase in value, say $60,000. This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return. These numbers are real and totally possible in any economic landscape. 

It all depends on the strength of your team and their expertise in local markets, asset acquisition, and asset management. The power is in the team.

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. At the very least, you will rapidly be building your wealth so that you can reach the scenario where you get to decide when and how you want to work.