Today I’d like to talk about Recurring Income versus Passive Income and why I believe there is a difference. In fact, I believe their is a HUGE difference in your choice of words in that when it comes to real estate investing whichever phrase you choose will have a bearing on what you can expect from your real estate portfolio.
Recurring Income
Investopedia describes Recurring Income as:
Recurring revenue is the portion of a company’s revenue that is highly likely to continue in the future. Recurring revenue is revenue that is predictable, stable and can be counted on in the future with a high degree of certainty.
When you go on to read the rest of the page you’ll get the message that essentially, Investopedia believes that recurring income is/can be largely subscription based. I would like to offer the argument that rental leases are, in fact, subscriptions for a period of time.
Think about that and we’ll double back to that in a moment.
Passive Income
Investopedia describes Passive Income as:
Passive income is earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved. As with active income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS). Portfolio income is considered passive income by some analysts, so dividends and interest would therefore be considered passive.
Look closely at the term IRS. Passive income is actually a classification of the Internal Revenue Service. And therefore, I argue, more a term of the IRS than a reality.
Have you ever owned a rental property? How passive can it really be? Aren’t you actively involved in some form or fashion? If you do own one or two or more income properties you know that they are anything but passive. If you are not managing the day-to-day operations of the homes or apartments then you are paying someone like a property manager to manage the units. And then you are managing the manager.
As many of my readers know, I also own Ad Astra Realty, Inc., a property management firm in Kansas City and we work with real estate investors from around the globe with anywhere from one to seventy-six rental units. And while yes, we do a great deal of the work so that owners don’t have to we still have to communicate with them at the level they choose, we still have to send them the docs that they need for their tax man and they still have to check in on us from time to time to make sure we are doing our job.
Therefore, I argue, owning rental property is not like writing a a song in the 1960’s and still receiving royalties in 2019. Only a few of us can be Paul McCartney. (Yes, I am aware that he sold his royalties, then bought them and for all I know sold them again.)
Mindset
So let me conclude this discussion by pointing out the reason I wrote this post… owning rental property is great for your economic future and yet it is not truly passive. Income properties will take mind-share and future investment and management. Income properties DO take yearly subscriptions (leases) to generate a predictable flow of income, i.e. recurring income, and a certain amount of involvement in some form or fashion (direct or through a property manager) to maintain the value of the investment.
And I think how you look at this matters. This is why I argue every real estate agent in America should own rental property.
- First, it helps you to secure a recurring income to balance out the highs and lows of real estate sales.
- Secondly, if puts you in a place of active knowledge so that you can better advise your clients.
- Third, it puts you in touch with the other half of the country that rent rather than own real estate.
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