The Truth About Active Income vs
Ali Boone is a lifestyle entrepreneur, business consultant, and real estate investor, who has literally defined non conformity when it comes to her career. Ali left her corporate 9 to 5 job as an Aerospace Engineer despite the job status that came with it to follow her passion for being her own boss and truly designing her lifestyle. She did this through real estate investing. With this success, she went on to create her company Hipster Investments, which focuses on turnkey rental properties and offers hands on support for new investors and those going through the investing process.
Ali written roughly 190 articles for BiggerPockets and she’s been featured in FOX Business, The Motley Fool, and Personal Real Estate Investor magazine. She has over 300K views on her Rental Property Numbers video on YouTube, has sold over 200 copies of her Turnkey Rental Properties 101 eBook, and was awarded Top 100 Real Estate Investing Blogs Websites. Her articles teach successful rental property fundamentals, investor psychology, and strategies to help get new investors started.
She still owns her first turnkey rental properties and she is also a co owner and the landlord of a local property to her in Venice Beach.
In addition to running Hipster Investments and working as an active business consultant, she’s a pilot and teaches flying. She can often be found snowboarding, hiking, or volunteering in California prisons. Her ultimate goal is to one day challenge Tim Ferriss to a lifestyle design duel.
Ali has two master’s degrees: a master’s in Aerospace Engineering from Georgia Tech and a master’s in Spiritual Psychology from the University of Santa Monica. Her undergraduate degree is a bachelor’s in Aerospace from Middle Tennessee State University.
Oh yes, there is a difference. More than you know.
You may already know there is a difference and you may know generally what that difference is, but it’s likely you don’t truly grasp the implications of those differences. For the record, there is nothing wrong with either of them. But if you want to maximize your returns down the road, you do want to make sure you really do have a solid feel for how these two differ.
Definitions: Active vs. Passive Income
Using Investopedia, which should be in every investor’s browser favorites, the definitions of active income and passive income are as follows:
Active Income: Income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation.
Passive Income: Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.
Investopedia goes on to explain that passive income does not include earnings from “active business participation”. To go a less formal route on defining these two terms I’ll tell you my own interpretations of them:
Active income means you are doing something in order to receive that income. Some kind of work. Some kind of effort. You are not hands off. You have to exert some kind of energy and time towards earning that income. Passive income means you are earning regular income with little to no effort required to replica hermes crossbody bag
keep it coming. You are for the most part hands off.
Source of Income vs. Your Goals
Why does it matter which one you are earning if it’s all income?
Oh it matters. It matters because accomplishing your goals depends on understanding these terms very clearly. What is the most common reason investors give as to why they are getting into real estate investing or why they are already in it? Financial freedom. Those who want financial freedom very clearly define that goal as being able to use real estate as a vehicle to eventually break loose of their current career and not have to work for their income. Okay, cool, a goal! And an amazing goal at that. Okay, so financial freedom, let’s talk about that.
In theory, and keeping it at the highest most basic level, financial freedom means you have to do no work in order to receive income. So once you are financially free, you no longer have to worry about money. What does that look like to you? Maybe you are like me and plan to do a lot of traveling, take up new hobbies, take random college courses to learn new things (for fun, not because I have to), spend epic amounts of time snowboarding and playing in the woods, and as always, sleeping in. Or maybe you are the polar opposite and plan to wake up early and hang out on your couch all day and watch TV.
There is a term both of these plans fall under. It’s called “lifestyle design”. You get to design your life exactly the way you want it.
Isn’t that the point of financial freedom?
If you don’t care about lifestyle design, you can just stay at your current job, right? With financial freedom, you can do whatever you want. You can actually start forming lifestyle design before you are financially free too, just like I have. Even though I spend the majority of my time working on my company, I have positioned myself to be completely on my own schedule, I work whenever I want to for as much or as little time as I want, I sleep in most days, I live at the beach, I can stop working in the middle of the day to go have lunch with a friend, go to the gym, walk the dogs or, shoot, stop working completely for the day and do whatever I want instead! Hiking, snowboarding, surfing, margaritas, whatever.
I wanted these freedoms so I began pursuing a means to have those, which in my case ended up being starting my own company that I could work from anywhere and with no deadlines whatsoever (although the no deadline thing does make things hard sometimes). The income from that company is planned to continue buying more passive income investments so eventually I hit total financial freedom where I can keep living my current lifestyle minus the work part. All of this is called “lifestyle design.”
So let me recap the circle I just made here:
Investing leads to Financial Freedom leads to Lifestyle Design
Are you totally convinced that I have completely diverged from talking about active vs. passive income? I don’t blame you. I would have forgotten about those by now too. But let’s bring them back now. Ok, how do those relate to lifestyle design? Well, I’m assuming we have established that your personal lifestyle design does not involve working, correct? Do you remember which kind of income requires you to work for it? Active income. So then for complete lifestyle design, do you want to have to rely on any active income? No. You only want passive income because passive income doesn’t require much, if any, work on your part. Then you are free to travel or play or watch TV all you want.
Now you know you don’t want to deal with any active income, but what investing methods are considered active?
Active vs. Passive Investment Methods
A couple weeks ago I wrote an article that broke out the very broad categories of real estate investing that someone can get involved with. (See: Which Real Estate Investing Route Should You Go?). Of these categories, the split goes 50/50 for which ones produce active income and which produce passive income.
Active Income Investments: Flipping and wholesaling. You have to do work in order to see money from these. You have to be hands on. Note: I do still stand by my argument that wholesaling is not actually an investment at all, but for the sake of so many people thinking it is, I am including it. Another note: It is possible, if you are really slick and good, that you could be decently hands off for a flip. But that is long down the road of being an advanced flipper so for now, I’m leaving it here.