We have recently talked about how we have to work so we can earn a living and keep a certain standard of living. It does not have to be like that. You can have your money work for you. Is that possible at all?
Yes, it is possible – let’s say your monthly passive income from renting an apartment is higher than your overheads, then you will be able to maintain a certain standard of life. You will reach a state of “financial freedom”. You will be able to continue your job at the office, bank, court, or wherever you are working at, or you will be able to run your own business, but you won’t have to do it just to maintain your current lifestyle for you and your family. Your investments will be bringing you monthly income.
Sources of passive income
The key to understanding the concept of financial freedom is to understand the term “passive cash flow”. It’s cash flow that is deposited to your bank account every month regardless of your professional activity, meaning it does not depend on whether you are currently working or not, whether you are in Poland or abroad, or whether you are working full time or not. It is a regular income that comes from a different source from your professional job or the business that your own. The king of pop, Michael Jackson, is a good example. After his death the income from the sales of his records and royalties from radio stations playing his songs, plus income from the use of his image or biography are higher than when he was alive (and it’s harder to be more passive than when you are deceased). That’s because when alive he built his assets – his image and his hits – which became his source of passive income, even after his premature death.
You can enjoy several sources of passive income. Besides the above mentioned royalties from songs, the passive income can also accrue from any patents to technological inventions. The inventor of the CD as a carrier of music can enjoy his passive income every time a CD is made. The owners of brands such as Virgin or Orange are receiving income from proceeds from the sales of products that are associated with their branding. Great idea. However, there is one question: how to create such an instant hit, invention or a brand. That is not that easy. To invent a new variety of a decorative rose, for instance, you need at least 12 years of hard work on cross-pollinating existing pollens and in the end you still cannot be sure that your invention will be a success. In addition, market tastes change. Today’s hit can quickly become passé and no radio station will play it, leaving the author or the performer without income. New technologies could displace existing inventions.
Another type of passive income can be investment banking. Let’s say that you have inherited several dozens of millions of zloty or that you have won the lotto and you deposit your money into your investment banking. Every month the bank charges you interest on the deposit. The snag is that the chance of winning the lotto is 1 in 13 millions. Similarly you have a small chance to inherit a fortune. Besides, the central bank can also lower the interest rates and your passive income may shrink.
Another source of passive income can be your retirement. After working for a certain number of years and reaching a retirement age you will receive your pension benefits until the end of your days. It sounds good, however most of the retirees in Poland don’t feel much “financial freedom”, because the monthly pension is insufficient and hardly allows for decent lifestyle. An additional problem with the pension system, invented in the nineteenth century by German Chancellor Otto von Bismarck, is that it is not suited for modern times. We live longer than retirees of 100 or 150 years ago. Probably only naive optimists expect that the government will provide them with a decent life after retirement, as they wait patiently through the next several decades.
The most reliable is real estate
The most accessible and most common source of passive income which can lead you to financial freedom is renting real estate. There are many investment sources which will bring profits when you sell them on, such as land, bonds, stockmarket shares, investment funds, gold or other precious metals such as copper or investing in foreign currency. Investments like that won’t generate steady, monthly cash flow, and you need the cash to pay your monthly bills.
The portfolio of properties for rent can generate passive cash flow. Month to month, for many years, apart from your professional activity. Studio apartments, houses or commercial spaces can be the foundation to your financial freedom. The money you invest into buying a property will continue to work for you until the end of your days or even longer.
About the advantages of investing in real estate for rent, as to what type they may be and barriers that must be overcome in order to begin the process of investing in real estate for rent – I will write in the next issue of Pangea.