//Passive vs Active Real Estate Income

Passive vs Active Real Estate Income

By |2017-09-22T09:21:34+00:00September 22nd, 2017|Categories: Real Estate Investing|Comments Off on Passive vs Active Real Estate Income

When it comes to real estate investing, there are two types of income you can make: Passive and active income.

Passive income typically comes from rents and interest on loans aka: Money that is earned from “not doing work”

Active income can come from: property management fees, consulting fees, sales commissions, wholesale fees, profits on flipping real estate (as a dealer), option consideration and other sources where you have to “Do work” to get the money.

To get wealthy in real estate, typically you need to have a mix of passive and active income.

Some people say “I just want passive income” but that isn’t really realistic unless you have millions of dollars sitting in the bank and the ability to borrow millions more on day one.

The formula that so many people have followed to build wealth in real estate is: Start with active income, convert your earnings into passive income.

In the words of monopoly, the famous board game: Buy 4 green houses, trade in for 1 red hotel.

Active income turns into cash which can be converted into passive income and passive income also yields cash. This is a virtuous cycle that creates wealth and you need both to be truly successful over time.

If you are using a corporation in Canada, active income is taxed at 11% for the first $450,000 of profit and passive income is typically taxed at around 29% (check these rates with your accountant)

The government gives businesses tax breaks to 1) provide housing and 2) Create jobs. The government doesn’t want to be responsible for housing and jobs so they give business owners incentives to take over those responsibilities.

Active income is taxed much lower because you are actively creating value in the economy whereas passive income is taxed much higher because there is no active value being created.

If you have more than 5 employees in your real estate company however, you can make the case that your passive income tax rate should be much lower because you are actively employing people.

When it comes to taxes and tax rates always week professional advice from a professional accountant.

Respect The Grind,
Stefan Aarnio