Although the Internal Revenue Service (IRS) defines 25 different categories of income, ranging from wages to dividends to social security benefits, this article will focus on the high level categories of earned income and passive income.
Earned Income can be defined as…
“Money derived from paid work.”
What Is Earned Income?
- You work for someone who pays you
- Or you own/run a business.This occurs when you utilize your time, expertise and effort to create value in the world so you get compensated for your efforts.
Some activities that generate earned income include:
- Working a job
- Owning a small business
- Any other activity that pays based on time/effort spent
While earned income is the most straightforward way for making money especially as we grow our careers in our working years, the drawback is that if you stop working (by your choice, downsized or illness), you stop making money.
What Is Passive Income?
Passive income can be defined as “income received on a regular basis, with little effort required to maintain it.” It is closely related to the concept of “unearned income”. This occurs when your money is doing the ‘working’ rather than you personally. Investing in assets that create income or creating assets that generate income are pathways to passive income.
Some activities that generate passive income include:
- Interest income backed by real estate.
- Rental Income
- Business Income (not earned based on amount of time/effort spent)
- Creating and Selling Intellectual Property — Books, Patents.
Legacy Capital creates passive income for our investors as well as the principals (since we use our own capital to invest in deals also) by using investments to fund real estate deals in which experienced real estate rehabbers pay us interest income.
This income is secured by real estate assets via a mortgage and the promissory note explains the monthly payment amount. Using debt instruments creates passive cash flow on a monthly basis.
Looking to add more passive income to your portfolio?
Learn more about how private lending works and connect with us to discuss ways you can work with Legacy Capital to put your capital to play in a passive way.
Or simply give us a call today at (215) 600-3419!