Passive Income is a lie

As a child I remember watching superstar athletes like Wayne Gretzky glide so effortlessly on the ice and dreaming about how easy life would be to be blessed with innate talent.  “Talent would make my life so easy,” so I thought.  I had no clue how much work had to be invested to make talent look seamless.  A little later in life, I remember hearing the quip coined by Thomas Edison that [sic] “genius is 1% inspiration and 99% perspiration”.  I naively assumed that talent combined with a bit of elbow grease would really go far in life.  Only after two decades, some gray hairs, and a lot of mental and physical pain during my medical training did I better understand what Thomas Edison meant (maybe).  Success is even more difficult if you lack the talent to begin with!

Success undoubtedly requires sacrifice.  Professional swimmers dedicate years of training and a controlled caloric consumption without lapse.  There is indeed an incredible amount of work behind the scenes to obtain the intended result.  The audience only sees the end result, and makes whatever judgment they perceive.
Everyone wants to be lucky.  That is why lotteries exist.  Luck gives you a story to tell your friends.  And this is why it’s important to remind oneself that free lunches are few and far in between.  The same goes for free money.  

Even this guy had to find the water to cool down.

Passive should be in quotes

Passive income sounds sexy.  It connotes income hitting your bank account without any effort.  By having passive income, we can focus our most precious resource, time, to what is important to us.  Examples of passive income include:

  • Owning a swimming pool maintenance company with managers handling a full staff of employees.  Income just gets deposited into your bank account automatically.
  • Owning multiple rental units with property managers handling all of the tenants and daily operations.  Even the rent checks are deposited electronically.  
  • Participating in several syndicated investment ventures in commercial real estate.  Dividends are paid out quarterly, and facilities are refinanced every five years resulting in big payouts to investors.

All of these scenarios are real and result in passive income, but it is important to realize that there was undoubtedly unmeasured amounts of effort and time into developing these income streams.  

The swimming pool maintenance company owner inherited his business from his father, who took roughly three decades to establish the income generating behemoth that it is today.  This is probably the closest that one could get to being passive income.  Even then, the founder of the swimming pool company had to put in the work initially.

The point about passive income is that it only becomes a passive endeavor once the income stream has been established and stabilized.  Even then, chance can still intervene for or against you—you can have deadbeat tenants, find that the land on your property is spewing out toxins, or hit the jackpot when a tycoon decides to offer you ten times the amount your property is worth.  And the biggest unknown is the amount of work that you have to put into developing a reliable passive income stream.

It could be months or likely years of toiling around before true success can be quantified.  If you decide to embark on finding a true passive income stream, you have to be prepared to put in the work.

Buying a rental property is not passive

Let’s suppose you decide to purchase a four-unit apartment complex for $500,000.  Assume that all of the legwork in hunting for the unit to purchase has already been done, and you make a down-payment of $100,000.  After mortgage interest and operational costs, you profit a handsome $15,000 per year.  That is a pretax cash-on-cash return of 15% ($15.000 on a $100,000 investment).  Not bad right?  

Mathematically, this sounds like a winner, although the amount of background work invested into this cash-flow property is far from passive.  Most successful investors in these venues clearly have a strong interest learning the in’s and out’s of the business or a strong desire for money.  You should have both.  For this endeavor to financially supplant your primary job as a physician, you’d better own another dozen of these units.  Obviously the process becomes easier with practice, but the upfront work can be substantial.

Doctors shouldn’t quit their day (and night) jobs
For busy professionals, this homework has to be done on your free time.  I would venture to argue that all successful passive income ventures require a pre-existing stable primary income source. This income source could be from a spouse or even a hefty emergency fund, but it has to exist.

If you are a fresh attending in your first five years of medical practice with limited savings or family money and three mouths at home to feed, it is unlikely that you will be spending your free time side hustling ventures that risk your family’s financial safety.  This is especially true if your primary physician job is unstable, or if you are still learning the ropes of your profession.  The residents or medical students who have the courage to leverage their time and money for passive income pursuits probably shouldn’t have entered the medical profession to begin with.  Their primary profession is medicine, and it ought to be mastered before pursuing another passion.  

You might also like: Doctors need to understand their worth 

It’s okay to not like medicine or desire a way out.  It’s also important to remember that medicine still provides a stable career path.  You don’t have to find creative money making endeavors just because the doctor in the physician’s lounge says that it worked for her.

Do you agree with the points of developing passive income?

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8 thoughts on “Passive Income is a lie

  1. Something to think about. How much joy do you get practicing medicine. Passive income doesn’t have to be just passive income. How much joy do you get looking at properties to buy, fix up, rent out, etc. as opposed to practicing medicine. Passive income can give you enjoyment too.

    1. Absolutely. The term just happens to be the closest approximation to what it actually is. The work gets put in up front, and hopefully over time can provide you with a cash cow that keeps on giving. Sometimes it can be more enjoyable to plumb a toilet than to revascularize a vessel!

  2. I agree with the author that there is no such thing as a truely passive income, work and effort has to be placed somewhere in the process, but I found the author to have quite a fixed mindset. Art of medicine is changed but I love what I do so I enjoy the effort I put in and the same will be true of other ventures of income I pursue. I would evaluate the process it takes and if it ignites my passion, that will be my venture. You have to love the process.

    1. Thanks for stopping by!

      Someone once said that if you loved what you do, you’ll never have to work a day in your life. As with anything we pursue in life, it is important to enjoy the process. If that passion is labor intensive, however, we still have to exchange our time.

  3. Quitting your day job, however, might make it easier to convince the IRS that you are a real estate professional, or that you engage in the business a majority of the time. That’s when the real benefits of business ownership come into play, with your passive income getting offset with losses or depreciation. It is a very large leap to convince the IRS that a full time physician engages in anything beyond their day job. Real estate is still a good investment, but the additional work of rental properties is, in my opinion, not worth it because it will never be considered your primary source of income unless you quit.

    1. Agreed. Those who dive into real estate full-time, obviously, enjoy it much more than their prior job. The tougher step is to build real estate income to a sufficient level to supplant income from the other job.

      Thanks for stopping by!

  4. would also venture to say that if anything, this small virus problem has demonstrated to us all that maybe our job security and stability isn’t as stable and secure as we once thought. …but neither is investing. nice viewpoint.

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