February 5, 2018

Ages ago, people lived in elaborate and magnificent castles that were often protected by moats.  A moat is a wide, deep ditch dug around a castle to prevent enemies from overtaking the castle.  By surrounding the castle with water, moats served as an effective deterrent and provided the castle with the security it needed to prosper.

Today, many of us live in our own plain and simple financial castles that are much more vulnerable than the castles of yesterday.  Not only do our financial castles not have any sort of moat for financial security, many real estate investors do not know how to build a moat to accumulate wealth and retain it.

Why do most people today not have a financial moat?  Why no financial security?  Why are most people so financially vulnerable?  We live in a culture that has brainwashed us into thinking that we should be paid per hour of work.

If you are like most people, you have to work for a living.  If you don’t work, you don’t get paid.  You see, most people have “linear” income.   So while linear income may be the way most people earn their paychecks, it is also the reason many of us cannot afford to retire.  This type of income continues only as long as you continue to work.

  1. If you are an attorney, you get paid whenever you represent a client. If you don’t provide legal services, you don’t get paid.
  2. If you are a teacher, you get paid when you teach our children. If you decide not to teach, you don’t get paid.
  3. If you wholesale or retail houses, you get paid when you flip a house to another investor or sell it to an owner occupant.   If you quit wholesaling or retailing houses, you don’t get paid.

The real test is that if you are let go by your employer, as I was in June 2002, your income definitely stops.  After almost 20 years of working safely for different companies, I was left out in the cold in the middle of summer.  I discovered I was not secure; I only had the illusion of security.  Working for a company is fine, but you must understand it will never give you security.

That’s how linear income works.  You receive income when you work.  Usually, you earn just enough income to pay your bills.  When your income stops, you’re on the brink of disaster.  In fact, if you’re like most folks, you’re no more than two or three paydays away from a serious financial catastrophe.

OK, so how do we start to build the moat that will provide us with financial security?

You start digging a ditch around your financial castle with “residual’ or “passive” income.  A complete change happens when you start earning passive income.  Passive income means you continue to earn money for a long time whether you work or not.  When you do something right just one time, you get paid over and over again for what you did.

  1. If you write a hit song, you get a royalty every time the song plays on the radio.
  2. If you write a book that becomes a best seller, you receive a regular royalty check from your book sales.
  3. If you’re already a multi-millionaire and had a few million to invest in quality stocks and bonds, you now get a regular dividend check.

Passive income sounds nice, doesn’t it?  Unfortunately, most people have trouble creating and maintaining passive income.

Why?

Well, if you can’t sing or write music or know the first thing about writing a book, much less how to go about having it published then no passive income.  And I really can’t remember the last time someone came up to me and told me they had a few million dollars sitting in their checking account waiting to be invested.

However, there is hope.

There is another way to develop passive income.  There’s a way to get monthly checks so that we can do the things we want in life.  So that we can achieve our dreams.  And best of all, almost anyone can develop this residual income that will give you the financial moat you need to accumulate and retain your wealth.

So I launched a strategy that would create steady streams of passive income.  The approach is to buy properties at substantial discounts, rehab the properties, and then rent them out.   And the best part is that the tenants pay for my properties.  Once the properties are paid for, I can continue to have rental income for the rest of my life.

But what about tenants and toilets, you ask.  Well, everything has a price and you’ll likely have occasional problems with your tenants.  But you have options.  You can (a) develop a system to minimize your problems with tenants, (b) retain a property management company to deal with the tenants or, (c) offer seller financing to your tenants so they become owners and they no longer call you.

Personally, I like the buy and hold strategy for three principal reasons.  First, I continue to accumulate assets or rental properties.  Second, I will continue to receive residual income for the rest of my life whether I continue to rent the properties or elect to use a seller financing approach so I deal with a buyer/owner and not a tenant. And third, as the properties increase in value and the mortgages are paid down, I can leverage the equity to buy more properties.

The more properties you accumulate, the more passive income you will receive.  And the more passive income you get, the wider and deeper your financial moat will grow to provide security for you and your family’s future.  The wider and deeper your financial moat, the more difficult it will be for circumstances to penetrate your financial castle.  You will have the security you need to truly prosper.

Author Bio: Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter, and podcast for seniors and retirees, that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti for 11 years as missionaries serving orphaned, abandoned and at-risk children.

If you liked this article, subscribe to Rentometer's email newsletter to stay up-to-date on the latest trends in rental housing.