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How to calculate your passive income target

Learn about passive income, how to create it, and ways that you can calculate your passive income target for your long-term financial future

What’s passive income?

Passive income is a name given to an income source that creates money without actual hard work, time, or labour. Wealthy people have and continue to use this method to achieve financial independence.

Creating passive income

There are various methods for creating passive income. The popular one’s people use to generate it include:

  • Investing (i.e., shares, term deposits, peer to peer lending, etc.)

  • Renting out equipment and personal belongings

  • Brick and mortar types of businesses

  • Online ventures

The most common and (arguably) our favourite is real estate investment. Therefore, for most of this article, we’ll be referring to real estate investments when discussing passive income.

Becoming a smart property investor and creating passive income

When generating passive income, through real estate investments, it’s important consider the significant up-front commitment. Initially, properties are a costly investment, and they take up some of your time.

Additionally, you could be faced with maintenance and management commitments, along the way. That’s where a good property manager comes into place to alleviate this burden off you. Regardless, a good real estate investment can generate significant returns and passive income targets.

Properties with a high rental yield can produce great passive income
Properties with a high rental yield can produce great passive income

A smart property investor will invest in properties that work within their chosen strategy, depending on their long-term wealth creation goals. As an investor, if your goal is to generate passive income, you should invest in properties that come with a high rental yield. To understand how a rental yield is determined, check out this earlier article that we wrote.

Essentially, an investment with a good rental yield produces a return on investment. As a smart property investor, you should expect to produce a rental salary that pays for all expenses relating to the property (i.e., your mortgage, insurance, property management fees, etc) and still be able to leave you with left over funds (i.e., your passive income).

How to determine your passive income target?

Your finance goals

First and foremost, when working out your passive income target you need to determine your passive income goal. That is the figure pertaining to how much passive income you’d like to earn per month. Once that figure is determined, multiply it by 12 to determine your annual passive income salary.

Your passive income strategy

Next, you’ll need to determine the strategy that’ll allow you to achieve the passive income goal you desire. Whether it be shares, dividends, real estate investments, etc. It may be suitable to talk to a finance expert who can provide you with the most suitable guidance based on your existing financial circumstances.

Generating passive income

Once you’ve determined the most suitable passive income strategy(ies), you’ll need to put in some initial work to help you establish it. While passive income requires minimal work to produce returns, there will be some initial upfront effort. Though, once it’s fully operational, it’ll be a matter of regularly reviewing your returns and consulting with the right team of professionals to continue supporting you.

As you work towards achieving financial freedom, you should have several income streams generating you sustainable, long-term wealth. It’s important to think about passive income and how you can best utilise it. This will be beneficial for the day you no longer need to work and that it produces you the returns you require to live comfortably from.

For more information relating to your financial future

REIF are supporting Australians to build wealth for their financially independent future. Our team of property and finance specialists are helping people to create sophisticated finance structures and real estate investment strategies.

To learn more about how we could support you, feel free to reach out on the details below. Alternatively, you can download our free eBook ‘Building Wealth Through Property’ for more information.

Ph: 1300 130 932

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