It’s safe to say that, given a choice, most people would prefer passive income above active income. Chris Hogan of the Dave Ramsey Network states, “Passive income is money you earn in a way that requires little to no daily effort to maintain. Some passive income ideas — like renting out property or building a blog — may take some work to get up and running, but they could eventually earn you money while you sleep.”
Active income, on the other hand, according to Investopedia.com, “refers to income received from performing a service and includes wages, tips, salaries, commissions, and income from businesses in which there is material participation.” In other words, you need to be actively engaged in a task that produces income. The moment you stop the activity, the income stops.
Passive income is the goal of any serious investor. If you can manage to build a large enough passive-income base, you can effectively quit pursuing active income and begin spending more time on your passions, whether they be charitable activities, travel, hobbies and more.
I think it’s safe to say that most people are so consumed with keeping active income coming in that they never pursue any effective means of producing a passive income stream. I find this particularly true of Realtors — the number of agents who manage to leverage their profession into a significant passive income successfully is minimal. It is ironic because Realtors have direct access to one of the most effective wealth-generating mechanisms on the planet.
Although the idea of making money while you sleep is enticing, it’s not quite as simple as it sounds. To begin with, most income labeled “passive” is not truly that. In other words, you cannot set it and forget it. For example, owning a significant rental property portfolio is often billed as passive income.
There are a couple of misnomers here. First, it takes a considerable amount of work to build a sizable portfolio of properties with a significant positive cash flow. Second, and speaking from experience, it takes ongoing work to stay on top of the portfolio, keep the properties maintained, follow up on collections, manage tenant churn and more.
Even if professional property managers manage all your properties, interaction is still required to keep things on track. Additional engagement is necessary to manage the portfolio itself: locating new assets, managing depreciation, selling existing properties as necessary, etc. It may take less work than your standard 9-to-5, but a smart investor will stay actively engaged. The same holds true for a stock portfolio.
Truthfully, most income streams labeled “passive” are not in the strictest sense. If you are looking for truly set-it-and-forget-it income, there are two additional categories that need to be understood.
The first is “leveraged income,” defined as an activity you do once that produces ongoing income. Examples would be creating a YouTube video, writing a book, producing a song, developing an app, etc. Even then, you need to have an audience willing to pay for your content and, over time, as tastes and markets change, your audience will most likely dwindle.
The final category is “scalable income.” It simply means you take the leveraged income activity that produced income the first time, and you do it again. And again. Instead of writing one book, you write more. Produce more videos. Write a recurring blog. As your content scales up, so does your income.
With this in mind, I believe that Realtors who genuinely understand the road to building a successful business have a significant advantage when it comes to establishing passive income. Additionally, if managed correctly, it can end up as scalable income.
I am talking about your database.
There is a good reason many agents refer to their database as their data-bank. In my team’s business year over year, over 50 percent of our transactions come directly out of our database.
I frequently hear of agents and teams with much higher percentages. Again, this has an ironic twist: A significant number of Realtors across the country have little or no database and no effective plan for managing a database if they had one.
Properly built and effectively managed, a database is almost identical to a rental property portfolio. If a rental portfolio can be categorized as passive income, then your database can as well.
The similarities between the two entities are significant. Like a substantial rental portfolio, it takes time to build an effective database. Once built and managed effectively, it can be the backbone of your income stream. Like rentals, your database can provide a steady cash flow with minimal effort.
It does not mean, however, that you can ignore it. Like rental properties, it will need ongoing maintenance and intervention. It will require you to make new additions regularly as you remove existing members for various reasons. However, it will be that component of your business that will provide the highest return for the least amount of effort.
Here are my recommendations for building a database that will provide you with “passive” income:
1. Find a good CRM and commit to using it
CRM stands for customer relationship management, and it’s a tool designed to help you stay in touch with and effectively communicate with your past, present and future clients. There are plenty of options out there, ranging from basic programs for individuals to multilevel systems designed for large teams.
Most brokerages provide their agents with an in-house CRM or, if you prefer, you can establish a relationship with entry-level CRM companies such as LionDesk, Wise Agent or Follow Up Boss. Like any tool, a CRM will not do you any good unless you use it. You don’t need to spend a lot of time trying to find the perfect CRM — although they each have slightly different features, they all perform the same fundamental tasks. The adage is, “The only CRM that doesn’t work is the one you don’t use.”
2. Input contacts, not leads
We all get leads. It might only be a name, phone number, email address or physical address — but it is not a contact. In our organization, a valid contact is someone we have met, conversed with, and have obtained their name, physical address, phone number, and email. We need all this info because we want to communicate with them in as many ways as possible.
3. Enter contacts weekly
This point assumes that you are doing the types of activities that bring you face to face with clients. Although we cannot currently hold open houses in many parts of the country, there are still plenty of ways to find prospective clients. It should not be unreasonable to add five new contacts to your database every week.
4. Establish a multiple touch program
We endeavor to contact each person in our database a minimum of 36 times a year. This is assuming we have been granted permission by them to do so. These touches include a monthly newsletter, emails, texts, quarterly calls, video, client events, social media and more. If you are using a CRM, many of the touches can be automated, especially if you add in content programs such as Outbound Engine.
You might be saying, “This doesn’t sound very passive to me,” and on the one hand, you would be right. On the other hand, however, if you do this right, the amount of actual time spent will be minimal, and, of all the tasks you perform in your everyday real estate business, this is the one that is the most automated and most similar to passive income.
If you compare the effort you will be putting into your database to managing an extensive real estate portfolio, the similarities are striking, and most people have no problem categorizing real estate rental income as passive income.
If you have read the book The One Thing, you will know it is critical to focus first on those things that will reap the highest benefits — your database should be at the top of your list. Although it might seem like a lot of work, keep in mind that you want to stay front-of-mind with your clients. Here is the rub: if you don’t, someone else will.
The final thought here is this: Once you have built a sizeable database and implemented an effective management strategy, you then have an asset very similar to a rental portfolio. If you sell your business, your database is the only asset you have that is worth anything. Therefore, once your database is fully functioning, it transitions from passive income to leveraged income: It is something you have built over a fixed period that now produces a steady income stream.
If you want to move to the next level and develop it into scalable income, keep adding to it weekly. Your income will continue to scale upward in direct proportion to the number of contacts you add to your database and effectively manage.
Our team understands a fundamental fact: If over 50 percent of our business comes from our database, then the easiest way to grow our business is to keep adding contacts.
Like the idea of earning income while you sleep? My challenge to you is simple: Do not look at your database as a chore — look at it as passive income that can be nurtured into leveraged income and from there into scalable income. Don’t currently have a database? Silly you.
Carl Medford is the CEO of The Medford Team.
