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The Rich Have Multiple Sources of Investment Income… But You Should Start with One

Published by ezLandlordForms on

Millionaires don’t earn that title from only investing in stocks, or just from working and setting aside money in a savings account.  Most of America’s wealthy did not inherit their riches either.  Rather, most millionaires have their income eggs in many baskets… but they didn’t start out that way.  

The majority of Americans have one source of income: their job.  Some have a stock portfolio, which adds a second source.  Rental properties are a third source, for landlords.  Profit from real estate flipping or other businesses is a nice fourth source.  But we’re straying too far ahead.  Before anyone tries to have seven income streams, they should first master one new way of making money.

Become an Expert in One Niche Before Tackling More

Multitasking is murder on productivity.  There are countless studies on the subject; read some if you’re skeptical.  To breed success, choose one field to focus on first.

Focusing on one area will help you become an expert in that field, rather than a dabbler with a surface understanding.  For example, you might choose one niche for real estate investing, such as income properties in college towns, or vacation rental properties in tourist areas.  As you gain experience and expertise in that one area, you’ll find yourself better able to reliably make money in that field.  You'll eventually be able to do it full-time and support youself without a 9-5 job.

But something else happens too.  You’ll begin to be exposed to related skills, people and ideas that you had never encountered before.  New opportunities will present themselves, new doors will open.  In the course of buying and renovating rental properties in that college town, you may find deals perfect for flipping rather than holding.  Or as a regular at local real estate auctions, you may meet the perfect partner for a note investing business.  Or you may be asked to speak at a local real estate investing club, and make useful industry connections afterward.

A critical first step though was becoming an expert in one field that interested you.  Imagine if you started by trying to flip a house, buy a college rental and go into the note buying business all at once?  You would lose your shirt in all three.

Find a niche and become an expert.  Expand from within that niche, and meet as many people in related niches as possible.  Look for new areas of expertise to add.  And with each area of expertise, you will find opportunities to add income streams.

Wealthy Income Sources Graph
The wealthy's income is more evenly distributed between compensation,
investment returns and business revenues.
Courtesy of CNBC

Diversity Breeds Opportunity

As you diversify beyond your initial niche, you’ll be exposed to successful people who think differently about money than the 9-5 crowd does.  You’ll meet people in different industries, who are doing work you had never heard of before.  Each new connection means new opportunities, new ideas, new potential sources of income for you. 

And as you develop new income streams, each new venture will mean less risk, since you already have revenue coming in from other sources.  So what if the vacation rental business wasn’t for you?  Perhaps your time there introduced you to someone looking for a partner for historic building restoration projects.  Or maybe you gleaned an idea for how to improve another aspect of your business.

Each rental property is a separate income stream.  Profits from your business (whether you sell widgets or flip houses) are an income stream.  Dividends from a stock portfolio are an income stream.  As you begin to add income streams, look for tax advantages that can help protect your income.  For instance, your stock portfolio may be best held in a Roth IRA combined with a traditional 401(k).  Or perhaps the profits from a flip should be 1031 exchanged into a new investment, and taxes deferred.

Not All Income Streams Are Created Equal

Diversity can be an advantage in any portfolio, but only to the extent that the complexity is worth the extra administrative work and costs.  For example, is it better to own ten rental properties free and clear, with $1,000/month cash flow apiece, or a hundred properties mortgaged to the hilt, with $100/month cash flow apiece?  (Hint: the accounting alone for a hundred rental properties is nightmarish.)

Likewise, if your real estate flipping business takes up 50% of your work time every week but only produces 10% of your income, perhaps your time is better spent elsewhere.  Notable exception: when you are first learning a new field.

Having multiple income streams is not the goal in itself, it is merely a means to an end: financial security and stability.  The moment one income stream begins to cost more in time or administration than it is worth, it becomes a liability rather than an asset. 

Before running out and trying to stick your fingers in as many pots as possible, start small. Become an expert on one niche.  After you’ve mastered one niche, you’ll be ready when more opportunities knock.

Related Reading:

Who Is “Wealthy”? The 5-Step Ladder Between Middle Class and Wealthy

Want to Join the Top 20%? Invest in Retirement Accounts & Rental Properties

The 25X Rule for Retiring Early (…and How Rental Properties Change the Math)

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