Active Income – Definition, Overview & FAQ

What is active income?

Definition: Active income refers to earnings derived from active work or services provided. It includes salaries, wages, commissions, and fees that you earn directly from your involvement or participation in business activities. For example, real estate can come from several activities where the individual is directly involved in achieving the money. 

How to better understand active income in real estate?

In real estate active income involves earning money through direct, hands-on involvement in property-related activities. Real estate professionals can generate income by engaging in roles such as agents/brokers, and they earn commissions from buying and selling properties. Also, property management offers opportunities, requiring involvement in tenant management, maintenance, and operations. In addition, buying properties to renovate or sell for a profit, requires substantial involvement and expertise. Active income in this field is distinct from passive income, and requires continuous, active participation to maintain and grow earnings, reflecting the dynamic and labor-intensive nature of the real estate industry.

Activities directly tied to earning potential

1. Real Estate Sales: Income earned through commissions by agents/brokers for buying or selling properties on behalf of clients.
2. Property Management: Fees earned for managing properties on behalf of owners, which can include tasks like finding tenants, collecting rent, handling maintenance and repairs, and dealing with tenant issues.
3. Flipping Houses: Buying properties and renovating them, to sell at a higher price. The profit made from these transactions counts as active income because it requires involvement and effort to improve and sell.
4. Development: Engaging in property development, such as constructing new buildings or renovating existing ones for resale or leasing. This includes managing construction projects, securing permits, and overseeing the sales process.

Difference between active and passive income

Active Income in Real Estate:

• Real Estate Agent/Broker: Earnings from commissions when buying or selling properties on behalf of clients. This job requires active participation in marketing properties, negotiating deals, and managing transactions.
• Property Flipping: Purchasing properties, renovating them, and selling them for a profit. This demands significant hands-on involvement in terms of project management, budgeting, and execution.
• Property Management: Actively managing properties for owners, including finding and dealing with tenants, handling maintenance, and solving any issues that arise – generates income through management fees.

Passive Income in Real Estate:

• Rental Properties: Owning property and earning income through rent. 
• Real Estate Investment Trusts: Investing in this concept allows individuals to earn dividends from real estate investments without needing to directly manage properties or business operations.
• Land Leasing: Leasing land to others, such as farmers, businesses, or solar companies. The landowner earns regular income from the lease payments with very little required involvement.

What are the opportunities in the UK?

1. Urban areas: Big cities like London, Manchester, and Birmingham have a high demand for rental properties due to their population density and economic/business opportunities. 
2. Legal Nuances in Property Flipping: The UK has specific legal considerations that impact property flipping, such as stamp duty land tax which can significantly affect the profitability of buying and selling properties quickly. 
3. Holiday Let Boom: With the rise of the “staycation” trend in the UK, especially post-Brexit and during the COVID-19 pandemic, there’s been a significant increase in demand for holiday lets. 
4. Green Housing initiatives: With increasing awareness of environmental issues, there is a growing market for properties with green ability. 

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