Passive Income Update For Financial Freedom 2016

In early 2012, I made it a goal to try and achieve $200,000 a year in passive income by 2H 2015. The idea was to somehow make a large enough sum of money to comfortably provide for a family of three or four in Honolulu or San Francisco. With $200,000 a year, I wouldn’t have to go back to work ever again. Instead, I’d rest easy working on building Financial Samurai into a lifestyle business.

Creating a lifestyle business has always been a dream of mine because it helps mix entrepreneurial passion with the ultimate end goal: living a better life. Killing myself for the next 10 years to try to make something huge in order to live a nice life sounds a little backwards. Why not live a nice life now?

Growing passive to semi-passive income from ~$78,000 in 2012 to $200,000 is a daunting task, especially given our low interest rate environment. But when we write out our goals, I firmly believe we’ll figure out ways to eventually get there. Let’s see if I made it or not!

2016 PASSIVE INCOME UPDATE

I’m sorry to say that I’ve failed at achieving my $200,000 a year passive income goal by 2H2015. If I stayed at my banking job, I would have earned a lot more money and hit my target by now. However, I took a risk and left a steady paycheck to just live off of the then $78,000 a year in passive income and the uninspiring money I made online.

But looking back, I am absolutely ecstatic that I decided to start my own website in 2009 because my online income has now far surpassed my passive income that has taken over 15 years to build! But making money online is a topic for another time.

Here’s my latest passive income for 2016.

I use Personal Capital’s free financial tools app to track my 32+ financial accounts. If I didn’t, I’d go crazy and miss things. It’s like having a grocery list to keep track of what to buy and not having a grocery list for a party. The former is much better.

CD Interest Income

CD interest income is down to roughly $19,920 from $21,000 a year ago because I cashed out one CD and used the proceeds to pay down debt and buy another property. Two CDs expire in 2017 with an interest rate of 4%, and one CD expires in 2018 with an interest rate at 2.6%. In retrospect, locking up money in a 5-year CD at only 2.6% was a poor financial move. But, I’m happy to invest money at a 4% risk-free rate all day long. Please read: Should I Buy CDs In A Stock Market Correction? 

Despite having a hefty amount in CDs, I’m still aiming to maintain a $100,000 liquid savings account earning just 1% for future investment and insurance purposes. Opportunities always come up, and I want to be prepared to deploy $20,000 – $50,000 slugs at a time without penalty.

Dividend Income

Dividend income has risen to $24,912 a year from $21,360 the year prior. The main reason is because my portfolios have all grown due to performance and contribution. I’m also building up my muni bond and bond positions after they sold off in 2015. 2016 is a rock year in the stock market, and I want to focus more on stability.

My investments are still very growth oriented because I’m looking for hopefully faster capital appreciation. For example, stocks I own like Netflix and Tesla don’t pay any dividends. If I wanted to optimize my portfolio for income, I could probably earn $45,000 – $55,000 a year in dividends. But as someone who is still relatively young at 38, with other income sources to pay the bills, I’m willing to take more investment risk.

Once you accumulate a large enough nut, then go heavily into dividends if you need the cashflow.

Real Estate Income

The real estate category is where I’ve made some good strides. Total estimated annual income rises to $100,322 from $88,332 due to three main factors: 1) I increased the rent of my single family house (Rental Property 1) after spending about a month trying to find new tenants after my old tenants decided to cut the lease short by 1.5 months. It was a PITA but I was effectively able to raise the rent from $8,700 to $9,200 a month and keep my 100% occupancy record for 10 years in a row on two properties in SF.

2) The second action was finally paying off my condo rental property mortgage (Rental Property 2). The monthly PMI mortgage was $1,308, $200 of which was principal. I also increased the rent by $200 to $3,950 after two years of keeping rent steady at $3,750. The master tenant is fine. She just hasn’t been able to hold down a roommate for longer than a year, which has caused a lot more work and fines. This property could easily rent out for $4,300 – $4,500 in today’s market. As a result, if there is another roommate turnover, I will be raising the rent when her year lease is up in June to $4,300 instead of $4,050 as I was originally thinking. I may even consider selling the property next year to simplify life.

Finally, my Lake Tahoe vacation rental is slowly recovering due to the rising Bay Area population and strength in tech and internet. There are over 100,000 more employed people in the Bay Area than five years ago. Napa Valley and Lake Tahoe are like the Hamptons of New York, and money eventually finds its way here when disposable income increases. El Nino has finally arrived, bringing with it record snowfall in 2016 so far.

Other Income

Other income will improve to roughly $30,000 from $19,876 mainly due to an investment in a new Venture Debt fund, slight growth in my severance negotiation book sales, investing more money into P2P lending with Prosper.

The biggest opportunity to create more value is through my severance negotiation book. I’ve updated How To Engineer Your Layoff to a second edition with 50 more pages (50% larger). I’m also experimenting with price, raising it from $48 to $55, $65, $75, and $85 to test out elasticity of demand. Currently, the book is now priced at $85 with a $10 holiday discount. It has seen no drop off in demand so far. The lesson learned is to always test, test, test.

The book has resulted in more than a dozen 1X1 layoff consultations at $500 for 1.5 hours. I’m pleased to say that every single client walked away with at least $10,000 in severance. One walked away with over $500,000.

I’ve committed $94,000 in a friend’s Venture Debt fund so far, with another $56,000 in capital contribution within the next 12 months. The preferential interest is 9%, hence $94,000 X 9% = $8,460 a year in interest income. My Venture Debt investment is unproven, so this income stream is not as certain as my other income streams. The real returns should be closer to 12% a year, but we shall see.

I’m going to start contributing $10,000 every six months into my after tax portfolio. They’ve got a great feature where you can automatically contribute to your portfolio every month just like your 401k. They’ll buy your positions based on existing weightings for you. The first six months was a test to see how things would work out. So far, so good spending $9.95 building 30 positions and watching them outperform the market with a year-to-July 16 performance of ~5%. I do everything in baby steps.

Finally, it’s been close to three years since I first started investing in Prosper. My performance investing in the most conservative loans is a 7.41% annual return, which is great. As a result, I also plan to invest another $10,000 every six months into Prosper, starting now. I finally feel very comfortable with P2P lending after learning about the sector for the past six years. In a rising interest rate environment, you want to be a lender of money, not a borrower. As a result, Prosper is also one of the biggest money making opportunities for 2016.

WHAT ABOUT ONLINE INCOME?

Online income is not passive, which is why I don’t include online income in my annual passive income reports. It takes a long time to write articles, test out products, highlight products in a value-added way, negotiate deals, and maintain the site.

If I wanted to cheat, I guess I could include 50-75% of my online income as passive income since 71% – 75% of my traffic comes from search engines. I also did a calculation that 1% of all posts on Financial Samurai generates 32% of all traffic. But what’s the fun in cheating? Besides, search engine traffic is out of my control and my traffic would probably decline beyond the 75% if I stopped writing. It’s much better to keep online income separate from passive income so I can better optimize both.

It’s true that my online income can provide a comfortable lifestyle for a family of four here in San Francisco. However, I’ve been writing three to four posts a week for the past seven years now. Heck, I even spent 25 hours being an Uber driver in order to write a first-hand account of the ridesharing economy! Not even Uber employees are willing to be Uber drivers! That is some serious due diligence for an article that may never generate much income at all.

If you have an idea for a site, definitely register one online and start (step-by-step tutorial). It costs less than $4 a month to host and it’s easy to link up your WordPress.org account. I never imagined starting a site would enable me to break free from Corporate America after only two and a half years. At the very least, build your brand online by registering your name. Why should only LinkedIn, FB, Twitter benefit from you? Control your own destiny. With an online platform, you can get consulting opportunities like I’ve gotten that pay more than $200,000 a year combined. Your online platform can also sell products you’ve created, or make your advertising income. The possibilities are endless!

CLOSE, BUT NO CIGAR

Despite taking a lot of actionable steps to improve my passive income, I’m still $25,000 a year short of my goal. With the risk-free rate at close to 2.5%, I need another $1,000,000 in capital to make up for the short fall if I’m to stay conservative.

If I didn’t challenge myself to the $200,000 a year goal by 2H2015, I’m not sure I would have even broken $120,000 a year by now. I’d probably buy a fancy car or blow myself up by actively day trading the stock market like I used to. Now that my online income has grown, I’m confident the $200,000 a year goal can be met by the end of 2017.

The whole goal for building passive income streams is to give yourself optionality. There will inevitably be a day when you no longer want to do your job. If you can build your passive income streams while you are still enthusiastic about work, you might be able to time the fade perfectly.

There’s an old Chinese saying, “If the direction is correct, sooner or later you will get there.” It’s time to get started already!

PASSIVE INCOME RECAP

1) Write out your goals and start building passive income now. In 10 years, you won’t regret the actions you take today.

2) Invest in what you know, but also consider diversifying your passive income streams. Having 100% of your net worth in dividend stocks or 100% of your net worth in rental properties could pose problems in the future.

3) Your risk-free money shouldn’t just sit in a savings account. Treasury bonds and CDs are your best alternatives. At the same time, keep six months of living expenses liquid just in case of an emergency or a salivating investment opportunity.

4) Every investment has an opportunity cost. Therefore, the ultimate way to generating more passive income is to produce more products. You’re going from nothing to something. The internet makes things so much easier to sell nowadays, which is why you should launch your own website. Once you have your own platform online, you can leverage it to find new consulting gigs, brand yourself online, find new work, sell products, and make advertising revenue. There are three billion people online today.

5) Keep your passive to semi-passive income separate from your day job income, one-off investment gains, or business income. You will grow your respective incomes much faster this way.

Updated 2019: I’m strongly focused on building passive income through real estate crowdsourcing platform, RealtyShares. Unfortunately, RealtyShares is no longer accepting new investors on their platform. I suggest taking a look at Fundrise, the pioneer in eREITs. They are also currently working on an Opportunity Fund to take advantage of tax-efficient Opportunity Zones. Fundrise was founded in 2012 and is open to all investors – accredited and non-accredited alike.