When I left my job in early 2012, I made it a goal to achieve a $200,000 annual passive income figure by June 2015. At the time, I had around $80,000 in annual passive income and figured why not shoot for $200,000 in order to never have to go back to work again.
In those days, 4% interest rates for dividends and interest income were more readily available. Thus, $200,000 a year in income would theoretically require only about $5,000,000 in invested capital. Since 2012, however, interest rates have continued to decline along with my risk tolerance for investing in more risky assets. As a result, when June 2015 came around, I was $25,000 short.
As 2017 approaches, I've got conviction that after four and a half years, I will finally be able to achieve my passive income goal. In this article, I write about the various steps I've taken.
FINANCIAL SAMURAI PASSIVE INCOME 2017
Below is a spreadsheet of all my various passive income streams. I've included columns for 2016 and 2017, along with columns for YoY growth rate and the percentage of total. The 2017 monthly figures are what I'm earning now.
Interest Income (10.1% of Total)
The biggest change in this category comes from more aggressive savings. As a result, my organic savings balance grew from $96,000 to over $216,000 today. At a 1% online interest savings rate, I expect to generate about $2,160 a year in interest income. I plan to continue growing this savings amount each month until the winter of 2017/2018, when I expect to take advantage of motivated property sellers either in Honolulu or San Francisco.
In March, 2017 my “Bank 1, CD 1” comes due. I'll be losing $13,200 a year in annual guaranteed passive income given the yield is 4%. As a result, my main focus is figuring out how to wisely reinvest roughly $340,000 in capital to generate at least a blended 4% return. Lately, I'm focused on investing in real estate crowdsourcing opportunities through Fundrise with hopefully 9% – 13% returns. I'm starting with $10,000 and will work my way to higher amounts. Other investments will include Treasury bond ETFs, Muni bond ETFs, and maybe a 5-year CD at 2.4%.
Dividend Income (13.7% of Total)
My company stock dividend income has gone to $0 because I finally sold all my holdings at the end of 2015. I'm glad because the stock is down a whopping 50% YTD due to some “surprise” losses. In banking, a portion of your year-end bonus is in the form of company stock and deferred cash. The vesting period is usually three years.
Because I engineered my layoff, I was able to keep 100% of my unvested stock and deferred cash. The agreement was for all monies to be paid out based on its vesting schedule. I got stock and cash in 1H2012, 1H2013, 1H2014, and 1H2015.
What I didn't include in the spreadsheet is the final balloon payment of an investment senior employees had to make in 2009. A portion of my bonus was invested in “toxic assets” consisting of international mortgage backed securities. Management decided the responsible thing to do was force such assets down all senior employees' throats instead of write it off and hurt shareholders.
At first, we weren't too happy because most of us had nothing to do with creating mortgage backed securities. But getting force fed crap at the bottom of the market turned out to be a blessing because the overall return after 7 years is estimated to be 2.9X. Thirty percent of our capital has been repaid, which means 70% will finally come back home in 1Q2017.
This payment isn't included because it is a one-off item. But I hope this illustrates how important it is for people with deferred compensation to try and negotiate a severance. If I had quit my job, not only would I not have received a severance, I would have also lost three years of deferred stock and cash compensation, and this 2.9X investment.
For my after-tax and pre-tax portfolios I've rebalanced to ~50% bonds and shifted my stock investments mostly towards large cap, dividend paying stocks. Rebalancing is what accounts for 80% of the 21.1% growth in dividend income.
REAL ESTATE (52% of Total)
After making a big passive income move in 1H2014 by buying a fixer and renting out my house of nine years, 2016 – 2017 is more about minor adjustments.
The first adjustment was refinancing a mortgage down from 2.625% to 2.375%. It had one year left of its 5-year fixed term so I decided to take advantage when interest rates collapsed in the Spring of 2016. The mortgage refinance took almost four months, but now I'm locked in at 2.375% until August 2021. This move saves me about $2,400 a year in interest.
The second adjustment was raising the rent on a property from $8,800 to $9,000 a month. I had wanted to raise the rent to $9,300, but we came to a compromise because it would have been harder to find tenants at that price point. One month of vacancy would have reduced annual rental income by 8.3%, and the SF rental market above $4,000 is slowing.
My tenants are pretty bad. They throw parties, damage the floors, damage the baseboards, crack kitchen tiles, leave the yard a mess, and have been late paying the rent six times. At least they never pay more than a week late. I fully plan to use some of their $17,000 deposit to fix up my place when they leave. I also plan to enforce the $250/day late payment fee. Given I'm used to remodeling, I'm not traumatized about house damage anymore. After all, I just busted through my own master bedroom wall recently to install a 12-foot wide sliding door.
The third adjustment was raising the rent on my 2/2 condo from $4,000 to $4,200. The 3.375% mortgage on this property was paid off in 2015. $4,200 is not a bad deal for a 2/2 in Pacific Heights with a view and parking. Many 2/2 condos rent for $4,600 – $5,200, but they are in newer condition. I got what I hope are dream tenants, a couple moving in together who make at least 40X the monthly rent.
The final adjustment was taking down links on Financial Samurai pointing to my Lake Tahoe 2/2 vacation property at The Resort At Squawk Creek. I did this because I wanted to test out new advertising copy in my vacation and travel related posts. Despite taking down the links, it looks like the overall Lake Tahoe vacation property market continues to recover largely due to the strength of the SF Bay Area economy. Perhaps the property management company I'm paying 25% to is also doing a better job marketing.
* All income in the spreadsheet is Net Operating Income, or income after property taxes, insurance, mortgage interest, and estimated maintenance expense.
OTHER INCOME STREAMS (24.2% of Total)
I realized back in 2012 that the only way for me to meaningfully increase my passive income was to create my own product and sell it online. Low interest rates are a killer for retirees due to the need for so much more capital.
After updating my severance negotiation book, How To Engineer Your Layoff, I raised the price to $85 from $48. My experience consulting with people who wanted to leave their jobs was that they are price inelastic. When you have a $25,000, $50,000, or $500,000 severance package on the line, paying $85 or $48 makes no difference. I have a feeling paying $197 makes no difference either and I should probably test that price point for a month.
With about $33,600 a year in annual net revenue, How To Engineer Your Layoff accounts for 16% of my total passive income. This is very significant because it required $0 up front capital, just time. In contrast, my 2/2 rental property which produces a similar amount of annual income requires about $1,000,000 in capital if you were to purchase it today.
Starting your own website to sell a product is one of the best ways to boost passive income. An eBook is probably the easiest way to go. Even if you just sell 10 copies a month for $10, that's $1,200 a year in passive income. With today's risk-free rate at 1.6%, you would need $75,000 in capital just to reproduce the same income stream!
Related: How To Start A Profitable Website
I've got $108,000 fully invested in my friend's venture debt fund. So far he's repaid about 25% of capital and the net return after fees is about 8%. We shall see what happens to the remaining 75% of capital which is expected to be returned over the next several years. We own a bunch of warrants in the private companies we've lent money to that could help juice returns to over 15%. Management only gets their 20% performance fee on returns above 8%.
My friend launched a second venture debt fund by partnering up with a large financial institution. Instead of investing another $100,000+, I decided to invest $50,000 instead due to my focus on raising as much capital for another property. With about $130,000 in venture debt exposure ($28,000 already returned), I'm hoping to generate a 10% internal rate of return over the next 5-7 years.
Motif Investing & P2P Investing
My Motif portfolio started at $10,015 on Feb 1, 2015 and now stands at $10,785 for roughly a 7.8% gain. The portfolio is 51% in bonds, 49% in stocks and will likely stay that way for the remainder of the year. I'll do a more comprehensive post come year end.
Motif Investing has a great value proposition for investment enthusiasts given you can build and rebalance a 30 position portfolio for less than $10 versus spending $7.95 to buy each position. Further, their portfolio building interface allows investors to take more appropriate risk, rather than just buy a handful of securities.
Prosper is providing a steady 7.4% annualized return after four years. But after the Lending Club CEO scandal in 1H2016, I've been reluctant to contribute any additional funds until the smoke clears. I know Prosper is creating a P2P Fund that is shooting for a 7% annualized return after fees. The minimum I hear is $250,000. I might consider participating after my Bank 1, CD 1 comes due in 1Q2017.
I've come to realize the older I get, the less desire I have to actively manage my money. I used to love researching and picking stocks. Now, I would rather pay someone to manage my money after deciding where to allocate my money e.g. venture debt, private equity, public equity, real estate crowdsourcing, etc. Financial Samurai is my focus right now.
Uber Driving Referral
One of the big benefits of actively driving for Uber is not only meeting new people and writing fun posts such as “Spoiled Or Clueless? Try Working Minimum Wage Jobs,” it's earning driving referral income.
Instead of making $30 – $40 gross an hour driving, you can make $50 – $1,000 every time someone signs up with your referral code. And the only way you can get a referral code is if you become a driver yourself. It's worth signing up to take advantage of the sign on bonus that also ranges between $50 – $1,000. After you've hit the number of rides you need to get your bonus, I'd quit and just use the destination feature to pick someone up along the way to pay for gas money like I do now.
The gig economy is not my passion, which is why I've only written nine articles in this category. But these nine articles are generating roughly $600 a month in passive income. To generate $7,200 a year in passive income requires $360,000 in capital yielding 2%. I have no doubt that if I write 90 articles on the gig economy I could generate $6,000 a month in passive income. But I just don't care enough right now.
This simple math should provide you clues to the power of having your own website. Build your brand online by doing what you love. You will find a plethora of ways to make extra income if you try.
Bottom line: Total Other Income grew by 70% YoY, much faster than every other income stream because I was able to take action.
Although I'm now making an annualized $200,000+ a year in passive income, anything can happen over the next 12 months. I'm very cautious about the economy in 2017 and 2018. It's why my public investment portfolio has a 50/50 stock/bond allocation. Caution is also why I'm aggressively saving as much cash as possible while actively building even more passive income streams.
When you're cautious, you must pinpoint your financial areas most at risk. In my case, Real Estate is my biggest risk given it accounts for 52% of my total passive income. I've done my best to counter this risk by paying off one mortgage and refinancing another. But I need to do more to avoid potential vacancies. Here's what I plan to do:
* Be a friendly, attentive landlord who addresses all issues right away. Even though my house tenants aren't ideal, I need to treat them as valuable clients. This means communicating in a professional manner and making no judgement about the blowup doll they left in the foyer or the keg and broken beer bottles left in the backyard. For my condo tenants, I've offered to buy a new stainless steel range and dishwasher if they manage the process. The stove supposedly doesn't heat past 100 degrees and both items are 30 years old anyway.
* Send small gifts to my tenants during the holidays. Wouldn't you be less likely to screw over your landlord and more likely to follow the lease if you received a hand-written note along with a box of cookies for Christmas? I gave all my immediate neighbors some Honolulu Cookies this year and they couldn't care less about all the construction I'm doing at my house now. In fact, I just got a box of homemade pecan squares and free movie tickets from my neighbor. She let me trim her tree to protect my ocean view as well. That's huge!
Besides real estate, everything else should be pretty stable since I'll continue to contribute to my investments if there is a decline. If I want to sell more severance negotiation books, I'll write more severance negotiation related articles. If I want to make more gig economy income, I can start writing about Doordash, Lyft, Postmates, etc.
THE KEY TO PASSIVE INCOME: PURPOSE
There are no shortcuts to building passive income, just an unwavering discipline to save as much as possible and deploy capital in a risk-appropriate manner. I've been building my passive income since December 1999 when I realized I could not last getting in at 5:30am and leaving past 7:30pm for the rest of my career.
My main reason now for generating passive income is to be able to comfortably take care of a family in an expensive city. I don't want to be forced to move to save money. Once money is taken care of, precious time is all that's left. I'd like to use passive income to avoid the office in order to see my kids grow up.
Action Items Before Next Update
1) Consider paying down my vacation property mortgage in 5-10 years. Once it's paid off, passive income will increase by $1,500/month or $18,000 / year.
2) Keep on analyzing real estate crowdsourcing opportunities to be able to comfortably deploy a significant amount of capital in 1Q2019.
3) Create another online product that generates $1,000 / month based on a sub $25 price point.
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