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.
Related: Investment Strategies For Retirement Based Off Modern Portfolio Theory
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)
Online Product
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
Venture Debt
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.
MANAGING RISK
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
A realistic budget for a family of three living in an expensive city like SF
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.
Utilize Free Financial Tools
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
How does your retirement planning output stack up?
Sam,
Do you have all of your passive income structure in a business such as an LLC, or Sole Propietorship? I wanted to know the costs/benefits of having passive income assets such as book royalties and rental real estate under and LLC and made as pass-through income.
Thanks
I’m very interested in passive income reading more and more of your articles very good of what I have seen. Very new to this, but I have one question that I have not seen yet.
What kind of passive income would be the best to start off your journey with?
A little background on me, I’m 25 years old and fortunet that my company gives me all I need to retire when the time comes, but I would like to have passive income as a backup due to my job pay can vary drastically depending on what is needed.
Hope to hear back, doing a great job on this blog!
Dividend stock investing is the easiest. You can buy an dividend stock ETF and dollar cost average in over time.
Check out: Ranking The Best Passive Income Streams
Thank you very much! I will start looking into them and thank you for the quick response.
I think you are doing great so far.
I like your goal of paying down your rental property within 5-10 years though. This will definitely help to bring in some more cash flow and possibly reinvest back into another property.
Great site, I just found you but I will definitely be back.
The 20% effective tax rate seems very low in California. Wouldn’t you be in at least a 25% federal and 9% state bracket? Can you help explain that? I’m trying to figure out how to calculate my passive income that comes into my self directed 401k since it is really just tax deferred, and no one knows the future tax rate.
Hey Sam
Would’t it make better sense for you take out equity from your condo and buy more rentals?
Seems like your rental income would be far more than enough to cover the payments and the interest rate is so low now.
Hi Lloyd,
At this point in the real estate / economic cycle, I don’t think it is wise to take on more debt to buy real estate. Taking out a HELOC would means taking on debt to take on more debt. That’s how people get crushed and lose everything in a downturn. Instead, I’m paying down debt and building a municipal bond portfolio to pay for my living now that interest rates have increased post election.
Also, I’m being more surgical and investing $10,000 – $25,000 in real estate crowdsourcing investments around the country through RealtyShare’s platform. You can get much higher returns investing in non coastal cities. If I were to buy an SF rental property, I’d have to come up with $200,000+ down and take out a $800,000+ mortgage. Too much!
Sam
Hi Sam, I found this a fascinating read. I like how you accept that investments are essentially a hedge against inflation rather than a means in themselves for building wealth. I have been investing my money for about 5 years now and the returns are pretty depressing. Thus I have identified and accepted the need to create some form of passive income as you have done. I am comforted that your huge numbers here are the result of almost 20 years of work – this gives me patience! I plan to take the approach that I do in everything else work-wise…grind it out!
Cheers for the insight!
Paulie
Great article, thank you. Not surprising that real estate makes up the bulk of your passive income.
Make sure you do a lot of due diligence when you use a crowdfunder. The most important aspect of passive investing in real estate is the syndicator’s track record. I always wonder why syndicators would use a crowdfunding middleman to raise money for them. It adds to the cost and typically those with a good track record have no problems raising money themselves.
Curious if there’s a reason you keep track of your eBook sales here, but not your income from various affiliates?
It’s because How To Engineer Your Layoff is something I created and no longer touch, except once every several years with an update.
What I really should do is consider adding my Google Adsense revenue, because that is truly passive. But, running FS takes around 20-25 hours a week, so it’s up to my discretion.
As of now, I think books, driver referral, and Adsense should be included. I’m trying to make it as difficult / legitimate as possible for me to earn $200,000 a year in passive income. Maybe things will change in the future.
What are your thoughts on royalties? Last year I bought some on a wind farm in Texas and a geothermal plants in CA. They have a finite life but seem to pay well.
So cool and inspiring! Thanks for sharing such a detailed post. I’m a bit obsessed with passive income (although I’m a noob with investing) and thought this was a really worthwhile read. I’m wondering about your decision to use CDs for passive income. Is the advantage just that the return is guaranteed even though it’s on the low side? If you have a blog post about this that I haven’t come across yet, I’d love it if you pointed me in the right direction. Thanks again for sharing : )
Sure, no problemo. I like to have around 10% of my net worth in risk free assets. It makes me happy if and when things go to hell. It also gives me fire power to take advantage of opportunity.
Here are a couple posts:
Should I Invest In CDs And Other Questions To Ask Before You Do
Should I Buy CDs During A Stock Market Correction?
Thank you!!
So much of what you’re saying resonates with me. I’m working towards something very similar. Thanks for sharing this…
What are you thoughts on the best mortgage loan to have on rental properties at this time? 5/1, 7/1, 10/1, 30 year fixed? I hear differing opinions all the time and it sounds like you’ve gone with ARMs. Just curious as to your rationale.
I’m very pro 5/1 and 7/1 ARMs for primary and rental properties due to the savings, ability to refinance, belief in lower interest rates for longer, and the ability to pay down the mortgage.
But if your math can work well w/ a 30-year fixed, and it’s in the mid 3% range, I don’t see why not!
Related: 30-Year Fixed Or ARM? The Choice Is Clear
Sam, what screening process do you use when choosing tenants?
Check out these two posts:
How To Get The Best Tenants For Maximum Prosperity And Peace of Mind
How To Reduce Tenant Vacancy To Zero
Great, thank you!
great job on achieving your goals Sam – what you’ve done with your RE portofolio is very impressive. I specifically like the fact that out of only 3 units, you’ve been able to generate excellent income. I have 4 units producing income at the moment but nowhere near yours – next property will be invested for lifestyle, not just income ;)
Thanks Andy. I used to REGRET not buying a multi-unit instead of my house. But I realized that math is pretty similar in terms of rent, and I’ve only got ONE oven to deal with, ONE main electrical main, ONE garabage bill etc.
Here are some posts that discuss this:
What Type Of Investment Property Should I Buy?
What Type Of People Spend Over $100,000 A Year On Rent?
This makes me feel a little silly for struggling to come up with $30,000 of annual passive income…
Income analysis is at most 50% of the work in a spreadsheet.
The other 50% is Spending analysis.
:)
Need a post on Budget, Sam.
Which not only includes the motivation to have more income, but also to spend less.
Focused on Spending.
For example – I might be saving a lot as income, but am I spending a lot too?
Regards.
I’ve always wondered about budgets. It’s always been easy for me to spend a certain amount and then save the difference. I always like to challenge myself to save more until it becomes a game.
Here are two budget posts worth reading to help with budgeting/spending:
If You Want To Be Bad, Follow A Good Spending Ratio
Effective Tips For Boosting Savings And Controlling Spending
Financial Samurai Budgeting And Savings Category
Sam,
I am 18 years old and has read almost all of your posts. You are by far my favorite blogger, and have helped me decipher the stock market at an early age in my life.
I am starting up school again, and with sports and activities I will only be able to work weekends. I would really like to continue to earn money and grow my accounts during the school year though, so i need some of your advice. Do you have any specific ideas for creating passive income as a high school student?
I would love to hear back from you,
Tyler
Hi Tyler,
Nice to hear from you. My tips for you are as follows:
* Finish your college degree ASAP if you are in college. The statistics show people w/ college degrees earn more over their lifetimes than those without.
* Change your site to *.com not *.wordpress.com. *.com makes it more legitimate. Focus on building your brand on your site. What you put on your site will reflect who you are when people google your name. Be consistent, add value, and always remember to cultivate your brand.
You are already hustling more than most. Continue!
Thank you for the response Sam!
I am weary about spending the money on Bluehost like you say to due to the fact that it costs a decent amount of money, and I am afraid I won’t make money off my blog.
Up to you Tyler. Sometimes you have to invest $5 to make $10.
I can assure you that having your own hosted site looks much better and will attract more legitimacy and opportunities.
Very impressive. I’m wondering if it makes sense to focus hard on creating passive income if you are in a job you enjoy and your marginal rate is already quite high? I have enough passive income to give me peace of mind that if I lose my job my world won’t get thrown upside down; I feel like I don’t want much more than that runtil I retire or slow down at work, and I should be more growth focused and less income focused. Not sure, but it is on my mind.
This is a good question. My answer is “ye”s because you will fall into a lower tax bracket if you lose your job or retire. And you want to have the optionality of maintaining your lifestyle if you ever do lose your job or retire.
Why not try and build passive income when you don’t need the money?
I love how you use Real Estate as the driver for most your passive income! I’m trying to follow the same plan, with a few properties under my belt already and seen great results.
Any reason why you don’t shift the 300k into a commercial property? Even if you lack the knowledge, there are quite a bit of specialized investment companies that could put the 300k to great use.
It’s b/c I’ve never invested in commercial property, even though I’ve wanted to for the past 10 years. Lifestyle keeps on getting in the way, so I keep trying to buy properties I think would lead to a better lifestyle.
I wrote a post that will be republished in mid-September about a commercial property I’m looking to invest in, in PA. But I’m only starting w/ $10K and will work my way up. There’s no way I would just dump $300K without feeling 110% comfortable. This is why I’m looking into real estate crowdsourcing investments to be more surgical.
Sam-
Have you considered PeerStreet as an alternative to RealtyShares? I’m not affiliated with PeerStreet, but started investing through their platform not long after it opened up to the public last year. The minimum investment is $1000, which tends to be less than most of the other RE crowdsourcing platforms. You can also set up automated investing, similar to how Lending Club operates. I have accounts with most of the well known RE crowdsourcing sites, but primarily make my investments through PeerStreet and Patch of Land.
Hi Brady – I have not. I’ve only met the folks at RealtyShares in person, and used to work w/ their VP of Finance while I consulted at Motif Investing, so I feel comfortable doing more work on the RS platform. There are so many choices out there, I’ve got to focus and choose.
I think you should include your real estate income as part of your passive income if it’s your cash flow and not gross rents. It isn’t really income if you have repair expenses, insurance, taxes, mortgages etc. What does your real estate income look like after taking out all expenses?
Hi Travis – I agree. The real estate portion of my cash flow is after all expenses. It is the Net Operating Income (NOI) before taxes. The way I’ve written it, does it give the belief the chart is gross rental income? I did write that I raised my rents from $8,800 to $9,000 and $4,000 to $4,200. And these two figures are higher than what I wrote in my chart.
If you think i should clarify, I ‘m happy to do so in the post. It’s easy.
Are you a RE investor? How is your passive income portfolio doing?
Thanks for clarifying! I am a RE investor. I have 17 rental properties that cashflow about 9k/month off of gross rents of $17,400. But I don’t do anything with them. My primary focus are online businesses.
I’m not sure what my passive income is. I have online projects that I haven’t touched in many years that produce a lot of passive income. At what point would you consider an online project to be passive vs active income? For instance, if you decided to move on from FS and paid someone full-time to write new content and fully manage it while you moved on to another project, then would you consider FS part of your passive income?
Wow! 17 properties is a lot. I’ve gone ahead and clarified in my post that the income from my rental properties is net operating income after expenses as I’m guessing other people will be confused as well.
About 70% to 85% of my traffic is 100% passive and that people find me through search engines like Google or through word-of-mouth. I can probably sustain that percentage for one year without writing before it starts to decline.
So yes, if I were to just hire a ghost riders or staff writers to just write three times a week or so then Financial Samurai would be largely passive. I probably still do lunches and dinners and go to conferences to handle business development meetings.
But I run financial samurai because I love the active part of it. It’s very fun for me. I don’t think the authors of similar sized sites would be as responsive and interactive is I am. I do it because I like it. And when I start feeling burnt out I will just stop doing anything.
Sam! This is a great post!
Just to clarify, Net Operating Income does not include subtracting out loan principal and interest payments (as mentioned in the footnote of the real estate section). It is income minus operating costs only. If the property were purchased with a loan or cash, NOI would be the rent minus all operating expenses (taxes, insurance, repairs, utilities, fees, etc.). This allows the same NOI regardless of how the property is financed. For your properties that have mortgages, you will want to report the cash flow.
Interesting you don’t include mortgage interest as an expense. It certainly is to me. I will deduct all the costs I can think of so that I have as true net income before taxes as possible.
The components of net operating income consist of potential rental income, vacancy and credit losses, other income, and operating expenses.
Potential Rental Income – Potential Rental Income, or just PRI, is the sum of all rents under the terms of each lease, assuming the property is 100% occupied. If the property is not 100% occupied, then a market based rent is used based on lease rates and terms of comparable properties.
Vacancy and Credit Losses – Vacancy and credit losses consist of income lost due to tenants vacating the property and/or tenants defaulting (not paying) their lease payments. For the purposes of calculating NOI, the vacancy factor can be calculated based on current lease expirations as well as market driven figures using comparable property vacancies.
Effective Rental Income – Effective rental income in the net operating income formula above is simply potential rental income less vacancy and credit losses. This is the amount of rental income that the owner can reasonably expect to collect.
Other Income – A property may also collect income other than rent derived from the space tenants occupy. This is classified as Other Income, and could include billboard/signage, parking, laundry, vending, etc.
Gross Operating Income – This is simply the total of all income generated from the property, after considering a reasonable vacancy and credit loss factor, as well as all other additional income generated by the property.
Operating Expenses – Operating expenses include all cash expenditures required to operate the property and command market rents. Common commercial real estate operating expenses include real estate and personal property taxes, property insurance, management fees (on or off-site), repairs and maintenance, utilities, and other miscellaneous expenses (accounting, legal, etc.).
Net Operating Income – As shown in the net operating income formula above, net operating income is the final result, which is simply gross operating income less operating expenses.
You will include mortgage interest as an expense to determine your final cash flow value. I believe this is what you have reported on the spread sheet.
I am just pointing out that the term NOI does not take that into consideration. Everything you listed is correct. NOI is used to calculate capitalization rate, which tells you the return based on an all cash purchase. It is also used to calculate Debt Service Coverage Ratio (DSCR), where a lender can then determine if the property will generate enough income to cover the debt.
Sounds good. I care at the very end about my final cash flow value.
Share with us something about yourself and your passive income strategies. Thanks!
Sam,
I should have said before, but congratulations on your goals and projections! I am also on the road to financial independence. My favorite investment type is real estate as of now.
You mentioned your tenants paying late. This was something I was concerned about when getting into rentals. I figured if I set up direct deposit from their bank account I would eliminate physical checks, excuses, and late payments. Through my bank, I was able to have the tenant set up their account to automatically deposit the rent on the 1st of the month. With automatic payments on, I don’t have to worry and they don’t have to worry. It has worked out really well.
You might want to look at cozy.co. It is the online platform I use to process recurring rent payments, as well as credit checks and background checks, at no cost to myself.
It provides the added advantage of your renters being able to pay by creidt card etc, and not have to be directly linked to their checkign account.
Thanks Nuclear! I just looked into it and set up an account. Hopefully I will report back with good results.
Incredible passive income results. I get maybe 10% of that, but I’m just getting into the real estate game these last few years and trying to peak early in my career. So far it’s been going well but by the end of the year I’m hoping for the big raise that puts me into a lot more disposal income to invest. Hopefully i can catch up to you before the end of the decade!
The career is definitely the #1 money maker in the beginning. Get that optimized and everything else comes much easier. Good luck! It’s a damn long journey that can try one’s patience!
Real estate is by far my favorite source of passive income. I mostly invest in multifamily properties in other states (too expensive here in CA, hard to get good cash flow) where I achieve about 15% ROI on average! This will allow me to achieve my passive income goals much faster than if I were to invest in stocks, bonds, CD’s, or other sources of passive income. Not to mention all of the tax benefits of real estate! Cash flow, buy and hold real estate is awesome because you can build passive income and build wealth at the same time!
15% is a great ROI. I hope to achieve that w/ real estate crowdsourcing and some other private deals I’m invested in. How has the principal appreciation been? Where do you invest exactly?
I am mostly buying properties in northern Utah. The appreciation certainly has not been as big as what I have seen in my home here in California, but I have only been buying out there for a couple of years so it is still a little soon to tell. My investment criteria is more focused on cash flow so this market is perfect for my investment goals.
Love the transparency and the hustle, FS!
From your 52% allocation in real-estate and 0% in mine, I can see that we are opposites :) I’m pretty shocked that you have such horrible tenants and yet you manage to not freak out about them destroying your house. That says a lot about your risk tolerance…and handiness around the house. I think I would lose my mind if I had to deal with people like that.
Reading articles like this makes me feel like I’m SO lazy. I’m not motivated to hustle like you and make big bucks from the blog or any other side gigs. I’m just happy traveling, passively maintaining my portfolio, and interacting with friends I met online. It’s a good life…albeit a lazy one. Definitely don’t have your hustle :) I don’t know HOW you have the energy to do it all.
Everything just takes time and money to fix. The first year I rented out the house it hurt when the house was hurt. Now that I’m on my 3rd year, I don’t mind any more. The house has lost sentimental value and is now just a handsome property that’s just a financial asset.
I’ve got 6-7 years on you right? I’m you could do the same with all that time if you wanted!
This is why I come here, to get a glimpse into what’s possible with passive income. I’m sure there are others out there but no one does a better job sharing it with others.
I will challenge you though and claim a large chunk of your passive income gain is the result of having significant capital already to begin with! Ex. Paying down the rental mortgage.
Btw, I cannot believe you guys get away with 17k security deposits. I’m assuming that’s 2 months rents? And they had to pay first months rent up front right. Nuts.
I’m much more amazed however by the income you generate without the capital, utilizing your knowledge and platform. Income from things like the site, book, and uber referrals is the hardest kind to make in my opinion but the most explosive if successful.
Challenge accepted.
May I ask why I don’t any credit for working and saving aggressively to get to that “significant capital” to pay down the rental mortgage? It was paid off in 12 years, which is not particularly amazing compared to many stories out there.
I wonder if it’s like a statue of limitation where nothing counts beyond 10 years?
Check this post out: Sweet Dreams Of Becoming A Millionaire Again https://www.financialsamurai.com/sweat-dreams-of-becoming-a-millionaire-again/
I wanted to start over and prove myself that I could start from scratch and build some wealth with FS.
I don’t discount your path to reaching that amount of capital at all. The only reason I imply it doesn’t “count” is because you already have it if you want it.
For example, I’m quite convinced you could easily get 250-300k in passive income if you chose to divert your cash towards paying off mortgages. You might increase your risk where you don’t want to be, but it’s a lever you can pull to make it happen.
FS on the other hand is purely work from scratch and you’ve still been able to build it up to become a monster!
Sam,
First time reader here. Congrats on reaching your goal! Looking forward to reading more of your blog. Good stuff
Welcome to my site. Please take some time to peruse through the many categories on the bottom right or via the search bar on the top. There’s a lot to go through since 2009! How did you find FS?
Sam,
Congratulations on the outstanding progress. You have once again inspired me.
My passive income situation is very close to where you were in 2012. I have been pushing to improve this but some dividend cuts set me back. Now I need to set some aggressive goals over the next 4 1/2 years and see what is possible.
-Mike
Good luck Mike. With your income living in low cost Bangkok, I don’t think you should have a problem boosting your passive income if you really focus. How’s the little one doing?
The little one is doing well- 3 years old is just a great age.
And with another one on the way it’s time to buckle down and get the passive income cranked up!
-Mike
Ah yes! Hope there are great synergies with two. It’s good to be in Thailand and have inexpensive help compared to the US.
I thought blog/AdSense/affiliate income was in “OTHERS”. Is this intentional these were left out?
You bring up a good point about Adsense since that income on FS is truly passive. I never have to write about Adsense and the income just comes. Why should Adsense be left out if Uber driver referral income is included right? I guess it is because I always believe creating passive income first takes an initial burst of active effort.
Although Adsense income is completely passive as the ad units are there and always changing automatically based on the context of the article, I somehow feel that because I am perpetually writing, that such income is not passive. Such an interesting way to look at things yeah?
Perhaps I will include Adsense income in my next update. And perhaps I will update this every 6 months if there is more than a $10,000 annual change. Including Adsense would definitely fit.
Congrats Sam! It looks like you have just about made it to your epic goal of enough passive income for a family of 4 to live anywhere! Been reading your blog for years and have to say the time flew by quickly–kind of hard to believe you’ve just about met your goal.
So what’s going to be your next epic goal? Got any huge business surprises planned for us? Would love to see more podcasts and videos! Or is it time for some little samurais running around? :p
Time DOES fly yeah? I clearly remember writing this post, Achieving Financial Freedom One Income Slice At A Time, four years ago that started me off on this passive income journey.
I’ve got potentially two surprises for 2017! You’ll just have to stick around! :)
Did you hear this podcast interview I did recently? https://www.outoftheboxpodcast.com/podcast/2016/6/19/episode-103-sam-dogen-personal-finance-blogger-financial-samurai
Hi Sam,
Found your site and couldn’t be happier! I’m 26 and don’t have a lot of $, but I’m definitely working on saving more than I have in the past. Trying to build savings and not have to work into old age.
Do you recommend saving as much as possible in a savings account or put that money in a brokerage account like Betterment?
Thanks! And Go Bears!
Ah, to be 26 again! What a wonderful age, full of excitement and hope for the future.
I really love the robo advisor value proposition. As Wealthfront is based here in the SF Bay Area, I’m a fan of theirs. But Betterment in NYC is equally as good. You’ve got to know what you are saving/investing for.
I say:
1) MAX out your 401k / IRA first if your income makes it possible.
2) Contribute another 20% or more of your after 401k/IRA contribution into an after-tax investment account like Wealthfront/Betterment automatically.
You may one day want to buy a house or have some liquidity for something large. That’s where the after-tax investments come in. The key is to stay consistent over a long enough period of time and you will be amazed at how much wealth you’ll be able to accumulate.
Check out:
Invest In My 401k Or Save For A Downpayment?
Investment Strategies For Retirement Based On Modern Portfolio Theory
FS-DAIR: Pay Down Debt Or Invest
I appreciate that you are not changing where you want to live to make your passive income goal more easily attainable. My goal is much lower, but feels large since I’m so far away from it. I want $36,000/year in passive income. Most of my passive income will come from index funds, but I also hope to create some digital products.
Passive income goals always feel so far away… all of them. It’s important to have that target figure and then work on investing here and there little by little to get there. Eventually you’ll gain some momentum and it will become easier. Or, there will be a big shift.
The small goal I mentioned in this post was just publishing an ebook and selling 10 copies at $10 a month. That’s $1,200 a year, and a nice slice of the $36,000 goal!
Good luck! I’m so tired recapping this passive income journey this time. Need a break.