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
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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.
Thanks Sam. Just curious, what do u see happening in 2017/2018 with regard to asset prices?
In the winter of 2017/2018 I see housing prices in mid-to-high end and high-end 10% lower than they are now in places like SF, Honolulu, NYC, LA, London, Hong Kong, Singapore. Probably a lot of other places too. I’ve already seen a compression since early in this year.
The thing is, if Uber or AirBnb go public in 2017, six months after IPO, there will probably be a wave of buyers in the $1M – $2M sweet spot which will push prices higher or back up.
I’m surprised by the resiliency of the market. So maybe prices will just be flat.
Check out:
https://www.financialsamurai.com/real-estate-is-the-next-asset-class-to-fall-and-why-im-not-worried/
https://www.financialsamurai.com/take-advantage-of-unfair-situations-plan-to-buy-property-due-to-ipo-delays/
Hey Sam
As usual, an amazing post. Keep up the good work. I personally have a passive income goal of $80,000 annually – with the lower cost of living of where I am (New Brunswick Canada), this is enough to live a comfortable life.
All in the name of freedom!
Very cool. $80,000 was actually my passive income goal around 2009-2010 when FS first started out, and when the financial crisis was happening. I was getting disillusioned by the industry and thought that if I could earn just $80,000 gross, or $64,000 net, I would be happy as a clam. I’d leave my job, which I did in 2012, and relocate to Hawaii and work on my grandfather’s fruit farm, which I did not. I was tempted, but felt leaving the Bay Area during the internet golden age round 2 would be way too soon.
Hope you get there!
Sam – Kudos on the awesome accomplishment. Keeping reaching for that brass ring
Any thoughts on corporate fixed income? Many great companies are yielding 4-5 % return.
Thanks Vince. All income producing assets look interesting. So it depends on which corporate fixed income security. I haven’t paid as much attention. Rather, I’ve been buying structured notes on corporations that pay a fixed income. For example, I just dumped $50,000 in this Facebook note w/ a 23% barrier that pays an 8.5% annual dividend if the stock is above the -23% barrier.
Any particular fixed income security notes you are looking at.
Sam – I have a quick question about your plan to purchase another property in SF or Hawaii in the next few years. Will you be buying the property as an investment property or as a second home? I ask because it seems like with a standard 20% down payment in a place like SF there’s no way to make the house cash flow positive. Do you plan to put down more than 20%?
I have 8 rental properties, but they are all in lower cost areas like South and Midwest, where the CAP rates are much higher. I live in an expensive city in Southern California and there’s no way I could find a house around there that I could be cash flow positive on unless I put down ~50%.
The Money Commando
If I buy a Hawaii home, it will be that Hawaiian dream home to live in. I would then rent out my existing residence in SF for more passive income.
Realistically, 2018 will feel to soon to buy another home b/c I love our current home we’re doing home improvements to. But if there is great opportunity at the end of 2017 or in 2018, I will take advantage because I will have a lot of capital by then due to my savings projections and CD and deferred partner investment coming due.
You are much better in having 8 rental properties with higher cap rates in the South and Midwest. Those are exactly the areas I want to invest in for higher returns with real estate crowdsourcing platforms.
I buy physical property to enjoy first, and then rent them out after a certain period of time. Who manages your rental properties?
Absolutely amazing Sam. $200k in passive income from various streams. Right now our primary passive income stream is dividend income. I’m trying to more established in blogging and hopefully that’ll start generating some income in the near future.
I think you can definitely grow your blog into a nice income stream. There is more upside than you realize. Develop a blog growth plan! Once I really focused on growing FS in 2012, it started to grow more rapidly. There are A LOT of things you can do.
Sam- Thank you for posting. I learn something new every time you post, but these ones are really inspiring. Thanks for laying it all out there.
No problem Jessie. Glad you enjoyed the post and learned something new. Publishing this post once or twice a year seems about right.
My brother lived in a NYC apartment where the refrigerator died. He was lucky in that the landlord ok’ed him to buy a new refrigerator so long as it was within a reasonable amount for a similar model and he could deduct the amount he paid for the fridge, delivery, and haul away out of his rent. He got everything in writing so it was all above board. It was a win-win for him as he also got to earn miles for a purchase that went towards rent. I think the landlord was happy not to have to handle the hassle of setting up the purchase and working out delivery. That’s a good move on your part to do that for your condo tenants.
That’s great to hear. I’m happy to do the same if the tenant is willing to use his/her time to handle all the logistics. It’s a win-win. So for those tenants who want nicer stuff, tell your landlord you’re willing to do everything to get the nice stuff in and deal w/ the old stuff out. The landlord will be much more happy to pay.
Hi Sam,
Thanks for such a detailed update. It is helpful and inspiring to us as many have stated. I plan to deploy some $$$ in Real Estate around this time next year (currently saving like a bawse, lol).
Soooooo, I wanted to get your particular thoughts on a high performing REIT providing a ~ 10% dividend. I feel this is more passive then acquiring a rental property, advertising, screening and signing tenants, you know all the rest.
Which REIT? REITs have been ON FIRE the past 12-24 months. I’m trying to get on the “ground floor” by investing back at par value in real estate crowdsource opportunities instead b/c REITs have done so well.
AGNC for example, offers almost a 11% yield has 6B market cap and been around almost 10 years. Not sure what exactly the underlying MBS are from, so may be a bit risky. My brother also used to work for them and says its a strong company in Bethesda, MD.
Sam,
Another great post- I appreciate your level of detail.
As for your Solo 401K numbers, it would appear that you’d be eligible to sock more away there, given that the max is $53K per year ($18K personal plus up to 20% of your company’s income as a base contribution up to an additional $35K), and more for your spouse if you count her as an employee of Financial Samurai. Are you already doing this with other forms of income and the $30K you’ve listed here is just from your passive streams?
Indeed. The chart I posted is just a realistic example of a budget based off $200K income living in an expensive city.
With such expenses, contributing $53,000 will be difficult.
Here’s a related post: How Much Can You Exactly Contribute To A Solo 401k Plan Each Year?
Your real estate income growth is amazing. We are growing our rental income too, but it’s a bit slow. I’m going to raise rent 10-15% this year. That’s a lot to me, but we’re still below market value.
Great job growing your passive income. At this rate, you’ll meet your goal very soon. Next year?
Anything can happen in the next 12 months that’s for sure. I’m currently earning the monthly 2017 PI figure in the chart since June 2016. So this post is part projections and part actual figures given the future is uncertain. That said, my passive income portfolio has been very stable with no downswings. A lot of this has to do with rental income, which stays flat or goes up each year. Even in the recession, rental income did not go down.
10% – 15% is a big raise! Hope they stay and aren’t too bent out of shape by it!
Wow congrats! You are a passive income rockstar and totally prove how setting specific goals can really pay off with determination, time and effort. You have a great diversity of passive income streams as well, which is also an excellent position to be in. I still have more active than passive income streams, but my dividend income has been on the rise and it’s such a great feeling when I see money coming in. Fantastic job Sam, you’re an inspiration to us all!
Yeah, focus on children and family is the real goal here, I guess.
That will consume more energy than you could ever imagine. In a good way.
Way to go for taking that route when others continue to vigorously chase the money and look back on a life that simply passed them by.
Interesting as always to look at your stocks/bonds allocation. The whole bonds discussion is a minefield of debate on whether they add diversification and importantly sufficient returns. Still, it is all relative to what you actually need. I will be quite happy to accept 5% absolute return from our assets once we hit FIRE in two years. The old want vs need adage….
5% return guaranteed would be sweet. I’d put 70% of my entire net worth and lock 5% in for 20 years if that was offered to me guaranteed!
Sam, thanks for the peek inside your passive income portfolio; it’s very inspiring.
If you included income from the blog as passive I’m sure you’d have exceeded your goal…probably by the set date. How much time would you need to spend on your blog for you to consider it passive? 20 hrs/wk? 5?
How many hours for the blog to be passive? Maybe 3-5 hours a week so that I’m only spending time socializing on this site. Right now it’s more like 20-25 hours a week due to writing 3X a week and responding to comments. I’ve already spent 1 hour responding to comments this morning for example.
So unfortunately, the blog will never be passive. BUT, I don’t want it to be passive b/c I love doing it. I want things I love to do to be active! The passive part is really just the money part to ensure financial freedom and stability. The active part is the FUN part! To interact w/ folks from all over and create something from nothing.
Check out:
Active Income Is Much More Enjoyable Than Passive Income
The Ideal Split Between Passive Income And Active Income For A Better Life
You said you were $25,000 a month short. That would be $300,000 a year short of your $200,000 a year goal.
Did you mean $25,000 a year instead of a month?
Great catch. Yes, I was short $25,000 for the year, not month. Corrected.
Nice work, Sam, and congrats on your success with this.
Although I think we have different perspectives on the value and role of “passive income” in retirement, your accomplishments are laudable nonetheless.
Thanks for the update.
Thank you.
My passive income goal’s purpose is entirely for family now.
1) So my wife never has to work again if she doesn’t want to.
2) So I can be there as a supporting husband and father, and not at the office. Can’t get that time back in a child’s life, and I know how excruciatingly hard and trying it is to raise a child. I’ve seen so many breakups after a child is born. I can’t help but wonder how much of it is due to resentment and one spouse not being there.
And the third reason has to do with continuing to do what I love, which is running this website. I don’t want to feel the pressure of trying to make money online because it really starts to take away the joy of writing. I want to write first and then find synergistic products that can be woven into the writing. This is the fun part about online media. Answering a problem w/ content and also offering a tool.
What role and value does passive income in retirement play for you?
Thanks for the reply, Sam.
I stand (at least partially) corrected. I’d say our “values” perspectives are more aligned than I thought, recognizing that yours, as you point out in this post, has evolved.
We also seem very much aligned in the purpose of our writing.
I think some differences remain in our thoughts on the economic role of “passive” income in retirement. But they’re ultimately minor distinctions that make a difference only at the margins.
You’re spot on about raising children. Little Libre is very young, and raising him when I was running my consulting firm would have been a non-starter. Which is why we waited for retirement before we did the kids thing.
It’s a sincere luxury to fully participate in his childhood. (He sits in my lap as I write this.) And I wish you well in your own journey with a family!
200k+ in passive income is a fantastic achievement and something I aspire to! I wonder what that amount really is if you included your blog income? (Not sure if you ever do that).
I see myself wanting to follow a similar path to you regarding passive income which is why I have started DGI at a young age, a blog, and hope to get into rental properties back in Trinidad in 5 years or so. While I value the prestige my company has and the wealth I can accrue if I climb the ladder I see it more as a means to an end.
The prestige gets old after a while. Everything gets old after a while actually. 10 years of doing the same thing is the time frame I’ve noticed where I start getting tired of it all. So it’s good you are starting now BEFORE you get tired of the prestige etc.
I’m not sure anybody really wants to learn how to make money from blogging on this site. There are so many make money online blogs already. But maybe I can start a series, just like I’ve done for real estate, investing, gig economy etc. The irony is that because this site is established now, it has probably a top tier credibility level in teaching people how to make money with a website.
It always makes me smile to see bloggers blog about how to make money blogging when they don’t have much traffic, don’t make much money online, or haven’t been around that long. You can do anything on the internet.
I can’t be the only one that thinks creating a blog to the point where it becomes a valuable asset, like yours, is currently near impossible?
Where would you even start getting traffic from?
千里之行，始於足下, by Laozi (c 604 bc – c 531 bc) in the Tao Te Ching. It means “a journey of a thousand miles begins with a single step.”
I’m pretty sure that if you get up by 5:30am every day to write for a couple hours before work (if you work), publish three posts a week in your specific niche, and spend another couple hours after work writing, commenting, and sharing for three years, you will no doubt make at least $1,000/month from your site if not much, much more.
Search engines like Google automatically find your work. Give it a try.
Would you like me to begin a series on how to grow a blog into a money making machine?
I would love to see a series on blogging!
Yes, I too would love to see a series on how to grow a blog into a money making machine!
You will either be making 1k/month in 3 years, 10k+ a month in 3 years, or 0 in 3 years, no matter how hard you try from what I have seen.
Also, your niche must be big enough to allow you to grow indefinitely, but small enough for you to have a chance?
I feel like blogging only works out when all the stars align? I may be wrong!
True. As Wayne Gretzky once said, “it’s better to never try so you never fail.
Here are two posts you should read:
https://www.financialsamurai.com/stop-self-sabotaging-yourself-why-financial-samurai-is-finally-on-facebook/
https://www.financialsamurai.com/abundance-mindset-to-grow-wealth/
https://www.financialsamurai.com/how-to-become-rich-and-powerful/
Tell me a little bit about yourself and your background. Thanks
Sure, I’d read a real-life series using your traffic building methodology as an example. Just like I used your “how to start a blog” post to start mine.
I’ve noticed you seem to list the “3 posts per week” strategy over the long haul as well as commenting on other blogs that will allow back links. Any secret sauce around that, and other lessons learned will help aspiring freedom-seekers such as myself realize independence faster, which is what your blog is all about. You’re very candid and transparent about your sources of passive income, why not about your tactics as it relates to what is essentially your platform. You prescribe a LOT of very practical ways of investing and diversifying… Even a “valuable links” post to take your How to Start a Blog to the next level would be really valuable for your readers trying to get a leg up. Just a thought. Then again, maybe it’s truly secret sauce!!
OK, will consider. So far, I’ve only got three people who are interested in me wanting to write more about blogging beyond the post, Blogging For A Living: How Much Can You Really Make Online?
There is a plethora of things one can do to boost their growth, make tons of money, gain adoring fans, and live happily ever after! :)
Wow, $175k income in 2016 is impressive. But wow, you have some pretty big expenses too, I can see why you’re shooting for $200k!
Why so much money in CD’s though?
Yeah, it’s tough living in San Francisco and Honolulu due to the cost of housing mostly. But these are two of my favorite cities in America and the world (love Amsterdam, London, Paris, and KL too). I don’t want to compromise on where I want to live to save money.
I would probably put MORE of my net worth in CDs if I could find a 4% annual interest rate. 4% risk-free is a beautiful number to live off for the rest of my life. In my net worth allocation framework, I recommend risk-free assets to make up 5% – 10% of one’s overall net worth. If your risk free assets can get about the risk-free rate of return (~1.6% currently), all the better.
Having risk free assets helps with financial peace of mind. If all goes to hell, it’s nice knowing there’s still a portion of your net worth to live on.
Sam
What are your thoughts on Preferred stocks or MREITS as a source of passive income
Thanks
Hi Todd, I don’t think I have a single pref stock or MREIT investment, so can’t say. My Citi wealth advisor has mentioned them before, but I haven’t been able to get comfortable with the returns and risk profile at this current stage. How about you?
Thanks for sharing an amazing diverse passive income portfolio! Over 211K is truly remarkable! I like how you set a goal and then achieve it. Your passive income will continue to rise every year. It will be 250K soon and then 300K!
Since my wife and I don’t have the stomach for rental properties or the stock market, we only invest 100% in muni bonds.
Adam
Hi Adam,
I’d love to get smarter about Muni Bonds and how to invest in them. I’ve basically looked at funds like MUB, and state muni bonds like CMF since I’m in California. How do you invest in muni bonds, and what is your marginal tax rate?
I should have invested much more aggressively in munis in 2014………….. they’ve done great. But I decided to drop a lot of money on my fixer then, which seems to have also done well, although I can’t monetize it. Just living life!
Thanks for reading my site and sharing your thoughts.
Sam
I don’t think you should count pre-tax dividend income. It’s not liquid/deployable cash flow…
Disagree?
To be more conservative, I should probably take out my pre-tax dividend income. However, every year I choose to contribute to my pre-tax Solo 401k (and SEP IRA) or not. So probably the fairest way is to take a 25% haircut (effective tax rate) on the amount.
The pre-tax money is actually accessible penalty free via Rule 72(t).
Anything else you think I should change to show a more true passive income? How are you doing in your PI journey?
It’s slow but steady… A bit demoralizing to spend all this time researching diversified passive income streams when you’re talking about flipping $300k+ and I’m looking at doing the same thing with $15k! The payoff for the time invested is probably worth the effort, but certainly wish I was dealing with bigger numbers! On another note: I see your point about the pre-tax income… But you seem to be fairly conservative in your tabulations everywhere else… So why not here too!!
You got yourself a deal. I’ll eliminate the ~$13,440 projected 12 month pre-tax portfolio passive income figure in my next update. This will help motivate me to try and make up for the loss. I entitled this post “A Long Road Home” b/c I’m so tired. But you’ll help me keep going!
It’s good to write off 100% of all pre-tax retirement accounts while continuing to max out pre-tax retirement contributions.
Add a large 401k/SEP IRA/IRA/ROTH IRA to a surprise Social Security payment and there’s a high chance for a wonderful retirement!
BTW, what are your referring to regarding “flipping $300K”?
Related:
How Much Should I Have In My 401k By Age?
The Fear Of Running Out Of Money In Retirement Is Completely Overblown
Oh I meant redeploying the $300k+ 4% CD
Got it. Perhaps my expenses are much greater than yours living in SF and I’m older? I’m not sure of your situation.
But $15K is great too. Every little bit counts!
I had to aggressively save for many years to accumulate the $250,000 in savings to invest in a 4% CD at age 32. In retrospect, it would have been better to invest that money in the stock market 7 years ago! But that’s why we diversify. Just never know.
Must be a great feeling meeting your passive income goal of $200k. I cant’t imagine ever coming even close to that. Thanks for sharing and proving that with hard work and planning, as well as little bit of luck/blessings one can achieve.
Thanks. I’d work on coming up with mapping out a plan. I think you’ll surprise yourself at the things you can accomplish. I started at around $80,000 in 2012, but I was SUPER MOTIVATED to improve the amount b/c I had no job, which ironically makes building passive income more difficult!
So my outlet was building this site methodically in order to replace my lost income, and then aggressively save and invest. I needed to feel the fear of not having enough money, which is why I invested 100% of my severance in the market in 2012. Only now am I finally taking profits to pay for life b/c I’ve reached my goal 4.5 years later.
Create a sense of urgency. You WILL surprise yourself.
What a great goal to set for yourself. You’ve put your nose to the grindstone for so long, you should reap the benefit of passive income. I look forward to hanging up my 9-5 job someday (but who am I kidding, the hours are usually way longer than that) and living on retirement funds I’ve worked so hard to create.
passive income will reduce the size of the nest egg we need to build up – provided it is long term and consistent.
The biggest thing we are missing is real estate income, have started looking into the crowdsourced companies but also want a rental to manage ourselves
Thanks for the breakdown, to bad you can’t count on 4% gains from CDs anymore
Your passive income is truly amazing. It’s funny how you probably didn’t expect to see your numbers increasing once you quit working, but the proof is in the pudding!
I’ll definitely be keeping an eye on your real estate crowd-funding opportunities – that’s something very intriguing.
— Jim
I’ve been lucky, like anybody who has also invested in various asset classes, that the bull market has gone on for so long. Reaching $200K would have been so much more difficult if the bull market died in 2015 and interest rates are what they are now.
I know my luck will eventually run out, which is why I’ve rebalanced to a more conservative asset allocation and have been paying down debt and raising cash. I want the good times to last longer!
Related: https://www.financialsamurai.com/practice-taking-profits-to-pay-for-a-better-life/
Once you hit your $200,000 goal are you planning to continue to build your passive income after that? I think you are right about your book, I think a $199 or even a $250 price tag would have little effect on the demand. Does Engineering Your Layoff bring you a decent amount of 1 on 1 consulting business as well after clients read the book?
I’m getting close to having my rental house paid off, probably 3 more years, at which point I will gain around $350 per month in “passive” income. Once it’s paid off and our primary residence is paid off, I will look into getting another investment property.
Good questions.
I’m currently earning a monthly passive income stream that will equate to a little over $200,000 if things stay stable for the next 12 months. Of course, a lot of things could happen in this 12 month period which could derail or improve upon the $200,000 figure. I’m always going to be ACTIVELY trying to improve my passive income. So hopefully my actions will provide a buffer against a 10-15% decline, or continue to improve the passive income figure by 10% – 15% a year if things stay the same.
I plan to just keep on building passive income due to family responsibilities. It’s not just me I need to look out for anymore when I began the journey at age 22. I’m hesitant to put a new target, like $250,000 or $300,000 because it exhausts me to think about what more I need to get there right now. I have high conviction I can grow the PI figure by at least 5% a year, so we’ll probably just leave it at that.
Engineering Your Layoff does bring a decent amount of 1X1 consulting business actually. I’m doing a call today at 11am and an in person meeting this Wednesday with a pilot who is flying in from Hawaii. But 1X1 consulting is 1000% active income. There’s preparation beforehand, the call, and the action plan afterward. It is A LOT of work. I told myself I’d only do about 3 – 4 clients a month, but that’s not happening. I need to raise prices to get down to 3-4 a month. But also, b/c after doing so many sessions, I strongly believe my clients are getting way more out of the session than the cost.
WTG on the rental house! I don’t regret paying off my condo in 2015 one bit. It feels GREAT to not have a mortgage and have more of the rent flow down to the bottom line. I wish you best of luck w/ finding and retaining good tenants!
You have built a passive empire, Sam. It’s amazing what you have created for yourself with this income (let alone the active income you earn too).
I was very interested to read your change to dividend paying stocks – I know you had a fun discussion with DividendMantra about DGI stocks in the past.
I agree with your conservative moves to keep your capital safer, the world is in an uncertain place (i’m not sure what will change it out of this mode).
We are at the very beginning of our passive-income-creating, we have a long way to go. We’d love it to cover our expected expenses as you have, maybe in 10 years :)
Tristan
Whatever happened to DividendMantra anyway? Did Jason really just peace out and sell his site for short term gain while ignoring everybody else? It was the weirdest thing I’ve witnessed in the blogging world ever.
Times change. I feel the easy money has been made, which is why I’ve cut down my expensive growth stocks and gone more bonds and large cap dividend stocks.
I still believe younger folks (<40) should be more invested in growth stocks long term over dividend stocks. The principal growth will crush the amount of dividends gained IMO. Further, the goal is to grow your nut as large as possible through principal accumulation and THEN live off the dividends.
Also, investing in growth in a bull market is more profitable too. It's when the growth has faded, and uncertain times arrive when it's time to get more defensive.
10 years will get here sooner than you think! Enjoy the times.
He did peace out, but I believe he still has an internet presence on DailyTradeAlert.
I love your method and explanation Sam. Why not just stay invested in growth stocks (that pay a low dividend) the whole time? Even a 40 year old has many decades to go, surely they’d be better of holding the growth for another 20 years.
Tristan
I personally like to reduce risk the longer we are in a bull run. I’ve still go exposure, but I’ve reduced beta. I’ve been burned too many times before, and I’ve only been investing for 20 years. It just pains me too much to give up all my gains and then some as has happened in the past.
I really want to practice taking profits to pay for life. Because that’s the whole point of investing in my mind. See: https://www.financialsamurai.com/practice-taking-profits-to-pay-for-a-better-life/
I appreciate you sharing such a detailed report. As far as your comment goes about your tenants – we treat ours like clients as well. We have a 98% occupancy rate this year and our tenants treat our properties very well because we go above and beyond. It’s all about that emotional intelligence too. I spent time researching the real estate crowdsourcing ventures as that is the next passive venture we want to invest in too. We have enough physical properties (that are not passive at this point) – and I am looking into e-book ideas as well. Your point about the lack of money invested to gain that passive income is incredibly important. I have plenty to write about – just need to organize my thoughts. Thanks for the push!
98%! Well done!
Yes, now that you’ve launched your site, creating products is a no brainer. The toughest part is to just get going.
Is this correct, or a typo?
“The first adjustment was refinancing a mortgage down from 2.625%”
That seems like a really good rate already!
I wish the rental market was better here in Charleston. I like the concept of renting out properties but the math is hard to work out here. It’s tricky to find better than 5% cash-on-cash returns (I’d prefer at least 8%).
Not a typo, although I have many :)
Yeah, got the sucker down to 2.375% in Spring 2016! It’s a 5/1 ARM.
Check out: https://www.financialsamurai.com/how-to-get-the-lowest-mortgage-interest-rate-possible/
You’re lucky in Charleston no? The cap rates/rental yields are much higher than here in SF at 2% – 4%.
Both Charleston and SF benefit more from appreciation than cash flow when it comes to overall return.
We’ve looked at buying property in Charleston as a vacation rental, but everytime I run the numbers we’re better off investing here in Augusta, and then using the income to fund renting while on vacation.
Savannah looked better as prices are much lower than Charleston, while rental rates are only marginally lower. Still no enough to make the numbers make sense though.
While I know this article is focused on income streams I can’t help but always keep my eye on Net Worth. You make a statement that you would need $1mil in equity to get a $32k yearly return on your 2/2? This seems terribly low? I have been investing in the Midwest for almost 20 years and most real estate returns at least a 6-8% cash on cash return? Why is yours so low? That’s only a 3% return on Equity?
Holding the same return would mean you have close to $3.5mil in real estate equity alone? Adding this to you other investments would place your net worth close to $10mil?
Correct. Cap rates in San Francisco are only 2% – 4% for most of the property you buy NEW today. This is why I’ve been considering selling one of my properties and reinvesting it in the Midwest, South, or East Coast. I tested the market for one month by asking for a stretch price of $1.15M for the condo while concurrently looking for ideal renters at $4,200. Whichever came first, I would accept. And the winner were tenants. See: Creating A Win-Win Scenario To Never Lose: A Decision To Rent Or Sell Is Made!
In cities like SF and NYC, most of the gains are from capital appreciation, and then income. Cap rates have been low since 2001 when I first started seriously looking. I’ve talked to people who were looking in the 90s and 80s, and although cheaper, cap rates were lower than the rest of America too.
It’s the 1970s that really made real estate more expensive w/ a two income household.
Check out: Net Worth Over Cash Flow
Net Worth Targets By Age, Income, Work Experience
As long as I could hold on, I’d take capital appreciation over income all day. It’s just the high barrier that may keep people out!
Sam, thanks for sharing. It’s very interesting to see how you allocate your funds to generate passive income and how you think about the investments. I’m still trying to diversity my income streams away from my day job which is 95% of our household income. Hopefully the website will generate some cash in a few years. Otherwise, I may start building a dividend portfolio, although I’m hesitating with valuations being so high. We shall see!
This is so inspiring, Sam! $200,000 in passive income? I’m slowly building my different streams of revenue. For right now, it’s blogging, freelance writing, and social media consulting. I’m earning a small amount of dividend income from my brokerage account, which is the only 100% passive income stream I have. I own 3/4 of an acre in a popular Nashville neighborhood that I plan on further developing in the future. I need some additional capital, though, first.
If you’re blogging, freelance writing, doing social media consulting have developable property and have a job, you are doing more than 99% of the people out there! Well done!
Yes, passive income all starts with capital accumulation. But w/ the amount of things you are doing now, it’s just a matter of time. Nice job picking up your Nashville property during the down!