Financial Samurai Passive Income Update 2014-2015

Welcome to my annual passive income update. I don’t do these updates more often because nothing changes too much on a month-to-month or quarter-to-quarter basis. Do you really want to see that I increased or decreased my passive income by $1,000 from the month before? I think not.

Here are some immediate reasons I can think of for why building passive income is a good idea:

1) You likely won’t want to work forever, no matter how much of an eager beaver you now are.

2) Unfortunately bad things happen all the time e.g. layoffs, financial meltdowns, theft, etc.

3) It’s nice to provide as solid a financial foundation as possible for your family and loved ones.

4) You broaden your knowledge and expertise across various topics so you can seem erudite but remain a little dumb.

5) You’ll reduce financial stress and feel happier that not all your income is tied to one main source.

6) You will decrease your chances, your spouse’s chances, and your children’s chances of ever having to depend on the government to survive.

7) You will have more freedom to do things you truly want to do. This feeling becomes more intense as you grow older given you become more aware of the finality of life.

8) You can push yourself financially beyond what you think could ever be possible. Who doesn’t love a good challenge except for the people who have everything handed to them?

This is my third annual passive income report where I have a goal of making $200,000 in relatively passive income by mid-2015 after leaving my job in early 2012. I started off with roughly $78,000 a year and I’m currently up to a projected ~$150,000 a year if all goes well after renting out my old primary residence. Life is uncertain, and I’m sure things will change.

To clarify the meaning of passive income, I do not include income from consulting, freelancing, asset sales (stocks, bonds, real estate, baseball cards etc), and business income. I’ve got other targets for these revenue streams that I might discuss in a future post, but probably not. The goal of passive income is to have the income largely come in without doing much work at all. But in order to not do much work for money, we’ve first got to work very hard for our money!

One thing to note is that I started my passive income journey before writing about Stealth Wealth. $78,000 a year is roughly the median income in SF, so it wasn’t a big deal. But I promise that if I ever breach $200,000, I will go dark and never write any specific figures again. If I do, you’ll know that I’m lying to blend in because that’s what Stealth Wealth is all about. 

THE 2014-2015 PASSIVE INCOME CHART

* I keep track of all my assets for free with Personal Capital. PC tracks my net worth and cash flow for me so I don’t have to. Have you ever felt stressed having a long list of errands to do, but once you wrote them down you felt much less stressed? It’s kind of the same thing when you aggregate your accounts online.

CD Interest Income Analysis

From 1999-2012 I religiously invested anywhere from 25-35% of my savings into risk-free CDs because I wanted the guaranteed 4% annual return. 4% is my baseline target for increasing overall net worth each year. The other 65-75% was invested in stocks, bonds, private businesses, and real estate.

Two, five-year CDs expired at the beginning of 2014 which left me with a choice of either: 1) reinvesting the proceeds in a 2.1% yielding 5-year CD, which is not great since the 10-year yield is over 2.5%, 2) investing the proceeds in the stock market and bond market at record highs, 3) buying real estate, 4) investing in private equity, or 5) do nothing.

I did nothing for two months once the money expired so I could slowly formulate what I felt comfortable doing. It’s easy to go nuts when there’s a financial windfall, even if it’s your hard-saved money to begin with. In the end I decided to buy a new primary residence ~50% cheaper than my existing residence, rent out my existing residence of 10 years to capitalize on the rental income, pay down about $200,000 in another rental property mortgage at 3.375%, and invest in a venture debt fund my business school classmate started.

The mobilization of the two CDs into other investments left me with about $15,600 less in CD interest income a year for a total CD interest income of around $21,000. But that still leaves me with four additional CDs from two banks.

CD interest income equals 14% of total passive income.

Related: CD Investment Alternatives

Dividend Income Analysis

My dividend income has declined from $24,500 in 2013 to $21,360 because I have been selling my old work company stock every time a tranche hits my E*Trade account. Company stock is part of my deferred compensation that was negotiated during my severance. I’ve sold two-thirds of my stock with one year left of deferred stock to go. By mid-2015 I will have sold all my previous employer’s stock and reinvested the proceeds elsewhere.

The after-tax portfolio line item includes my Fidelity and Citi Wealth Management account where I’ve got several structured notes, index funds, and growth stocks. I try and practice “tax location” where I allocate more growth oriented securities that pay little-to-no dividends in my after-tax portfolios. You should consider doing the same. If I wanted to switch the entire portfolio to dividend stocks, I could double the dividend payout. Given I just bought another property, I’m allocating 90% of my after-tax savings toward my after-tax portfolio to get the balance right again.

My pre-tax portfolio includes my SEP IRA, rollover IRA, and solo 401k. I’m slowly shifting these portfolios towards more dividend-producing, lower volatility stocks and index funds. I was spending way too much time punting around my rollover IRA with uninspiring returns. These pre-tax portfolios should be steady and cause the least amount of stress. I plan to contribute the maximum to all three portfolios to the extent I’m allowed by law.

Dividend income also consists of 14% of my entire passive income stream.

Related: Growth Stocks or Dividend Stocks?

Real Estate Analysis

The main change is buying a new property to live in and renting out my old residence of 10 years for $8,700 a month. After taxes, insurance, maintenance I clear roughly $4,700 a month or $56,400 a year. I screened eight tenant applicants in order to get the best possible choice. They come from a reputable school and have a combined annual income over 40X the monthly rent, which is one of my key requirements.

The $8,700 a month in rent is actually only a net increase of $7,700 a month because I was renting out my garden room for $1,000 a month. This is why you still see three rental income properties in the spreadsheet. From a property management point of view I’m pleased because I don’t have another property to manage in a different location. I’ve simply gone from renting out a room for $1,000 to renting out a house for $8,700 a month.

The property that I really need to work on is my Squaw Valley, Lake Tahoe property. I switched property management companies because the new management company provided a $34,600 a year guarantee  in order for me to switch. $34,600 a year is the net operating income I was receiving from the previous management company. The pitch was that they would not only guarantee I make the minimum I did for the previous 12 months, but work on upside income as well. So far, that upside hasn’t materialized and I need to help them, help me because I don’t really want to go back to the old management company for now. I’ll write a post about my vacation property in the future, and perhaps some of you will want to rent it out throughout the year.

Rental income accounts for 59% of my total passive income. I plan to reduce this percentage down to 40% by aggressively increasing the amount of money I’m contributing to dividend stocks and a venture debt fund.

Related:

How To Properly Analyze And Value Rental Property

Increasing Passive Income Through Leverage And Arbitrage

Other Income Analysis

My book sales are slowly growing, but at a slower rate than the growth of my site. There are waves of high sales during the beginning of the year and the end of the year when people think, “This year, I will no longer be miserable!” or “I’m outta here after they pay my year end bonus!” or “Life is too short to work for a micromanaging boss that makes me miserable!” or “I don’t want to miss seeing my kids grow up!” or “FML! But I’ve got no plan!” I’ve heard all the reactions, and I empathize with every last one of them.

The main way to increase book sales is to find more affiliate partners who write about career, lifestyle, entrepreneurship, and early retirement. There’s only one book in America I know of that teaches employees how to negotiate a severance and engineer their layoff, and that’s my book. There are plenty of books out there on how to get promoted and paid.

P2P lending has continued to be on the back burner. Fundamentally, I think P2P lending is not only a great business, but a great way to make some passive income as well. But knowing me, I will get pissed off if and when someone defaults on my loan because I’m a huge stickler for always honoring your word. Nothing makes me madder than people who say one thing and do another or welch on their promises. Honor is super important on Financial Samurai and I’m not willing to get bent out of shape for money.

Total other income accounts for roughly 13% of my total passive income. Ideally, I’d like this figure to rise to 25%.

Related: How To Engineer Your Layoff

A $50,000 GAP IS HUGE

To put $50,000 into perspective, one would need to accumulate $1,250,000 in capital and return a relatively risk free 4% to generate $50,000 a year in passive income. Therefore, it doesn’t look like I’ll achieve my goal by June 2015 of generating $200,000 a year in passive income. I guess I could invest all my stock portfolios into strictly 3% or higher dividend stocks to get close, but I’m not that low on the risk profile yet where I no longer want to hunt for unicorns.

One of the things I’ve discovered is that ANYTHING CAN HAPPEN so long as you are in the game. Perhaps over the next 12 months some CNBC producer might e-mail me out of the blue and ask me to come on air to share some talking points on how to empower employees to negotiate a severance and find a more lucrative job given the declining median house hold income. That TV segment could literally sell $50,000 worth of books in a couple weeks.

Actually, in August 2018, one of my posts on CNBC went viral and I ended up generating record revenue.

Or maybe I do find a herd of unicorn stocks that go from $100,000 to $1.25 million. All the proceeds could then be easily sunk into a portfolio of telecom and utility stocks that generate $50,000 a year in dividend income. I won’t know unless I go searching.

Or maybe I just blow myself up like I sometimes do in the stock market because I think I have an edge. Maybe there’s a 9.0 earthquake that demolishes all of San Francisco and all I’m left with is the land. Damn, now I’m worried. Let me go check on my property, car, life, and umbrella insurance policies!

Good and bad things happen all the time. We must do our best to analyze new and existing investments, rebalance our portfolios, and continue to aggressively save. Don’t count on the Bank of Mom & Dad, an inheritance, a rich Aunt, or the government to save you.

Updated 4Q2018: I ended up selling my SF rental house for $2,740,000 and reinvesting $550,000 of the proceeds in real estate crowdfunding for a target 15% annual return. So far, so good as everything is passive and heartland real estate has more room to run than coastal city real estate.

Passive Income X Factor – Online Media Company

I started Financial Samurai in 2012 and I’m actually earning a good passive income stream online. The top 1% of all posts on Financial Samurai generates 31% of all traffic. The average age of the top 1% posts is 2.3 years old. In other words, after putting in the hours to write some very meaty content over two years ago, 10 posts consistently generate a monthly recurring income stream that’s completely passive.

I never thought I’d be able to quit my job in 2012 just three years after starting Financial Samurai. But by starting one financial crisis day in 2009, Financial Samurai actually makes more than my entire passive income total that took 15 years to build. If you enjoy writing, connecting with people online, and enjoying more freedom, see how you can set up a WordPress blog in under 30 minutes like mine. It’s cheap and easy to start!

Photo: The day I realized an online business could really work. Santorini, Greece, 2015.