Financial Samurai Passive Income Update 2014-2015

Financial Freedom Through Passive Income
Earning passive income in Santorini, Greece 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. 


Financial Samurai Passive Income Chart 2014-2015

* 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.


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.

RealtyShares Cumulative Returns 1H2018
My investment dashboard

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!

Pro Blogging Income Statement
You can start your site for next to nothing and potentially make a lot of extra income. This is a real example.

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

90 thoughts on “Financial Samurai Passive Income Update 2014-2015”

  1. Well. In that case, you have earned more than one can imagine. To generate $7000 net rental income per month requires over $1.5-2M in investments, paid for. To have paid for such, requires a saving rate of $200K over 10-12 years. To be able to save $200K per year requires an income of over $300K per year, after taxes, even if saved 100%. And this is ONLY for rental income part, let aside CDs etc. I dont get it.

    1. Looking at your CD section, to obtain $21,000 a year in income you must have at least $2.0MM invested correct? I think you could get much better returns on Investment Grade Corporate Bonds. Not Bond Funds, but individual bonds. My portfolio gives me 6% average, the funds are not guaranteed like the CD money but are pretty safe. Your $21K could turn into $120K a year.

  2. A Balance Sheet is incomplete without liabilities. This is passive income, what is the passive liability? Please do not tell me that you get over $7000 in rental income pm, with all of them paid for. Perhaps, you should write an article on “ranking passive liabilities”.


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  5. Hi Sam,

    I enjoy visiting your website on a regular basis. Your information is unique and well written. I was just reading your post above and was wondering why you haven’t included your affiliate marketing in your passive income chart.



  6. I really enjoy your blog and would love to generate passive income for myself.

    I’m mid 40’s living in my townhome that’s paid off and will buy a single family home with my significant other next year.

    I want to rent out my townhome but I’m not a Mr. fix-it landlord type. So I would have to hire a property manager to find tenants and handle their repair complaints. I can handle paying association and property taxes myself.

    Is it worth it? Do you use property managers for this purpose? I wonder what’s the best way to handle this?

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  8. Wow! How are you earning so much off CD’s. I have a 12-month CD of $5,000 earning .40% so it’s less than $2 per month of income. Am I doing something wrong?

  9. Looks like your doing awesome! So many blogs I read online ignore real estate as a form of diversifying and increasing your passive income streams. My father actually bought a few condo’s in Boulder, CO while I was in school and they now bring in 10% of property value each year. Not a crazy return or anything, but the consistency is nice when other income streams are down. Great to see you’ve been successful with it! Gives me the faith I need to pull the trigger on buying my first property. Best of luck with everything!

  10. Even Steven

    Just comparing blogging to poker for a second, you could “stake” another blogger that has some reputation/decent site etc with profit sharing in mind. It works in poker, but not sure how it would work in the bloggersphere of personal finance.

    1. Good idea! I imagine it will get hairy sometime in the future though. Also, a lot of blogs don’t make it b/c they simply give up within a year.

      It’s hard to keep a steady schedule of post publication unless you absolutely love to write.

      1. Even Steven

        Agreed it is tough, I think I”m throwing a party when I hit 1 year, probably a brewery tour, seems the most appropriate for me.

  11. First off, your passive income portfolio is very impressive! No one can argue that this money from things as simple as CD’s, stocks, etc is remarkable.

    However I’m disappointed that you don’t discuss more of your online business ventures (such as the affiliate marketing, etc) as part of this overall topic. Granted – they many not be completely passive, but I think it would still be of incredible interest to your readers. I know I’d like to know more.

    1. If I ever turn into a blogger who blogs about blogging, I might include my online income. But for now, I won’t and most people here aren’t interested.

      The blogging audience is less than 5% of my readership. For blogging related stuff is where it’s at.

  12. Congrats on the passive income its a great accomplishment Samurai. As the rents increase and the CD income will eventually go up as well, you can inch up to the 200K level soon enough.

  13. FS, nice $56K/yr bite towards the $200K/yr goal! Realizing this is strictly a snapshot of ‘passive income’, another metric that would be interesting for analysis is your cashflow. You have acquired another primary residence, and the Property Tax, mortgage interest, and other expenses must be significant. Would you say that the $56K/yr income covers the outflow for the new property?

    If it comes anywhere close, the years will fly by and eventually that acquisition will be free-and-clear (or leveraged for further investments, as you wish). You are working your plan, and your plan is really happening! Congrats.

    1. Cash flow is good. It’s really just accounting really whether I “live for free” now in my new home or whether I have $54k more in cash flow from renting out my old home.

      Either way, the increase in cash flow has provided more financial security even though I’ve taken on more debt. I truly can’t believe I was able to find a panoramic ocean view home for this price.

      The main optimization really is just lifestyle.

  14. The Wallet Doctor

    It looks like things are coming along nicely for you. How did you determine your goal for passive income? How does it compare to your goals for other income streams?

  15. quick question, do you reinvest your passive income and live from other active income or do you reinvest all the passive income? I’m presently in the process of figuring out my own financial freedom goals, I’m thirty and plan to retire in the next 12 years. I already have a pretty good passive income stream from bonds and treasury bills – btw if possible, you should look into investing outside the US, good rates on government bond to be had elsewhere. I am wondering if I should reinvestment all passive income and live off income i plan to receive from part time lecturing at a local community college or vice versa.
    If i live off passive income, the underlying pool wont get to appreciate and I wont have a hedge against inflation, I wont be working as such to add more money to the pie, it would just be to keep my brain ticking. If I reinvest passive earnings, I’m worried the part time gig might not be enough to maintain the standard of living i desire. What do you do?

    1. I reinvest/save all my passive income and live off my other income.

      I’m just trying to match income with expenses and prevent co-mingling as that’s what gets folks in trouble, at least me.

      I pay myself just enough to live comfortably from my business and save/invest the rest. There are multiple active income streams I can draw from if you check out the post:

      If I were you, id keep one foot in the door with PT work. It’s fun and safer. You don’t need much to survive.

  16. I’d say your best bet is to work on another product or book to help you hit that passive income goal. It would help diversify your passive income further, it would probably be the most rewarding area to focus on, and whatever it is, I’m sure it would provide great value to your readers. Sounds like a win / win / win situation to me :)

    I imagine you’d never consider doing another corporate stint just to boost your income, which you could pour into stocks / real estate to help build towards the $200,000? I guess an extra years salary wouldn’t do a huge amount for you, even with your previously high salary, and going back to work would probably defeat the purpose of what you’re trying to achieve anyway…

    1. It actually took a lot of effort to put together my 100-page book on negotiating a severance. Dozens of revisions, editing, applying for registration with library of congress etc.

      I’m still recovering :)

      But, I plant to put together another ebook before year end.

    1. Yes, thank you. The land appreciated 28% last year according to a government assessment. And thanks to my 8:1 leverage my $20K initial capital has returned 200% so far in one year :) All paper money for now though. Fingers crossed property values don’t crash.

  17. Zee @ Work To Not Work

    The problem I’ve been having lately with P2P lending is the small fees that they take off of each transaction. I don’t have a lot in lending club but every time I get an $.85 payment or something lending club chops off a penny. When my returns are starting to average down to about 8.5% I get frustrated that I lose more than 1% on each transaction. Perhaps they are really adding up just fractions of a penny until I reach a certain amount and then they collect it but that’s why I’m not so keen on P2P lending at the moment. My reasoning is that I wouldn’t buy an index fund or mutual fund with a full percent of management fees so why would I do that for P2P lending? It’s not like I actually know the people I’m lending to and feel a warm fuzzy feeling inside knowing that I’m helping them out, it’s just an average return with a high fee slapped onto it. Sure it is a different way to diversify, but I’m still not sure about it.

    As for my investing, I really like growth stocks. They have done wonderful things for my portfolio, but after so many great years in a row I find that all my new money is being allocated more towards solid dividend companies at the moment. Also if one of my stocks takes off I take a little off of the table and find some other investment that will lower my overall beta. I don’t think I will outsmart the market and see warning signs of when to get out so I’m trying to be a little more defensive as my portfolio gets larger. Honestly, I’m just waiting until the next crash or the next big pull back. I want to see blood in the streets because that’s when I hope I’ll want to suck up my fear and buy.


    1. I know A LOT of people who are waiting for a pull back. I’ve got a chunk of change as well waiting for a 5-10% downward move.

      Data shows millennials are under invested as well.

      Hence, will the markets ever correct a great deal if there are so many of us waiting? Eventually, but who knows.

      I try and overcome my fears with structured notes that have downside protection and people I trust who spend all day long making investment decisions.

  18. I’m curious if you’ve considered AngelList as a speculative play? Uber was listed on there in 2009 as was many others that have made it big. Only problem is you can’t cash out until there is an exit strategy by the company.

  19. Sam, have you considered getting into RE note investing? I’ve been investigating it for some time and it’s a way to diversify out of rentals while still keeping good returns.

      1. The idea is that you buy what essentially is a mortgage but, because of the time value of money, you can purchase it for less (and often substantially less) than the face value of the mortgage. When the mortgage holder pays on it, it generates a monthly income stream for you. But that’s not the best part.

        On average, people move every 7-9 years. When that happens, the due-on-sale clause is triggered and you get paid out: not for the amount you bought it for but for the face value of the note, minus what has already been paid in principal. And I believe this one-time payout is taxable as long-term capital gains.

        I’m still doing research, but next year if everything goes ok, I’m going to try it out.

        The risk, though, is that the person stops paying on the note. At that point, there’s a foreclosure, so, like all things RE, you make your money on the buy, not on the sell. The discount you get on the purchase needs to cover you in this event.

  20. You should add another reason to your list:

    10) To enjoy a Mythos overlooking the Caldera in gorgeous Fira.

  21. To make sure I understand, part of your passive income is off limits because it is in retirement accounts?

    Also, why do you exclude capital gains?

    1. Correct. A small portion of my passive income is off limits b/c they are in tax advantageous retirement accounts.

      I don’t touch any of my passive income, which is something I’ll clarify in the post.

      CD interest is allows reinvested.
      Rental income is used 100% to pay the mortgage and all expenses, and the $88K a year is reinvested.
      Dividend income is reinvested.
      Other income is saved and reinvested as well.

      I live off my business work income that I pay myself just enough to live comfortably so I can automatically save and reinvest the rest. You can take distributions if you want more money from your company. Just need to make sure the income and distribution ratio is close.

      I exclude capital gains because they are not recurring. They are one off. You can win and can lose. I want this report to be as pure passive as possible.

      1. I was wondering about that rental income Sam. You posted $88k in rental income, but without mentioning that it goes to paying the mortgages and all expenses in addition to reinvesting the extra, it appeared that your best bet would have simply been to buy a lot more real estate and keep sitting on properties while tenants pay the rent.
        I was initially under the impression that the $88k was above all expenses for the properties, which would be pretty doggone good.

        As always, the best to you! :-)

        1. Yes, $88,000 is after paying for all expenses associated with the rental property. $88K is the Net Operating Profits Before Taxes.

          I haven’t sold any properties and don’t plan to. I use the $88K to pay down principal, save in risk-free assets, invest in the stock market and debt market, and invest in private equity deals.

  22. I have a dilemma.

    I own two properties in Washington DC.

    The first is a row house is a very desirable neighborhood which nets about 40k/yr from rental income.

    I also own a 80yr old 4-plex in a gentrifying neighborhood not too far from the first property, however I live in one of the apts. This property is under performing and I am currently getting about 10k/year income form the 3 apts. I did some comps from rentals near by and I think with some renovation I could also get around 40k/year on this building. My goal is to be at 200k/yr and I think i will need another 2-3 properties to do that.

    My problem is that if I were to do this I would be kicking the tenants out and they most likely would have to go to the suburbs. I have a moral conflict between knowing that my decision has real impact on peoples lives, yet I want this to be my business (not a charity) and this is slowing me down from my goal. I am ready to buy another 4-plex which I don’t want to do until this one is performing at 100%.

    Also, I dont like having a building which constantly needs maintenance. I would rather fix it up and be at peace.

    Any input is much appreciated.

      1. I would probably not do that because it is not required. I can simply increase their rents substantially higher to push them out because their rents are low (even w/o renovations) compared to market.

  23. How does the venture debt fund your business school classmate started work? How often do you get distributions? I don’t understand why this would be categorized as “passive income” rather than a “speculative investment”.

    Why are you decreasing real estate income as a percentage of your passive income? Will there be negative tax consequences? Did you buy new home primarily to increase passive income by renting the old home?

      1. I’m getting an average 12% yield on my passive income investments (ie / non retirement account investments), where I am 100% in real real estate and a debt instrument secured by real estate, leveraged at the moment because I don’t have as much faith in the economy right now as you. I guess I’m going with the, “do-what-you-know” approach At best I could afford to live in a developing country on my passive income, so I’m not quitting my day job anytime soon! Enjoy following you strategies.

  24. The First Million is the Hardest

    With the success of your book sales you might consider creating another product that builds off of your book, or tackle another subject altogether. You have the audience here & possibly already have some demand from customers who really loved your book & want more from you!

      1. The First Million is the Hardest

        Not much about this passive income game is easy at the start :)

        Things are great, just trying to adjust back to reality now that the wedding and honeymoon are behind me. I have to get myself back on a writing schedule again real soon too!

  25. Money Beagle

    Good work building for so long that you now have that available. That took a lot of patience, discipline and time but it’s rewarding now. Enjoy!

  26. That’s pretty impressive for your passive income. My wife and I still not comfortable of leaving our full time job. right now, we are just trying to generate income from different income streams.

    1) Full time job
    2) Business income
    3) Rental properties
    4) Investment / Dividend stocks

    Until my #3 and #4 is larger than #1, I guess I’ll still be working.

    1. Good stuff. Keep at it. It takes a long, looooong time. But if the direction is correct, sooner or later we’ll get there. My passive income portfolio is from almost 15 years of saving and investing. I think I need at least another 3 years to get to my $200K goal. We shall see.

      1. Our passive income is generating around 80k at the moment, full time jobs at 200k combined. Business income estimating 400-600k (this year).

        However, tax is a big killer. All the net income is reinvested to increase net worth

        1. With business income of $400-$600k + job income, what are the things that make you guys afraid of leaving the $200k day job income? Maybe one of you leaves first and tries it out?

          What does your business do and is it relatively sticky with a defensive business model?

          1. Online business, but got good and bad day.

            Stable jobs, stable income and good health insurance (got a special need kid that spend 500k-1mil a year on insurance money)

  27. Why the low numbers with P2P loans? My Prosper is generating 16% right now and Lending Club is over 9%. With just shy of $20,000 in both, I’m generating about $300 monthly in interest income, though I’m drawing down both for my career / life transition in three years.

    1. Because you have more money in P2P than me.

      See the section of my post explaining P2P:

      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.

      1. Yeah, I guess I should have been more clear in my question, which was less about why you’ve made less money, but more about why you’ve invested so little in P2P.

        But, I see your point.

        I look at these loans as nothing more than numbers on a balance sheet. When people default, it is just a little less return than I would have liked.

        I’ve commented a few times over at my home about how much better my Prosper is doing than Lending Club, however, despite my best effort to have the lending criteria as identical as possible between the two. At least in my case, something is working far better with the former.

  28. Investing at this level is similar to a chess game. You make small moves and you are on your way to the goal. I would look at each investment and think about how you can tweak it. Remember, you get to increase rent on all your rentals once a year and more if they move out.

  29. I’m always curious as to how people evaluate risks/secondary risks in their portfolio.

    On the topic of growth stocks, for instance, I think one could make the case that SF real estate is essentially a levered wager on the performance of growth names. After all, it’s probably techies/auxiliary industry workers (IB, law, consulting) that keep prices/rents high. Should tech turn south, for whatever reason, SF real estate hangs on today’s growth names to keep on growing.

    Likewise, venture debt funds, if the strategy is to essentially provide bridge financing before an IPO, is highly-levered to the IPO window and whether or not it stays open for the foreseeable future.

    I’m just spitballing risks here, because, frankly, predicting the future is…well, almost impossible. After all, it’s much easier to comment than put money where your mouth is.

    1. I agree with you that real estate is a leveraged play on the local economy. I’m actually not buying real estate for the sole purpose of trying to generate income. The first time I bought my 2/2 condo is because I didn’t want to pay more than $2,000 a month in rent, which is what would have been required back in 2003 for a 2/2.

      After a couple years, I found my previous single family home which I thought would be a nice purchase because it’s hard to get a SFH for under X amount in that neighborhood. I had a couple good income years and saved almost all of it in order to put the 20% DP on it. The house was a little too big, but I ended up enjoying it for almost 10 years. Now my current house is because it has the panoramic ocean views I’ve always wanted, but never thought possible until I looked.

      Uber, Pinterest, AirBnb, DropBox, Box are all going public in the next 5 years. They employ thousands of employees. What are they going to do with their money and where will they live? In 2013, Uber was valued at $4 billion. Now in July 2014, it is valued at $18.5 billion. Crazy! But, even if the valuation drops back to $4 billion at IPO, that’s still $4 billion more wealth than there was in the past.

      Apple, which employes tens of thousands of people are entering their new product cycle with the iPhone 6 and more. The stock is back close to record highs.

      With all this wealth going on, SF property is dirt cheap compared to other international cities. SF corrected about 15-20% during the 2008-2010 period and that was the worst economic downturn ever. I’m prepared for that. But I don’t know if I care too much b/c I plan to live life and enjoy the home forever.

      1. Hi Sam
        Do you think the 2008 crash is the right comparator for Bay Area real estate considering that tech was relatively unscathed? Do you know how real estate performed before and after the bubble? That may be the more appropriate comparator for the Bay Area.

        1. Tech actually got hit hard during that time. I got laid off twice and was unemployed for 13+ months. Our house, bought in 2006, dropped 25% book value from when we bought it, and it’s currently up well over 20% from our purchase price. The house we sold in 2006, dropped nearly 50%+ and is up to almost where it was in 2006. Slightly different areas, one more desirable than the other.

  30. Good update Sam! Would you feel comfortable living off of only your passive income assuming you had no other sources of income? Do you think that it would be able to hold its purchasing power over time? Trying to get you thoughts on what % of the $150K you would feel comfortable living off of while still contributing some % back to the overall growth of the portfolio. While I know that there are a hundred different variables here, I was just curious about your thoughts at a high level. Assume that you don’t live in SF but someplace more modest like Kansas City (totally random city choice) or Dallas.

    1. Hi Dave,

      Yes, I think I would be pretty comfortable living in SF off only the $150K in passive income, even with a child.

      My comfortable income level per person in SF is around $85,000 – $100,000 based off my spending habits and mortgage amount. So I would have a $50,000 – $65,000 buffer.

      I would probably live overseas for 3 months a year to work on my Mandarin, one of my goals. China and Taiwan would be cheaper living too.

  31. I have about $60,000 a year coming in from my 11 rental properties that I bought starting in December of 2010. However, my real estate team manages them, which wouldn’t be possible for you so you would have to manage or hire a property manager. The other issue would be its hard to get those returns in Cali. I have spent about $330,000 or so in capital on those rentals and I finance them all.

    I am also a realtor which makes it easier for me to get deals and I save money on commissions. Have you ever looked into turn key rentals? That would diversify your real estate into other states, but you would be depending on others to manage and get you a decent deal.

    1. Yeah, SF and Manhattan rental yields aren’t as high given the price points are much higher. But the capital appreciation and stickiness of property values during downturns I’ve found makes up for it.

  32. Sam,

    I currently own 6 investment properties in the city where I live (Tulsa, OK). My wife and I have developed a love for vacationing in Colorado. We are in the market for another rental property, and instead of buying here locally, we are considering investing in a vacation rental in Colorado that we can also use a few weeks a year. The goal is ultimately to spend at least a full month each summer in Colorado. With that end goal in mind, we are considering getting our CO property now, instead of waiting for 10 years.

    What are your thoughts on these types of investments? We’d be happy to put 20% to 25% down on the CO property and just break even each year from a cash flow perspective (including essentially a free place to stay while on vacation).

    Is it a crazy assumption to think a property like this could break even or even turn a slight operating profit after debt service?

    Obviously, property type and location are key drivers, but I’m just looking for high level feedback right now.


    1. I am not an advocate of just breaking even on a property. How are your existing 6 properties performing from a cash flow perspective? Always interested in how the real estate cash flows are going in other parts of the country (outside of Sam’s SF perspective).

      1. My 6 properties provide about a 20% cash on cash return. Most of the properties I made a 20% cash down payment, but on 2 of them I did a rehab which substantially increased the value and therefore the rents in relation to my cash investment.

      2. Also, I agree. I wouldn’t want to just break even on a large portfolio of properties. However, if I could break even and essentially have someone else purchase a vacation property for me, I’d be willing to do that on a 1-off basis.

    2. Vacation property is a terrible way to make money. I have one, and it is a bad investment. But if you are investing in happiness and fantastic experiences, and you have money to burn, then I would go for it.

      1. Bad investment, maybe. But is the ROI on cash invested above or below 0%?

        If I did this, I wouldn’t compare it to other investments in my portfolio. The goal would be to break even on cash invested (not have to feed the beast each month). That would be a huge win for me.

        I’m just not sure how reasonable it is to assume I could break even.


        1. here is what I can add to the question as I have been in your exact shoes: every single one of my counterparts/friends that have second homes as “rentals” regret it from a financial standpoint. Now there are the exceptions of those guys who are older and bought a place for 400k that is now worth 1.4M…but all in all the common theme is that it is a pain, and for the couple weeks a year you get to enjoy it, you could stay at the Ritz and have less headache and the big one…not be tied to going to the EXACT same place every single time. On the bright side, if you are the type who has a hard time taking time off…this would sort of force that, and that is a good thing IMO.

        2. I don’t see a vacation rental as necessary a bad investment. You can often make 1.5x as much per month as you would having just rented it out on a lease. The only downside is that it is not passive income and you have to be more hospitable and have more forethought.

          As long as you don’t sink a ton of money, buy in a decent location, and charge the right price, what is stopping you from doing this? Why do you see this as so much different than any of your other properties? Buy somewhere where you would actually love to go every weekend and think about your guests and you’ll be fine.

          Check out AirBnB or VRBO to see the going rental rates for the area you’re considering. Also look and compare vacancy rates. See what people are doing right and what people are doing wrong.

  33. Couple of questions for you: 1) With property insurance in SF, if the next “big one” happens, they would insure you for the value of the structure, not the market value correct? so if your value is $2M as it sits today and the cost to rebuild is $700k…you get the $700k. At least that is the way we do it out here in the Midwest, just curious if things are different out there. 2) What do you factor in for vacancy rates when considering long term passive rental income? 3) if you had enough plain old cash to exceed your $200k passive income in relative risk free bonds themselves, would do that or would you press a little? Since there is no happiness gained beyond $200k as you have mentioned.

    1. 1) Correct, value of structure. B/c land should still be there. Hence, if one has a 1,000sqft property, then calculate the rebuild cost first. In SF, it could be up to $400/sqft… so get $400,000 worth of property insurance.

      2) For vacancy rates, unbelievably, I have never had a single month of vacancy in 10 years for my main rental. For my new old house rental, given it is a two year lease, I would estimate a 1 month vacancy every two years. But based on my experience land lording, I am very efficient at communicating with tenants, screening new tenants, and organizing the transition.

      3) I’d probably just keep on going because it’s a challenge and it’s pretty fun. Nothing is guaranteed, so what is $200K now might be $100K in the future.

      How about you?

      How is your passive income build going?

      What is your ideal income for max happiness?

      1. funny, I must have done something wrong because my response never showed up…anyway here it goes again:

        How about you? —I am like you, I’ll always stay in the game in some capacity. One of my good friends is buddies with a billionaire dude an when we were talking last summer I asked the question why he keeps going. He is in his early 60’s and what he said to us is “well if I stop, I’m just waiting around to die.” That seemed kind of sad actually to me, but I understood his point of view. Our culture here is a little messed up in my opinion, people need to keep score and that is their life’s purpose instead of what should be the important stuff like family, friends, and life experiences.

        How is your passive income build going? —Well honestly pretty well, currently I would say it is the $300k/yr range, but it is going to go down as I’m re-allocating some stuff that has had a hell of a run and sometimes it is good to take chips off the table. I believe I’ll shake out after it is all said and done in the $200k a year range with very minimal risk.

        What is your ideal income for max happiness? I’m right with you on this one for me as a single guy with no kids it would be hard to spend significantly more than $200k/yr. If you need more than that, honestly I think you have a spending problem. A life lived well is actually pretty cheap IMO.

          1. Thanks Sam, I have a paid for commercial property that throws off $180k/yr, a couple of private placements in apartment complexes that throw off $30k and $18k respectively…and my after tax pretty conservative investment portfolio throws off about $90k. I’m selling my commercial property though as it has had a huge run up in value and I can cash out now. hands down it was my single greatest investment turning $50k into well over $1M in 10 years…but single occupant commercial property can be high risk, high reward. I’ll probably plow that money into multiple multi-tenant type real estate deals.

            1. Hey nbsdmp,
              Would love to hear more about your commercial property..
              What is it? Where is it located?
              How did a 50k (I assume down payment) property turn out $180k a year?

  34. Hi Sam, you could always take some of your best content, use some free tools and a small initial investment of time, create a series of videos for a YouTube channel and turn on monetization. I know some folks that bring in high-five and low-six-figure incomes with their channels.

    1. Hi Chaz,

      That’s exactly what I plan to do. I figure I should work on creating one product a year. Just one. But after 10 years, that will be 10 products. It just takes time. But I’m determined to do so by end of year.

      Thx, Sam

  35. Regardless of if you hit $200k by next year or not, that’s very impressive. Maybe you should write a post about the above-above average person!


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