If you’re looking to achieve financial freedom before a traditional retirement age (60+), you must build passive income. This post will highlight the best passive income investments to help you get there in our current low interest rate environment.
Passive income is the holy grail of personal finance. If you have enough passive income to covered your desired lifestyle, then you are free at last! You can say and do whatever you want. Too many people fail to live their truth due to a lack of passive income.
However, the only way to generate useable passive income is by building a taxable investment portfolio, which includes investing in real estate.
Maxing out your 401k, IRA, and Roth IRA are great moves. Unfortunately, they can’t generate passive income to live on until after you turn 59.5, in most cases. When it comes to achieving financial freedom, the hope is that we achieve it as young as possible.
Why I Focused On Building Passive Income
After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at our company’s free cafeteria, I decided I had enough. Working in investment banking was wearing me out. I needed to generate more passive income to break free.
There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. I started focusing on generating passive income in 1999.
However, it wasn’t until the 2008-2009 financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I’m sure many people during the global pandemic are feeling the same way about their occupations as well.
It wasn’t until 2012 when I generate enough passive income (~$80,000) to break free from work. And it wasn’t until 2017 when I was able to generate enough passive income to take care of a family ($200,000). Today, in 2021, I estimate my wife and I will generate roughly $300,000 in passive income (chart at the end with a breakdown of various passive income sources).
We’ve discussed how to get started building passive income for financial freedom before. Now I’d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.
I’m updating my passive income rankings for 2021+ given so much has changed since my original passive income rankings came out in 2015. A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.
The best passive income rankings are born from my own real life experiences attempting to generate multiple types of passive income sources over the past 22 years.
Best Passive Income Investments Starts With Saving
By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!
Sounds nice right? If only there was a formula or a chart like the 401k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom. Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.
If you can max out your 401k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.
It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can’t touch your 401(k) and IRA before the age of 59.5 without a 10% penalty.
Let’s take a look at the best passive income investments for 2021 and beyond.
Ranking The Best Passive Income Investments
Below are eight best passive income investments to consider. Each passive income stream will be ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criteria will get a score of between 1-10. The higher the score, the better.
- A Risk score of 10 means no risk. A Risk Score of 1 means there is extreme risk.
- A Return score of 1 means the returns are horrible compared to the risk-free rate. A Return Score of 10 means you have the highest potential of getting the highest return relative to all other investments.
- A Feasibility score of 10 means everybody can do it. A Feasibility score of 1 means that there are high requirements to be able to invest in such an asset.
- A Liquidity score of 1 means the investment is very difficult to withdraw your money or sell without a penalty or a long period of time. A Liquidity score of 10 means you can access your funds instantly without penalty.
- An Activity score of 10 means you can kick back and do nothing to earn income. An Activity score of 1 means your’ve got to manage your investment all day long like working a day job.
- A Tax score of 1 means the investment is taxed at the highest possible rate and there’s nothing you can do about it. A Tax score of 10 means the investment is generating the lowest tax liability possible or you can do things to lower the tax liability.
To make the ranking as realistic as possible, every score is relative to each other. Further, the return criteria is based off trying to generate $10,000 a year in passive income.
Let’s look at my overall Best Passive Income Investments ranking chart.
Rank #8: Peer-to-Peer Lending (P2P)
The least best passive income investment is P2P lending. P2P lending started in San Francisco with Lending Club and Prosper in mid-2000. The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions. What was once a very nascent industry has now grown into a multi-billion dollar business with full regulation.
With a diversified portfolio of 100 or more notes, the leading P2P lenders claim investors can make an annual return between 5% – 7%. The returns used to be higher, but the increased supply of money has brought returns down.
The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There’s something that just doesn’t sit right with people breaking their contract obligations.
Over time, the P2P industry has seen its returns shrink due to higher competition and more regulation. As a result, I believe making money through P2P investing is one of the worst ways today. There could be a wave of lending defaults post pandemic too. Interesting to note ARK Capital has taken a large position in Lending Club in 2021, and has caused the stock to outperform.
Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity: 7, Taxes: 5. Total Score: 30
Rank #7: Private Equity Investing
Private equity investing can be a tremendous source of capital appreciation with the right investments. If you find the next Google, the returns will blow every single other passive income investment out of the water. But of course, finding the next Google is a tough task since most private companies fail and the investment opportunities always go to the most connected investors.
The most liquid of the private investments are investing in equity or credit hedge funds, real estate funds, and private company funds. There will usually be 3-10-year lockup periods, so the Liquidity score is low. These funds should at least provide for some semi-regular passive income distributions.
The least liquid of the private investments is when you invest directly into a private company. You could be locked up forever and receive zero dividends or distributions.
Access to private investments are usually restricted to accredited investors ($250K income per individual or $1 million net worth excluding primary residence), which is why the Feasibility Score is only a 2.
But the Activity Score is a 10, because you can’t do anything even if you wanted to. You’re investing for the long term. The Risk and Return score greatly depends on your investing acumen and access.
Gaining $10,000 a year in private equity investing is difficult to quantify unless you are investing in a real estate or fixed income fund. Such funds generally target 8-15% annual returns, which equates to a need for $83,000 – $125,000 in capital.
Risk: 5, Return: 7, Feasibility: 2, Liquidity: 2, Activity: 10, Taxes: 6. Total Score: 32
Rank #6: Certificate of Deposit (CD) / Money Market
There was a time when CDs or money market accounts would produce a respectable 4%+ yield. Nowadays, you’ll be lucky to find a 5-7 year CD that provides anything above 2%. The great thing about CDs is that there are no income or net worth minimums to invest.
Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, a CD and money market account are FDIC insured for up to $250,000 per individual, and $500,000 per joint account.
Now you can only get an online money market account paying 0.4% as of March 2021 because the Fed slashed rates to 0%. In comparison, the 10-year Treasury bond yield is hovering just under 1%. The problem with owning the 10-year bond is that you have to own the bond for 10 years to guarantee you’ll get the current yield.
It takes a tremendous amount of capital to generate any meaningful amount of passive income with savings now. To generate $10,000 a year in passive income at 0.4% requires $2,500,000 in capital! At least you know your money is safe, which is great during bear markets.
The huge drop in interest rates is why it’s prudent to lower your safe withdrawal rate in retirement and/or build a bigger net worth before you retire. It takes a tremendous amount more capital to generate the same amount of risk-adjusted income today.
Take Advantage Of A Drop In Interest Rates
The main thing savvy investors can do to take advantage of a huge drop in interest rates is to refinance debt or take on debt and invest in higher return investments.
At the very least, homeowners should be refinancing their mortgage. Check out Credible, my favorite mortgage lending marketplace where lenders compete for your business. It’s free to get a real mortgage rate quote.
The best mortgage value is refinancing or getting a 15-year fixed mortgage rate, followed by a 30-year fixed. However, mortgage rates are ticking back up due to inflationary concerns as the economy reopens. Hooray!
Risk: 10 (no risk), Return: 1 (the worst return), Feasibility: 10 (anybody can open up a savings account). Liquidity: 7 (savings are easily accessible, but not CDs without a penalty). Activity: 10 (you don’t have to do anything to earn passive income. Taxes: 5 (interest income is taxed as normal income). Total Score: 43
Rank #5: Physical Real Estate
Real estate is my favorite asset class to build wealth because it’s easy to understand, provides shelter, is a tangible asset, doesn’t lose instant value like stocks overnight, and generates income. When I was in my 20s and 30s, I thought owning rental properties was the best passive income investment.
The only bad thing about owning physical real estate is that it ranks poorly on the Activity variable due to tenants and maintenance issues. You can get lucky with great tenants who are self-sufficient and never bother you, or you can be stuck with tenants who never pay on time and throwing house-damaging house parties all the time.
Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market, and only after buying two or more properties are you actually long real estate. This is why everybody should own their primary residence as soon as they know they want to stay put for 5-10 years. Inflation is too powerful a force to combat.
In order to generate $10,000 in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50,000 property with an unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental yield, or a more realistic $200,000 property with a 5% net rental yield.
Generating High Rental Income Is Tough On The Coasts
In expensive cities like San Francisco and New York City, net rental yields (cap rates) can fall as low as 2.5%. This is a sign that there is a lot of liquidity buying property mainly for appreciation and not so much for income generation. This is a riskier proposition than buying property based on rental income.
In inexpensive cities, such as those in the Midwest and South, net rental yields can easily be in the range of 7% – 10%, although appreciation may be slower.
I’m bullish on the heartland of America real estate and have been actively buying commercial real estate there through real estate crowdfunding and speciality REITs, which we will discuss more below.
Real Estate Has Great Tax Benefits
The tax benefits of owning physical real estate are very attractive. The first $250,000 in gains is tax-free per individual. If you’re married and own the the property together, then you receive $500,000 in tax-free gains upon sale.
Then there’s the ability to exchange a property you own for another property via a 1031 Exchange so you don’t have to pay any capital gains tax.
If you own rental property, you can take non-cash amortization expenses to reduce any rental income tax. Owning property over the long term is one of the most proven ways to build wealth and generate passive income for the average American.
I believe there is an attractive opportunity to buy real estate in 2020 and beyond due to low mortgage rates, a rotation out of stocks, and the desire for more income and less volatility. I’m personally looking to buy another single family home to rent out.
Further the value of rental income has gone way up since interest rates have gone way down. Therefore, I think buying rental properties in this low interest rate environment is good because rental property valuations have not appreciated as much as the cash flow they generate.
Risk: 7, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6, Taxes: 10. Total Score: 44
Rank #4: Creating Your Own Products
If you’re a creative person, you might be able to produce a product that’s able to generate a steady flow of passive income for years to come. At the extreme, Michael Jackson, makes more dead than alive. This is due to royalties his estate makes from all the songs he produced in his career. Since Michael’s death, his estate has made over $2.5 billion according to Forbes.
Of course it’s unlikely any one of us will replicate the genius of Michael Jackson, but you could produce your own eBook, e-course, award-winning photo, or song to create your own slice of passive income.
Example Of A Product
In 2012, I wrote a 180-page eBook about severance package negotiations. It regularly sells about ~50 copies a month at $87 – $97 each without much ongoing maintenance. The book is updated for 2021 with 200 pages to teach people how to negotiate a severance. Once you have a severance, you have a financial runway for your next chapter in life.
In order to generate ~$50,000 a year in passive income from the book, I would need to invest $1,250,000 in an asset that generates a 4% yield. To earn $10,000 a year in passive income would therefore need roughly $250,000 in capital.
Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.
Leveraging the internet to create, connect, and sell. The startup cost is low and it’s easier than ever to launch you own site. The only risk is lost time and a wounded ego. Here’s my step-by-step guide on how to start your own profitable site in under 30 minutes. You want to build an online business that can’t get shut down.
Below is a real income statement of a personal finance blogger who started his website on the side while working.
If you are a creative person who takes pride in making money on your own, creating your own product is one of the best ways to go. The margins are extremely high once your product is produced. The only thing you need to do is update the product over time.
Risk: 10, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 7, Taxes: 7. Total Score: 45
Rank #3: Fixed Income / Bonds
As interest rates have been going down over the past 30 years, bond prices have continued to go up. With the 10-year yield (risk free rate) at roughly 1.65%, we’re in an interesting situation. The 10-year yield was at only 0.51% in August 2020. I believe long term interest rates can stay low for a long time and can head to 0%. Just look at Japanese interest rates, which are negative (inflation is higher than nominal interest rate).
Bonds provide a terrific defensive allocation to an investment portfolio, especially during times of uncertainty like during the coronavirus pandemic. If you hold a government bond until maturity, you will get all your coupon payments and principal back. But just like stocks, there are plenty of different types of bond investments to choose from.
Anybody can buy a bond ETF such as IEF (7-10 Year Treasury), MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total Return Fund). You can also buy individual corporate or municipal bonds. Municipal bonds are especially enticing for higher income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.
The main issue people have with bonds is its perceived lower historical performance compared to stocks. However, with the combination of lower volatility, higher coupon payments, and defensiveness during times of uncertainty, bonds are an attractive investment.
Take a look at how long-term bonds and stocks have performed over the past 20 years. Long-term bonds have, in fact, outperformed!
Main Concern With Bonds
The main concern for bonds is the future of interest rates. If interest rates do go higher, bonds will decline in value, all else being equal. There has been so much stimulus pumped into the economy due to the coronavirus pandemic, that higher inflation is highly likely in the future. In fact, the markets are now forecasting three Fed rate hikes by 2023.
That said, so long as you hold the bond to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA. Further, the Fed has clearly stated it will keep the Fed Funds rate at 0% for the next couple years.
Bonds are a great investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.
Refinancing your mortgage or any debt is one of the easiest ways to generate new passive income. I refinanced my mortgage to a 7/1 ARM at 2.25% for minimal fees with Credible. As a result, I boosted my cash flow by $400 a month, which is like boosting passive income! Unfortunately, mortgage rates are ticking back up in 2021 due to higher inflation expectations. Best to refinance now before rates go up even further.
Risk: 8, Return: 3, Feasibility: 10, Liquidity: 7. Activity: 10. Taxes: 8. Total Score: 46
Rank #2: Real Estate Crowdsourcing
Currently, my favorite passive income source is real estate crowdfunding. Real estate crowdfunding enables individuals to buy a percentage of a commercial real estate project that was once only available to ultra high net worth individuals or institutional investors.
Owning individual physical real estate is great, but it’s like going all-in on one asset in a particular location with leverage. If the market goes down, your concentrated investment could lose big time if you are forced to sell. Many did during the last financial crisis..
My favorite real estate crowdfunding platform for accredited investors is CrowdStreet. They are focused on individual real estate projects in 18-hour cities. Valuations tend to be lower and net rental yields tend to be higher in places like Memphis, Charleston, etc.
If you are not an accredited investor and like to invest in diversified funds, you can invest in a private eREIT through Fundrise. Fundrise is the leader in this more diversified style of real estate and has been around since 2012. For the average investor, a diversified eREIT is probably the best way to go.
Unlike with other passive investments on the list, with real estate crowdfunding, you at least have a physical asset as collateral. Both platforms are free to sign up and explore.
100% Passive Income Is Nice
For those of you who dislike dealing with tenants and maintenance issues, investing in real estate crowdfunding is wonderful.
In mid-2017, I sold my San Francisco rental property for 30X annual gross rent. I reinvested $500,000 of the proceeds in a real estate crowdfunding portfolio to take advantage of lower valuations across the country with much higher net rental yields. Not having to deal with maintenance issues and tenant problems has been wonderful.
Coastal city real estate has become too expensive. I expect people and capital to naturally flow towards lower cost areas of the country, especially with tens of millions experiencing shelter-in-place. The future of work is remote. Take advantage of a multi-decade demographic shift inland.
Further, the performance of Fundrise’s eREITs have been relatively steady during stock market downturns or flat markets, as we saw in 2015 and 2018. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income.
To be able to invest in real estate, but 100% passively is a great combination. You can invest in publicly-traded REITs as well for real estate exposure, however, as we saw in the violent March 2020 stock market downturn, REITs performed even worse.
Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity: 10, Taxes: 7. Total Score: 47
Rank #1: Dividend Investing
The best passive income investment is dividend-paying stocks. Dividend and value stocks are making a comeback after underperforming growth stocks during the pandemic. Value is back!
The “Dividend Aristocrats” are a list of blue chip companies in the S&P 500 that have demonstrated a consistent increase in dividend payouts over the years.
Let’s say a company earns $1 a share and pays out 75 cents in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the next year the company earns $2 a share and pays out $1 in the form of dividends. Although the dividend payout ratio declines to 50%, due the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.
Dividend stocks tend to be more mature companies that are past their high growth stage. As a result, they are relatively less volatile from a stock context. Utilities, telecoms, and financial sectors tend to make up the majority of dividend paying companies. In 2021, the S&P 500 dividend yield is about 1.6%, which roughly equals the 10-year bond yield.
Tech, Internet, and biotech, on the other hand, tend not to pay any dividends. They are growth stocks that reinvest most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.
Pay Attention To Dividend Yields
To achieve $10,000 in annual passive income with a ~1.8% S&P 500 dividend yield would require $555,000. Instead, you could invest only $154,000 into AT&T stock given its 6.5% estimated dividend yield. It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.
One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. You can also use a digital wealth advisor like Personal Capital to automatically invest your money for you at a low fee. Alternatively, you can DIY and use Personal Capital’s free financial tools to manage your wealth. The key is to invest consistently over time.
In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid. However, given dividend rates are low and volatility is high after a 11+-year bull market, the Return score is lower than in the past.
Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48
Best Passive Income Investments Review
Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:
- Dividend Stocks
- Real Estate Crowdfunding
- Fixed Income (Bonds)
- Creating Your Own Products
- Owning Rental Properties
If you can stomach the occassional volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding and fixed income instead.
There was a time when I loved owning physical real estate the best in order to generate a steady stream of rental income. However, once I became a dad in 2017, I no longer had as much time or energy to manage properties.
Real estate crowdfunding through platforms like Fundrise and CrowdStreet are good solutions for my real estate investment capital. 100% passive income is wonderful. I really like the combination of owning a hard asset that generates income. It’s a more stable way to grow wealth.
For those who are the creative types, starting your own website like this one and creating products online feels extremely rewarding. Some say making $1,000 on your own is like making $5,000 or $10,000 at a job. However, blogging would score a 1 in the Activity Score since these posts don’t write themselves. Instead, you really want to create products like a book or a course to sell passively.
Finally, owning rental properties is becoming more attractive given how low interest rates have fallen. The value of rental income has increased so much that I’m looking to buy another physical rental property in 2021.
Best Passive Income Investments Table
Once again, here are the best passive income investments. All eight passive income investments are appropriate ways for generating income to fund your lifestyle. The right ones depend on your personal preference, understanding of the investments, creativity, and interests.
Build More Passive Income Today
Enthusiasm for work is strongest when you are young and have very little money. After four years of high school, followed by another four years of college, work sounds like an exciting adventure! But after a while, your job can begin to beat you down.
Perhaps a coworker purposefully tries to make your life miserable because they resent your success. Maybe you get passed over for a promotion and a raise because you weren’t vocal enough about your abilities. Maybe you mistakenly thought you worked in a meritocracy. Whatever the case may be, you will eventually tire.
This is why it is important to take action while you still have the energy. With interest rates at rock bottom levels, building passive income will take a lot of effort and patience. Start now!
My Current Passive Income Investments 2021
Below is my latest passive income streams that I’ve been building since 1999. Our passive income allows both my wife and I to be stay at home parents to two children. Our goal is to consistently generate $300,000 in passive income and relocate to Hawaii for kindergarten.
Saving early and often is no sacrifice at all. Instead, the biggest sacrifice is living a life on someone else’s terms due to a lack of funds.
On your journey towards financial freedom, please diligently track your net worth. Further, analyze your investment portfolios for excessive fees. Finally, regularly calculate your retirement cash flow needs through a free financial tool like Personal Capital.
I’ve been tracking my net worth and my investments with Personal Capital since 2012 and have seen my net worth sky rocket as a result. My favorite tool of theirs is their Retirement Planner that enables me to properly forecast my cash flow.
Remember, if the amount of money you’re saving and investing doesn’t hurt, you’re not saving and investing enough. At the end of the day, nobody cares more about your money than you.
Now you know the best passive income investments, it’s time to get cracking! Your future self will thank you.
I’m a little confused by dividend investing. It’s my understanding that dividends pay outs come directly out of the stock price. So on ex-dividend dates the price of the stock drops at a similar ratio the dividend payment was disbursed. Now, it’s also my understanding that good companies usually regain those losses quickly before the next dividend payment, due to market psychology and other factors.
But many people’s understanding of the dividend being interest earned money, like you get from a savings account, without touching the principal seems wrong. It seems more similar to taking a home equity loan from your home to generate cash. (if the company was a simply physical asset, which i know it’s not).
Anyway… dividends always confused me.
You are correct in that it is not “interest” paid out (although I can see how investors may confuse the two if they do not have a solid understanding of business financial statements).
When a company declares a dividend and then pays out the dividend to shareholders, the companies enterprise value decreases? How? The cash on the Balance Sheet declines by the amount of the dividend. The flip side of the Balance Sheet has Retained Earnings declining by the amount of the dividend.
Investing is based on future expectations. A dividend paying company has a built in expectation that operations will continue and a dividend will be paid out again. The result is in increase in share price as cash starts to build up again on the Balance Sheet.
Hope this helps!
Tony
Excellent reply, Tony.
I’ll add that stock price is driven by supply/demand so the dividend payout is not always reflected in the stock price.
If you look at a mutual fund, a distribution of dividends and/or capital gains WILL result in a drop of NAV. However, the new NAV plus your distribution will equal the prior value.
Being informed of passive investment options has only become more important, as bonds aren’t serving income investors as they once did. Real estate is my favorite investment, but it can be pretty active at times. Understanding what you are getting yourself into from an active versus passive commitment up-front is key.
Hey Sam,
I’ve been a fan of your blog for years. Thanks for all the insights, a fantastic article as always. I’m curious about your thoughts on crowdfunding vs short-term rentals like Airbnb. Have been considering purchasing physical real estate for the sole purpose of STR income and using a management company to take a bit more of a passive approach. Have been investing with Fundrise since 2019 based upon your recommendations and am currently splitting extra cash between saving for the STR, Fundrise and low-fee ETFs.
Crypto Currency Mining: Risk 1; Return 10; Feasibility 9;Liquidity 9;Active 9;Tax 5(depends on your jurisdiction);
It is risky but it is a good diversification to the overall portfolio :)
Great write up, Sam. I’m from the UK and it seems that buy-to-let landlords have taken a bit of a beating recently with a lot of the tax implications tightened. I’ll research into some UK-equivalent real estate crowdfunding though as that seems like an ideal solution.
I really enjoyed this article. I was wondering if you would comment on the Rule of 55, where one could draw down from an employer 401(k) beginning at age 55 without 10% penalty, if one retires early from the employer. I’m hoping you would confirm my basic understanding of Rule 55. Thanks.
This is one of my favorite posts that inspired me to make some changes to my overall strategy. I’ve owned and operated some rental properties in the past but have re-focused on some additional streams after realizing gains from core real estate. I think many like myself may have moved away from the market with past poor decisions in a mix of allocations that were not passively managed. I generated this post of my 3 ETF strategy which may help others that get started around these principles of passive income from basic broad based holdings including real estate.
fargnoli2.medium.com/these-3-index-funds-will-make-you-wealthy-a-drive-thru-financial-education-for-the-working-class-da9dba097083
My next goal inspired by this article is to try to do P2P lending and it has been interesting to read other’s experience in this area.
For the years you are growing your army of dollars do you stick to things like VTSAX and switch to these methods only when you want income?
Thanks for the post Sam.
I am planning to invest in Fundrise. But I am little confused about taxes about the eFunds.
Do you have to file for each state where your eFunds are invested assuming K1 shows a profit and it is above the filing requirement for that particular state.?
Also when do they generate K1s?
Yes, that would be correct. I have seen that many times with clients. They receive an IRS Form K-1 (typically from Publicly traded Partnership – think America’s, enterprise Products Partners, Teekay, Kinder Morgan, etc.) and have income apportioned to states that is above the minimum filing requirement. This can be an expensive investment as a result.
Tomy
Any idea on what’s the minimum filing requirement? Are there any such requirements for 0 state income tax states like Florida, Texas etc?
What a nice overview and fact based comparison of passive income streams! While I don’t agree on all of your assessments (I personally prioritize direct RE investments over crowdfunding), I like the scoring methodology you have applied! Thank you.
Hello Sam,
Do you have any feedback on a newer real estate crowdfunding platform called Roofstock?
Most of their properties are in the heartland of America, where you can get a lot for your money.
I’m curious if you spoke to them, they are based in the Bay Area, or at least looked into it.
Thank you
Alessandro
Yes, I had lunch with them and wrote a Roofstock review. Not a bad offering.
I’m more focused on Fundrise and CrowdStreet because I already own a lot of single-family homes. Further, single family homes have done well in this pandemic. Commercial real estate has lagged, but I think we rebound a lot in 2021+.
Overall, I’m very bullish on commercial and residential real estate for the next several years. Just make sure to diversify!
Sam
On your passive income chart, for the real estate (e.g. $3,050 for the rental condo), are those numbers net after all costs? Does it factor in debt service on a mortgage (assuming you have one)
I’d like to get your take on “DeFi” platforms such as Celsius Network. Ignoring the risks of Crypto, it’s stable high yield alone is a great source of passive income on a model that is more stable than most banks.
I second this, Nexio, Celcius or the big one BlockFi.
You have
3.13% yield on DVY
2.03% on NOBL
3.16% on VYM
Blockfi has 9.3% APY on holding USD. US-Based and Regulated. $100 million in equity funding.
Is this just a blind spot for traditional investors? What are your thoughts?
Sam – great job on creating such diversify passive income streams. I’m a proponent of creating at least 3 revenue streams. It’s awesome to see that you have created more than 3 revenue streams – and passive to boot.
How sticky is your passive income stream? Any stress from COVID-19?
This pandemic does provide us with an opportunity for our revenue streams to be stress tested. If they can still continue to produce in today’s environment, they are pretty good during the next economic turmoil.
With the book you made. What specific marketing & sales strategies do you use? Anyone can write a ebook yet only few ma age to sell them consistently like you been? What tactics are you using to generate sales month to month? Be detailed please.
Thanks for updating this post – great information. One question, do you use an LLC to invest in real estate crowdfunding (specifically accredited investments)? On Crowdsource, it asks for the account type and legal investing entity name – just curious if there’s a need for legal protection. Thanks for your excellent articles.
Hi Dan –
I would think not as you are probably a Limited Partner and not a General Partner. I would not think another layer or legal blanket would be necessary.
Sam –
In addition to Vanguard REIT (VNQ) do you also invest in the Vanguard International REIT (VNQI) as a complement to the US fund?
Hi Sam –
Any thoughts regarding the Vanguard US and International REIT funds?
Sam –
Looking at Vanguard International High Yield and Vanguard International REIT/RE/REOC and wow, that fund sizes are small. $1 billion and $5 billion. I did not realize just how small. US REIT is $55 billion and US High Dividend is $35 billion.
I am thinking US REIT and US High Dividend would be better passive income funds than US High Dividend and International High Dividend or International REIT/RE/REOC.
What are your thoughts about small fund sizes where the risk is merged or closed funds?
Wow you make $50k a year from your book sales? I’ve considered self publish a personal finance book (I am a writer for a living after all) but my blog doesn’t get the type of traffic yours does nor do I reach the same affluent audience. But — wow, if I could make 50k a year from an eBook I’d be in heaven! You are my idol!
Hah, well, I don’t think it’s very impressive since I first published it in 2012 and it has gone through four revisions to be ready for 2021. What would be more impressive is if the sales growth grew with this site’s traffic growth since 2012. If so, the book would be generating more like $200,000+.
But it’s all good. What I really should do is write more books, but it’s hard work and I’m trying to enjoy the moment do what I want to do.
This article is getting me closer to trying things because I definitely want to build passive income and I want to start now, I just don’t know how to do or get started doing more than half of these things, and the terminology throws me in for a loop. I could definitely check out Fundrise, I don’t qualify for anything like CrowdStreet. Are there any other resources I should look into to actually physically put my money in these places related to the article?
Hi Chris,
Not sure exactly what you mean when you write “Are there any other resources I should look into to actually physically put my money in these places related to the article?”
But you can invest in rental properties, but that requires probably leverage and more active management. You can also invest in a publicly-traded REIT ETF like VNQ.
I like Fundrise because they have funds that are diversified. And their track record is pretty good and the returns are not very volatile, unlike the stock market. You can read my Real Estate Crowdfunding Learning Center and all the linked pages to learn more.
Yes actually I was interested in real estate crowdfunding, and I am currently learning more. I will definitely check this out.
To put my question in context I am always hesitant and reserved in investing because I know I could lose out. I always had this feeling that investing is something that can be very complicated as well and overwhelming. So when it comes to finances and growing them I always have this feeling of uncertainty. If I were to truly start investing my money like I have not been over the years, I always want to be sure and confident in what I am doing. Looking up other resources that can guide me (like baby steps for a non-finance person) how I can start putting my money in places that will allow it to passively grow is what I was trying to ask for in terms of recommendations.
Great article, I remember reading the original version a few years back and wanted to circle back and say thank you. It helped push me to continue to build passive income streams. I now have 3 rental properties a good investment portfolio and have started a blog as a way to create my own product.
The one I really like is rental properties as it is a great tangible asset you can drive by and see. Of course, there are concerns with tenants but what has worked well for me is I call the prospective tenant’s second landlord as that person has no incentive to lie to either keep the tenant or get rid of them. They are able to tell the truth about the tenant. It has worked well for my wife and I for our three rental properties over the years.
Great work both inspiring and helping many others, Sam!
How do you contact their past landlords? Because I feel like if you ask for the landlords contact information from the prospective tenants they wouldn’t give it or they’d fake it.
Great article! Regarding the sale of your rental, Did you 1031 the proceeds into the crowdfunding platform. Also if you don’t mind sharing, what has been your returns?
Thanks again,
I looked for a 1031 exchange property, but couldn’t find one. Therefore, I decided to reinvest my sale proceeds into stocks, municipal bonds, and real estate crowdfunding in roughly 33/33/33 increments. The real estate crowdfunding returns have been about 12% a year so far.
Related: Reinvestment Ideas After Selling Your House
This is the first time I’ve read one of your posts, but it won’t be my last. Great article! I was especially interested in your “create your own product” information, since that’s what I’ve been doing since retiring from teaching in 2018. You could say I was looking for validation, which I definitely found. The only thing I regret about starting my own passive income business is that I didn’t begin sooner.
Welcome to Financial Samurai! Yes, I actually wish I started Financial Samurai sooner than 2009 as well b/c I had the idea back in 2005-2006. But I had just finished going through 3 years of business school part-time while working 60 hours a week and was exhausted.
Better late than never! GL!
Great discussion here, Sam!
In my opinion, physical rental properties are undersold here vs. other types of passive income. My strategy has been to invest in high cash flow markets (Memphis, primarily), buy & hold rent ready properties, and use a professional property manager. It’s still not as passive as equities or REITs, but it’s still very passive after I acquire the properties.
And the returns are MUCH higher. It is remarkably easy to achieve 15%+ cash on cash returns, which doesn’t even count mortgage paydown or appreciation. I’ve done the math a hundred ways, and it just seems that there is NO faster way to build wealth or achieve FI than with rental properties.
It seems to me that the Walter Payton of
Passive income is investing in Renaissance Tech’s Medallion Fund. 66% annualized returns from 1988-2018 borders on science fiction.
It’s closed to only employees of Renaissance tech. But why hasn’t another company or group of mathematicians been able to replicate to some degree Medallion’s success?
At 10 bill in assets the fund is poised to disrupt everything. The company has apprx 300 employees.
I believe everyone is in a ROTH IRA in the company.
So, if it has an annual expense of 26% your left with 40% annual Return. In 10 years they will have 280 bill AUM for 300 employees. In 20 years it would have 8 trillion AUM.
This is fascinating yet scary. How does Medallion do it?
Sam –
What do you think about US REIT and International REIT funds?
I own several publicly-traded REITs. They are fine, but as we discovered during the March 2020 meltdown, they are often MORE volatile than stocks. See: How Does Real Estate Perform During A Stock Market Selloff
Therefore, I like a combination of publicly traded REITs and private eREITs. I personally hate volatility, which is why my net worth is so diversified and conservative. Besides, my wife and I don’t have day jobs and have accumulated enough capital to live comfortably. I’m not interested in hitting home runs anymore.
Sam, does the return on your rental properties include principal paydown?
It doesn’t. But paying down principal certainly builds wealth.
Excellent updates Sam! What do you think of Vanguard US High Dividend fund and also Vanguard International High Dividend fund as possible additions to a passive income stream?
Those are definitely some of the top choices for dividend investing. The question is whether now is the right time to add positions in equities.
For me, the answer is no. Not beyond my normal SEP IRA and Solo 401k maximum. I’m building cash and looking for real estate deals.
Follow-on question: how long would you look before you leapt into something if you had cash sitting around and wanted to avoid your cash inflating away?
PS I’m amazed by how much you make annually, passively. Awesome.
Enjoyed this post.
Back in the 80’s I started a high income JOB, rife with office politics & blatant nepotism within the ranks, so I started buying properties to get OUT!!!.
After I watched my colleagues take a beating during black Monday ’87, I have NEVER lost any sleep over the stock market, nor have I ever invested in it.
After a few year of buying ‘dumps’, busting knuckles rehabbing, then renting every room to pay down double digit interest rates I was burned out.
By chance I met a very classy real estate agent & could not believe her std of living & after a few ‘meetings’ she confided her strategy: short term financing of investment properties &/or holding high interest notes on those she decided to sell.
It changed my life & since the 90’s (I retired in ’98) it has been an exponential Rule of 72 ride.
I have taken back a few deed-in-lieu-of, but have only ever had one foreclosure & that turned around quickly for no loss & another 12% note for double my original cost.
Pat , I thought it was no longer possible to create a note with that double digit do to Dodd Frank?
Thanks Financialsamurai for enlightening me on this topic, would look forward in these type of posts more often.
I and my brother found the following in the comment very useful, specially during this pandemic.
hope you find it useful as we find it to be!
Great Thanks!
Thanks. Enjoyed being exposed to some new ideas, having some existing ideas confirmed, and special thanks for the inspiration to continue the push to create my own products.
Samurai are known for a focus on death. Dying well often meant everything. You could write a badass masterpiece on passing on wealth. Id love your ideas on setting up trusts. Im sure Id learn a lot. Thanks again
The trust is the least of your concerns. Educating and providing a good financial foundation to your kids (and grandkids) is everything.
My big concern is my grandkids squandering the nest egg or not having ambition.
Financial Samurai,
Have you looked into Constant? Stumbled upon it and looks promising in the P2P lending arena. All loans are backed with 150% collateral of the loan. Much less risk than Lending Club or Prosper from what I can tell.
Appreciate your feedback!
FS,
What about commodities? Where would they rank and do you own physical gold/silver or another commodity investment?
Best,
RT
Is your venture debt fund investment through a specific platform?
I have a direct investment in two venture debt funds run by a private venture debt company. One of the founders is a business school classmate from Berkeley.
Hi Sam, great post – I would love it if you could do a post on how you do your due diligence on deals on Crowdstreet.
Sure, here’s are two posts to read:
What To Look For When Investing In Real Estate Crowdfunding
Deciding Between Debt and Equity Investing In Real Estate Crowdfunding
The Risks Of Real Estate Crowdfunding To Be Aware Of
Hi. Great post as usual. Just couple of points. I managed to retire early at 43 on rental income. I write about it on my blog. There IS a bit of hassle with it and I believe index fund investing is top at least based on research.
I would not focus only on dividend investing as top passive income. It is at the discretion of the company to pay dividends and many cancel them to preserve capital as happened now due to coronavirus. In Australia and NZ many banks significantly cut dividends after increasing them for last few decades. This caught short many retirees. Also some banks stock dropped partly due to decreased dividends.
Thats my 2 cents.
Cheers
Mr Whyninetofive
Excellent read as usual. I’m currently in a position where I’m not quite able to max out my or my wife’s 401k, but we are maxing out our IRAs. Should our next goal be to max out our 401k’s? Or just get the employer match, and then invest the rest in something like Fundrise? I was under the impression one should always max out their pre-tax investments before post-tax, but perhaps I’ve misunderstood.
Thanks for your insights Sam!
Hello, I have been following Financial Samurai for a while now and find your writing very informative and helpful in formulating my own thoughts, thanks for all your insights.
I have only a simple question. For real estate, is your passive income as stated net of all maintenance, mortgage and holding costs (but before tax)? I find it difficult to generate high passive income from real estate on a net basis.
Hi Lydia,
The real estate income is income after all expenses but before taxes.
One of the reasons why I diversified into the heartland of America is because the Cap Rates are so much higher than San Francisco. We’re talking 4-5X higher. Combined with the fact I can earn the income passively, it was a good solution for my real estate capital.
S
Thanks Sam. Can I ask if there are mortgages on your investment properties? For me, the largest expense is the interest payments and I find that unless I pay down the loans, it is very hard to earn decent passive income on rentals.
So I am thinking of using any spare cash I have to pay down loans, which seems a bit of a waste at times given the low interest rates. But then the stock market seems risky to me now given how fast/far it has recovered since March so I am hesitant putting my savings there.
Some do, some don’t. It takes a while to expand the cash flow. But it’ll happen over time as inflation increases rents and your mortgage stays fixed. Real estate is one of my favorite asset classes to build wealth given it is simple to understand.
That said, I’ve diversified as I’ve gotten older b/c I don’t want to manage real estate as much anymore.
Good update of a popular post. Thanks. Would love to see you take a deeper dive into the #1 rank – dividend paying stocks. I believe there are considerable differences between investing in dividend paying stocks directly vs a dividend stock etf (DVY VYM). For me, a diversified portfolio of 30 – 50 companies with “secure” dividend payout fits my risk tolerance. The key is assessing the safety/security of the dividend per investment – PNG, PG, PSA, CSCO & T for example. Their NAV usually goes up more slowly in an up market and down more slowly in a down market. Less volatile. The dividends don’t change much. I dipped my toe into Real Estate Crowdsourcing and got bit. I know you love this area, but outside of my comfort zone. I have a couple old/good CDs but nothing available now. This is a tough time and environment for retirees seeking passive income. Even your favorite – real estate – is getting sketchy in many parts of the country.
In my humble opinion wealth only papers over with racism with mostly half – hearted politeness. I am a minority and I have been both rich and poor. I have found that racism in the US changes it’s form depending upon the minority’s economic circumstances and environment. I have also found that there are wealthy and poor racists, educated and uneducated racists and democrat and republican racists. When I have been stopped (questioned ) by the police they don’t know that I have a masters degree in finance, that I have FINRA securities license designations (series 7, 63 and 79) , that I am also a licensed real estate broker or that I that I have been a volunteer for the Boys and Girls Club for over ten years they only see that I am black and what I have in terms of wealth, education or character is secondary to the image and expectations that they expressly and implicitly carry with them about what a black male 6 feet tall weighing approximately 180 pounds means to them . On a good day I live beyond that encounter but on a bad day I might not because they fear my blackness and if they have to make a split second judgment and they have all the power (in that dynamic)
I (and many people who look like me) might not get the benefit of the doubt because I am a perceived as a threat and/or they feared
for their life.
Sincerely,
A relatively well off black male sick and tired of the systemic racism, implicit bias and excuses for them. I will acknowledge that the slope for progress is positive in some areas but boy there is a lot of variance!
P.S.
I am old enough to have to attended legally segregated schools in my elementary school years in the south , then integrated middle and high schools and then college in the Northeast, guess what, there was varying degrees of racism at at every level. I have been married to the same woman for 29 years (an interracial couple) guess what racist did not like us very much back then and some don’t like it now. We had one daughter graduate from an Ivy League college and has been in Forbes magazine, guess what, she’s faced racism in school and even now as a CEO. All said money may make things more comfortably for an individual but it does not seem like it will eliminate the problem of racism or antisemitism towards a group. The Jewish story in Europe and then in America would seem to bear that out, every seems nice until the majority gets fearful over something and the old familiar antisemitic tropes come out …..again.
NM, based on what you’ve written above, it sounds to me like you have a book (or ten) to write…..and I’d read every single one :) Your stories need to be told – please consider publishing a book.
Best regards,
Kari
Not sure what this has to do with the article, or anything in the comments thread
Impressively detailed article as usual! This was a refresher for me as I read it awhile ago.
The ability to participate in real estate and achieve high returns with low risk is highly dependent on where you reside. For example, for me personally, return is a 10 with rental portfolio over 17% for 2019, and risk is a 10 as non-leveraged Class C property purchased well under market value will never be worth less than purchase price.
Real estate crowdfunding is definitely higher risk than managing our own rentals as we have no *control* with crowdfunding. (Disclosure: I have small investment in Fundrise.)
We could also argue “liquidity” is irrelevant as the intention is passive income *forever*, so no need to sell a good income generator. Rental property investors are typically in for the long haul, and may hold for life or 27.5 when depreciation benefit is gone.
So, for me, or anyone living in the midwest or South, rental property is easily #1.
– Mike
I wanted to wait till the dust settle on my job to post this.
I’m 25 and despite the stock market drops and job market will be pulling in 280k this year working in NYC. My income at 24 was 220k and at 23 was ~180k. I work at Facebook as a machine learning expert so only around 20-30hrs per week and very stable relatively.
I hate business/markets with a passion so I’m only buying index funds until I get close to my FIRE age – 35 – at which point I’ll put my new cash flows into Bonds. Online business is not an option since I can’t sell – unless it’s an algorithm – but obviously you can make infinite money if you’re smart – see Sergey Brin.
Just wanted to point out that Tech is _even better_ now than anyone can even believe. If you’re good at mathematics, it’s by far the best place you maximize the dollar value of your talents, regardless of whether you’re an employee, small business owner etc.
What would you say is your after tax, after living costs, net amount? Like how much of that $280k would you say ends up in your bank account for investments?
There are state tax calculators, based on that it’s a little over 165k post tax. I spend 60-72k per year so up to 100k invested. I also get 50% 401k match so you can tack on another 5k in free money.
Sam – great job on creating such diversify passive income streams. I’m a proponent of creating at least 3 revenue streams. It’s awesome to see that you have created more than 3 revenue streams – and passive to boot.
How sticky is your passive income stream? Any stress from COVID-19?
This pandemic does provide us with an opportunity for our revenue streams to be stress tested. If they can still continue to produce in today’s environment, they are pretty good during the next economic turmoil.
So far it’s pretty sticky. However, I suspect a couple investments in hotels in my real estate crowdfunding fund are hurting right now. I’m doing an income analysis in a new post with a potential to have a 20% decline if things get really bad.
Hey Sam, thanks for taking the time to update this post. I’ve always loved this post since you published it before, lots of great food for thought. Why haven’t you ever dabbled in commercial real estate investment? I know you do commercial crowdfunding but what’s the reason for never buying a small building to rent out to a business? Full disclosure, I’ve never owned a residential or commercial rental. That being said, I’m looking to purchase a small commercial building in the next year or so to see if I like it. Mainly I’m attracted to not having to deal with tenant repairs or anything like that. If something breaks down in a commercial property, the tenant has to handle and pay for it. Commercial properties basically seem like more work when it comes to finding tenants to rent the space but then less little headaches to deal with in terms of repairs. Plus I like that you can do legwork on commercial property to instantly increase the value. If you buy a building that is 70 percent occupied and you hustle and work hard and get it to 85 percent occupancy, then you just created additional sweat equity. I feel like it’s harder to do that with residential (unless you are a handy person and can do repairs and upgrades yourself on the property but I’m not handy at all). Anyway, thanks again for the post. I feel like you’ve been throwing down an abundance of great articles lately. Seems like you’ve upped your publishing cadence so kudos on that!
Also if anyone on here has dabbled in commercial and residential, let me know which one you prefer and why. Thanks all!
Hi Jon, let me know how your foray into investing in physical commercial real estate goes!
The main reason why I sold my main SF rental property in 2017 was to simplify life. As a father of two young kids now, I don’t have the energy or the desire to manage as many properties any longer. I want to spend as much time with my children as possible. Real estate crowdfunding has been a great solution for my real estate investment capital.
I wish you good luck and please keep us updated!
Great post Sam, I used to always come back and refer to you’re 2015 report.
At the moment I am pretty heavily into stocks and corporate bonds, but used to have holdings in crowdfunded real estate.
The crowdfunded real estate was a pretty good investment in terms of returns, but I started to have growing concerns about platform risk and eventual liquidity.
In the next few years I am going to start to diversify from the US total market and either add some international exposure, or start looking at REIT’s
P2P lending does interest me, but I am slightly concerned with platform risk over here in the UK, but will reserve my judgement and see what happens.
Keep the content up, love your stuff!
Josh
Great updates and very impressive passive income streams! Thanks for inspiring all of us with so many different ways to earn passive income.
I personally prefer investing in stocks but this post gave me some ideas on how to diversify my investments even more. I would like to invest in real estate, but I think that real estate in my country (Croatia) is overpriced at the moment. Do you think that real estate prices could decrease in the following months on a global scale?
I tried the P2P lending site lendingclub.com and returns were abysmal. In fact for the first 2 years I was earning negative returns due to all the defaults. It finally climbed out the basement and is paying me a dismal 2% yield. I can do that well by just having savings account at Ally Bank.
It depends on what P2P loans you invested in, but I do agree that returns have been declining and the risk / reward ratio isn’t what it once was.
I had the same issue with Prosper. The defaults were much higher than I anticipated. Even at the higher credit ratings loans. You’re basically stuck too if you want to get out as there aren’t a lot of options. I wouldn’t do it again
This article proved wonders for me! Thanks a bunch! I am a noob when it comes to investments and financial terms. But after reading this, I understood that you can make money work for you.
I like what you say about the defensiveness of real estate investing during times of uncertainty. I think you’re right that more people will buy real estate, especially with mortgage rates so low. People want a tangible asset that is less volatile and produces income.
Amazing read! Keep sharing.
Excellent article Sam on the stock market! I would love if you could take a deeper dive into the asset classes and funds/stocks that you are investing in if you could.
S&P 500
High Dividend Yield Funds
REITs
Technology Stocks
What asset classes you prefer and like and which ones you don’t and why.
I think that would be a smash of an article and very helpful and informative to the readers of Financial Samurai.
Love all these passive income ideas. I always advise everyone to start a little business on the side. Future is very uncertain and having a side income is essential these days.
Sam – Related to Private Equity what are your thoughts on simply taking a position and investing in Blackstone common stock – BX? I believe Blackstone was previously a publicly traded partnership with complex Form K-1 tax reporting and is now simply a c corporation with no complexity.
Great ranking system! Seems like blogging, index funds, RE crowdfunding are more or less the same in terms of overall benefits, but are all clearly better options than real estate. That would be especially helpful for the many readers who want to be location-independent as well
If you have property managers for your rental properties (the smartest way to go and to free up your time and reduce your stress), you can live anywhere you want.
Real estate is one of the best ways to build money and it offers huge pay offs such as cash flow and leverage. Once you started investing in real estate there are ways to leverage investments for higher cash flow. For example, you buy real estate with $10,000 for a $100,000 property use to $10,000 as the down payment but borrow or finance the $110,000. Normally, you would borrow $90,000 but borrow $100,000 so you have extra cash $10,000 to renovate and then in a few years sell at a higher price then you bought it. The profits can be placed on a 1031 exchange account so taxes are deferred and you can buy a higher valued property that has a larger cash flow then the previous investment.
Financial Samurai – agreed on most points although I tend to think that the only real and pure passive income is long term investing (which requires little on-going ‘maintenance’)
To that effect I was recently thinking on how to simulate an implementation strategy. Market seem to be disconnected from reality which makes the situation even more confusing.
How can one implement a safe strategy and get passive income while focusing on health, family and more important issues (while not having to look at the markets everyday)? More importantly, can it be done so that I don’t have to predict which way the market will go this year? I wanted to spend some time to help investors on how to relatively conservatively deploy their savings for long term returns by limiting downside risk and ran a few basic simulations.
The way I thought about the current investment situation is to assume three potential scenarios:
-Base case – to stay on the conservative side I assume that the current rally is a bear trap that will ultimately reverse. It is likely that the S&P 500 will drop to 2,500 or may retest the lows of March 23rd. Ultimately, I assume that base case goes as low as 2000 points for the benchmark Index and recovers in the second half of the year. This is in line with a number of Wall Street strategists and shouldn’t come as too controversial.
-Optimistic case – this is not a bear trap and market will consistently rally. While I assign a lower probability to this scenario than the Base case it remains a plausible path forward. It can’t be ruled out that one of the c. 700 studies currently performed on COVID-19 will result in (i) a cocktail of medications containing the disease (ii) or/and a successful vaccine on an accelerated timeline – note, that the market always discounts these events much earlier than the economy (e.g. Friday’s rally partially on the back of Gilead study (even if this proves too optimistic the point is that we may be getting much closer to something that works)
-(Extreme) Stress case – this scenario assumes that the S&P drops to 1600 points and subsequently recovers. This broadly assumes medications are not successful in the short term, FED liquidity injection / bridge is not enough and reopening of the economy is a failure (aka multi round – ‘no single round’ which the FED is betting on as per game theory) resulting in massive bankruptcies and potential depression (I don’t even want to think about the ramifications of this scenario, hence I won’t elaborate here)
For sake of simplicity I assume to have max. 130k USD to deploy for long term returns
-This serves only as illustration to show that there are effective strategies for long term returns assuming one has a tolerance for short term losses
-This strategy is based on S&P levels and NOT deployment of capital through regular time intervals. Time interval investing is another way of deploying capital that is not illustrated here
-It has the disadvantage that capital is not fully deployed in Base and Optimistic scenarios – one would need to make additional assumptions here
-However, it has an advantage of partially protecting you from tail risk should the S&P move sideways in the medium term and then plunge. This is essentially why I use this strategy as I always then to remain on the cautious side
-I invest in ETFs to reduce idiosyncratic risks
-Assumes one would have already deployed capital so that at current S&P levels (2850) 60k of the funds are invested in the S&P 500
-For simplicity and to be extremely conservative I assume the S&P recovers to c. 3,400 points over 36 months
-Balance is ‘replenished’ every 5-10% of fall in S&P 500. I also ‘top it up’ by 5k.
While there is a few simplifications here and assumptions that one needs to make the overall result is that your portfolio can make gains over time (from +20% to +50%) with the S&P going back to its February levels no matter what will happen this year.
As such I think the typical saver should focus on building a robust ‘all-weather’ strategy by deploying cash on the way down (or periodically) rather than try to predict the market.
I like Paul Merriman’s strategy, you should check it out if you haven’t heard about him
Sam –
Great article! Do you still invest in a High Dividend Fund with the S&P 500 for additional passive income?
Hi Sam. I enjoy reading all your articles and am especially curious about your endorsement of the relatively new crowd-funded real-estate sites. I’ve been lurking around a couple of the sites and think what prevents me from putting some money to work is concern for the safety of the investment. What gives you the confidence that the site doesn’t just “disappear” one day along with your investment ? Something reassuring about brick and mortar banks and investment companies, FDIC, etc. Also, I read an article indicating roughly 30% of tenants in US chose to not pay rent over the last couple of months. Does that concern you or change the math on anticipated real-estate returns? Thanks and keep up the good work !
Thanks for the link to the article Sam. It appears that you do not invest in international stocks and bonds. Is that correct?
What do you think of a simple portfolio (think you have this portfolio) of S&P 500, Vanguard High Dividend Yield, and US REITs with Muni Bonds?
PIMCO has some products with high dividend monthly income such as PHK, PDI.
Do you think they are good investments?
Do you recommend investing in International stocks and bonds or keep it simple with just the S&P 500?
Here’s a good article: https://www.financialsamurai.com/the-proper-asset-allocation-of-stocks-and-bonds-by-age/
You can search a topic and type Financial Samurai after it and you’ll probably find some good thoughts.
Thanks!
Sam –
If I understand correctly are you essentially investing in the S&P 500 fund? Do you also invest in Vanguard High Dividend Fund? If so what percentage of equity is allocated to that fund?
Do you also invest in an international fund?
Yes, an ETF like SPY, or a higher yielding ETF like DVY. There are many index ETFs.
The death toll keeps increasing. I’m stuck here with little funds. Well, BTCINVESTLIFESTYLE. C O M has been able to keep my finances increased while I wait till outbound flights are available. Temporary neighbors in quarantine. Nobody really wants to get sick.
Sam –
How important as part of the bond fund allocation are inflation bonds? Do you recommend these bonds?
Sam –
Amazing thread and website. Excellent post that I have learned much from. I have a question related to international bonds: what are your thoughts? Most of the world is close to zero or negative yield. Yet, Vanguard continues to recommend a 30% of fixed income allocation.
Shouldn’t a one simple low cost and diversified taxable or tax exempt bond fund be enough?
Bonds are so expensive now, and many of their charts like TLT’s looks like internet stock charts from 2000.
But the goal of owning bonds isn’t to make a lot of money, even though that’s what bond investors are doing right now. The goal of owning bonds is to prevent yourself from LOSING a lot of money, as some stock investors are doing now with the coronavirus pandemic.
I think CASH right now looks attractive. CIT Bank is currently offering a 1.75% interest rate with zero lock-up, while the 10-year bond yield is at only 0.7%. To guarantee you get that 0.7% and not lose principal, you have to hold the bond for 10 years!
I’m also a big fan of real estate and real estate crowdfunding now as affordability rises and money flows out of stocks and into much more defensive real estate. Publicly traded REITs are acting just as volatile as stocks, so I would stay away if you want defense and diversification.
I have started an investment in Groundfloor. It’s peer to peer investing like Lending Club, but instead of loans backed by nothing, these are loans backed up by Real Estate. YOU are the hard money lender. You can invest in loans with as little as $10 per loan. Loans interest rate go from about 7% to 14%. These are 1 year term loans, with payback option of interest quarterly and lump sum at the end, or like most of the loans which are interest and principal paid back at the end.
Sam,
I have read your blog for years and I enjoy your posts. I was also a corporate person for 20 years before achieving FI at age 43.
I like the tools you use to discuss topics. I was with GE at the start of my career and learned all about these tools – I think they are great and I use them to analyze my own projects.
I will continue to enjoy your posts now that I have achieve FI and I am even writing about my own experiences now. Hope to meet you down the road.
How about Import/Export. I’ve been involved part-time for 5 years and would consider it a great return on investment.
Not a very passive income generating activity. The goal of this post is to identify and rank the most passive type of income investments possible. But I’m glad import/export has helped generate you some side income.
Any recent updates about the performance of Fundrise? I am invested but would like more insight before I put more money in.
Best regards,
Moustache Samurai
The 2019 figures for Fundrise look like a ~9.47% return for the overall number of deals and funds, which is higher than the 9.11% in 2018. Pretty steady.
I have a deal that finished with a 14.3% IRR over three years that I will write about soon.
I do like how my real estate deals performed well in 2018 when the S&P 500 was down 6.2%. The diversification and steady income is nice. As a result, I’m also doing a lot of research on CrowdStreet because they are focused on 18-hour/secondary cities with lower valuations, higher cap rates, and potentially higher growth.
Speaking of 2019 returns – I haven’t seen your year end update on your portfolio post – did I miss it?
Not sure. I did do a year in review post. https://www.financialsamurai.com/financial-samurai-2019-year-in-review/
Crowdstreet and Fundrise seem to have good offerings with attractive IRR and yields. I would love to know what you look for when deciding to invest or not in a given offering. While Fundrise has eReits, Crowdstreet has more specific project offerings so would be helpful to have some general criteria for evaluating these since they are so different from traditional stocks and bonds.
Great write up Sam. I’m working on building my passive income streams. I’m investing in the stock market and real estate currently, but may have to take a closer look at some of the other options you’ve brought up. In my area, you can get some cash flow, but a lot of the returns come from appreciation. I have one house that has appreciated $85k since I bought it, but cash flow wise has pretty steadily broken even as I’ve spent pretty much all the income on repairs. They’ve all been the major repairs though that I’ve expected to come so I kept all the income from that property sidelined strictly for the repairs. That one should be good for some years to come and start bringing in more cash flow now that all major repairs are completed.
And real estate does more than just track inflation – it throws off income (which is important to some people and useful to most). And while your underlying asset is appreciating, the income also grows as rents increase over time. And if you make smart and well-timed purchases, both rents and asset values can increase at well above the rate of inflation.
I think that this is a great article and reminds me of Jeremy Siegel and his books “Stocks for the Long Run” and “The Future for Investors”
To take it a step further though I think it would be prudent – given how highly you’ve ranked dividend investing – to suggest that investors start to ween themselves off the frothy S&P 500 Index and instead start to focus on Dividend Aristocrats and areas of the market that aren’t as highly valued.
There’s a treatise to global dividend aristocrats investing.
Interesting article. I do wonder though what influence regions play into this. Either way, it’s certainly something to think about. Thanks for sharing.
I think real estate is the most attractive passive income opportunity in the new decade. Mortgage rates are down, and prices are down, but incomes are up and stock returns are up.
Hey Sam, have you written any articles outlining how you went about creating your eBook? I’ve just written the text for my first, and am at the phase of exploring how to design layout, format, and ultimately sell (as Kindle compatible and / or as a PDF sold on a standalone site as you do). Would love your insight on how you navigated the process, what resources you found most helpful along the way, and potential pitfalls to avoid. Thanks!
Passive income is one of those things more people should focus their attention on. My preference at my stage in life is real estate. However, I am always willing to look at other options.
Reading this post reminded me to consider the inverse relationship between the degree of passivity of a given investment and return on investment. Certainly we all want the highest return we can get. Most of us also want the most passive investment. We can’t have it both ways, but we can use this knowledge to pick the best investments.
Two other things to keep in mind are the impact of tax laws on any form of investment and the ability to leverage our capital (financing).
Given these factors, real estate continues to be at the top of my list. Nevertheless I’ll dig in deeper into other options just to be sure.
Samurai,
Have you investigated alternative passive income investments:
Life Settlements and viaticals
Private loans to businesses
Legal settlements
Your assessment of the net return on rentals in the midwest is accurate. I live in Indiana and own several single family homes (no mortgages). They yield a 9.5-10% net return. The appreciation in Indiana historically on SFH is about 2%. The last few years it’s been an astounding 6-9%, which of course is not sustainable but a fun tidal wave to ride.
Hey Samurai!,
I invest in physical real estate myself. I currently own one single-family home and a duplex as well. In 2020 I think I will be looking to diversify my portfolio with some more “passive” options. Have you had any direct experience with any of the crowdfunding or p2p platforms that you would recommend? Or even a syndicator that you have had a good investing experience with.
Thanks
-Jason L.
There’s a firm Worthy Capital/Bonds that offers bond-like investments that are currently earning 5%, with minimum investment at $10 bond increments. But they’re not like government bonds but rather an unregistered security subject to limits like Fundrise.
And on the Fundrise type investments, for non-accredited investors, there’s technically an investment limit (e.g. 10% of income if over 100k, else 5%, or equivalent net worth to income calculation). So for those unaccredited but want to invest more (say they have savings around just not enough legal net worth to qualify as accredited), what to do? What I’m curious about is it’s not clear if the investment limit is an annual limit or lifetime limit (stuck with limit until you move up the income or net worth ladder to raise the limit some more or become accredited eventually), and whether the limit is per institution (FundRise, and like companies), or across all such institutions. e.g. can you invest to the limit at each institution? Or across all of them have to be no more than the limit?
Do what ever you want to do as long as you completely understand the risks of the investments. No one checks this you just self certify. The government is like a huge wall keeping you from accessing great investments and only allowing rich people to gain access. There should be absolutely no rules keeping you out of an investment if you can go gamble 50k and lose it at a casino or invest in highly speculative penny stocks or use leverage in a brokerage account. The government doesn’t keep you out of these risky activities. If it were me and say I was at my max limit according to the law but I fully was aware of the risk and made an educated decision I would just change the number so it allows me to invest. These rules do not protect investors they keep people from investing like the wealthy do. The accredited investor rule is not protecting you. My net worth is approx. 300,000 I understand various types of investments and yet I can go invest $5,000 into a real estate syndicate that could produce great returns and if I lost that it wouldn’t hurt me where I need protection from it. It’s all a way to keep middle class people in the middle class. If you understand something and all the risks and you are ok with it I wouldn’t let some arbitrary limit stand in my way, if you can just change a number to raise the limit just do it. I am heavily invested in various types of real estate syndications and I am aware I’m taking a risk and I understand the risks so I just update that number to allow me to invest. The only thing that should matter is your financial plan and weather or not that investment would fit into your plan and goals.
Many similar Net-worth profile, $200K-$500K are looking for investment plan & strategy. Passive income can only happen taking individual tax situation and risk profiles in consideration as suggested above.
Also you have to play your own game, someone with $100K vs $1M vs $10M is a very different level of difficulties to preserve The capital and somehow enhance it.
I think there is a business opportunity for who will help define blueprints and pattern for those who seek.
Sam,
Can you tell me more about Fundrise.
How and When can you get your principal back from the investments you make?
What is the liquidity like?
What are the scenarios where you can lose money from fundrise?
In other words when real estate crashes some day how much would you expect the draw down to be in comparison to something like REZ?
Than you so much
Sure, check out my Real Estate Crowdfunding Resource Center than answers all your questions. Thanks
I did take a look. Trying to understand this piece below. Is it secured or unsecured? Didn’t see/read anything on how/when you are allowed to unwind your position. Thank you again for any further input.
2. Unsecured Investment
Real estate crowdfunded investments are generally unsecured investments, meaning that if, say, the platform were to go under, investors could lose their capital. While most investors are aware of the risk, the nature of the security of investments may be changing, and lawyers say investors should keep an eye on that point.
The solution to a real estate crowdfunding platform like Fundrise going under is the hiring of a third party bank who acts as the custodian of all assets. For example, Pershing has over a trillion in assets managed and is not going anywhere even if a REC platform does.
At least with real estate crowdfunding, if there are troubled times, there is the underlying real estate asset that can be worked out, unlike lending money to people via P2P.
Wow! This article is great! There are a lot of points in it that I can really relate to. Especially the part about annoying co-worker.
There are so many great points in your post. Do you really collect $825 from online savings account? That must come from a large amount of cash. Would that cash be better utilized for investments?
I always have 5% – 10% cash handy for investment opportunities and proceeds from various investment sales.
Further, cash is paying 2.1% now from online banks such as CIT Bank. That’s not bad given cash was paying 0.1% before 2016.
To get that kind of monthly return in your online saving account you have to have almost half a million dollars. This seems highly dubious.
(825 * 12) / .021 = 472K
And that’s 5-10% of your cash??
I don’t understand. What’s wrong with having 5% – 10% of your investable net worth in cash when its paying an OK amount?
What percent do you suggest?
MY personal preference with regards to my risk tolerance is whatever I can do with leverage. I love actively investing in the stock market with leverage, however this cannot be done passively with leverage.
With regards to passive income, real estate is my favorite. It’s a cyclical industry so if you get in at a downturn = almost guaranteed money. You can use 2-4x leverage easily with real estate investing, and with good tenants it can be done easily with very few headaches + less risks of drawdowns compared to many other investments.
I liked your starting points:
How much money do I need to achieve what makes me happy?(dangerous question!)
What makes me happy?
It happened to me some years ago to have the chance to spend some years working on the understanding and achieving of some financial peace.
I am still in the process, I am about to getting there and it feels great. It is a wonderful trip. No regrets.
Can you please expand on your muni bond holdings? Thank you.
I’m obviously a huge fan of dividend investing, but one of my other favorite passive income investments is off the wall, stock photography. You take the time to take some great photos, then upload them to a stock photography website and that’s it. If they’re good photos, that creates a nice passive income stream.
Wahoo passive income!
-Andrew Kraemer
Andrew- What sites do you use to sell your images?
Yeah? What sites?
I have tried Lending Club, did ok. About a 6% return. All out now.
I have recently investing in Fundrise in their “supplemental portfolio”. So far, happy.
I like REITs, but I also like some Mortgage Reits, and some other dividend payers.
I also something you have not mentioned.
That would be preferred stocks and baby bonds. Specifically preferreds and baby bonds in Mortgage Reits and REITs and some other. Why Mortgage Reits….those funds are kinda like cockroaches, they will survive a financial disaster. They pay pretty handsomely too.
Do you know of any good mortgage REITs?
Here are some I am invested in: Note – some are a bit pricey now.
I would suggest following “Colorado Wealth Managemnt”, “Brad Thomas”, “Rida Morwa” on SeekingAlpha.com for some more information and research.
AGNCO
AI/C
CDR/C
CIM/B
CMO/E
ECCB
NLY/F
TWO/B
Problem with investing in private equity is that it is hard to get access to the good funds that have consistently generated good returns over multiple cycles.
Nowadays, there is so much dry powder and so many new large funds being raised that it makes me question whether private equity returns over the next decade will even come close to what they have been over the past decade.
So while PE has generally outperformed other investment vehicles (ie. hedge funds), I question whether the out-performance will continue, especially if most investors do not have access to the proven established funds.
Fantastic article!
I think that especially the P2P-lending is more profitable nowadays, at least in Europe. People are getting 10-15% profit from P2P-platforms annually, pretty easily. I have only invested in Mintos, but I will soon divide and invest more in P2P-lending, because it gives pretty decent passive income :) I will post my strategy in my blog soon.
– Nordic Fire
I am new to Financial Samurai and am very excited about about the content you are writing about. Regarding passive dividend investing, what are your thoughts on higher yield mortgage trusts like NYMT or capital investment finance companies like ARCC? They have intriguing dividend yields, but this must come at some risk?
Thanks!!
NYMT and other mortgage REITs generally use some leverage to boost the yield by playing the spread. Some mREITs are very safe as they only invest in mortgages backed by the government otherwise know as agency backed mortgages.
Others mREITs are usually some blend of agency and private mortgages.
So they are generally a pretty safe investment. It’s the spreads that wreak havoc on the mREIT profits and the pre-payment of the mortgages too that can cause problems as then they probably are having to invest in lower yielding mortgages.
Hope that helps.
Hello Sam, I am an avid reader of your blog. Absolutely love it.
Can you please elucidate “Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market, and only after buying two or more properties are you actually long real estate.” ?
My best wishes for you !!
Satish
start with the premise that we all have to live somewhere, and from that we all are short until we own, and dont have to keep paying for the right to make use of what we need to survive.
neutral means that once you own, real estate markets up or down dont hurt you or help you in that the physical need you have is covered, your position isnt so much speculative as just covering your need, and if you sold it you would have to find a way to replace it again.
if you rent, you dont actually own what you need, but are borrowing it and paying rent while you do so. and maybe later you might be betting the market goes down, or probably that your buying power goes up, at which point you can give back what you are borrowing ie your rented property, and instead buy the item you need. your mortgage looks a little like the rent you paid before, but its more accurate to see that as renting the capital you used to buy the home.
going long, means that for a home you are not living in, you are invested in something that provides you something more than covering a basic need, it provides a dividend or yield, which in this case would be rent payments from your tenants. you are exposed to upside if the market goes up, and downside if the market goes down, gains you are free to lock in if you decide to sell, because you don’t need to live in it.
Can you please expand on your muni bond holdings? Thank you.
Nice article and I am glad to see that I have 4 out of the 8 of these options already. Although I used to be very keen on owning physical property as I liked having actual bricks and mortal, these days taking a more active role in REITS. In particular S-REITS as they seem to trigger a healthy annual dividend. That said, the market is high in Singapore and who knows when there will be a correction.
Have you ever looked into Singapore REITS as an option?
Great Post, very useful. I agree with the part of Real Estate having a lot of benefits but also having the main downside of liquidity and that it isn’t as passive as the other investments. I would argue that being long on the housing market is actually a good move, sure the prices fell in the 2008 financial crisis, but they seem to provide some good diversification since stocks and bonds are sometimes very sensitive to the overall economy. I’d have a different ranking because I’d give more weight to returns and liquidity than risk and feasibility but I guess that comes down to whether you’re risk averse or risk tolerant, nonetheless great article and ranking system.
Nearly all of my former colleagues (all are retired now), made their wealth by owning one extra house, duplex or triplex for 20-30 years. That was in the great growth era of the 1960-2005 period in California. And…paying off their home. Our house in Los Altos, CA went from $36,000 to 3.2 million over 40 years. We sold at $330,000 to get out of crowded California to live closer to the outdoors in Oregon. A great lifestyle decision for us.
I am now collecting from P2P (Prosper) after six years or so. I have been happy with it returning 12% in the beginning. Now it is down to 4.5% return. My favorite investment, by far howver, is High Growth Dividend Paying Stocks. I do it myself to hold over the long term, from At&T to MO or IRM, as examples. They work for me, as I invest all of the dividends monthly while living on Social Security and Seasonal Work Income. It’s the first investment where I love it when the market goes down and I buy more stock to increase the dividends. Our backup is in I Bonds (Treasuries) bought when rates were 10% and Social Security.
I only wish I had discovered Dividend Paying Stocks when I was in my 30’s rather than my 70’s. Hey…but that’s life. Now in my 80’s, it’s never too late to learn.
Would you care to explain how you leverage your high Growth Dividend taxes if you are reinvesting them rather than spending/living off them? I too am deploying capital into High Growth DIV stocks and juggling their taxes vs the balance of my other income in early retirement.
I was too busy building a professional building in 2012 to buy more than a couple of rentals. I have since sold one rental to my son. I am on track to retire in 6 to 12 months and am looking for new ways to build passive income. The crowd funding of real estate ventures seems to be cooling off. Real estate on the entire west coast has gotten out of reach for most; I don’t see that buying rentals in most markets will give a positive cash flow now. I am looking for ideas. I have been too conservative in investing over the last 20 years but will be able to retire easily with a good margin. We live below our means. I believe we will have another big correction in stocks and real estate within 3 years; I will buy more rentals once cash flows work. Overall, most vehicles are full valued so what to do now to capture more income? Is it better to build cash now or are you seeing some good opportunities at present values?
“Hello, my millenial son. Buy my boomer house bags”.
– You
Hey David,
Similar experience here in Scotland, Paid off house 1st, bought property, ran a rental empire for 10 years. Discovered John Bogle and passive funds, we now split between Vanguard broad spectrum funds, high yield FTSE 100 shares in tax free accounts and are slowly dissolving the empire. risk/return? I like 7%. All the best in Oregon, I hear its beautiful.
I would like to see how much you’re putting into these vehicles to get the return you are getting. I can do the math based on your rate and return, but too cumbersome. Thank you for the transparency. Does make me more excited knowing that it’s possible.
Saving is definitely the #1 step.
Once you can start a good plan the fun really begins.
Hey Sam,
Great article. So when you say bullish on the heartland do you have any particular areas you think are emerging with nice returns in the next 2-3 years you want to share?
I always have a great deal of difficulty in researching markets that have not already started to peak due to not being able to find any tools that will help me research enough data points. You can find a thousand articles about the “50 best cities to invest” etc, but cannot find any info for small town to mid size underdeveloped cities. I have played around with Mashvisor but feel like the methodology is flawed based on the small number of data points they are using.
I have had the same theory that investing in smaller cities and towns will often have better potential for returns if purchased and researched correctly, but cannot find any source of data that would show me CoC or ROI numbers for a city of 20,000 for example instead of just the top 100-200 cities with their metros.
Great Article. One thing I feel that would be useful is how long it took for you to get to this level of passive income. I am in my mid to late 30s. I am trying figure out how long it will take me to get to even 100K of passive income per year and how much savings I should have.
Since 1999.
CD’s may be no risk now but this hasn’t always been the case. My grandmother often showed me the CD’s she had purchased for a few relatives and myself in the 80’s & 90’s. Years later she passed away without stating where they were. A few of the banks were no longer in business but even those that were stated that during those years they didn’t keep records of them. I’ve tried lost property but no luck. If you have elderly relatives that purchased CD’s keep copies, etc.
Try again. Each state now has a robust online search tool that will produce the records. Federal laws in the US would have required financial institutions to keep these records. You need only try each state.
At the moment, Fundrise is offering another iPO to its current investors. What are the pros and cons of investing through the traditional Fundrise means vs through the iPO offering? Through your recommendations, I’m currently a Fundrise investor.
In general, I stay away from investing directly in private companies. The most I will do is invest in a venture capital fund or venture debt fund, like I am now. I don’t have an edge to pick the winners and losers, as all company private equity investments are long shots.
I like what Fundrise has been doing since its founding in 2012. They are innovators and leaders in the real estate crowdfunding space. I think it’s OK to invest in small percentage if you are a platform user, money that you are willing to lose and not see back for 5-10 years.
As of now, I’d much rather invest in the eREITs and individual real estate deals themselves.
Like everything, no risk, no reward.
Related: Just Say No To Angel Investing
Enjoyed the article. Wondering what your best pick on Fundrise is?
Supplemental Income, Balanced or Long term appreciation? With or without Plus?
Thanks.
Also, surprised you do not have FIA’s with uncapped strategies w & w/o and income rider.
Hi Sam,
I was just wondering if you would classify Real Estate apartment syndication under real estate crowdfunding or have it out on its own as a separate form of passive income?
I think it’s pretty much the same thing. The key is the sponsor and the vetting process.
Like every investment, there is risk involved.
any ideas of how these strategy compares in terms of taxes?
it’s great to earn some pasive investment income but it is also very important how much tax you pay for each
thank you!!
Malbec
Great point. For tax efficiency, dividend investing and real estate are great.
See Short-Term And Long-Term Capital Gains Tax Rates. Qualified dividends are taxed lower. Municipal bonds have no federal and state income tax.
Real estate has a tax shield due to non-cash amortization expense and the ability to expense all operating expenses.
I like real estate crowdfunding the best b/c I love real estate as an asset class the best, and now I can earn money passively as well. Public REITs are good too, just not as focused.
Real estate passive income through tax has a sweet benefit called depreciation. REIT dividend now has a great qualified tax treatment in IRS.
And a physical strategy for tax: get out of CA if you do online trading for living.
Now, I know why this is one of your popular posts. It’s all very useful information for a newbie like myself!
On real estate, I wonder what folks think about BuildingBITS. I recently came across that. Is FundRise still better than them?
I just found your site from an article I read from Marketwatch.com. This article on passive income investing caught my eye. I saw the mention of bonds but what about Preferred Shares as an avenue for getting higher rates than CDs (Warren Buffet seems to love Preferred Shares and Warrants). Any reason why one should avoid Preferred shares?
I own some Schwab Preferred C shares that yields about 6% annually.
I was going to ask the same question about preferred shares. They seem to be a financial step-child that no planner seriously considers. I currently have BofA and Wells Fargo preferreds that have 7.5% yields. Set them up as drips and watch the pot grow.
I agree that physical real estate isn’t really for everyone but the biggest penalty in your chart it is the lack of liquidity. I figure that penalty isn’t so bad when you are going long on retirement.
Lack of liquidity is only an issue if I can’t cover a surprise cost. Big transaction fees are bad if I was going to turn it over quickly. If you are retired for 50+ years and living off that rent lack of liquidity might even be better to encourage you not to get antcy and do something dumb.
Like yourself I’m very into real estate but don’t think anyone should go 100% in on it :)
All, curious what folks think about dividend growth investing through a basket of quality stocks versus buying one of the many ETFs (SCHD, SDY, NOBL, VIG) or Robo advisors like Wealthfront. I have most of my investments with Wealthfront already and am thrilled with their service. Seems like investors can avoid fees by direct stock ownership using a service like M1 Finance. But then you are back to picking stocks and hoping to beat an index. I see some possible advantages to buying individual stocks and holding over long time periods.
Would love to know what others think. I am only interested in setting and forgetting this type of investment. Using M1 with high quality stocks seems to get there.
I started by purchasing roughly equal $ amounts of the Dividend Aristocrat stocks yielding >3% (skipping some of the companies whose stock prices dropped due to issues).
I also looked at the holdings of Vanguard Div Appreciation, franklin rising dividends fund, spdr s&p dividend etf, wisdomtree lgcap dividend, and others. I wanted to know what these funds were holding.
Of the seven funds I reviewed (this was about 6-8 years ago), all 7 held PG. Six funds held: ABT, ADP, JNJ. MCD, PEP, and WMT.
The portfolio can be low maintenance but you shouldn’t just set it and forget it. You need to be ready to bailout when issues hit, like GE and PG&E in the last few years.
Thanks Jim. The biggest advantage I see to individual stock over ETFs is your ability to hold each stock for long periods and buying on individual dips.
Hi Sam, on your bonds income, you show projected yearly passive income of $61,872 for both 2018-2019 and 2019-2020. On one of your articles, you mentioned having around $605K in mostly municipal bonds that generate this $61,872 annual income. This is a return of 10.2%. In this article, you mentioned “The tax-free yields range from 3.6% – 4.2% for a 20-year duration, equivalent to a gross yield of 5% – 5.5%.” How are you able to achieve 10.2% annual returns with municipal bonds when it is yielding in the range of 4%? What was your actual returns for 2018-2019 with municipal bonds? Are you banking also on capital appreciation of the bonds on the returns? This will be very helpful for me to understand. Thanks for clarifying!
Sure. Gross yield is closer to about 4%, hence ~$1,500,000 in bonds.
The $600,000 I invested in municipal bonds was only from my house sale proceeds in 2017.
https://www.financialsamurai.com/why-i-sold-my-rental-home/
How about you? What is your retirement income and how have you asset allocated and so forth?
Hi Sam,
Do you invest in Municipal Bond Funds or the bonds themselves. I’ve researched a bit about both and what I’m hearing is that with a fund you may see the prices fall during a financial stock because they are liquid, but individual funds would see inflows as they are seen as a safe haven. That isn’t exactly jiving with me to be honest. Funds also presumably have a slightly lower return due to management fees.
Please advise – what do you invest in?
I wonder what are folks thoughts on firms/services for the dividend investing. Is Wealthfront the best? There are others in the area I think like WiseBanyan, Bettermant, etc. How does one think they stack up against each other?
Wealthfront is my favorite digital wealth advisor because they were the creator of the genre and are based in the SF Bay Area. They charge 0.25% of AUM after an initial promotional offering of the first $5K free.
Digital wealth advising is in their DNA, built from the ground up. The key is to invest regularly over time.
Just found your site, I love the ranking system and look forward to reading more of the articles.
Hello,
I just invested in my friend’s business, who does flipping. I dont want to invest in all of his projects but I will invest only in those projects where I feel comfortable. I believe this would be considered my passive income. Can anyone please guide me how would this be reported on Tax return for both of us? Since this would be passive income, there wont be 1099 and I am not a partner on his llc so there wont be any K1.
Thanks.
Mike
I think you misunderstand when a 1099 is necessary. There are many different types of income reported via 1099 forms. Almost certainly your friend’s business will need to send you a 1099 to report any payments to you. Lots of passive income is reported on 1099s, including interest income on 1099-INT, dividend income on 1099-DIV, and many different types of income on 1099-MISC, some of which are passive, some active.
I am an active Private Lender, exclusively to Real Estate investors and primarily to flippers/rehabbers, most of whom are operating as a LLC. I have a Note (typically 12%/3 points), first position Mortgage, and personal guarantee. Because my available funds are not 100% busy all of the time, annual ROI is typically 8 to 12%. Borrowers should always issue a 1099-INT to me, although many do not. I send a Form 1098 (Mortgage Interest I received) to them.
I do it as much for the fun of the deals as for the income (I’m “retired”). I lend both with personal funds, and with funds from my Self-Directed Roth IRA which is TAX FREE INCOME!!!
Mike, I’m not a tax advisor but either 1) you made him a loan in which case he needs to Give you a 1099-INT, or you made an equity investment as a partner, whether or not you put it in writing, in which case the partnership should give all partners a K-1. You need to ask your accountant.
Hi Sam, great post as usual. Loved your ranking system. Very useful and easy to understand.
I personally focus on dividend investing, but I am also trying to build up my blog to a point where the passive income is reasonable. I find real estate crowdfunding interesting, but my only gripe is that it has not been around long enough to see how it handles during a recession. I enjoyed the article though! Keep on writing!
Peer-to-Peer Lending (P2P) risk should be much higher than 7. More like a 2 or 3. The reason is:
1. You are lending to people banks have rejected due to risk.
2. Peer-to-Peer Lending (P2P) was born AFTER the 2008-2009 Financial Crisis. Therefore, NO ONE has any way of knowing how P2P market will react in a down stock market, recession, or great depression.
3. If people are have trouble paying their bills in a “good” economy like today, think about what will they do in a “bad” economy like 2008-2009.
Agreed; I diversified $50,000 in P2P with Prosper and had A borrowers defaulting just like the C’s. I spread my risk across those grades as well as the amounts that I would contribute, higher the credit the more money contributed. What should have been between a 15 – 20% return resulted in a $7,000 loss! Granted this was in 2008 – 2010, but there definitely is risk with individuals that the banks won’t loan to.
Investing in life settlements (the secondary life insurance market in which life insurance policies are bought at a discount, premiums paid, and the insurance is paid out upon the death of the original policy holder) is beginning to enter the mainstream of passive investing.
How to invest? Find a firm that buys life insurance policies that also offers an opportunity to invest. The firm will give investors a promissory note payable in a specific number of years at a specific interest rate. The notes I hold are 5 years at
8.75% interest rate.
What firm are you using or do you recommend? I don’t know of any myself.
Sam
You mentioned most of your bond holdings are California munis with yield of 3.6-4.0%. Have you considered myc by Blackrock. It is 40% levered Cali muni investment grade bond fund. It yields 4.7% and you get all the tax benefits. I think it will be a good enhancer to your passive income in that category. Would love to hear your thoughts on it.
#9 Military pension/VA disability. Obviously requires a lot of front end effort in your 20s and/or 30s depending on length of service however once out and receiving it is totally passive with cost of living adjustment included most years. It has changed somewhat with new “blended retirement” plan but even those not staying past first or second enlistments often will get some VA rating. My wife got it on both ends of her service as the Navy paid for med school and then she was rated by VA after seven years active duty.
I bought a house. I chased my dreams and moved to a big city on the other side of the world where I rent. I am living my dream in what I could never describe as work—it’s a hobby— and am now mortgage free and the rental income from that property pays off my rent here. When you truly love what you do it’s not even work, you don’t even want to retire, you have more money to do more interesting projects. I will be using my equity to buy a house in central London in the next 18 months and will keep buying as much property as I can. I couldn’t give a $ht about stocks and shares. I have collegues, friends and family who have lost everything in stocks after being quite wealthy. The ones who succeed, so what if you have 50 million instead of 20? who cares? It’s just a trophy. I save but I spend a lot on things I like. I like nice cars, nice furniture, clothes etc. I really love nice experiences and I love sharing nice experiences with my loved ones. Screw being frugal. What I love most is being able to freely give and provide for family and friends and charities too. Being able to give is a great gift and I’ve watched instant karma happen in my life so many times. It’s truly like magic. The more you give the more you get. Everything we have is on lease from the universe! Life is truly amazing when you immerse yourself fully in your dreams, because—and it sounds cheesy—but DREAMS COME TRUE so you better make them bloody big ones!
This ^^^ I couldn’t agree more with everything Dan said. I want to always have the means to take care of myself and never be a burden on others, and I definitely want to enjoy the finer things in life, but the first priority has to be to enjoy life. To be a positive person and share positive experiences with those you love as well as those who are trying to make this world a better place. I’m a little late getting started because of a career in the military, but I hope to one day make this dream my reality.
I will take whatever cash you want to offer, I am sure it will all come back if you actually, really believe in what you’re saying. Maybe it’s easy to convince others but I believe it is impossible to convince yourself that what you are saying is actually true.
I will take whatever you got because I could easily apply it to charity for my family and loved ones. Whatever secrets you have about however much wealth you have, go ahead and share that those step-oriented instructions with me now, why dont’ya ? Since you leased everything you have from The Universe, I bet The Universe won’t mind you sharing with me.
a little late, but good post. I am curious about creating a product. I’ve often thought about writing an e-book, but it seems you get a lot of traffic/sales via your website. Do you have suggestions for getting it out there minus a website to advertise?
Thanks again for the information, I’m currently an index fund investor, getting closer to the date where I can leave megacorp, and work on passion projects. So far that strategy has worked well, but always interested in other streams of income.
Thanks for posting this I am a real estate investor and quite frankly am thinking of quitting real estate all together due to the hassles of dealing with tenants. I rather put all that money into real estate crowdfunding. I also learned about Mortgage Investment Corporations. Would you recommend that as another form of alternative investment?
It is nice list…
Once said that, I think the most efficentet and cost/value is to make the products (infoproducts, ebooks). The ROI can be huge…
As yo said, if you can get 2500/month per an ebook. Who is willing to spend countless hours trying to pick a few stocks. The only problem is not everybody can get close to this numbers. But even far away from this numbers the better ROI comes making our products.
Anyway, great reading.
Cheers
Or you could do joint ventures/strategic alliances for your business or for other businesses and make residual cash flow for $0 investment.. that’s what I do lol. No money, no risk, little time, 20+ years working from home. Just connect companies and take a %, use the Internet to do it locally or globally, be the intermediary & connect companies…. ;-)
Allen – Would you please care to share more details?
I just found your site & so far I like what I see. I am 50 years old & will be retiring at the end of Jan 2019. I turn 51 the following month. I will have a pension income of $60,000 per year & an additional $5,400 from a survivors benefit. I was able to save $200,000 in a deferred comp program through my employer & wish to know what to do to generate a passive income? I can leave it in the plan which will generate about 3.5% or invest it. My concern is the tax liability of taking out a large sum from that fund & leaving me less to invest. I do have an opportunity to invest in a bar/restaurant with family (my main concern) that currently generates $120,000 annually for an absentee owner. It would be a 3 way partnership if I did that. I do like your idea of creating my own product such a blog with a goal of $12,000 to $18,000 passive income I feel that may be my best option. Any thoughts or advice would be greatly appreciated.
Best way to turn a large pile of money into a smaller one is the restaurant business: Capital AND labor intensive, continuous operating costs that rapidly expire, huge ongoing risks (see Chipotle), and limited growth potential, all for a reputational business with a no moat, and a continuous stream of potential reviewers with unlimited capacity to take a bad outing out on your business’ bottom line. Not what I would call passive income, unless you enjoying washing dishes or working the line or busing tables.
Wow! what a great comparison of passive income sources. I was not expecting that physical real estate would rank second to the lowest. In an emerging market like my place, property flipping is much more preferable than rentals due to its fast value appreciation.
Hello from the UK! Fundrise and Wealthfront are only available to US residents it seems :(. Any other readers from the UK here? The only thing I have managed to do from Sam’s list is getting a fixed rate bond (CBS is having a 5-year fixed rate at 2.01% – not great but the best I could find ). Don’t know if the FIRE movement will ever take off here but would love to trade tips/ideas on how to reach FI and have the freedom to consider alternative rythms to living.
Thanks so much, Sam for keep posting and sharing!
Say a person leveraged his permanent or whole life policy, and had $500,000 to invest for a healthy monthly passive income. How would this newcomer proceed?
Good question! I would like to know as well.
This is a site that I wish I found when I was a lot younger. I have been fairly lucky and smart in that I have saved about what I should have saved by my age; using his chart on another page. (https://www.financialsamurai.com/how-much-should-one-have-in-their-401k-at-different-ages/) I find some comfort in that.
What I find most interesting is the fact that I had never considered options like LendingTree or realityshares for other income sources. Investing in property has been too much of bad luck for people that I know personally, so I am interesting in getting involved in a situation where I would have to be dealing with maintenance issues or tenants. There are services for you to do that, but I had not come across any that didn’t eat most if not all of the earnings. Then again, I live in the NY area. Investing in the midwest would not be reasonably possible for me, directly, but reading about realityshares is something I am going to look into further. That might be a real possibility.
Question: For anyone :)
My current status:
$450000 in a 401k
$45000 in a ROTH
5 rentals:
House #1 Mortgage: $108,000 Value: $226,000 3.50% IR
House #2 Mortgage: $196,000 Value: $340,000 4.00% IR
House #3 Mortgage: $107,000 Value: $250,000 4.75% IR
House #4 Mortgage: $103,000 Value: $230,000 4.75% IR
House #5 Mortgage: $98,000 Value: $220,000 $.75% IR
Liquid cash: $20,000
Age: 48
Net Yearly Income: $126,000
Net-worth Approximately 1.1 million
Question: I’m currently saving 25%. Should I use additional net cash to pay down the mortgages, or put extra money into more after-tax investment vehicles. Dave Ramsey says pay off the homes, but would like input from others. Thanks
Anthony, nice setup! To your question about the rental mortgages, you haven’t said what interest rate you are paying. As a start, if you are paying more than the risk free rate (Treasury bills) which you probably are, then a true apples to apples comparison would be yes, pay off the mortgage. But, if you are comfortable taking more risk, you have other options to invest in which you *hope* will yield you more over the coming years. You also didn’t say whether the rentals generate net income and if so, how much? What is the implied rate of return on the equity you have invested in them? If you pay the mortgages off, you’ll have even more equity tied up, will the extra net income make that worthwhile? Maybe you should use the money to buy more rentals instead, if purchase opportunities still exist in your town. … this is less of an answer than a framework to analyze the decision, hope it is helpful.
I am 30 years old and am retired. Previously, I made a modest salary as an Army officer. I own three duplexes and a quadplex in central Texas (10 rental units in all), and each of the properties provide me with net rental yields in excess of 15%. The last deal is actually an infinite return as my partner paid the down payment in return for a 50/50 split on a property that would otherwise provide a net rental yield of 18%. The above net rental yields also factor in an excellent property management team who manages my properties while I pursue other investment opportunities. To date, I have never interacted with any of my tenants nor have I ever had to personally deal with any maintenance issues.
Hey Sam,
Some time ago you posted thoughts on REITs, and how the returns of 8+% were something you were interested in. I know this is an old post but REITs have a good potential for returns.
Are you still in any of them or have you moved all that into RealtyShares? Im not an accredited investor and I have just reached a nw of 1m. Trying to find ways into real estate without having to deal with landlord type stuff.
Love the blog and all the insights, have really helped my focus more over the past year Ive followed.
Gary
With the new tax law, 20% of REIT income is not taxed. This is a relatively new development.
Any suggestions for crowdfunded real estate besides Realty Trac? They seem to have some high barriers to entry regarding income.
Sure. Fundrise is my favorite for non-accredited investors.
I think I read this post two or three times per month. It’s always really inspiring and keeps me excited to work on my own creative efforts. There’s something very exciting about being guaranteed nothing but having the possibility of the unlimited return for something you create.
I stumbled into your article just now through a Google search. I enjoyed the article and also found the comparative analysis to be enlightening. Very much thanks.
I would be interested in knowing why you did not include county’s tax lien investments. While not feasible in most states, they can be great investments in a few states and the returns are more or less guaranteed by law. How would you rank county tax liens?
Ultimate Passive Income: I can understand why the son is so upset inheriting the remainder of a $30K/Year 99 year lease on land where the leasehold improvements are now three new car dealerships … due to inflation and the current value of the lease!
But when so many turn down leasing one and one-half acre for one Wind Turbine for each 80 acres, that lease certainly does not materially affect the rest of the Farm or Ranch grazing pasture and the lease pays much more than the farm crow or grazing pasture lease, just because some lawyer said the lease was too long: 30 years plus 30 year option = 60 years, and the wind turbine company has selling production/electricity contracts for the next 150 years – which is needed to obtain financing!
No one should turn down wind farming’s ultimate passive income for the next 30 or more years … even 60 years when there is a positive cash flow on the sum total of all base payments when computing inflation for the next 60 years based on the previous 60 years, as long as the next era’s energy resource is not perfected (at which time they would not renew the option for the second 30 years).
Yes, no one should turn down wind farming’s ultimate passive lease income when the lease income also includes rate increases, technology increases all along and a big one at 25 years when they change out the wind turbine, blades and head. (Pensacola dam changed out their turbine(s) and got a 17% technology increase.)
Therefore, who cares how long any ultimate passive wind farming lease is when you do not have to do anything except sign the lease and have a bank or credit union account for the wind farming cash flows?
Who cares, especially when very conservatively, the ultimate passive income includes a six digit or more base lease, plus an estimated additional six digits or more for rate increases and another six digits for more for various smaller and one bigger technology increase at 25 years. All four (base, rate, smaller and mega technology increases) combined, certainly could yield much more depending upon inflation, rate increases and technology increases?
The base lease could be compared to a temporary long term quasi common stock dividend?
And the rate and technology increases could increase the above to a temporary long term quasi preferred stock? Not just a lawyer’s opinion: the lease is too long?
When you follow the absolutely essential vital empirical prima facie forensic evidence and related cold, hard facts to discern the truth for ourselves:
The long term 30 year lease with an additional 30 year lease may be too short for your lifetime, and certainly may be too short for your and future generations lifetimes!
So who cares how long the lease is, especially when Murphy’s Law and its corollaries are funded: to remove the Wind Turbines when they become obsolete due to the next era’s energy resource being perfected, damages during construction, etc.
At this point in the industry, additional attorney’s and other professional opinions are also less valuable when there have been hundreds and thousands of attorneys and other professionals opinions from both sides that have crafted the lease contract!
It never occurred to the lawyers or other professionals that they should suggest or insist on any improvements in the systems (that complete the plans). Franz Kafka, “The Trial.”
This world is a dangerous place to live, not because of the good people that often act in irrational and/or criminally wrongdoing ways within the confines of their individual minds, core or enterprise groups, but because of the good people that don’t do anything about it (like reveal the truth through education like Financial Samauri is doing!). Albert Einstein and Art Kleiner’s “Who Really Matters.”
Therefore, when considering Wind Farming, consult a Certified Public Accountant (CPA), CCIM and other Financial Consultants too, or you may not receive the best financial advice to build long term multi streams of ultimate and other passive income for your and future generation’s financial futures!
Excellent, excellent, excellent article yet again.
Many thanks Samurai, for inspiring so many of us on a daily basis. I truly appreciate the time that you give to pass on your wisdom, and I can only hope to emulate even 50% of your inspiration as time progresses.
An enchanted reader and writer,
Steven, Money Marathon.
This is an amaaazing list! It’s so good to see just how many options there are for passive income generation these days. Where to start!
I enjoyed your summary and found the comparative analysis to be enlightening. Thanks for this.
But I do want to clarify some points relating to private equity.
First: I understand why you would say that such investments are restricted to only accredited investors, because generally, that’s true. There are means, under federal securities regulations and Blue Sky laws in each state, to sell interests to non-accredited investors – but usually those means are so heavily regulated and involve disclosures so similar to cumbersome registration requirements that it is not worth it for the seller to offer to non-accredited investors.
Secondly – and this is just quibbling – I’d change that risk score. The risk of private equity is incredibly high and should be considerably riskier than bonds! You are providing a typically very large amount of capital to one business that you agree to have no control over, and the success or failure of that business over a locked, predefined term determines your return. And in the few deals I’ve negotiated for clients, my experience has been that there are often management fees, performance fees, etc. that may cut into your potential gains, anyway. You’re putting a lot of eggs in one basket, and promising an omelet or two to the management no matter what. You really need to be confident that you found the next Uber before you take this giant risk!
Wait… in calculating the total score for each investment type, you’re _adding_ the risk metric. This means you rank riskier investments higher. Should you subtract the risk score? Or reverse the scale such that 1 is most risky and 10 is least risky?
The less risky the higher the score.
Thank you for the article. I will tell you that RealtyShares requires you to be an accredited investor. I wanted to look at the properties and they require you to sign up before you can. During the sign-up, they ask if you are accredited and if not, you can’t go further. So, I guess the feasibility on that needs to change to a 4.
Hi Matthew,
You can still click yes and look if you want. It’s not like the internet police is going to pop out and punish you for believing that you one day may become accredited. :)
In all my years of investing, I’ve never heard of the government or a financial institution going after someone who wasn’t really an accredited investor. The key is to learn and get comfortable with each investment BEFORE making one.
Regards,
Sam
Passive income through real estate to me is #1 by far because that is what allowed me to achieve early FI. Real estate allows one to get a much greater rate of return then CD’s, bonds, etc. And you can use leverage to great advantage.
So we may to have to agree to disagree on this one.
Have you tried creating a product or an online product yet though? I felt the same was as you for over 10 years until I started creating products and making online income for the past seven years.
Sam,
I have not. While I am intrigued with the possibility of making online income, it seems to be less passive then how I want to spend my time. Regarding your blog / site, you have done quite well for yourself. However, you have to keep pumping out content or your site would eventually go out of business. That sounds like more of a commitment then I would want. Regarding your book sales, it is probably relatively passive now, but certainly was not when you were writing the book. Now if you love it, great. Just not for me.
I prefer assets that make me a high return for the lowest amount of work possible (semi-passive involvement). And assets that pay me in several unique ways. Cash flow is only one way RE makes money for me. I also get principal reductions, appreciation, tax advantages (depreciation), and I control the rental increases on a yearly basis. Plus a majority of the capital is provided by the secondary market on 30 year fixed low interest rate debt.
I manage my rentals so granted it is semi-passive. But a majority of days it is completely passive and typically the only thing I do is manage the process. In general, no maintenance work, etc.
Nobody gets early FI investing in bonds, CD’s, or even stocks unless they make a huge income or are extremely frugal or a combination of both. Paper assets just don’t provide enough returns. Business income can be great but it is typically not as semi-passive as I would like and there is a relatively high failure rate. That is if you can monetize an ideal to begin with. RE investing needs to be higher ranked IMO as a way that the “average guy” can become FI.
Got it. It’s definitely tough to understand how attractive online and online product income is compared to RE if you’ve never tried or experienced it before. You’ll just have to trust me on this one.
If I do nothing, I will still do fine because 74% of my traffic is from search engines which is 100% passive/organic. A site with 740,000 organic pageviews a month will still generate a good income vs 1M.
But you still have to nurture and feed the experience to remain relevant in search. Also, if Google changes their algorithm and bumps you, you’ve lost traction. I sell digital learning product online and while there are periods of reduced touch, the process to keep it relevant isn’t passive.
I had created a website that taught people to maximize present value cashflow. I took them through the process of establishing credit and then investing that credit in an FDIC insured account, which at the time was paying 6%. I personally leveraged $85,000 doing this, but the links on the site had the potential of generating $600 per lead. Knowledge was my product. The problem I encountered was that none of the companies would credit the cookies, they even argued with me about my own cookies. Finding the appropriate audience for fiscal prowess and discipline was my greatest obstacle. I found your site through CNBC.
There are so many ways to do real estate, yet most people only view it through 1 lens. Most people think you have to be a direct landlord to have a rental property, which keeps them away. I buy turnkey and use property managers, which makes it much more passive.
I’m also curious how you came up with the return score. You like real estate for building wealth, yet it has the same score as P2P lending?
I agree with your CD post about how far the rates have dropped and how it has completely changed. I will say brick and mortars are still lacking in any sort of positive interest rates but the increase in online only banks with CD rates has been positive
I got a question about your real estate – is that after mortgage payments?
Yes, after mortgage payments, estimated maintenance, and property taxes. I do add back the principal portion of the mortgage payment as that acts towards building my net worth.
Great, thanks for the fast reply!
How were you able to find properties that generate 2k a month?? Would you like to chat personally for half hour? I would love to meet / learn from you!
Just takes time and being in a good rental market like San Francisco.
Check out:
Real Estate: My Favorite Asset Class To Build Wealth
And if you’d like to chat, here’s my personal finance consulting page. I’ve only got so much time. Thx!
Great, sent you an email!:)
What are your thoughts on an Immediate Annuity as a passive income vehicle? I suppose it’s not a great investment since you never get your principal back, but the risk is zero and the cash flow is fairly good, approaching 6% currently. And, since you are guaranteed payments for life, you may not care that you never see your principal again anyway since you’ll be dead!
I will pass on those. I don’t sit well not being able to get my principal back. What happens if you die? Can you pass the annuity to someone else?
Yes, that’s the drawback. Once you die (not if), then your principal is gone. There are certain variations that will allow you to get some of the principal back to pass on to your heirs, but then the interest rate is significantly lower.
Many financial planners will recommend putting some of your money into an immediate annuity to give you piece of mind with consistent cash flow and then keeping another chunk of your money in stocks/bonds for capital appreciation over time.
Another risk with annuities is inflation. Even with a low 2-3% level, in 20 years your buying power from that annuity income will be roughly half of what it is today. Meaning that you wouldn’t want to count on that entire 6% from day 1. Might want to start using only 3% and then increase as needed due to inflation.
Hi Sam, I understand that this is your personal earning rankings of your passive income streams.
My thoughts on this is that, the earnings of your investments is solely dependent on the market condition and geographic location, right? Because for example if you are in Asia, these earnings may not apply.
It’s a good thing though that you show this for us. This is a good reference.
Another great post! Have you ever thought of lowering the cost of your ebook but upselling with a bigger product?
I actually spent a year and a half working as an affiliate marketer (mostly selling drumming related products – lessons, kits ect). 5 years on and one of my one page sites (which I’ve not touched) still nets me about $150 a month. I won’t be retiring off that but only really now appreciate the reverse pyramid approach to entrepreneurship (working for nothing initially but later being paid without effort!)
Sam
I’m actually going to be updating my How To Engineer Your Layoff ebook and raising the price. Let’s see what happens.
$150 a month is better than a poke in the eye mate!
Great article, Sam! Would you recommend one max out their 401K before building passive income? I currently only contribute about $5,400 a year to my 401k (I’m in graduate school+working) Thanks
Hi RW – I would definitely max out your 401k before trying to build passive income. There is no guarantee you’ll have a 401k retirement tax vehicle for the rest of your life, so might as well max it out while you can.
For example, I got to max out my 401k for 13 years and get company matching and profit sharing. But then I decided I had enough in 2012 and left the finance industry. Now I’m trying to catch up with a SEP IRA and Solo 401k through my business, with no matching.
Take advantage while you can! Life changes quickly.
S
I live in the Greater Toronto Area in Canada. Real estate up here has been appreciating at roughly 9-10% yearly for several years.
Imagine I have 100k to play with. If I choose to invest in dividend paying stocks I can prob average 8% return per year.
However, that 100k will get me a down payment on a property likely worth 500k. Any return on that investment is on 500k not on my original 100k
Although I dont have rental property, I see colleagues reaping huge benefits from taking those kids of risks 4-5 years ago. In fact, some people are taking a loss on rental income, just to have a net gain when you factor in real estate appreciation.
I have toyed with the idea of doing this. Any thoughts?
Hey Sam! Just read this article after clicking through from your email newsletter. It only took you 10 hours to write this article and produce all of this data?! It would have taken me a lot longer than that!
Other than just, “creating your own product,” I might add that there are several other ways to create passive income online. Affiliate marketing would be a big one – although the feasibility ranking would be pretty low.
I also noticed that in your passive income chart at the bottom that you don’t include your internet income other than sales from your book. Is there a reason for that? Do you not consider is passive because you are actively blogging all the time to create it? Or do you just not want readers to know how much money you generate from blogging activities?
Hah! Funny how we all take different lengths of time to do things and think how different times are considered long or not.
I don’t consider online income passive because one has to comment, write, market, design, and work many hours. I love it. But running FS is certainly not passive.
So you think it is? If so, why?
Thx
I just can’t seem to get my head around creating my own online product. When you talk about it, you make it sound like its mostly just about putting in the time and plugging away at it. Problem is I can never seem to come up with any ideas for a site or product that seem remotely unique or compelling or that I have any special knowledge about. The stuff I do know about is pretty commodity type knowledge that can mostly be found on thousands of sites on the internet already. Any tips on discovering what your “unique angle” is? I mean, you have a pretty compelling and somewhat unique personal story of working on wall street and then walking away at a young age.
Without knowing your full background, it’s hard for me to say. But, when was the last time you sat in silence for 10 minutes, meditating or brainstorming something? Give that a go!
Everybody is unique and has something to offer. The evidence lies in literally MILLIONS of products currently out there for sale!
Really enjoyed this post and how you summarized all the passive income streams you know and their ranking.
I currently do not have a strategy for passive income, I am mostly focused on building wealth and primarily through stock index funds. I was tempted by P2P lending but it is not available in my state (TX).
Do you have an opinion as to when to focus on passive income and when to focus on building wealth? Would that be like the allocation stocks/bonds in a portfolio?
Good question. First focus on building as much wealth as possible, and then once you’ve gget the formula down, start expanding to various passive income streams.
You can obviously do both at the same time.
Good luck!
Why did P2P lending get a liquidity ranking of 6? It is quite possibly the most illiquid investment option you listed. You said you rank liquidity by “difficulty level of withdrawing your money without a massive penalty”, and for Lending Club notes, it’s not only difficult and extremely time consuming to sell all of your notes in their super illiquid market, but you would have to sell your notes at large losses to hope to get others interested in buying your notes. On top of that, it is impossible to withdraw your money any other way other than just waiting for interest/principal to pay off every month until maturity in 3 to 5 years. You can’t just one day tell Lending Club “I want to quit, please give me my money back.” One can even argue that it is less difficult to sell a home (in order to “withdraw” the money invested) than to withdraw all of their money from a P2P loan portfolio because it is very possible to sell a home before 3 to 5 years.
For a CD which you gave a score of 4, one just needs to pay a one time penalty to get ALL their money out. Your scores are clearly subjective, which is fine, but I’m just trying to understand your reasoning in ranking that higher than CD’s and real estate.
Thanks! Btw, I love Lending Club, but only for retirement accounts.
Perhaps my experience at Prosper is different from you. I have A and AA loans where I can sell them in the secondary market. Furthermore, I have multiple loans that are staggered much more than CDs.
I have a total of three CDs left. There is no way in hell I’m selling them after holding them for 4+ years so far to take the penalty. The CDs are for 7 years. That would be completely counterproductive. As a result, I feel very stuck with ever getting my CD money back if I wanted to. If the CDs were for just 1 or 2 years, I agree, it doesn’t matter as much. But combine a 7 year term with 4%+ interest is too painful to give up.
Have you ever had a long term duration CD? If so, how much did you invest in the CD vs your P2P account?
Tx
Awesome article. My goal is to build a $200,000 passive income too!
Couple of arguments, and feel free to tear them apart.
Real Estate vs Stocks
It’s obvious that stocks outperform real estate in terms of capital gains, but I would like to see S&P compare to Real Estate in SF, Manhattan, LA. Our house in NC was $80,000 20 years ago. It’s only $150,000 now. Same house in Santa Monica went from $200,000 to $1.8 million. People who happen to bought real estate in major metropolitan would have a natural positive association with real estate investment.
In term of labor involved in real estate, it’s not too bad. I only have 3 properties, and I get 1 phone call every 2 months about something not working. You just pass that onto the handy man or the plumber. No big deal.
You make a good point about real estate capital appreciation depending on area. Hence, for non major city areas, then real estate is best purchased for income in mind.
Equities have done better than RE 1:1. But, most people are leveraged to real estate, hence the bigger growth.
Hi there. I am new here, I live in Norway, and I am working my way to FI. I am 43 years now and started way to late….. It just came to my mind for real 2,5years ago after having read Mr Moneymoustache`s blog. Fortunately I have been good with money before also so my starting point has been good. I was smart enough to buy a rental apartment 18years ago, with only 12000$ in my pocket to invest which was 1/10 of the price of the property. I actually just sold it as the ROI (I think its the right word for it) was coming down to nothing really. If I took the rent, subtracted the monthly costs and also subtracted what a loan would cost me, and after that subtracted tax the following numbers appeared: The sales value of the apartment after tax was around 300000$ and the sum I would have left every year on the rent was 3750$……..Ok it was payed down so the real numbers were higher, but that is incredibly low returns. It was located in Oslo the capital of Norway, so the price rise have been tremendous the late 18 years. I am all for stocks now. I know they also are priced high at the moment which my 53% return since December 2016 also shows……..The only reason this apartment was the right decision 18 years ago, was the big leverage and the tremendous price growth. It was right then, but it does not have to be right now to do the same. For the stocks I run a very easy in / out of the marked rule, which would give you better sleep, and also historically better rates of return, but more important lower volatility on you portfolio. Try out for yourself the following: Sell the S&P 500 when it is performing under its 365days average, and buy when it crosses over. I do not use the s&P 500 but the obx index in Norway. Even if you calculate in the cost of selling and buying including the spread of the product I am using the results are amazing. I have run through all the data thoroughly since 1983, and the result was that the index gave 44x the investment and the investment in the index gives 77x the investment in this timeframe. The most important findings though is what it means to you when you start withdrawing principal, as you will not experience all the big dips and therefore do not destroy your principal withdrawing through those dips. I hav all the graphs and statistics for it and it really works. The “drawbacks” is that during good times like from 2009 til today you will fall a little short of the index because of some “false” out indications, but who cares when your portfolio return in 2008 was 0% instead of -55%…….To give a little during good times costs so little in comparison to the return you get in the bad times. All is of course done from an account where you do not get taxed for selling and buying as long as you dont withdraw anything.
Hi Sam,
The challenge I’m facing and, I know it’s a good problem, is that the SF real estate has shot up about 35% in the last couple years. I’m sure you’re experiencing the same thing! So as the net worth is rising, the yield on the total portfolio is going down. Right now, it seems the only way to increase the passive income will be to raise the rent in December and to invest some of that cash in stocks, which I’m nervous to do in this market. Current allocation:
39.51% SF condo
27.46% cash
29.26% stock funds
3.78% Bond funds
Raising the rent is a logical conclusion to increase yields. It’s just business, and the markets and nothing personal.
I like your net worth asset allocation. Perhaps P2P lending is in your cards?
I like dividend investing the best because it’s easiest and it’s pretty liquid. You can keep adding to a good dividend paying stock and you’ll most likely come out well ahead in the long run.
I like real estate investing, but it’s a bit of a headache and not very passive. It also takes a really long time to pay off and the tax bill is huge when you sell..
Creating a product really is the best way to go if you can do it. I will work on this when I have time…
Real estate for me feels too much like a job… which is fine if it is your idea of a hobby. I guess I have more of a “set it and forget it” attitude as I prefer to invest in Stocks/Bonds/REITs. This way I can allocate more of my time to other pursuits.
I read about early withdrawal penalties on IRAs/401Ks very often. Almost always with a statement of “locked up” or “can’t touch” until 59.5. I’m sure you and well informed readers as well know about SEPPs in regard to IRAs/401Ks. For those that don’t SEPPs aren’t perfect but they are a way to tap retirement funds penalty free and I will be using in the future as I have over half of my equity investments within retirement accounts. South of a mil, North of a half. Let me add that I think your blog is outstanding.
https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments
I have a fair amount locked up in my IRA as well and have become interested in SEPPs. Seems a little scary because if you ever screw it up they can charge you penalites all the way back to when it began. But very tempting all the same– my IRA could safely generate about 1k/month in income if I used SEPP.
Interesting article. I too am trying to build up my passive income streams but currently they just consist mostly of ETF dividends.
One aspect you might want to add to your scoring is “inflation protection”. At one end, bonds and CDs generally pay a fixed nominal coupon that doesn’t rise with inflation. Stock dividends and Real estate rents (and underlying property value) tend to. Not reallly sure how P2P lending ranks- though I suppose the timeframes are fairly short (1 year or less?) and therefore the interest you receive takes into account the current risk free rate + a premium for your risk. Now that I think about it, P2P lending probably deserves a lower score in the activity column than bonds too (since you probably need to make new loans more often).
And speaking of inflation, shouldn’t the risk for CDs be scored less than 10 because you may lose money to inflation that may not be compensated for with the interest you receive?
Not sure how i’d score “inflation protection” for intellectual property. From what i’ve observed, prices for items like music and books tend to be pretty sticky (or even declining), so over the long term you’d probably need to counteract that with higher sales.
What do you think?
Inflation protection could be a sixth factor, but I’ve already got the Return metric in place, which can and does incorporate inflation and other thing that affect return.
How about The Kai-Zen Financed Plan & Trust?
Great site! Just found it recently and I’m really enjoying your writing. I feel like most financial blogs are just regurgitating the same old stuff over and over but you are writing new and interesting stuff.
I’m a 45 year old business owner who also has focussed on diversifying my income streams. I have a short term vacation rental in Florida that I bought for $390k in 2012 and net rental income for the last three years has been growing steadily. 2015 I am at $70k gross right now but should end up at $80-85k with net around $45k plus we use the place about 35 nights a year.
Also own two commercial rentals with great long term tenants. Paid $1.4m combined for both and gross rent is $120k/year but net not so great as I borrowed $1m to buy them and took a short amortization of 15 years so paying it off faster than I need to (even dumping lump sums on it when I can).
Principle residence worth $900k and paid for. Knocked the $300k mortgage off in 5 years and have been mortgage free for 4 years.
Seven figure investment portfolio holding only 4 cheap efts with good global diversification and total cost about 0.12%/yr. Adding six figures of new cash per year and this portfolio is growing fast.
My business is doing well and growing. Income is a 50/50 mix of salary and dividends and I live on the salary and invest the dividends. Wife still working since she loves her job and adding another $125k to the pot for now.
Websites like yours keep me motivated, give me good ideas and since I can’t talk about my financial situation with friends it’s sure nice to do it anonymously here!
What I do need is an exit strategy from my business and I am thinking it’s going to be in 5 years at age 50.
Thanks again.
Welcome to Financial Samurai, Chris!
Nice work on knocking off your mortgage so quickly. Keeps me inspired to keep on going on one of my rentals.
What type of business are you in?
Nice job Chris! Paying off a mortgage that fast is awesome, I am also curious as to your business or vertical :).
Thanks for writing this Mr. Samurai. I just got over the student loan hump but I feel pretty good about it at 27 having a graduate degree and being 100% debt free. Now that I’m on the other side it is good for my brain to absorb some of your knowledge regarding passive income investments. I love gleaning wisdom from older folks who have been there and done that. Mentors rock!
For privacy reasons I will just say it’s a B2B service industry with low overhead and high profit margins. I fell into it 20 years ago and found my niche at a young age. Started my own business after a dozen years in.
Sam – what is the blogging software / host company do you recommend? I saw that you had a link to one recently but cannot find it. I think you said now you host your own server to keep up with traffic?
Hi S – you can go with Bluehost for under $5 bucks a month. After about three years, I moved on to a dedicated server, which you can also do with them.
What about preferred stock for passive income? Like a ETF like PowerShares Preferred Portfolio. They are returning around 5.9% right now and its monthly income. What’s your view on preferred stock?
I don’t know much about the structure. A 5.9% yield sounds fantastic. But what is the risk the principal will go down?
I have a question about highly leveraged rental property. If you are buying it with 5% down or so, aren’t you losing a huge amount of cash flow to PMI?
Probably Jon. But it all depends on how much rent you are taking in, your mortgage rate, and the I cost.
I paid a Pakistani to skeleton a medically oriented ebook. I’ll let you know how that project goes. In my experience, it has about a 15% chance of being profitable. But, for some reason, I feel like this will be a winner.
You don’t have to answer with your specific information but how much would a person have to invest to create a professional looking e-book?
You can go online and get a freelancer to design your cover for under $50. You might want to hire a copy editor at 10-20 cents a word. Or get your loved ones to edit your writing for free. You should file your book with the Library of Congress too.
The cost to create a professional looking eBook is probably therefore $50 – $1,000 for the majority of cases.
The biggest cost is time.
Well I’ll definitely agree that starting your own product has the lowest beta. Best risk/reward ratio there is, period. The problem is it requires combined creativity and persistence, something most just won’t ever stick with.
I like that you included dividend investing. *Cue dividend-focused mindset haters*. I wonder if this is an actual part of your portfolio (individual stocks) since you never write about it?
Dividend investing is a small portion of my net worth (but growing) because I’ve always focused on growth stocks over dividend stocks to build my capital faster. It’s worked, even after stepping on some land mines here and there. The older I get, the more I’ll write about dividend investing most likely.
However, my X Factor is the online business, which is throwing out a lot of cash flow at the moment. Hence, my goal is to either plow some of those earnings back into the business, or reinvest the proceeds elsewhere. I’ll do both.
I’m actually surprised that real estate ranked further down the scale for you. Being a regular reader and seeing your opinions of it, I expected it to be somewhere near the top. That’s probably why you did the analysis, of course — takes the emotion out of the equation. Also didn’t expect CDs to rank as well as they did.
I’ve already begun my dive into P2P lending, with real estate on the 2 year horizon. I doubt I could put it as well as you have, but I am curious what my own rankings would look like in a few years time.
Yep, I’m surprises too. I tried to be as objective as possible with each factor score.
I love real estate, and I think Irma great for a “proactive passive income earner,” but it’s certainly not as easy to earn income as other investments due to the maintenance and tenants.
I do feel RE should be a core holding in everyone’s net worth.
Hey Sam-
Passive income is so powerful. It can be frustrating just starting out as building a significant amount of passive income is no easy feat!
What do you think about owning a business that you don’t work at? An example would be someone who owns a few fast food restaurant chains and just collects the profits. You hear those stories of “So and so owns the business, but he is never here.” I want to be so and so!
Great question. Maybe I should include “Absentee Business Owner” as the 8th passive income investment option!
Maybe such a business is owning a McDonald’s franchise or something. If one has the capital (Feasibility Score 2), then the returns might be good (Return Score 6). But the Risk Score is probably under a 5, b/c how many times have we seen franchise chains come and go? Like, what happened to Quiznos and Jamba Juice? A McDonald’s franchise was $500,000… probably much more now?
Washer/dryer stores… now that’s pretty easy to main. I’d look into that. Want to research that business and report back?
Funny, I just read this blog yesterday!
https://www.myshinynickels.com/2015/03/14/we-bought-a-laundromat-and-its-all-about-the-numbers/
Wow, a 40% annual return? Is that possible? If so, I’m buying 10 laundry shops this year!
Speaking from our own experience, you can’t be a passive McDonald’s franchisee. Every McDonald’s potential franchisee will need to complete at least thousands of hours of training before he/she would be approved to acquire a franchise and only if he/she has the financial resources to acquire a franchise. It could take years before one would get a single store franchise. Until the franchisee eventually has acquired multiple stores and established his/her own management team, the franchisee would have to put his/her nose to the grindstone and work his/her ass off every day. I won’t call it a passive investment by any stretch of imagination.
It is complete misconception or false imagination of many outsiders who think that it is easy to acquire most of the name brand franchises as long as they have the capitals.
Just my 2 cents here.
1,000+ hours is a lot of training Good to know. That doesn’t sound very passive. Perhaps once there’s scale and a fantastic management team, yes.
Real Estate hands down. Even during the market down turn, the house was underwater, most people can make adjustment to have roommate live in the house to cut down mortgage. Extraordinary time, you take extraordinary measure :)
$400k to get $10k in CD?
Try real estate:
If you leverage $300k, put down $115k, get $44k before expense. It is like a part time job, but you don’t have to work all the time, just sometime. The return can be great.
Bond now is risky as the FED is toying increase interest rate, and you’d get stuck with a 5 year CD, of course when you get multimillions, it’s really doesn’t matter. When you are younger, have less money, you want to leverage. Let the borrowed money build wealth for you, but don’t get caught up too much into the real estate bubble.
For CDs, yes… Risk Score 10, Return Score 1.
Real estate is great, but leverage works both ways. Things are all good now, but eventually things will turn. The good thing about real estate is that rents tend to stay stick e.g. one year rental agreement, or rents that stay flat during a downturn, but go up during an upturn.
Check out: Should I Buy Bonds? Wealthy People Don’t
Sam,
How much passive income is coming from the blog?
Congratulations- you are far ahead of us in terms of passive income, and at a younger age. Respect!
I am 41, with passive income in the range of $60K per year, and still running with a day job. You are just killing it!
-Mike
What is your passive income source?
Mike, I don’t consider the income from FS to be passive, as I’m spending time commenting to you right now. But since 75% of my traffic comes from search, the most traffic I would probably lose is 25% for probably a year. And then my search word rankings would probably slowly fade given frequency of posting new content is one of the search algo variables.
If you like your job Mike, all is good! The goal is to make enough passive income so that by the time you don’t like your job, your passive income will allow you to break free and not miss a lifestyle step at all.
I’d be interested in your thoughts (if any) on Crowdfunding Real Estate investments. I treat this money the way many people treat their Prosper/Lending Club investments, rather than as a RE investment, although the fact that there is an underlying asset is a huge advantage to my mind.
It’s a (mostly) short term, higher risk, higher reward place to invest cash that has a low correlation with the stock market, but is far more passive than buying and managing properties, has more opportunity for diversification than private placements (minimums of 5-10K, rather than 100K), and most of the equity offerings (and all of the debt offerings) provide monthly or quarterly incomes. Unlike a REIT, you can choose exactly which projects you wish to invest in.
Feasibility is low, as you must be an accredited investor. The industry is still young, but there seem to be a half-dozen platforms that have good backing and are taking the lead.
Crowdfunding in real estate is a great model. I know companies like Realty Mogul are doing just that, and they are filling a good niche.
If real estate floats your boat, and you enjoy liquidity and picking your investments, RE crowdfunding is a great approach.
Hey Mike! Love this article. Recently, I paid off my student loans and am crazy focused on creating multiple passive income streams. Currently, all my passive income comes from real estate and because of your great articles on the subject I called to check out refinance options! I had no clue about CD laddering, dividend investing or P2P lending until two weeks ago when I started doing my research on where to put my hard earned money. I had been just saving it but when I looked at the terrible 0.01% return I said forget it! 2 % for me is a great way to start. It is better than what I have been getting outside of my real estate. Also, creating products is a must! I’m working on this type of royalty too. I find it so exciting to learn how to use your money to make money. Thanks and I will be sure to link to you when I start my blog!
I definitely agree with your top two, which are the two I want to focus on. I love the flexibility that ‘dividend investing’ (or any listed equity investment) gives you, where you can really tailor your portfolio to your own investing style, risk profile and personality.
But despite not having ever generated passive income from creating a product, this one would be a clear winner for me. Especially if you included a ‘satisfaction’ or ‘rewarding’ measure in your ranking! And the control you have over it is likely to be much greater to some extent. But it obviously involves much more hard work in the early stages!
I’ll let you know if my ranking changes once I start making money from a product of my own :)
Good point. It IS very satisfying to spend time producing a product and finally releasing it to the world. And if you truly believe your product will help someone, you get more satisfaction knowing you’ve made a different.
The e-mails and “thank yous” I’ve gotten from my severance negotiation package book have been very uplifting. They drive me to write more. We spend so much of our lives working and making money. It’d be nice to break free once in a while.
Sam,
I think you should use Financial Samurai to raise your passive income. You’ve already proven that you writing 3 articles a week is enough to not only sustain the site but grow it. Why not have more guest writers post articles? Since you started with the extra post each week I’m guessing traffic is above your normal growth rate. Leverage that up with more posts and my bet traffic will continue to grow.
If you could work the same amount of time you currently do on your site and through guest posts increase your traffic and ad revenue, wouldn’t that be a form of passive income? Your posts are certainly good enough to retain your existing base. Let someone else make you some extra money.
Hi Bill,
That’s definitely an idea. This current post is over 3,000 words long and has gone through 20 revisions and eight hours to put together. The excel chart on my rankings alone took two hours as I constantly went through various permutations to come up with as realistic score as possible.
I want my writing to be as high quality as possible on FS. It feels embarrassing if I don’t put my best into each work since personal finance is so important to so many people. Given this feeling, I’m hesitant to host too many guest posts.
That said, I do plan to revamp my site this summer by adding another column of content that is made up of guest posts from the community and from outside voices. I will still spend time editing them, so things will never be passive online. But, I enjoy the effort spent online so all is good for now.
If one day I don’t, I can totally automate things by hiring people.
thx
I have exposure to real estate, dividend paying stocks, CD’s, and very small amount in P2P.
The plan is to ramp up the P2P account this year.
I am currently working on my first digital product that I am aiming to launch this summer.
Sam – Do you not consider income from ads and affiliate links passive income? In reality the content is evergreen and so people will continue coming to the site long after you wrote the content.
I would definitely consider income from blogging through affiliate links and ads as passive income.
Interested to hear your thoughts on this.
Yes, a percentage of the income through blogging can be considered passive. Perhaps an “evergreen” article can stay ever green for three years. But if it is not updated, and if you don’t continue to link back and write, it can easily lose its search position.
I’ve spent probably 10 hours this year updating a lot of older posts with new figures and content. That’s not very passive. But, 75% of my traffic is from search, which is passive.
I’m curious as to why you would consider your eBook as passive if, in general, your advertising income from the blog is not. If traffic to Financial Samurai were to wane, so would book sales, no?
I have exposure in real estate, P2P, and CDs. I have a little in dividend stocks but not enough to make a real impact right now. So that’s something I should consider expanding this year. Same with private equity perhaps. Creating my own product is something I’ve thought about too but I have other priorities at the moment.
Well, starting a site to earn income is like creating your own product. It just takes a lot of time to maintain a site as you know!
What about bonds (muni’s, high yield, investment grade)? Did you purposely leave those out?
Bonds are there. Check the post again Gary. Thanks
Considering AAA Muni bond default rates are nearly zero, why do you list bond risk at at more thanouble the rate of CDs?
Sure. Because CD default risk is zero below the FDIC guaranteed limits.
It literally is like ranking a 5’11” person taller than a 5’10” person.
I live in NYC where I never thought buying rental property would be possible, but am looking into buying rental property in the Midwest where it cash flows and have someone manage it for me (turnkey real estate investing I guess some would call it). I agree with what Mike said about leverage and tax advantages, but I’m still a newbie to real estate investing so I can’t so how it will go. I have a very small amount in P2P…I’m at around 6.3% It’s okay but I don’t know how liquid it is and it still is relatively new…I’d prefer investing in the stock market.
The Midwest could be good, but you will then have to take one or two trips to the Midwest a year to maintain your properties most likely. I’d look for a property within 100 miles of you first.
I own several rental properties in the mid west and I live in CA. I have never even seen them in person. With good property management in place (not easy to find but possible) it is definitely possible to own cash flowing properties across the country. Not for everyone and not without it’s drawbacks, but it seems to be working for me so far. I’m happy to answer any questions about my experience with this type of investing.
I’d be very interested to hear how you both found rental properties so far away, and also vetted an ethical and honest management company from so far away.
I have already come up with 50 ways that a management company can screw you for profit without you ever knowing(or not finding out for awhile). Did you have an inspection before you made an offer on the property? Do you have a picture of the property you bought? How do you know if that picture shows the house you actually own? or if it even hows the ‘current’ state of the house you own?
I’m a hard working optimist who knows it is possible to own rental real estate from a distance. I have heard of many people doing it successfully, however have never asked for advice or direction like I’m doing now. I’m just looking to find out where to begin.
Could you please talk about and explain how someone could start this process.
I am very interested to hear how (or if) someone could replicate your actions.
I’m specifically interested in how you selected and agent to help you, and also how you decided on a specific location. I don’t need/want to know the details of your specific transaction, but just rather looking for broad instructions in your reply. Looking forward to hear your advice.
Hi David,
I’m looking for a good turnkey provider. Would you be willing to share your contact? Thanks,
Hey David,
If you are still around, please consider replying and pointing us in the right direction. You said you live in CA but bought rental properties in the midwest.
People here would be interested to hear how someone can or should go about finding and vetting an ethical management company from out of state.
Since David may never be coming back to this site, If anyone other than David can point me in the right direction, Id greatly appreciate it. I live in Chicago, and I need to buy a quality rental to hold long term somewhere but I have no idea where, and I really don’t want to buy in Chicago. Chicago is insanely corrupt and in HUGE debt. I cant leave Chicago in the near term, I take care of an aging parent, and if I left, my salary would drop by 50%. Id still like to diversify into a rental property.. but I feel that if I just call up a stranger, they’d attempt to sell me their best pig with lipstick, and pressure me to jump on the deal before someone else ‘stole’ it. I have no problem hiring a property inspector from a different city, but don’t want to waste hundreds of dollars if the agent is steering us towards crap property after crap property. I’m looking for broad advice. Any constructive reply appreciated. Thanks guys.
How does someone vet a management company?
How does someone go about finding an independent person to tell me which city to start looking it?
Im in the same boat, live in ca with houses in tennessee . Overall very happy and i also hv never seen my houses. Been 6 years.
Hey Ted, Maybe you can share how exactly you bought your rentals from so far away. Im not asking for identifying info, but rather seeking vague guidance; a help nudge in the right direction. I have been trying to get someone from here to respond for a very long time.
It is very important to understand that contacting a “professional” to learn how to do this only results in them trying to sell me crap properties (whether high end or low end). I’ve tried contacting realtors out of state, and they attempt to sell me crap or someone else’s problem. No one has a vested interest in actually helping someone or teaching them about how to get an out of state rental. very frustrating. I could go out tomorrow and buy a rental in my city, but that is the last place I want to own one. Anyone? Are there an real people on here?
How does someone vet a management company?
(There are a TON of companies out there that are not ethical, and I know a lot of the typical tricks management companies use to unfairly increase their profits at the owners expense).
How can someone buy a property site unseen from a thousand miles away?
Anyone?
The best thing I’ve done is invest in real estate crowdfunding where the platform carefully vets all the deals and allows for only 5% seen onto the platform. Then I carefully vet the deals or choose a fund of theirs that has an investment committee that tries to pick the best of the best.
I’ve invested $810,000 with RealtyShares so far because I like the platform and I like the deals they have in non-coastal cities, where I want to diversify. The coast is way too expensive now and I have 2 SF homes and 1 Tahoe home already.
My target return w/ crowdfunding is 10% – 12% vs. the 2.5% I was earning with my SF rental house and all the headaches.
Sam
I’m replying to an old post, but thought someone might see this and be interested. I have two properties that are out of state. What you have to do is research and use some intuition. You know those goofy articles about where are the top 10 best areas to live/retire? Start there. You want to find an area that has rising jobs, diversified industry, low crime rate, preferably has a college (people look for that when they are thinking of retiring), good hospital, lowish property taxes, no HOA if possible. Then within that city look at the area that has the best schools. Start with a single family home that is the most sellable, 3 bd 2 ba, 2 car garage. Look on zillow and see what is for sale (be aware that some photos are touched up). Zillow also shows current rentals. After you have narrowed it down, use Google street view to actually look at the house and the neighborhood. How does the roof look? Do you see any evidence of mold? Trashy neighborhood? etc. Look at the city/county crime statistics. Have a realtor take a look. Most are pretty savvy about areas and expenses. Nashville, Huntsville, Raleigh-Durham, Kansas City, Oklahoma City, and St. Louis look pretty good. Stay away from the Phoenix area. Those people are so fussy, your house has to be perfect looking for even low income tenants. I also do not recommend Las Vegas. Too many rental houses there. If there’s a downturn, there will be a glut and prices will plummet. See what kind of loan you qualify for. We were surprised to find that we only qualified for a $100k loan even though we both have over 800 credit scores and spotless records. They do not use rents when calculating the debt to income ratio.
One investor I know likes to buy newish houses. Then there aren’t very many repairs for at least a couple years.
One of my houses was a crap house. The photos were horrible. I had it gutted (I called one of the zillow realtors and asked her who her contractor was), and the tenants are very happy.
I keep my rents low so the tenants are happy and don’t complain very much, and don’t ever want to leave. Getting a new tenant costs money and gives you headaches.
I have property managers for both that get lots of money for doing nothing. I don’t like either one, so I can’t help you there. But I sleep better at night having them. What you do is get one based on their advertising and then if you don’t like them, change managers. Look out for lease contracts, some have agreements that if you cancel they’ll charge you for the whole length of the lease term. You don’t want to pay for 9 months of management fees for nothing. If you can find one with a lower number of properties I’d recommend that. Then they have more time to devote to your needs. Some of them have hundreds of properties they manage and don’t have any idea who you are. Nowadays you can manage them yourself. There are online companies that handle evictions, vet tenants, etc. You can use Angie’s List to get a handyman/repairman for practically anything. Generally what people do is create a contract with the tenant saying the tenant will pay for all repairs under a certain amount. You’ll pay for any repairs over that. If the tenant wants to remodel/upgrade something, if you approve, you can share the cost.
All that being said, I would not buy anything now. Now is the time to sell. Maybe, maybe if you can find a cheap fixer upper I’d do it, but nothing else.
That is a nice list of passive income sources. Actually, the most up-to-date list of dividend growth stocks is the list of dividend champions, maintained by Dave Fish. The list of dividend aristocrats is incomplete at best. For example, the dividend champions list has over 100 companies that have managed to increase dividends each year for at least 25 years in a row. The list of dividend aristocrats has no more than 50 – 60.
Best Regards,
Dividend Growth Investor
What lists are you referring to?
Great breakout of some common items that are (mostly) accessible to individuals. My biggest issue with p2p is the ordinary interest it generates and the ordinary tax that we have to pay. That really takes a bite out of the returns. Fortunately, I opened an IRA with one of the providers to juice the return with zero additional risk. 6-8% nominal returns over a long period of time will make me very happy. It should end up as 5-7% of the portfolio anyway, so nothing too significant.
I wish I had more time to put into real estate. Given the run up since 2012, I may even be interested in selling my condo that I currently rent out. I need to get it appraised to really see what it’s worth, but I think conservatively it’s gone up ~50%, although rent is probably only up ~10% or so. I am bullish on rents going up in the future… mostly in line with inflation, or perhaps even slightly faster due to constricted credit and personal income growth which should provide a solid supply of renters. At this point, I just don’t want to manage the property. I’ll probably look into a property manager as my time is likely worth turning it into a nearly passive investment.
Thirdly, I think a reasonably diversified stock/bond portfolio can also provide a solid ~2.5-3.5% blended yield quite easily, depending on asset mix and growth profile. Personally, I’m more of a value investor and absolute return investor and will buy stocks that seem more likely than not to have a place in the portfolio.
I think the next product/website thing is definitely something to look into. I’ve seen many people generate considerable income/wealth through their efforts, and as you mention many times, the costs are minimal in this digital age. Limited downside, unlimited upside… can’t really get better than that, huh?
Creating Your Products definitely has a fantastic risk profile. I highly recommend it, and will discuss more about it in the future.
A 2.5% – 3.5% blend yield on a diversified stock/bond portfolio is OK. It’s just not very exciting. So far, one can easily get 6%+ in a diversified P2P lending portfolio. There are now funds that invest in just P2P you can invest in. There’s one on Sliced Investing right now.
I would hold onto your real estate forever. The returns just get better as rents rise on a fixed cost basis.
the 2.5-3.5% was just the cash flow (dividend) component in a very moderate or value-tilted portfolio.
I agree mostly with the real estate advice. I’m looking for ways to take advantage of the condo I own to get up the rent from ~$0.90/ft to the $1.2-1.5/ft that seems more like the range in the same area. I’d have to put in a bit of capital (probably 10k on the low end for just the basics up to 40k if I wanted to remodel the kitchen and 2 bathrooms up to par with the area), so the return is likely there if those upgrades warrant $1.30/ft (given the unit is larger than most 2br/2ba in the area).
We’ll have to see. I’ll probably need a manager which will cut ~10% in fees since I don’t like to manage remotely (different city that I left).
Prices may go down in the future if the economy slows down, but I really doubt rents will go down.
Perhaps this is something you’re familiar with: Do you know what sort of economic conditions cause or push rents down? (barring a local market anomaly like a large employer leaving a city)
Well written piece, but I question the core premise. Why the fascination with maximizing “income” (passive or otherwise). Shouldn’t the goal simply be to maximize long-term after tax growth of your entire portfolio? If this takes the form of dividend paying stocks, so be it. But what if small caps are poised to outperform? What if you want to take Buffet’s or Bogle’s advice and just buy a broad market index like the S&P 500, (no matter what the dividend because you’ll just have it automatically reinvested to avoid the transaction fees).
Whether you take a “distribution” (aka free-cash-flow) in the form of a dividend, interest payment, capital gain, maturing ladder of a CD, etc, you are still taking the same amount of cash out of your portfolio. Don’t fall for the trap of sub optimizing your overall portfolio’s performance because your chasing some unimportant trait called “income”.
P.S. I also fail to understand your fascination with real estate. Granted we’ve had some impressive spikes along the way, especially with once in a life time bubble we just went through. But over the long term (see Case Shiller real estate chart for last 100 years ) real estate tends to just track inflation. Why would you sacrifice stock market returns for a vehicle that historically hasn’t shown a real return?
Portfolio growth isn’t the end-all, be-all. Especially if you’re looking for early retirement (and by your handle, I’d guess you did), income can be very important. If I have a $5 million net worth but all it does is grow internally, then I guess I still need a job.
And real estate does more than just track inflation – it throws off income (which is important to some people and useful to most). And while your underlying asset is appreciating, the income also grows as rents increase over time. And if you make smart and well-timed purchases, both rents and asset values can increase at well above the rate of inflation.
If you need cash flow, and the dividend doesn’t meet your needs, sell a little appreciated stock. (or keep a CD ladder rolling and leave your stock alone). At the risk of repeating myself, whether you take cash out of your portfolio in the form of “rent”, dividend, interest, cap gain, laddered CD…., etc. The arithmetic doesn’t change. You are still taking cash out of your portfolio. I’m just pointing out that we shouldn’t let the tail wag the dog. IOW, the primary goal is to grow the long term value of your portfolio, after tax. Period. All other goals are secondary.
The idea growth stock may beat out all the other forms of passive income fascinates me. But please tell me how to resolve this scenario…
If today I inherit $1 million dollar and I want to live off it’s passive income, and I purchase a $1 million growth mutual fund. How should I tap into it for living expense? Let’s just say I want a modest $40,000 a year allowance?
If the stock goes up 6%, I can comfortable take out $40,000. But if it drops 8%, what should I do?
To live off this portfolio, does the amount I withdraw differ depending on the market performance or not?
I can see if I’ve already invested for 20 years and now I am tapping it for retirement. In that case I would not have reservations. But just starting out and tapping into principal as a source of passive income does not make sense to me.
Case Schiller only tracks price appreciation of RE. RE as rental investment vehicle is measured primarily on rental yield or cap rate or some other measure. Price appreciation in that scenario is only a secondary means of growth, and arguably should be ignored as a predictor of returns when deciding on whether or not to invest in rentals. More important key performance indicators for rentals are net operating income and cash ROI. Appreciation, if it occurs, is a bonus.
Rentals, just like stocks, throw off cash. With rentals we call that cash “rent”, and with stocks we call it dividends. A significant difference however is that the S&P 500 has appreciated at ~6% per year (above inflation) for the last 100 years…..Real Estate has had almost 0 growth above inflation. So are rents higher than dividends? Maybe, maybe not. But unless you got one heck of a deal, the delta in rent over dividends will have a very tough time making up for the 6% per year difference in appreciation.
Just to add something for consideration. With a rental, there is a good chance your renter is paying off your mortgage which is increasing your equity (separate from value appreciation). Should you include that equity growth as part of the return?
your mortgage also magnifies the returns on your recurring cash flow on a rental (positive or negative)
Leverage can make RE and stocks a complex comparison.
Hence Why paying all cash for Real Estate is not the optimal way to increase ROI and it looks like earlyritired is using this method of purchasing Real Estate in his comparison.
Add Leverage (Mortgage) and you greatly increase the ROI especially from the perspective of using Rents (other peoples money) to pay down the mortgage and increase your equity in the property over time. At this point then yes price appreciation is secondary bonus and we have an arguement of how and why Real Estate can be better than Growth Stocks in some scenarios and for some investors.
The fascination with maximizing income is because this post is about maximizing passive income. If you want to read a post about maximizing wealth, read this post on growing net worth over income.
The goal of building passive income is to improve financial strength and generate enough income so you can leave the work force early, or pursue lower income jobs, or higher risk endeavors.
Do I come across as being fascinated with real estate in this post where I have it ranked second to the bottom of seven passive income investments?
I like real estate b/c every market I’ve lived in: New York City, San Francisco, Taipei, Singapore, Beijing, Kuala Lumpur has done incredibly well over the past 37 years. Real estate is tangible, has tax advantages, provides utility, can generate rental income, and is a real asset.
Please share with us your passive income profile, age, experience, etc. thx
Re: “Please share with us your passive income profile, age, experience, etc. thx”
Early retired at 46, now 48. Have been CEO of 3 companies, one public. Completely burnt out on anything “corporate” but still love playing with investments.
If every valuation metric I can find didn’t suggest the domestic equity (and real estate) market is historically expensive, I’d try to follow Buffett’s advice for his wife’s estate and put 90% of my assets in broad market equity index funds. The long-term +6% CAGR (over inflation) of the equity markets simply cannot be beat.
However, until we get another reset in valuations (I’m calculating a 40% to 50% correction is justified ), I’ve moved largely to the sidelines. Beginning in July 2013, I began slowly reducing equity exposure and am now sitting firm at 40% with the balance in various forms of 5 yr cd’s and short duration bonds. This is down from over 60% when I ramped up to take advantage of the March 2009 lows.
I’ve never invested in real estate (except to live in), but am always intrigued by communities like FS who seem to have such a passion for it. My intrigue stems back to my earlier comments that the long term trends in appreciation in real estate are simply not very competitive versus equities, despite what Robert Kiyosaki had to say in his book, Rich Dad, Poor Dad.
My question for you, why is Buffett apparantly wrong about equities outperforming real estate (and everything else)? Why would I waste even $1 in that asset class when buying an equity index fund is so easy (and long-term profitable)? And at the risk of sounding crass, why make it so complicated?
Sure, nobody can dethrone or argue with Buffet’s methodology.
This post isn’t encouraging people to invest in all seven passive income investments. It’s ranking them in accordance with five factors that matter differently to different people.
For you, going all-in with index funds is what works. For others, maybe not.
For me, I like real estate more than stocks because it’s tangible, and many other reasons I’ve already mentioned. Electronic money, stocks, mean very little to me b/c they are just numbers on a screen. They bring very little joy to my life itself.
Don’t get the “tangible” comment. If it makes you feel better about stocks, drive over to Microsoft headquarters and touch their building. And while you’re there, shake the hands of the tens of thousands of employees that are working for you if you own the blip on the screen referred to as msft.
Yep, if that’s what it takes for you to feel better about your stocks, that’s definitely a good idea. No need to defend why you’re heavily allocated to stocks. Everybody has their own preferences.
Being a CEO of three companies is impressive! Perhaps you can share your story one day in a guest post.
I had completely written off using CD’s for putting money away. I had assumed that it was just a bad investment due to the low interest rates. But you make a great case to make it a part of our portfolio for diversification purposes. I’m intrigues now and I’m going to start doing some research. Thanks.
It’s a low return investment, but it is a good place to park cash risk-free.
Good ranking FS, I’d have to agree with the rankings. And it looks like your portfolio covers five of the six! Some people consider real estate passive will others classify it as active. But every scenario is different, whether you are doing all the maintenance and managing yourself, or you are contracting out a lot of the work. Obviously it takes a lot more time and effort than purchasing a 36 month CD and “setting it and forgetting it.”
At the end of the day real estate investing may be too risky for certain individuals and not give them peace of mind like dividend investing. So finding what works for you is very important, and as long as you begin to ramp up your passive income along the way, FI becomes much more realistic.
Real estate can definitely be risky, if one is inexperienced. But at its core, real estate is one of the simplest investments out there. Hence, a 5 Risk Score. Much simpler than picking stocks, that’s for sure, hence why most should just buy index funds.
I’ve actually got all seven passive income sources (I added one more after publication). Will update my passive income chart for 2015-2016 this summer.
Personally, I’d rate dividend investing higher than creating your own product.
For dividend investing, I do most of mine through my various IRAs in order to get the tax shelter on the dividends so they grow that much faster. For me, at least, that raises the “return” rating a notch.
On the product creation / sales perspective, it can be hard to come up with a compelling product with good revenue potential. Writing an ebook is easy. Writing an ebook with valuable enough information that you can charge $48 for it and have people happy to pay it, is a higher level of knowledge and creativity which can be difficult to attain.
But overall, this is one of the best summaries of passive income options I’ve seen in a while. Will be sharing on my networks shortly. Thanks!
Dividend investing is right up there for sure. You don’t have to charge $48. You can charge <$10 to boost sales. The internet has enabled so many creatives to publish their works at a low cost. People will surprise themselves if they try to create like when they were in school. The other reason why I have Creating Products edging out dividends is because of the much higher POTENTIAL to make a lot more money. For example, $20,000 a year in book sales requires $570,000 in dividend investments to replicate the same amount. Plus, there is capital risk. With book sales, there is a correlation with EFFORT, and you are not beholden to the whims of the markets.
Perhaps what has not been factored in is if you select the right dividend stocks in the right sectors you can also achieve capital growth. Also, the highest yielding dividend stocks are not in the US right now. In a portfolio focused on Australasia and Europe we see a running yield of around 6.5% p.a. Meanwhile growth has added another 5-10%. I’m not saying this will surely continue (past performance and all that) but it is worth noting.
Why not include the most popular wealth building tool for PF geeks? Investing in low cost index funds is pretty well-proven by now.
Risk: 6, Return: 8, Feasibility: 10. Liquidity: 7. Activity: 10. Total Score: 41
Index investing is not great in terms of passive income, although I agree it is a powerful tool for building net worth. It would be similar to dividend investing which Sam already covers.
Risk: 6, Return: 7, Feasibility: 8. Liquidity: 10. Activity: 8. Total Score: 39
Why couldn’t you use properly allocated index funds for income by simply applying the 4% rule and withdrawing a portion of your investment? Or if you don’t trust the 4% rule, then go a bit lower than that if you prefer. There’s a certain withdrawal percentage at which you can be statistically assured that you’re unlikely to ever run out of money.
That strategy seems waaaayyyy less risky than actively picking stocks of supposedly “reliable” stocks that issue dividends, which could be cut at any time due to shifting industry trends and company performance. Dividend investing feels like an overly complex old-school way of investing that doesn’t have a very strong intellectual basis compared to index investing.
Josh,
The Dividend Investing strategy encompasses dividend index funds and ETFs.
I guess I just don’t understand why the specific importance of focusing on “dividends” instead of focusing on the total return of your investment, including stock appreciation. I don’t really care if a company decides to issue a dividend or not; presumably, if they don’t issue a dividend, then they’re doing other things to increase the value of the company, which will be reflected in the stock price of the company. As an investor, I can make money by selling a percentage of my holdings or collecting dividends, and I don’t really care how that’s divided up – it’s an artificial distinction.
For example, Apple was famous for decades for never issuing a dividend. Now they do. Are they a better company to invest in now than they were in 2005? Not really – and without Jobs steering the ship, most people argue that they’re a less reliable investment than before.
Which all goes back to my point – since companies change in a lot of unpredictable ways, it makes more sense for passive income to just ride the market by investing in a Total Domestic Stock Market, Total Bond Market, and Total International index funds, with allocations that depend on your goals and time horizon. For income, withdraw 4% or less, depending on what research you believe, and you’ve got a pretty low risk strategy.
The income portion starts to matter more for those who decide to retire early or lose income streams to focus on XYZ.
Drawing down principal will work, but it very painful to do, especially for those who’ve simply been focused on accumulation all their lives.
What is your current work life stage?
Check out: The Ideal Withdrawal Rate In Retirement
Sam,
I really think you misunderstand the 4% (or 3% rule in some academic circles). It’s not about withdrawing principal.
The reason I consider dividends artificial and believe they don’t matter is because you can just as easily reinvest your dividends. If a stock is worth $100/share, I don’t care if it issues a $1/share dividend or if the share price instead increases to $101/share – either way, I have the same amount of money, because there’s no difference to my net worth whether I take the dividend or sell part of a stock.
When withdrawing money to live on, I don’t care how many stock shares I own or what the dividends are – I care about how much MONEY I’m able to safely withdraw from my total portfolio without running out before I die. A lot of academics have analyzed total market returns based on indices and done Monte Carlo simulations of portfolios with various asset allocations, and have come up with percentages that you can have reasonable statistical confidence of being safe.
Dividends made sense 40 years ago as a relatively simple rule of thumb, but after all the work done by John Bogle with index investing, and academics with Monte Carlo sims and the 4% rule, dividend investing just isn’t the simplest, cleanest way to invest or receive passive income anymore. It’s actually significantly more risky compared to index investing, because dividend companies are a much smaller share of the total global economy compared to the broader indices.
Not sure why you think I misunderstand withdrawal rates given my main goal is to withdraw at a rate that never runs out of money. That is the bottom line and if you never touch principal, you will likely never run out of principal.
What is your current passive income stream amount and make up? Please also share with us when you left your day job and what was the inflection point or catalyst that made you do so. I love those insights.
Thanks
Everyone’s situation is different but I definitely have thoughts on this topic. I am planning on leaving the corporate world in 12 to 18 months. I will be 50. My wife has a business and I will begin the transition by helping her. We will have a deficit of about $3500 a month to cover after the income from the business.
The age old argument of total return versus income has been, incorrectly imo, categorized as an either or proposition. We are going to do both. Right now I have a lot cash in an on line money market. I also have investments in 2 passive Index funds in a taxable account. We then have substantial 401ks/IRA’s which we won’t touch for at least 10 years. My wife will continue to max out her sep and we will continue to invest in the index funds although with a smaller amount. We have already factored that in. I looked at how to cut into the monthly deficit. Here is what I observed.
P2P
I have had a LC account for almost 2 years. Invested 5k. A lot of very small loans. Unfortunately I had to invest though Folio FN. The fees reduce your return. Now, they are not even allowing that. My interest and return of principal are not being reinvested. I talked with LC and they are working on it for my state. Even if I can obtain access to the prime portfolio, I would only place 10 percent of my cash here and would reinvest for at least 3 years. I am still concerned about what would happen when a recession hits.
Real Estate
I just haven’t figured out how to get positive cash flow after factoring in the down payment. It seems to me that you have to wait many years before truly making money on a NPV basis. Not what I am looking for. Plus, I am not overly concerned with losing money on a sale. I am more concerned with not being able to sell at all.
Cash
I am earning 1 percent. Good in today’s market but keeping all the cash there won’t work.
MLP’s
Enticing but it seems like a play on energy in the end. A small portion I might be willing to do but more research is needed.
Income producing ETFS
We have decided to invest in 2 ETFs, a multi asset allocation ETF (Fixed Inc, alts and div paying equities) and a preferred stock ETF. This will cover almost 45 percent of our deficit. We will be extremely diversified, can access the markets at a very low cost and the investments are liquid. On this pool of $, we have no plans to invade principal unless the investment grows by 20 percent, which we think is unlikely given the characteristics of the investments.
We are going to start with 1.5 years of all spending needs in cash. We will draw 1800 to 1900 per month. We will add to this from the index funds by taking a portion of the gains in good years to supplement. This is the total return portion of the equation. Obviously, if stocks decrease drastically over a 5 year period, then I would have to reload by selling some of the ETF holdings.
My point is that a combination approach can work. I do expect our expenses to decrease over time and I am hoping to be an entrepreneur of sorts who can figure out how to make $ on my own.
MD, a combo sounds good. I think one of the hardest things you will find is actually take the leap from saving to spending your principal/Savings on living.
It’s been 3 years since I left Corporate America, and I still cannot get myself to spend a single penny from principal on living. This is partly why I’m so focused on building passive income and multiple income streams in order to never draw down principal.
As a former financial analyst, CFA I have to go against some Bogle group think here:
1) when everyone blindly adopts an investment strategy based on backward looking returns, forward looking returns almost inevitably disappoint. Indexing has never been more popular…buyer beware..
2) Dividends provide important discipline on management. The market hates dividend cuts and managers are loath to do so, including their crony board members
3) most companies that don’t pay dividends use share buybacks instead and usually buy high and sell low..classic example’s of buyback problems are chevron and Exxon…buying their overpriced shares at 100+ oil…now suspended at $40 oil
4) Beware of ETF’s where liquidity of ETF is out of synch with Underlying market liquidity…emerging market, junk bonds, pretty much every ETF except us stocks, gov. Bonds and GLD has fake liquidity
Hi Josh,
I agree with your total score, but I would rate “Return: 6” and “Liquidity: 9”.
My reasoning:
Return would be lower than Dividend Investing above because index funds need to hold stocks yielding 1 and 2% as well as those yielding >3%. (I hold most of the Dividend Aristocrats that yield >3%.)
Liquidity should be close to Dividend Investing above.
Vanguard’s Dividend Appreciation and Dividend Growth funds both yield ~2%. Their High Dividend Yield fund (and ETF) yield close to 3%. My stocks yield ~4% without MLPs or REITs. I’m not too concerned about market value as long as the stocks don’t cut their dividend.
Wow, real estate is your favorite investment even with <5% return. Out here in the Midwest (Metro-Detroit) I don't look at rental properties that have a net rental yield less than 10%, while most of mine are above 15%. Some of my properties are mortgaged so that drops the return a few percentage points.
One of the things I'm surprised your article doesn't mention is the tax advantages of this type of investment. The depreciation and rehab costs (purchasing distressed properties) can be huge deductions to ones income taxes, which none of the others have. Then, along with the appreciation of real estate, this passive income investment outperforms the notion of maxing out my 401k as well.
Mike, not sure if you read my entire article, as it is long at 3,000+ words.
Here is one snippet,
“The biggest surprise is real estate being second to last on my Passive Income Ranking List because I’ve written that real estate is my favorite investment class to build wealth. Real estate doesn’t stack up well against the other passive income sources due to the lack of liquidity and constant maintenance of tenants and property. The returns can be huge due to rising rental income AND principal over time, much like dividend investing. If you are a “proactive passive income earner” like myself, then real estate is great.”
With 5:1 leverage on a 20% downpayment, the 5% turns to a 25% cash on cash return, but of course, there is risk. If you take the time to assign a score for each of the five factors, you’ll find the exercise to be enlightening as it’s all relative.
Sam, if you’re willing to share, I’d be curious what your combined down payments were for the rental properties that netted you $88.3K last year… to calculate a proxy for the cash on cash return you were able to get using leverage.
Jona, can you share your background and passive income streams first? I’ve felt I’ve already shared so much already. thx
Sure Sam. I don’t mean to pry with the down payment question; my intent was to parlay your concrete income example into an illustration on how leverage can bolster returns.
My wife and I are relatively young in our journey to FI. We have one 5 unit building which we put 25% down on, and we are aggressively saving to purchase another within the next 1 to 2 years.
For our day jobs, I manage a group of financial analysts at a large aerospace company, and my wife is a first grade teacher.
Thanks Jona. The cash on cash return pretax is over 15% right now. With refinances and rising rents, it has continued to go up over the years.
My returns are based on full cash purchase of the properties, as it is hard to compare the attractiveness of properties at different price ranges when only calculating down payment or properties that need very little rehab/updates. I did think about the scores assigned to each factor, but I believe tax deductions are a SIGNIFICANT factor when comparing passive income steams.
The bay area is currently far too difficult to obtain high cash-flow real estate. Things are not necessarily overpriced, but very expensive nonetheless. Can’t blame people for wanting to live there. I love SF!
Here in Texas it’s very easy to find 20%+ cash-on-cash return properties. There are a few other reasons to love real estate unmentioned in the post:
1. Depreciation. The magical expense that makes real estate so wonderful.
2. Leverage. The bank pays for 80% of the asset while the investor reaps all the rewards.
3. Tax Shelter. Real estate, invested properly, allows investors to legally pay little to no taxes.
Jeff, I was looking at property in Texas but was stunned at the property taxes. How does that factor into your returns there?
I have to agree. Our Duplex cost us 200k initially in 1998. Over time and completely refurbishing the property with historically appropriate sensitivity, we invested another 200k or so. We just had a realtor advise us we could ask 700k for it today. It nets us 30k annually after taxes, insurance and maintenance. We still have a loan on it which I have not taken into account, that will be paid off within 5 years if we keep it. My mental drama now is, while I am quite giddy over the prospect of earning a tidy sum of profit if I sell, what then would I do to equal the ROI and monthly income this thing generates? Rents are low, they should be 4k a month and will only go up. Tempted to keep it and not sell. And while I do have some stocks, I basically suck at them. I am much better at doing properties.
We’re in the same position, a 1987 $72k property went to $475k with only $45k in Cap Cost added over the years Instead of selling we opted for a 1301 exchange to avoid the immediate (taxable) Depreciation recapture being added to a (taxable) Cap Gain due on sale. Plan is to eventually sell it holding the note to defer an immediate taxable event.