If you’re looking to achieve financial freedom, this post will highlight the best passive income investments to help you get there. Passive income is the holy grail of personal finance. Once your investments can generate enough passive income to cover your desired living expenses, you are truly financially free.
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. 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 2020 global pandemic are feeling the same way about their occupations as well.
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 somewhat subjective, but they are born from my own real life experiences attempting to generate multiple types of passive income sources over the past 20 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 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 the new decade.
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.
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 0.5% as of 4Q2020 because the Fed slashed rates to 0% – 0.25%. In comparison, the 10-year Treasury bond yield is hovering between 0.7% – 0.8%.
The problem with CDs and money market accounts really is the low return. It takes a tremendous amount of capital to generate any meaningful amount of passive income. To generate $10,000 a year in passive income at 0.5% requires $2,000,000 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.
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.
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 due to the 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 that regularly sells about ~50 copies a month at $87 – $97 each without much ongoing maintenance. The book is updated for 2020 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 as I do now, 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 is something every person should attempt to do given the startup cost is so low. 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.
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 0.7%, it’s hard to see interest rates declining much further. That said, 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 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. See below the various bond fund returns in recent times.
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. 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.
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.
If you think about it, 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!
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.
Real estate crowdsourcing allows you to surgically invest in multi-family or commercial real estate project for potentially 7 – 13% annual returns based off historical data.
My favorite real estate crowdfunding platform for accredited investors is CrowdStreet. They are focused on investing in individual real estate projects in 18-hour cities where valuations are lower and net rental yields are higher.
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.
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 don’t want to come up with a $300,000 downpayment and carry a $1,200,000 mortgage to buy the median home in an expensive coastal city like SF or NYC, who don’t want to deal with tenants or remodeling, and who wants to sit back after an investment is made, real estate crowdfunding is a great alternative to owning physical real estate.
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. I expect the same type of outperformance to continue in 2020 as the S&P 500 remains volatile. 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. 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. Utilities, telecoms, and financial sectors tend to make up the majority of dividend paying companies.
Tech, Internet, and biotech, on the other hand, tend not to pay any dividends because they are reinvesting 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 Betterment to automatically invest your money for you at a low fee. 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 10+-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.
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
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 next goal is to generate $300,000 in passive income by 2023 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, analyze your investment portfolios for excessive fees, and 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 the 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.
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?