In order to relax, you must first work very, very hard!
After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at the free cafeteria down at 85 Broad Street, I decided I had enough. There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. I became obsessed with generating passive income starting in 1999.
We’ve discussed how to get started building passive income for financial freedom in a previous post. Now I’d like to rank the various passive income streams based on risk, return, and feasibility. The 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 16 years.
The passive income journey is a long one. But thanks to innovation and technology, the ability to generate meaningful passive income is accelerating!
PASSIVE INCOME STARTS WITH SAVING
Generally speaking, it’s much more pleasurable to spend than to save. If saving was easy, we’d never have to read another story again about a multimillionaire who ended up broke.
I’ve already touched upon one reason to save: to buy a property in order to expand and make a profit. Let’s talk about the most important reason to save: to have enough money to do what you want, when you want, without anybody telling you what to do.
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 what to do with your savings is just as 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. If one is looking for earlier financial independence, such as retiring in their 40s or early 50s, it may be a good idea to skew towards more after-tax savings and investments given one has to wait until 59.5 to withdraw from their 401k or IRA penalty-free.
RANKING VARIOUS PASSIVE INCOME STREAMS
Below are eight main passive income investments to consider. Each passive income stream will be ranked based on Risk, Return, Feasibility, Liquidity, and Activity. 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 Return Score of 1 means the returns are horrible compared to the risk-free rate. A Feasibility score of 10 means everybody can do it. A Liquidity Score of 1 means it’s very difficult to withdraw your money without a massive penalty. An Activity Score of 10 means you can kick back and do nothing to earn income. To make the ranking as realistic as possible, every score is relative to each other. Furthermore, the return criteria is based off trying to generate $10,000 a year in passive income.
1) Certificates of Deposit (CDs)
There was a time when CDs would produce a respectable 4%+ yield. Nowadays, you’ll be lucky to find a 5-7 year CD that provides anything above 2.5% The great thing about CDs is that there are no income or net worth minimums to invest, unlike many alternative investments, which require investors to be accredited. Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, a CD is FDIC insured for up to $250,000 per individual, and $500,000 per joint account.
In order to generate $10,000 through CDs at a 2.5% rate, you need to invest $400,000. Good thing CIT Bank has a 12-month CD now for 2.5%. It’s the best rate I’ve seen online as of 2H2018.
Risk: 10 (no risk), Return: 1, Feasibility: 10. Liquidity: 3. Activity: 10. Total Score: 34
2) 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 2.55%, and the Fed Funds rate at 1.5% (two more 0.25% hikes are expected in 2018), it’s hard to see interest rates declining much further. That said, long term interest rates can stay low for a long time. 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. 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. The main concern is the future of interest rates. If interest rates do go higher, bonds will decline in value, all else being equal.
I’ve personally been accumulating a large position of California municipal bonds whenever the 10-year yield breaches 2.6%. The tax-free yields range from 3.6% – 4% for a 20-year duration, equivalent to a gross yield of 5% – 5.5%.
See: The Case For Buying Bonds
Risk: 4, Return: 5, Feasibility: 10, Liquidity: 8. Activity: 9. Total Score: 36
3) Physical Real Estate
For those willing to take on the task of managing a property, real estate can be a powerful semi-passive income stream due to the combination of rental and principal value appreciation. But to generate passive income from real estate, you either have to rent out a room in your house, rent out your entire house and rent elsewhere (seems counterproductive), or buy a rental property. It’s important to realize that 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.
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. When I say net rental yield, I’m talking about rental income minus all expenses, including a mortgage, operating expenses, insurance, and property taxes.
In expensive cities like San Francisco and New York City, net rental yields can fall as low as 2%. This is a sign that there is a lot of liquidity buying property for property 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, net rental yields can easily be in the range of 8% – 12%, although appreciation may be slower.
Risk: 5, Return: 8, Feasibility: 7. Liquidity: 3. Activity: 6. Total Score: 29
4) Peer-to-Peer Lending (P2P)
P2P lending started in San Francisco with Lending Club 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.
Lending Club went public in 2014 and is now worth about $1.7B. They advertise P2P lending returns of over 7% for well-diversified portfolios of over 100 notes. I’ve personally been able to achieve a 7.4% annual return over the past two years in a completely passive way by investing in A and AA notes. Others have achieved a 10% annual return through relatively minimum effort.
To achieve $10,000 in annual passive income through P2P at a 7% rate, you need to invest $142,800 in hundreds of high-grade notes. The higher the interest rate, the higher the risk. P2P lending has taken me the longest to get comfortable with because I really dislike the idea of people not paying me back (breaking their honor).
Risk: 7, Return: 7, Feasibility: 9. Liquidity: 6. Activity: 8. Total Score: 37
5) Dividend Investing
Investing in large cap dividend companies is one of the best ways to build passive income. 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. 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 growth.
To achieve $10,000 in annual passive income at the S&P 500’s 2% dividend yield, you would need to invest roughly $500,000. Or instead of investing in the S&P 500 index, you could invest $183,800 into AT&T stock given its 5.44% estimated dividend yield.
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 pay an algorithmic advisor like Wealthfront to automatically invest your money for you at a low fee. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Wealthfront charges $0 in fees for the first $15,000 and only 0.25% for any money over $10,000. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation. The key is to invest regularly.
Risk: 7, Return: 6, Feasibility: 10. Liquidity: 8. Activity: 9. Total Score: 40
6) Private Equity Investing
Private equity investing can be a tremendous source of passive income with the right investments. If you find the next Uber, the returns will blow every single other passive income investment out of the water. But of course, finding the next Uber is a tough task since most private companies fail.
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 6 month – 3 year lockup periods. The least liquid of the private investments are when you invest directly into private companies yourself. You might not be able to get your money out for 5-10 years, depending on the success of the company and upcoming liquidity events.
Access to private investments are restricted to accredited investors, which is why the Feasibility Score is only a 4. 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: 4. Return: 7. Feasibility: 4. Liquidity: 2. Activity: 10. Total Score 27
7) 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 – an estimated $140 million in 2014 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 articles online to create your own slice of passive income.
My esteemed marketing colleagues initially balked at the idea of creating products that generate royalties, so I can understand how creating something from nothing might be daunting for those who aren’t even in creative roles. However, realize there is this enormous world out there of photographers, bloggers, artists, and podcasters who are making a passive income thanks to the Internet.
In 2012, even I wrote a 150-page eBook about severance package negotiations that still regularly sells about ~35 copies a month at $85 each (2nd edition for 2017) without any effort. In order to generate $2,975 a month or $35,700 a year in passive income as I do now, I would need to invest $892,500 in something that generates a 4% yield! To earn $10,000 a year in passive income would therefore need roughly $250,000 in capital.
Ask yourself how many hours a week do you spend sitting in silence, coming up with an idea and working on your idea? We’re so busy with our jobs that our childhood creativity sadly vanishes at some point in our lives. There are food bloggers who clear over $15,000 a month. There are lifestyle bloggers who make over $10,000 a month while living in Thailand. And there are even personal finance bloggers who’ve sold their sites for multi-millions.
Leveraging the internet to create, connect, and sell is something every creative person should attempt to do. The only risk is lost time and a wounded ego. You can start a site like mine for as little as $2.95 a month with Bluehost and go from there. They give you a free domain name for a year. Forget all the add-ons. Not a day goes by that I’m not grateful for my site.
I truly believe generating $10,000 a year online can be done by anybody who is willing to dedicate at least two years to their online endeavors. Here is a snapshot of what a real blogger makes through his website and because of his website. Roughly $150,000 a year is semi-passive income followed by another $186,000 a year in active income found through his site. Check out my guide on how to start your own blog here.
A real income statement example from a blogger. Look at all the income possibilities! Click to learn how to start your own blog
Risk: 10, Return: 8, Feasibility: 8, Liquidity: 8, Activity: 8. Total Score: 42
8) Real Estate Crowdsourcing
I’m a big fan of real estate crowdsourcing, which basically allows individuals to buy a piece of an investment project or lending money to an investment manager somewhere around the country for a return. Owning physical real estate is great, but it’s like going all-in on one asset in a particular location with leverage.
Real estate crowdsourcing allows you to surgically invest as little as $5,000 into a residential or commercial real estate project for potentially 8 – 15% annual returns based off historical data. Such returns are much better than the average private equity, CD, bond market, P2P lending, and dividend investing returns. With P2P lending, borrowers can sometimes default and leave you with nothing. At least with real estate crowdsource investing, there’s a physical asset that’s backing your investment.
Less than 5% of the real estate deals shown gets through the Fundrise funnel
For those of you who don’t want to come up with a $220,000 downpayment and a $900,000 mortgage to buy the median home in SF or NYC, who don’t want to deal with tenants or remodeling, and who wants to not do any work after the investment is made, check out Fundrise. They are my favorite real estate crowdsourcing company founded in 2012 and based in Washington DC. They are pioneers in the eREIT product offering and they’re raising an Opportunity Fund to take advantage of new tax favorable laws.
In mid-2017, I sold my San Francisco rental property for 30X annual gross rent and reinvested $500,000 of the proceeds in real estate crowdfunding. I’m leveraging technology to invest in lower valuation properties with higher net rental yields in the heartland of America. With the new tax policy starting in 2018 capping state income and property tax deductions to $10,000 and limiting interest deduction on mortgages of only $750,000 from $1,000,000, expensive coastal city real estate markets should soften at the expense of non-coastal city real estate.
Risk: 7, Return: 9, Feasibility: 6, Liquidity: 6, Activity: 10. Total Score: 38
PASSIVE INCOME RANKING REVIEW
All eight passive income investments are good ideas if you can execute them. Some are just better than others. Based on my five factor ranking system, Creating Your Own Products, Dividend Investing, and Real Estate Crowdsourcing are the best passive income investments, while Private Equity, Physical Real Estate, and CDs are at the bottom.
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. Physical 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.
Finally, I imagine the biggest debate with my ranking is Creating Your Own Product as the #1 passive income source. If most people have never created their own product, then it’s easy to give it a thumbs down. There won’t be much complaint about Private Equity Investing being in last place because most people are not accredited investors. But given I believe that plenty of people can create their own product if they try, pushback is inevitable because a lot of people simply don’t try!
There is not a day that goes by where I’m not glad I didn’t start my own site in 2009.
START EARLY AND INVEST OFTEN
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, and mistakenly thought you worked in a meritocracy. Or maybe you have a new boss who decides to clean house and hire her own people. 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. The sooner you get started, the better!
Here’s my latest passive income streams that took 18 years to build. I don’t include all my online income because generating income beyond my severance negotiation book takes work.
Wealth Building Recommendation
Track Your Wealth For Free: If you do nothing else, at the very least, sign up for Personal Capital’s free financial tools so you can track your net worth, analyze your investment portfolios for excessive fees, and run your financials through their fantastic Retirement Planning Calculator. Those who are on top of their finances build much greater wealth longer term than those who don’t. I’ve used Personal Capital since 2012. It’s the best free financial app out there to manage your money.
Are you on the right retirement path? Click to find out for free
Updated for 2019 and beyond. The bull market is showing signs of fatigue. You’ve got to be on top of your finances more than ever before.
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.
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.
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.
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.
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.
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.
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)
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
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
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 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!
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?
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 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.
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’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.
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.
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
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.
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.
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.
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.
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.
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.
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?
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.
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.
How about The Kai-Zen Financed Plan & Trust?
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.
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.
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 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…
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?
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.
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
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!
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!
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 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?
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
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!
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.
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.
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!:)
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
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?
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.
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
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.
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!
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!
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.
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!
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?
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.
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.
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
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.
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.
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.
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?
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!
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.
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.
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…. ;-)
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