If you’re looking to achieve financial freedom before a traditional retirement age (60+), you must build passive income. This post will highlight the best passive income investments in our current economic environment.
Passive income is the holy grail of personal finance. If you have enough passive income to cover your desired lifestyle, then you are free at last! You can say and do whatever you want. Too many people fail to live their truth due to a lack of passive income.
However, the only way to generate useable passive income is by building a taxable investment portfolio, which includes investing in real estate, alternative investments, and more.
Maxing out your 401(k), IRA, and Roth IRA are great moves. Unfortunately, they can’t generate passive income to live on until after you turn 59.5, in most cases. When it comes to achieving financial freedom, the hope is that we achieve it as soon as possible given our time is limited.
Why I Focused On Building Passive Income
After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at our company’s free cafeteria, I decided I had enough. Working in investment banking was wearing me out. I needed to generate more passive income to break free.
There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. Thus, I started focusing on generating passive income in 1999.
However, it wasn’t until the 2008-2009 financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I’m sure many people are feeling the same way about their occupations during the global pandemic as well.
It wasn’t until 2012 when I generated enough passive income (~$80,000) to break free from work. And it wasn’t until 2017 when I was able to generate enough passive income to take care of a family ($200,000).
Today, I estimate my wife and I will generate roughly $380,000 in passive income. We’ve discussed how to get started building passive income for financial freedom before. Now I’d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.
I’m updating my passive income rankings for 2023 given so much has changed since my original passive income rankings came out in 2015. A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.
The best passive income rankings are born from my own real-life experiences. I’ve been working on building passive income since I got my first full-time job in 1999.
Best Passive Income Investments Starts With Saving
By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!
Sounds nice right? If only there was a formula or a chart like the 401k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom.
Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.
If you can max out your 401k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.
It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can’t touch your 401(k) and IRA before the age of 59.5 without a 10% penalty.
The pandemic has shown us that if we WANT to save more, we can. Before the pandemic began, the U.S. personal saving rate hovered around 5% – 7%. Now it looks like the average saving rate may consistently be above 10%.
Let’s take a look at the best passive income investments for 2023 and beyond.
Ranking The Best Passive Income Investments
Below are the eight best passive income investments to consider. Each passive income stream is ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criterion has a score between 1-10. The higher the score, the better.
- A Risk score of 10 means no risk. A Risk Score of 1 means there is extreme risk.
- A Return score of 1 means the returns are horrible compared to the risk-free rate. A Return Score of 10 means you have the highest potential of getting the highest return relative to all other investments.
- A Feasibility score of 10 means everybody can do it. A Feasibility score of 1 means that there are high requirements to be able to invest in such an asset.
- A Liquidity score of 1 means the investment is very difficult to withdraw your money or sell without a penalty or a long period of time. A Liquidity score of 10 means you can access your funds instantly without penalty.
- An Activity score of 10 means you can kick back and do nothing to earn income. An Activity score of 1 means you’ve got to manage your investment all day long like working a day job.
- A Tax score of 1 means the investment is taxed at the highest possible rate and there’s nothing you can do about it. A Tax score of 10 means the investment is generating the lowest tax liability possible or you can do things to lower the tax liability.
To make the ranking as realistic as possible, every score is relative to each other. Further, the return criteria are based on trying to generate $10,000 a year in passive income.
Best Passive Income Investment Chart
Let’s look at my overall Best Passive Income Investments ranking chart. It has recently been updated to account for the ever-changing economic environment. Interest rates will likely stay low for a while, which makes generating meaningful passive income harder.
Compared to the previous best passive income investments chart, Fixed Income / Bonds moved down from 3rd best to 5th best. While Physical Real Estate moved up from 5th best to 3rd best partly due to higher net rental yields and lower prices. Inflation is elevated in 2023, but is finally coming down.
Dividend (stock) investing is still the ranked the best passive income investment. However, it may not be the best for you given its higher volatility and lower relative yields.
Private real estate funds, on the other hand, is much less volatile and provides even higher yields. During bear markets, private real estate funds like those from Fundrise tend to outperform.
Best Passive Investment Rank #8: Hard Money Lending / Peer-to-Peer Lending (P2P)
Lending money directly to friends, family, and strangers for passive is tough to do. friendships and relationships are often ruined because of money. Therefore, I don’t recommend doing it unless the person you care about is desperate. In such a situation, it would be best to provide an interest-free loan or a gift.
To make lending money less personal, you could got the P2P lending route. P2P lending started in San Francisco with Lending Club and Prosper in mid-2000. The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions.
The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There’s something that just doesn’t sit right when people break their contract obligations.
Over time, the P2P industry has seen its returns shrink due to higher competition and more regulation. As a result, I believe making money through P2P investing is one of the worst ways to generate passive income today.
Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity: 7, Taxes: 5. Total Score: 30
Best Passive Investment Rank #7: Private Equity Or Debt Investing
Private equity investing can be a tremendous source of capital appreciation with the right investments. If you find the next Google, the returns will blow every single other passive income investment out of the water. But of course, finding the next Google is a tough task since most private companies fail. Further, the best investment opportunities always go to the most connected investors.
The most liquid types of private equity investments are those investing in equity or credit hedge funds, real estate funds, and private company funds. Private debt investments include venture capital and real estate funds as well. There are usually 3-10-year lockup periods, so the Liquidity score is low. These funds should at least provide for some semi-regular passive income distributions.
The least liquid type of private investment is when you invest directly into a private company. You could be locked up forever and receive zero dividends or distributions.
Access to private investments are usually restricted to accredited investors ($250K income per individual or $1 million net worth excluding primary residence), which is why the Feasibility Score is only a 2.
But the Activity Score is a 10, because you can’t do anything even if you wanted to. You’re investing for the long term without the daily noise, which is why I enjoy investing in private funds, even though fees are higher. 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: 6, Return: 8, Feasibility: 3, Liquidity: 3, Activity: 10, Taxes: 6. Total Score: 36
Best Passive Investment Rank #6: Certificate of Deposit (CD) / Money Market
Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, CD and money market accounts are FDIC insured for up to $250,000 per individual and $500,000 per joint account.
Now you can typically only get an online money market account paying ~3.2% (as of 1H 2023) because the Federal Reserve has hiked the Fed Funds rate aggressively. As of January 2023, another great option to take advantage of is CIT Bank’s Savings Connect account offering 4.05% APY. CD interest rates are also way up.
It still takes a tremendous amount of capital to generate any meaningful amount of passive income with savings now. To generate $10,000 a year in passive income at 3.2% requires $312,500 in capital. At least you know your money is safe, which is great during bear markets.
Relatively low interest rates are why it’s prudent to lower your safe withdrawal rate in retirement and/or build a bigger net worth before you retire. It takes a tremendous amount more in capital to generate the same amount of risk-adjusted income today.
Today, you can get a 18-month CD yielding 4.6% from CIT Bank. Up to $250,000 per person is FDIC guaranteed. The rate is the best we’ve seen in years.
Risk: 10 (no risk), Return: 1 (the worst return), Feasibility: 10 (anybody can open up a savings account). Liquidity: 6 (savings are easily accessible, but not CDs without a penalty). Activity: 10 (you don’t have to do anything to earn passive income. Taxes: 5 (interest income is taxed as normal income). Total Score: 42
Best Passive Investment Rank #5: Fixed Income (Bonds)
Bond yields are finally attractive again! After 35+ years of inflation and interest rates going down, bonds had one of the worst years in history in 2022. With inflation surging higher bond funds have collapsed.
The 10-year yield was at only 0.51% in August 2020. But now, the 10-year bond yield is at ~3.8%. I would take advantage of this temporary spike in bond yields and buy Treasury bonds with 3-month, 6-month, 9-month, and 1-year durations. If and when inflation roles over, you’ll be glad you own Treasury bonds at 4.2% – 4.75% rates.
Long term, I believe interest rates will stay low for a long time. Just look at Japanese interest rates, which are negative (inflation is higher than the nominal interest rate).
Bonds usually provide a good defensive allocation to an investment portfolio, especially during times of uncertainty. 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. Further, the aggregate bond market was down about 14% in 2022, the worst year ever. Hence, even bonds are not always safe havens.
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. Just know that with bond funds, there is no maturity date. Hence, you will experience higher principal risk if you need to sell.
Municipal bonds are especially enticing for higher-income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.
Main Concern With Bonds
The main concern for bond funds is that their values go down when the Federal Reserve hikes interest rates. That said, so long as you hold individual bonds to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA.
Bonds are usually investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.
Risk: 6, Return: 2, Feasibility: 10, Liquidity: 7. Activity: 10. Taxes: 8. Total Score: 43
Best Passive Income Rank #4: Creating Your Own Products
If you’re a creative person, you might be able to produce a product that’s able to generate a steady flow of passive income for years to come. At the extreme, Michael Jackson makes more dead than alive. This is due to the royalties his estate makes from all the songs he produced in his career. Since Michael’s death, his estate has made over $2.5 billion according to Forbes.
Of course, it’s unlikely any one of us will replicate the genius of Michael Jackson. But you could produce your own eBook, traditional book, e-course, award-winning photo, or song to create your own slice of passive income.
Example Of A Product
In 2012, I wrote a 120-page eBook about severance package negotiations. Today, the book is in its 5th edition for 2023 and is 200-pages long. It regularly sells about ~50 copies a month at $87 – $97 each without much ongoing maintenance.
Another way to think about how profitable creating a product can be is to look at the amount of capital it would take to generate the same about of earnings. For example, to replicate the ~$40,000 a year in passive income I can get from the book, I would need to invest $1,000,000 in an asset that generates a 4% yield. To earn $10,000 a year in passive income would therefore need roughly $250,000 in capital.
Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.
Another Example: Royalty Payments
On July 19, 2022, I published an instant Wall Street Journal bestseller, Buy This, Not That: Spend Your Way To Wealth And Freedom. The book took two years to write and has been reviewed and revised 15 times by three professional editors. I figured why not write a great personal finance book during the pandemic.
Once the book sells enough copies to cover my book advance, I will make a 13% royalty based off each hardcover sale. I believe the book will provide at least 100X more value than the cost of the book. You can pick up a copy on Amazon, where it currently has the best sale.
Leverage the internet to create, connect, and sell. The startup costs are low and it’s easier than ever to launch your own site. The only main risks are lost time and a wounded ego.
Here’s my step-by-step guide on how to start your own profitable site in under 30 minutes. You want to build an online business that can’t get shut down.
Below is a real income statement of a personal finance blogger who started his website on the side while working.
If you are a constant daydreamer, creating your own product is one of the best ways to go. The margins can be extremely high once your product is produced. The only thing you need to do is regularly update the product over time. If you have a great product, the upside is enormous.
Risk: 8, Return: 8, Feasibility: 8, Liquidity: 6, Activity: 7, Taxes: 7. Total Score: 44
Best Passive Investment Rank #3: Physical Real Estate
Real estate is my favorite asset class to build wealth for the average person because it’s easy to understand, provides shelter, is a tangible asset, doesn’t lose instant value like stocks overnight, and generates income. When I was in my 20s and 30s, I thought owning rental properties was the best passive income investment.
The only bad thing about owning physical real estate is that it ranks poorly on the Activity variable due to tenants and maintenance issues. You can get lucky with great tenants who are self-sufficient and never bother you. Or you can be stuck with tenants who never pay on time and throw house-damaging parties.
Maintenance issues can be an ongoing headache without proper preventative maintenance. For example, your roof could leak during the next Bomb Cyclone. Or your water heater could burst and flood your basement. Both have happened to me before!
Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market. Only after buying two or more properties are you actually long real estate. This is why everybody should own their primary residence as soon as they know they want to stay put for 5-10 years. Inflation is too powerful a force to combat.
In order to generate $10,000 in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50,000 property with an unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental yield, or a more realistic $200,000 property with a 5% net rental yield.
Generating High Rental Income Is Tough On The Coasts
In expensive cities like San Francisco and New York City, net rental yields (cap rates) can fall as low as 2.5%. This is a sign that there is a lot of liquidity buying property mainly for appreciation. Income generation is second. This is a riskier proposition than buying property based on rental income.
In inexpensive cities, such as those in the Midwest and South, net rental yields can easily be in the range of 7%+, although appreciation may be slower.
I’m bullish on the heartland of America real estate and have been actively buying multifamily real estate there through real estate crowdfunding and specialty REITs, which we will discuss more below. Owning rental property in an elevated inflation environment is an optimal choice. Renting is not.
Real Estate Has Great Tax Benefits
The tax benefits of owning physical real estate are very attractive. The first $250,000 in gains is tax-free per individual. If you’re married and own the property together, then you can receive $500,000 in tax-free gains upon sale.
Then there’s the ability to exchange a property you own for another property via a 1031 Exchange so you don’t have to pay any capital gains taxes.
If you own rental property, you can take non-cash amortization expenses to reduce any rental income taxes. Owning property over the long term is one of the most proven ways to build wealth and generate passive income for the average American.
The value of rental income goes up when interest rates fade. Therefore, I think buying rental properties over the next 12 months is good as interest rates and property prices decline.
Risk: 8, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6, Taxes: 10. Total Score: 45
Best Passive Investment Rank #2: Real Estate Crowdfunding, REITs, Real Estate ETFs
Owning physical real estate has been my key source for achieving financial freedom. My rental properties generate about $120,000 after expenses a year, or roughly a third of my overall passive income streams. However, now that I’m older and have two young children, I really want to minimize the time I deal with maintenance issues and tenants.
Therefore, I’ve been investing more of my capital in real estate crowdfunding, REITs, and real estate ETFs. Real estate crowdfunding enables individuals to buy a percentage of a commercial real estate project that was once only available to ultra-high net worth individuals or institutional investors.
Owning individual physical real estate is great, but it’s like going all-in on one asset in a particular location with leverage. If the market goes down, your concentrated investment could lose big time if you are forced to sell. Many did during the last financial crisis.
My favorite real estate investing platform is Fundrise. Fundrise manages over $3.2 billion in assets and has over 387,000 clients. Fundrise mainly invests in single-family and multi-family investment properties in the Sunbelt, where valuations are lower and net rental yields are higher.
Work from home and migration to lower-cost areas of the country is here to stay. As a result, I believe Fundrise is investing in the real estate sweet spot for the next several decades.
Unlike other passive investments on the list, with real estate crowdfunding you at least have a physical asset as collateral. Both platforms are free to sign up and explore.
100% Passive Real Estate Income Is So Nice
For those of you who dislike dealing with tenants and maintenance issues, investing in real estate crowdfunding is wonderful.
In mid-2017, I sold my San Francisco rental property for 30X annual gross rent. I reinvested $500,000 of the proceeds in a real estate crowdfunding portfolio. The goal was to take advantage of lower valuations across the country with much higher net rental yields. Not having to deal with maintenance issues and tenant problems has been wonderful.
Coastal city real estate has become too expensive. I expect people and capital to naturally flow towards lower-cost areas of the country, especially post-pandemic. The future of work is remote. Take advantage of a multi-decade demographic shift inland.
Further, the performance of Fundrise’s eREITs has been relatively steady during stock market downturns. Therefore, if there is another crash, Fundrise eREITs should outperform. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income.
Below are the latest returns from Fundrise compared to public REITs and the S&P 500. Notice the significant outperformance in 2018 and 2022, when bear markets occur. I enjoy investing in private real estate given there is less volatility and potentially outperformance during tough times.
To be able to invest in real estate, but 100% passively is a great combination. You can invest in publicly-traded REITs as well for real estate exposure. However, as we saw in the violent March 2020 stock market downturn, REITs performed even worse.
Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity: 10, Taxes: 7. Total Score: 47
The Best Passive Investment Rank #1: Dividend Investing
The best passive income investment is dividend-paying stocks. Dividend and value stocks are making a comeback after underperforming growth stocks during the pandemic. After a bear market in stocks in 2022, dividend stocks are offering better value and higher yields.
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. Names such as McDonald’s, P&G, Sherwin-Williams, Caterpillar, Chevron, Coca-Cola, and Sysco Corpare considered some of the best blue-chip dividend stocks. But there are some dogs like AT&T.
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 to the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.
Dividend stocks tend to be more mature companies that are past their high growth stage. As a result, they are relatively less volatile from a stock context. Utilities, telecoms, and financial sectors tend to make up the majority of dividend-paying companies. In 2022, the S&P 500 dividend yield is about 1.8%.
Tech, Internet, and biotech, on the other hand, tend not to pay any dividends. They are growth stocks that reinvest most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.
Pay Attention To Dividend Yields
To achieve $10,000 in annual passive income with a ~1.8% S&P 500 dividend yield would require $555,000. Instead, you could invest only $154,000 into AT&T stock given its 8% estimated dividend yield. The problem is, AT&T stock could decline much greater in value.
It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.
One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. Alternatively, you can DIY and use Personal Capital’s free financial tools to manage your wealth. The key is to invest consistently over time.
In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid.
However, given dividend rates are low compared to real estate and volatility is high in stocks after a 12+-year bull market, the Return score is lower than in the past. You need a lot more capital to generate passive income with dividend-paying stocks and index funds.
Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48
Best Passive Income Investments Review
Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:
- Dividend Stocks (100% passive but need a lot more capital)
- Real Estate Crowdfunding, REITs, and Real Estate ETFs (100% passive, higher yields, but less liquidity)
- Creating Your Own Products (huge margins, low startup costs, takes a while to get going)
- Owning Rental Properties (tangible asset that’s more stable, but not as passive)
If you can stomach more volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding, rental properties, and fixed income instead.
There was a time when I loved owning physical real estate the best. It was my favorite way to generate a steady stream of rental income. However, once I became a dad in 2017, I no longer had as much time or energy to manage properties.
Real estate crowdfunding through platforms like Fundrise and CrowdStreet are good solutions for my real estate investment capital. 100% passive income is wonderful. I really like the combination of owning a hard asset that generates income. It’s a more stable way to grow wealth.
For those who are the creative types, starting your own website like this one and creating products online feels extremely rewarding. Some say making $1,000 on your own is like making $5,000 or $10,000 at a job. It just takes a while to get going.
However, blogging would score a 1 in the Activity Score since these posts don’t write themselves. Instead, you really want to create products like a book or a course to sell passively.
Best Passive Income Investments Table
Once again, here are the best passive income investments. All eight passive income investments are appropriate ways for generating income to fund your lifestyle. The right ones depend on your personal preference, understanding of the investments, creativity, and interests.
Build More Passive Income Today
Enthusiasm for work is strongest when you are young and have very little money. After four years of high school, followed by another four years of college, work sounds like an exciting adventure! But after a while, your job can begin to beat you down.
Perhaps a coworker purposefully tries to make your life miserable because they resent your success. Maybe you get passed over for a promotion and a raise because you weren’t vocal enough about your abilities. Maybe you mistakenly thought you worked in a meritocracy. Whatever the case may be, you will eventually tire.
This is why it is important to take action while you still have the energy. With interest rates at rock bottom levels, building passive income will take a lot of effort and patience. Start now!
My Current Passive Income Investments
Below are my latest passive income streams that I’ve been building since 1999. Our passive income enables both my wife and I to be stay-at-home parents to two toung children.
Our goal is to consistently generate over $300,000 in passive income to raise a family in expensive San Francisco or Honolulu through the year 2040. The irony of a bear market is that all of us can actually more easily generate even more passive income!
As you can see from our passive income chart, roughly half of our passive income comes from real estate. Real estate is my favorite asset class to build wealth because it is relatively stable, generates income, and provides utility.
My favorite real estate investing platform is Fundrise, with over $3.2 billion in assets under management and over 387,000 active investors. Fundrise predominantly invests in single-family and multi-family rental properties across the Sunbelt. The Sunbelt has lower valuations, higher cap rates, and strong demographic trends. I like owning a fund where I don’t have to focus on each investment.
With economies opening up, I’m also actively looking for hospitality real estate deals on CrowdStreet. CrowdStreet focuses on real estate opportunities in 18-hour cities where valuations are lower and cap rates are higher. In addition, CrowdStreet has launched a build-to-rent fund to take advantage of the strong rental market.
Saving early and often is no sacrifice at all. Instead, the biggest sacrifice is living a life on someone else’s terms due to a lack of funds. Keep building the best passive income investments so you can one day be free.
Remember, if the amount of money you’re saving and investing doesn’t hurt, you’re not saving and investing enough. At the end of the day, nobody cares more about your money than you.
Now that you know the best passive income investments, it’s time to get cracking! Your future self will thank you.
More Action Items
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The Best Passive Income Investments is a FinancialSamurai.com original post. I have invested in all products mentioned for years.
Love this post! I hope more people learn about this. I love how in depth you go into the topic, with examples and little tips.
The only thing I do not agree on is this: “Best Passive Income Rank #4: Creating Your Own Products”.
Creating your own product is all but passive. It requires an incredible amount of effort and skills. The only advantage is that you can do the effort upfront and then you can enjoy the revenues from a beach in Hawaii drinking your cocktail
Sam, great article – I definitely agree that dividend investing is the way to go for most.
Wanted to get your thoughts on generating passive income by selling shareholder voting rights. I found this company Shareholder Vote Exchange svegroup.com that allows investors to do so. What do you think?
Thanks!
I’ve never heard of such a passive income potential. Feel free to summarize and share the pros and cons. Thanks.
Sam, new to real estate crowdfunding, and wanting to invest 100k in this, what would you recommend I invest in now.. is it worth waiting another 6 months before real estate cools off. awesome website.
Hi there,
Welcome to Financial Samurai. I would first read everything on real estate crowdfunding on this page and the links within the page first. It’s so important to understand everything you can before making an investment. Please pay special attention to the capital stack as well.
Once you’re comfortable and have the desired asset allocation, I would invest in a fund first. For the vast majority of investors, investing in a diversified fund through ones like Fundrise is the most prudent move. Most don’t have enough time or interest to pick individual deals and assemble their own portfolio. You can leg into a fund and build a position over time.
Whereas with individual deals, the minimums are often $10,000 – $25,000. With $100K to invest, you may only be able to invest in four individual deals, which may be enough or not enough for diversification. It depends on how big your overall investment portfolio is. If you’re looking for individual deals, check out CrowdStreet and RealtyMogul. I’ve met them many times before and they do good due diligence. But in the end, it’s up to you to decide what vetted deals are best for your portfolio.
Regards,
Sam
P2P Lending sounded incredible when it first came on the scene. However, poor underwriting standards by Lending Club basically decimated the industry.
Not sure why they couldn’t apply the same underwriting standards as large banks….(notwithstanding 2000s mortgage underwriting).
The same thing happened w YieldStreet, they put a really bad taste in everyone’s mouth when it came to alternatives…
Hi Sam,
love your articles, and agree with “Real estate is my favorite asset class to build wealth for the average person because it’s easy to understand, provides shelter, is a tangible asset, doesn’t lose instant value like stocks overnight, and generates income.”
Nevertheless, how do you feel about real estate risks related to climate changes. To be more specific, I live on the Florida coast, and own two homes (one i live in, and second one rental).
I am starting to get concerned about the possibility of a major hurricane wiping out both of them, or water rising, etc ect.
Please, have you any opinion to shre about the risks associated with Rental Properties over climate changes?
Climate change is definitely a risk. Make sure you have the appropriate amount of insurance.
Here’s an article on climate change and real estate.
I also wrote a post called, The problem with ocean front property.
If you plan to hold your properties for decades and pass them on, like I do, climate change is very important to pay attention to.
Thanks for your quick reply, and confirming i am on the right path to consider those risks. I will make sure to read your suggested articles. Ciao
Hi…
Aren’t pensions passive income?
Hi Sam. Enjoy your work. Are you generally not a fan of bond funds preferring to buy actual bonds to avoid interest rate risk? It’s the impression I’m getting but wanted to confirm. thanks.
Correct. Of the bonds I do but, they are individual bonds held to maturity. Mainly Treasury and municipal bonds. They can gyrate all they want in the meantime.
With rates so high now, people should read: How To Buy Treasury Bonds And Buying Strategies To Consider
Not seeing making 10x 20x 50x by house flipping in Toronto/Vancouver markets ;)
The passive income options you mentioned all seem legitimate, and I’ve tried a few of them successfully.
With the world in the state that it seems to be now, with so much unpredictable and volatile stuff going on in politics, supply chains, economics, etc. I find it hard to commit my excess capital to something that I can’t directly control.
Am I crazy?
Hi there! What a great article and detailed advise! I have been investing in Fundrise for a 3 years now and my returns have been around $40,000 but IM not sure if my portfolio is well balanced or not. Can I ask you what is the allocation of your Fundrise portfolio? Thank you in advance.
I am 100% invested in the new Flagship Interval fund
. This fund presently has 60 projects, mostly single and multi-family, with a little industrial / warehouse, and. A couple of very high end retail properties. All in the sunbelt.
Is it good to invest in fundrise now when real estate is in such a weird situation? The rising interest rates might impact the cash flow from the projects in the next few years; wont it?
I’m dollar cost averaging in stocks and real estate right now. Fundrise has outperform the stock market tremendously in 2022, just like it I’ll perform tremendously in 2018 when the stocks are down.
At the moment, I’m investing about 60% of my cash and cash flow into treasury bonds because I can get a 4.2% – 4.5% risk free rate of return.
Check out this post: https://www.financialsamurai.com/how-id-invest-250000-cash/
Hello was hoping for some advice or recommended articles if someone would be so kind.
Entering a job position where its possible if i work and save hard to put 1000 pounds a week away for the next 5 years.
I’m 35 now and i need it to be very low risk as the thought of slumming it until im 40 and then losing it all is too much too bear. I’m just looking at very low risk. Would you think AAPL would be a safe bet? My goal would be to get to 3000 a month in dividends or passive income a month. I can happily live in southeast asia on that money. That would be enough for me.
Any advice appreciated.
Liam
Incredible article.
I was wondering however if there is much concern about “platform risk” as it pertains to Crowd Fund investing, such as Fundrise. I realize that I own shares of a an actual REIT, but in the back of my mind I sometimes wonder what my risk is if Fundrise itself ever failed. Not sure how to quantify that risk…. Any perspective?
Hi Vaughn, I write this article about the risks of investing in real estate crowdfunding. And platform is a risk.
However, the investments a platform like Fundrise or CrowdStreet makes is separate from the real estate platforms themselves. There’s no co-mingling of funds.
For example, let’s say someone passes away (platform bankruptcy), the investments that person holds still go on as usual. The added complexity would be in gaining access to those funds and unwinding them if desired. But that’s what listing contact info and survivor benefits are for.
Sam
Oh wow, I didn’t realize you had written that article until now. Thank you! I can’t wait for the book btw!!!!
Hi Sam, I was wishing to FIREd in few years but the latest market drop is making me reconsider this and keep working for some more year.
Given the recent rise in long term bonds do you advise to “lock in” what is basically annuities in the 3/3.5% range hoping that the inflation will subdue in few years?
My liquid assets are 40% cash, 60% invested (70/30 and I’m down roughly 15% YTD). 2.2m total.
Thanks
Francesco
Hi Sam –
I finally did it! I opened an account with Fundrise and selected the Interval Flagship Fund. That fund invests in mostly single family homes and multi-family. There is a very small allocation to retail and warehouses.
Combined with the Vanguard REIT fund, this is providing real estate investment and a growing and compounding passive income stream.
Best.
Tony
Do you know if I can open a Roth IRA with Fundrise?
Also is Fundrise liquid?
Yes they offer IRA accounts. Not as liquid as Vanguard REIT (daily liquidity). You can request a liquidation quarterly.
Best.
Tony
Very engaging article, thank you! I am currently debating paying off student debt in a lump sum which would save ~$5K in interest vs putting ~$25K to work somewhere else. Stumbled across P2P lending and a few clicks later ended up here. What do you suggest is a better/best use of the cash? Loan rate is 4.4%, and I have been paying extra monthly. Trying to gauge if there is opportunity to invest $25K somewhere with a steady and safe income/ROI, or if I need to think about it differently. My struggle is that I can guarantee interest savings through payoff, but savings are buried under a cash outflow. Flip side is take some risk and maybe beat the savings over time?
Thanks,
Anthony
Sam, I have a question –
I read that the one of the criteria that the IRS considers as passive income is if you work on said project for less than 500 hours a year. So my question is; would you consider a W-2 job passive income if that job required you to work less than 500 hours a year? There are a few jobs like that. For example, a paid board member, some online projects, freelance, etc..,
Interesting! But no, I don’t consider working 500 hours a year or less passive income.
But getting paid to be on a board with only quarterly meetings ain’t too bad!
I recently read an article about buying an established blog and then using that for passive income. Rather than writing articles himself, he hired a writer on UpWork and let it run from there… Thoughts?
It’s a decent idea. But it’s not very passive unless you really don’t mind letting go. You would still have to edit, coordinate the editorial calendar, approve or deny comments (many are spam).
It will probably be hard growing a blog if the content is generic and just for SEO reasons. You’ve got to really care about the writing for it to grow, which takes lots of time.
Sam,
Thanks for this great article! I have few question regarding to tax score on your table. I understand physical real estate has great tax benefits. Does CrowdStreet and FundRise has tax benefit too? Do they issue K-1? For CrowdStreet/FundRise, can I get my initial investments back anytime or only after certain terms? It seems Dividend Investing also has some tax benefit from your table, how so?
Hi Jean,
The answers to your questions are easily found via internet search — why would you expect Sam to do your homework for you?
If you want to see how the IRS treats dividends, look it up! This was the very first link via Google: nerdwallet.com/article/taxes/dividend-tax-rate
It’s great to ask questions of experienced investors, but only after you’ve done everything you can on your end.
Hi Sam,
I just wanted to share with you my story.
I’m a female engineer from Australia and I’ve been reading your blog since 2013 when it all looked so out of reach for me. I’m 31 and I’m about $100K shy of being a millionaire. I’m also off to Oxford University this year to do my MBA. Things are looking up.
Your podcast rocks, I binge listened to it all as I wasn’t aware it was out there. Keep the good work coming!
Thanks for all of your guidance,
Mimi
Hi Mimi!
Very lovely to hear from you. Reading since 2013 is awesome! Congrats for all your progress and success since then.
Thanks for listening to my podcast as well. Every positive review is motivating to keep on going.
Please enjoy Oxford! You’re going to have so much fun. Being able to attend business school with so much wealth is a great luxury.
Oh, and I might as well share that I’ve got a new book coming out this summer called, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Hard copy preoders are open. I think you’ll love it. Thanks for the support!
Best,
Sam
Sam, thank you for updating the post (read your previous version too). Great summary! I’m wondering how you achieve so much rental estate income in SF. Do you have all mortgage paid off and self manage? Would you advise selling and buying somewhere else else to diversify and increase cash flow? I own rental in the bay area too–even though rent is high, the income is not impressive after mortgage, tax, management fee and miscellaneous/repairs! And we bought in early 2010 when the market was low!
Hi Karen,
My SF first property I purchased in 2003. It was paid off in 2015. Another property I purchased in 2019 was purchased with cash and I haven’t done a cash out refinance. Another property purchased in 2014 only has about a 25% loan-to-value ratio as I’ve methodically paid down some extra principal while refinancing the loan several years ago. These properties generate very strong cash flow.
Since 2016, I’ve been aggressively investing in the heartland of America through real estate investing platforms like CrowdStreet and Fundrise. They are the two best platforms with the best opportunities in my opinion. I own a fund and 18 different investments.
I think the growth of 18-hour cities is going to continue for decades. Thanks to technology, the pandemic, and the work from home trend, I see population spread out more in America to take advantage of lower cost areas of the country.
I’ve also hit my limit in terms of the number of rental properties I want to manage at my age. I noticed starting around age 40, the desire to own more physical rental properties really began to decline. It also coincided with the birth of our firstborn. I didn’t wanna spend any more minutes dealing with tenants or maintenance issues.
To earn 100% passive income from real estate, my favorite asset class, is a dream come true. And to diversify away from expensive San Francisco or any expensive city is smart in my opinion.
We’ve had such a long bull market that I think more money is going to go towards ordering real estate and other physical assets that don’t just lose its value overnight like stocks.
Good luck!
Sam
Sam,
What do you think of Fundrise preparing for an iPO (not a real public offering but shares of Fundrise). How does one assess risk versus reward in this case?
BTW – IMO your blogs are one of the best blogs I have seen and I am following your advise about real estate investment not just for passive income but for diversification reasons too.
Thanks!
Hi Max
Thanks!
I think the Fundrise IPO is OK. They let you invest on a pro-rated amount based on how much you’ve invested in their funds. Just don’t expect any liquidity for years. It’s the same way for all individual private equity investments.
Fundrise has really done well, especially since 2020. I actually spoke with Ben Miller, the CEO and co-founder last Friday for an hour. They have over $2.4B AUM and 210,000 clients now. Due to vertical integration and scale, they are getting better deals and charge a lower fee.
They hit the sweet spot by buying so many multi family and single-family rentals in 2020 and prior in the Sunbelt. Returns were very strong in 2021. I expect the returns to moderate in 2022, like I do for the housing market overall. But I think returns will still be positive (8-10%).
I’d much rather invest in real estate than the stock market right now. Although with the south in stocks, there are a lot of opportunities.
GL!
Sam
Sam – What are thoughts on high yield closed end funds, specifically PIMCO
You’ve got to check with the discount to NAV are, the historical discount to NAV, and the fees. Which one are you looking at in particular?
Looking at PHK. Nice yield, reasonable expense ratio and trading at a large discount to its historical discount to NAV. 5.85% premium isnt ideal but seems like it might be worth the risk given how the fund has preformed. Curious to get your thoughts?