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 low interest rate 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 $310,000 in passive income (see the chart at the end with a breakdown of various passive income sources). 2022 will hopefully be the third year in a row of generating over $300,000 in passive income so we can remain stay at home parents in expensive San Francisco.
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 2022 given so much has changed since my original passive income rankings came out in 2015. A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.
The best passive income rankings are born from my own real-life experiences attempting to generate multiple types of passive income sources over the past 22 years.
Best Passive Income Investments Starts With Saving
By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!
Sounds nice right? If only there was a formula or a chart like the 401k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom.
Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.
If you can max out your 401k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.
It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can’t touch your 401(k) and IRA before the age of 59.5 without a 10% penalty.
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 2022 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 due to rising rates and low yields. While Physical Real Estate moved up from 5th best to 3rd best partly due to rising inflation. Inflation is likely going to stay elevated for 2022 due to a surge in energy prices and commodities.
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. I’m expecting an uninspiring 2022 in the stock market, but continued strong runs for real estate. Therefore, real estate is moving up the rankings.
Best Passive Investment Rank #8: Peer-to-Peer Lending (P2P)
The least best passive income investment is P2P lending. P2P lending started in San Francisco with Lending Club and Prosper in mid-2000. The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions. What was once a very nascent industry has now grown into a regulated multi-billion dollar business.
With a diversified portfolio of 100 or more notes, the leading P2P lenders claim investors can make an annual return between 5% – 7%. The returns used to be higher, but the increased supply of money has brought returns down.
The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There’s something that just doesn’t sit right 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. Although Lending Club no longer offers P2P investing, you can still invest in individual loans with Prosper or use their automated investing feature.
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. 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
There was a time when CDs or money market accounts would produce a respectable 4%+ yield. Nowadays, you’ll be lucky to find a 5-7 year CD that provides anything above 1.5%. The great thing about CDs is that there are no income or net worth minimums to invest.
Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, 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 0.4% (as of December 2021) because the Fed slashed rates to 0%. In comparison, the 10-year Treasury bond yield is hovering around 1.3%. The problem with owning the 10-year bond is that you have to own the bond for 10 years to guarantee you’ll get the current yield.
It takes a tremendous amount of capital to generate any meaningful amount of passive income with savings now. To generate $10,000 a year in passive income at 0.4% requires $2,500,000 in capital! At least you know your money is safe, which is great during bear markets.
The huge drop in interest rates is why it’s prudent to lower your safe withdrawal rate in retirement and/or build a bigger net worth before you retire. It takes a tremendous amount more in capital to generate the same amount of risk-adjusted income today.
Interest rates are ticking back up now that the economy is recovering. The Fed also stated it will raise interest rates three times in 2022. Therefore, savers should benefit, but investors may see a more volatile period.
Below is a chart that showed how much more capital you needed to generate $50,000 a year in income due to a collapse in interest rates in 2020. The graph has come down as interest rates have risen in 2022. But it still makes the point about how investors need a lot more capital in a low interest rate environment.
Take Advantage Of A Drop In Interest Rates
The main thing savvy investors can do to take advantage of a huge drop in interest rates is to refinance debt or take on debt and invest in higher return investments.
At the very least, homeowners should be refinancing their mortgages. Check out Credible, my favorite mortgage lending marketplace where lenders compete for your business. It’s free to get a real mortgage rate quote.
The best mortgage value is refinancing or getting a 15-year fixed mortgage rate, followed by a 30-year fixed. The average 15-year fixed mortgage rate is lower than the average 5/1 ARM rate. This is an anomaly worth taking advantage of.
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)
As interest rates have been going down over the past 30 years, bond prices have continued to go up. With the 10-year yield (risk-free rate) at roughly 1.3%, we’re in an interesting situation.
The 10-year yield was at only 0.51% in August 2020. I believe long-term interest rates can stay low for a long time. Just look at Japanese interest rates, which are negative (inflation is higher than the nominal interest rate).
Bonds provide a terrific defensive allocation to an investment portfolio, especially during times of uncertainty like during the coronavirus pandemic. If you hold a government bond until maturity, you will get all your coupon payments and principal back. But just like stocks, there are plenty of different types of bond investments to choose from.
Anybody can buy a bond ETF such as IEF (7-10 Year Treasury), MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total Return Fund). You can also buy individual corporate or municipal bonds.
Municipal bonds are especially enticing for higher-income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.
Main Concern With Bonds
The main concern for bonds is that the Fed Funds rate will likely go up given inflation is picking up. If interest rates do go higher, bonds will decline in value, all else being equal. In fact, the markets are now forecasting three Fed rate hikes by 2023.
That said, so long as you hold the bond to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA. Further, the Fed has clearly stated it will keep the Fed Funds rate at 0% for the next couple of years.
Bonds are a great investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.
Refinancing your mortgage or any debt is one of the easiest ways to generate new passive income. I refinanced my mortgage to a 7/1 ARM at 2.25% for minimal fees with Credible.
As a result, I boosted my cash flow by $400 a month, which is like boosting passive income! Unfortunately, mortgage rates are ticking back up in 2021 due to higher inflation expectations. But they are still very low by historical standards. Best to refinance now before rates go up even further.
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, 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 2022 and is 200-pages. 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 ~$50,000 a year in passive income I can get from the book, I would need to invest $1,250,000 in an asset that generates a 4% yield. To earn $10,000 a year in passive income would therefore need roughly $250,000 in capital.
Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.
Another Example: Royalty Payments
On July 19, 2022, I will launch a traditionally published book with Portfolio / Penguin Random House, entitled, Buy This, Not That: Spend Your Way To Wealth And Freedom. The book took two years to write and has been reviewed and revised 12 times by three professional editors.
Once the book sells enough copies to cover my book advance, I will make a 15% royalty based off each hardcover sale. To pre-order the book and guarantee delivery on the launch date, please click the link and order. I believe the book will provide at least 100X more value than the cost of the book.
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% – 10%, although appreciation may be slower.
I’m bullish on the heartland of America real estate and have been actively buying commercial real estate there through real estate crowdfunding and specialty REITs, which we will discuss more below.
Real Estate Has Great Tax Benefits
The tax benefits of owning physical real estate are very attractive. The first $250,000 in gains is tax-free per individual. If you’re married and own the 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.
I believe there is an attractive opportunity to buy real estate in 2021 and beyond due to low mortgage rates, a rotation out of stocks, and the desire for more income and less volatility. I’m personally looking to buy another single-family home to rent out.
Further, the value of rental income has gone way up since interest rates have gone way down. Therefore, I think buying rental properties in this low interest rate environment is good because rental property valuations have not appreciated as much as the cash flow they generate.
Risk: 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 $100,000 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 crowdfunding platform for accredited investors is CrowdStreet. They are focused on individual real estate projects in 18-hour cities. Valuations tend to be lower and net rental yields tend to be higher in places like Memphis, Charleston, etc. If you like to pick your own deals and want to build your own select real estate fund, CrowdStreet is a great choice.
If you are not an accredited investor and like to invest in diversified funds, you can invest in private eREITs through Fundrise. Fundrise is the leader in this more diversified style of real estate and has been around since 2012. For the average investor, a diversified eREIT is probably the best way to go. Fundrise does the work for you so you don’t have to.
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.
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. Value is back!
The “Dividend Aristocrats” are a list of blue-chip companies in the S&P 500 that have demonstrated a consistent increase in dividend payouts over the years. 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 1.6%, which roughly equals the 10-year bond yield.
Tech, Internet, and biotech, on the other hand, tend not to pay any dividends. They are growth stocks that reinvest most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.
Pay Attention To Dividend Yields
To achieve $10,000 in annual passive income with a ~1.5% S&P 500 dividend yield would require $667,000. Instead, you could invest only $154,000 into AT&T stock given its 6.5% estimated dividend yield.
It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.
One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. Alternatively, you can DIY and use Personal Capital’s free financial tools to manage your wealth. The key is to invest consistently over time.
In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid.
However, given dividend rates are low and volatility is high after a 12+-year bull market, the Return score is lower than in the past.
Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48
Best Passive Income Investments Review
Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:
- Dividend Stocks
- Real Estate Crowdfunding, REITs, and Real Estate ETFs
- Creating Your Own Products
- Owning Rental Properties
If you can stomach occassional volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding, 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.
However, blogging would score a 1 in the Activity Score since these posts don’t write themselves. Instead, you really want to create products like a book or a course to sell passively.
Finally, owning rental properties is becoming more attractive given how low interest rates have fallen. The value of rental income has increased so much that I’m looking to buy another physical rental property in 2022.
I’m bullish on the housing market for the next several years. As a result, I want to own as many rental properties as possible to benefit from rising rents and rising asset values.
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 allows both my wife and I to be stay-at-home parents to two children. Our goal is to consistently generate $300,000+ in passive income and relocate to Hawaii for kindergarten by 2023.
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 $2.4 billion in assets under management and over 210,000 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.
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.
Join 50,000+ others and sign up for the free Financial Samurai newsletter. I’ve been writing about helping people achieve financial independence since 2009. Everything is written based off of firsthand experience. The Best Passive Income Investments is a FinancialSamurai.com original post. I have invested in all products mentioned for years.
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?
What about royalty payments from oil, gas and other energy investments? I personally began my journey investing in oil and gas minerals and working interest in 2007 and currently have 1 employee besides myself and a company that generates over 100K in monthly revenue ( residual although for the tax code working interest is not a passive investment since you do make operating decisions and additional investment). This seems to be one thing always left off the passive income list. Maybe it’s due to geographic location or bloggers, but out in Oklahoma, Texas, Colorado, Wyoming, Kansas and east coast( PA, WV, Ohio) it’s not uncommon to have companies generating substantial passive income or residual income with a handful of people involved. Prices do fluctuate, but like an older timer told me “learn to to live on half your monthly income and save and invest the excess out side energy, maintain low to no debt and rising the ups and downs becomes easy”
Brett,
I know a couple people in Northeastern OH that own several oil wells. Who knew?
They do hardly any work on them and they net 5-10K per month. Its a hit and miss venture but once you have a few successful ones up and running it is a good passive investment.
I do not know anything about this type of business, only what I have been told.
That is exactly right. It takes success early to get started, but once you are up and running its a fun business with passive income.
@Brett, Can you direct us to information about how to get started in the business of “royalty payments from oil, gas and other energy investments?”
Sam, good points on RE crowdfund and I see the appeal – however I am having a hard time understanding how leverage can be applied to real estate crowdfunded deal.
For example, if I had 1M in traditional RE, I can expect disproportionate returns with a physical mortgage (of course this can go both ways). However, I am having a hard time trying to understand how the biggest RE investment benefit of using leverage applies to crowdfunded deals as a limited partner, to me this seems like a fundamentally different investment.
Also, you can keep your physical RE as passive income generator for a lifetime, but crowdfunded deals mature after 3-5 years typically and you’d need to find another opportunity and enter your position. Is this correct?
If anyone else has insights here please do share, I would love to learn something new
Hi Ed,
I have been on Fundrise for a few years, and made over $20,000 so far. (I cannot speak about CrowdStreet as I’m not on there.)
Fundrise is well named: it’s actually a bunch of REIT funds, and you choose the funds that work for your objectives.
One of their funds I’m in has over a hundred property projects. Some projects are just getting started (acquiring the land), some are well underway (building, or doing upgrades), and some are mature (collecting rent). Some are commercial properties like warehouses, and some are residential apartment buildings and single-family homes.
To your question “crowdfunded deals mature after 3-5 years typically and you’d need to find another opportunity and enter your position. Is this correct?” it is not correct re: Fundrise. While a single project may be completed (i.e., the loan Fundrise made to the builder is repaid, or the property is sold) there are new projects coming into the fund all the time. Like a mutual fund, you can buy and hold a Fundrise fund forever, either reinvesting the interest and dividends, or having them deposited to your checking account quarterly.
The “leverage” comes from having really big funds with money coming from thousands and thousands of investors, so they can go after really large deals on much more favorable terms than most investors could get in their own.
My suggestion is to start small with Fundrise, as I did, see how it works for a few quarters, and then put in all the investment you’re comfortable with. The average return in 2021 was about 16%, which probably won’t be true every year, but I think they are in a really good position for many years to come. They make very savvy investments based on real discipline (not wild guesses) and they take a pass on the 98% of potential deals that don’t meet their criteria.
I agree that real estate is a very good investment for creating wealth and a good stream of passive income- I have rental unit that has done very well for me over the years. But what about two other possible sources of passive income: pensions and Options trading- more specifically selling covered calls?
I receive a pension take-home income greater than my working monthly take-home income despite not starting until I was age 35 and retiring early at age 59- an investment decision in my choice of job and employer due to the retirement plan offering a great stream of passive income. Jobs with pensions may not be as easy to come by as they used to but they are still out there – mostly in lower paying public sector jobs that may align with your values interests and skills and that nevertheless in the long run have a much greater return for your efforts. And as my example proves, you don’t have to start at a really young age or work until well into retirement age (though doing either or both can be very beneficial in growing your pension income!).
As for options trading by selling covered calls, it might not be regarded by many as a “passsive” income and may be considered to be much too risky by many others, but I would respectfully disagree if approached with appropriate prudence. By that I mean selling covered calls in only one or two stocks that you already own and that you believe in their long term prospects and wish to hold onto. The time required on a monthly basis is minimal, especially with auto alerts on your phone, and it’s less risky than simply just owning the stock without this extra income/insurance.
What are your thoughts?
Having a pension is great! However, most employees do not have pensions anymore. What I wanna do is highlight passive income investments That most people can make. And most people cannot have a pension, just pre-tax retirement accounts.
I would say writing covered calls is not a passive investment. But if you enjoy doing it, more power to you.
While everyone is into real estate and stocks, i’d advise that we also look into crypto.
I’d just like to add my story, I think others would like to hear it. I got involved in crypto a few years back. This was when bitcoin was only a few bucks. I ended up selling all my bitcoin when it was only $75. Easily the worst financial decision I’ve ever made in my life. Because of a few different reasons I didn’t get back into crypto until recently. I just started trading bitcoin with this beta testing group and i’m going to keep all my bitcoin this time. Crypto currency will be the biggest wealth transfer of our generation. Bitcoin is turning into our generations version of digital gold. and YES it has it’s ups and downs. But it’s trending upwards. I know it might be hard for some to believe, but in the near future bitcoin could be worth 100k to a million dollars easily. Don’t forget there is a capped supply of only 21 million, and as the world’s appetite for bitcoin grows, so will it’s price.
I just don’t understand it enough. I know that each transaction adds another required computation, so the processing farms may need to get exponentially bigger over time to support an ever-increasing blockchain. Maybe there’s a technical fix for that? But if it starts to take days or weeks to process a transaction, it’s toast. And then there’s the regulation issue. Can it be regulated and remain completely anonymous, it’s only real feature? And to that point, though fully supportive of a free market, I also support a transparent market. Not sure if I want to be supporting money laundering, terrorist financing, human trafficking, and all the rest that crypto was designed for… imo…
Selling puts and calls is awesome. Probably falls in the active category rather than passive though. I understand one can vary expiration dates and strike prices to make it less active.
As for me, I’m selling my rental homes and plan to use proceeds for option selling. I find options more white collar and scalable.
Completely agree re: Dividends, completely disagree re: index investing.
Dividends that consistently increase over time, ‘Aristocrats’, provide a hedge against inflation, and it doesn’t matter what the markets or share price do, the cash payment remains the same or increases. Do I care if (T) shares are volatile? Pretty sure everone’s going to be paying their phone / internet bill for the next 50yrs+.
I am admittedly biased, but could point out many actively managed Funds that crush market index’s. Index etf’s are a guarantee to average.
Hi Sam –
What are your thoughts regarding Fundrise changing the platform to have 4 investment “plans” to chose from rather than individual e-REITs initially? Tony
I think it’s smart from a business POV as it streamlines operations. It enables Fundrise to better serve its customers by level of wealth/risk, and tailor service and products as clients grow wealthier.
From the Investor’s side, more tailored plans should be better. Fundrise is thinking about the various stages of wealth for the investor, which enables the investor to invest more passively.
After securing a $300 million credit line facility from Goldman Sachs recently, Fundrise really is entering the big leagues as it grows smartly.
Sam
Would you clarify “The best mortgage value is refinancing or getting a 15-year fixed mortgage rate, followed by a 30-year fixed.”
Are you getting two mortgages?
Just one mortgage. The average 15-year mortgage is lower than the average 5/1 ARM now, which is very unusual. Therefore, if you can afford the higher payments, it’s probably getting or refinancing to a 15-year.
As someone who has multiple streams of income……passive income is by far, the best. The only thing that is better is residual income(writing a book….one time…..and getting paid over and over!)……I love my real estate properties….have cut to a 1/3 of what I used to own….but then again….I am getting older……started when I was 30…..the only thing that I would have done sooner is……buy earlier…..retire earlier…….I retired when I was
46……now….investing in stocks and spending most days analyzing stocks….love it!!! While my rental properties take care of any day to day spending and income write offs……that is the key…..not have much you MAKE…..but….how much you KEEP!!! I never forget a guy telling me how much money he was making….something like 153,000 a year…..but after taxes and such…..he was only making around 60,000….
so my 83,000 a year was WAY over his income…..he never understood that/this…..LOL!!!!
Makes a lot of sense. Passive income is the best. High Yield Dividend stocks, bonds, REITs, rental properties.
What are your thoughts and do you have any experience with real estate crowdfunding such as Fundrise?
Tony
How do you guys feel about the risks when comparing: REITs/Real Estate Crowdfunding vs. say a syndication where they’re focused on smaller projects?
I haven’t had much experience with REITs and was also wondering if they normally supply a PPM with projected income, vacancies, expenses, forced appreciation plans? Was wondering how the due diligence works in REITs/crowdfunding.
Have only had experience with syndications where they give you a lengthy PDF of market studies, and their 3-10 year plans for example.
So, was wondering what the difference in the due diligence process was between syndications vs. REITs, and what everyone felt about the risk tradeoffs between the 2?
It’s not mutually exclusive. But here’s a post on the subject: REITs or Real Estate Crowdfunding. Thanks
I really enjoy your posts and insight. Can you please share more how you generate 80k passive income from 810k in crowdfunded real estate? Fundrise supplemental income (which I assume is a core holding for you for income and I am a fan of myself) pays 6-7% dividend. It seems to reach 10% you would have to hold for long periods and generate the rest on capital gains and not from passive income, but you mention this annual passive income figure and I assume it is not from long term capital gains. How do you achieve this from Fundrise? I am moving more from physical single family investment property (4-4.5% cash flow + 5-6% appreciation per year+ depreciation deductions) over to crowdfunding in order to bump up the passive income by 2-3% over LT gains and appreciate how you are achieving this, as income is more important to me now than LT appreciation. Keep up the great writing. It is inspiring and motivational.
I made 18 individual investments since the end of 2016 through a different fund. Since then, several have exited. Fundrise is a portion of my overall investments.
Depending on how you classify passiveincome, it could actually be much more. Check out this post on the lumpiness of proceeds: https://www.financialsamurai.com/accurate-passive-income-forecasting/
Great article, this is one of my favorites that I come back to time-to-time as I think about possible allocation changes in my portfolio. Excluding my primary residence, 30% of my portfolio is in direct real estate. That’s intentional as I work in real estate professionally and wanted to get exposure in my own portfolio. I am becoming more interested in getting the real estate crowdfunding platforms, but I get hung up on the taxes. I can effectively pay no taxes on direct real estate cashflow due to things like depreciation. But I believe distributions from a crowdfunding platform or REIT are taxed at ordinary income levels. When I sell a property I own I can 1031 and defer capital gains – with a crowdsourcing/REIT I pay cap gains tax. That’s a big difference in after-tax cashflow and proceeds, to the point where I think the additional risk in direct real estate investing vs crowdsourcing/REITS is more than offset. Am I missing something?
Sure, the key differences are the level of passivity, concentration risk, and diversification. Hence, the variables in my chart and post.
It’s not easy doing a 1031 exchange given you’ve got to identify and buy a property within a certain amount of time. I tried and couldn’t find a like-for-like property.
Further, I didn’t want to invest $2.75 million into another property. Instead, I wanted to diversify into stocks, bonds, and heartland real estate. See: Reinvestment Ideas After Selling A House For Big Bucks
That’s the beauty of so many asset classes. You invest according to your situation in life. As someone with two young children, I’m at my capacity with four rental properties. The rest of my real estate capital is going into REITs, crowdfunding, and real estate stocks.
You’ve got to invest based on your situation. Thankfully, we’ve got a lot of choice.
Makes sense, thank you for the reply. Really appreciate it.
Obviously you are an accredited investor, why crowdfunding versus private equity REIT. Treated as a partnership and given those same friendly tax breaks.
Hi All,
I’m at a cross road and wanted to get some opinions on what I should do with large amount in savings. All of this is relative to my portfolio, 50% real-estate (including rentals), 50% liquid (including 401k/IRA/Cash/Brokerage accts). I like to move part of the cash (about 10% of my liquid) into a fund that has the traditional 60/40 (VBIAX?), but not sure if I should consider other products like annuities, hybrid life insurance, etc…
My situation, my wife left the workforce over 20 years ago, kids college funded, no debt, and I’m told from a retirement manager that I can retire comfortably now at 50. SS+SB will be at 62 with over 3k (today’s money) per month with no more further contribution needed according to SS.
There will be other income / saving streams coming in the next 10-15 years, however I usually like to count on what I have now which already includes dividends, interest, and rent (my family live off the rents for past decade). I’m a IT Exec that makes good money and have been pouring my salary+bonus into the markets for years, I’m thankful that I enjoy my job, however aching to just do my own thing (IP I own).
What I like to do is retain the value if I invest part of my liquid (cash from savings) and get some sort of passive income that is more secured, again VBIAX seems like a good product to start, but annuities or others?
Thanks
CJ…….I am over 60 and I am investing in Dividend Aristocrat stocks!!! Some have dividends of over 9.00%……not too bad!!! Most are in the 4-5% range……so the income….which I have not starting taking yet…..is between 5-7k a month…….I do not need it yet….hopefully….never…….and I am not receiving any ssa yet either……so….in the next couple of years…..my monthly should be around 10-18k a month…….so…..I would suggest some solid dividend stocks for monthly/quarterly income….stagger them….so you get monies every month…….much success!!!
Sam and others –
If building a portfolio for a little more income, would you consider Vanguard REITs (VNQ) or Vanguard US High Dividend and Vanguard International High Dividend?
Or would you include all?