After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at our company’s free cafeteria, I decided I had enough. I needed to generate more passive income to break free. This post will highlight the best passive income investments in the new decade.
There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. I started focusing on generating passive income in 1999.
However, it wasn’t until the 2008-2009 financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I’m sure many people during the 2020 global pandemic are feeling the same way about their occupations as well.
We’ve discussed how to get started building passive income for financial freedom before. Now I’d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.
I’m updating my passive income rankings for 2020/2021 given so much has changed since my original passive income rankings came out in 2015. A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.
The best passive income rankings are somewhat subjective, but they are born from my own real life experiences attempting to generate multiple types of passive income sources over the past 20 years.
Passive Income Starts With Saving
By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!
Sounds nice right? If only there was a formula or a chart like the 401k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom. Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.
If you can max out your 401k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.
It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can touch your 401(k) and IRA before the age of 59.5 without a 10% penalty.
Let’s take a look at the best passive income investments for the new decade.
Ranking The Best Passive Income Investments
Below are eight best passive income investments to consider. Each passive income stream will be ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criteria will get a score of between 1-10. The higher the score, the better.
- A Risk score of 10 means no risk. A Risk Score of 1 means there is extreme risk.
- A Return score of 1 means the returns are horrible compared to the risk-free rate. A Return Score of 10 means you have the highest potential of getting the highest return relative to all other investments.
- A Feasibility score of 10 means everybody can do it. A Feasibility score of 1 means that there are high requirements to be able to invest in such an asset.
- A Liquidity score of 1 means the investment is very difficult to withdraw your money or sell without a penalty or a long period of time. A Liquidity score of 10 means you can access your funds instantly without penalty.
- An Activity score of 10 means you can kick back and do nothing to earn income. An Activity score of 1 means your’ve got to manage your investment all day long like working a day job.
- A Tax score of 1 means the investment is taxed at the highest possible rate and there’s nothing you can do about it. A Tax score of 10 means the investment is generating the lowest tax liability possible or you can do things to lower the tax liability.
To make the ranking as realistic as possible, every score is relative to each other. Further, the return criteria is based off trying to generate $10,000 a year in passive income.
Let’s look at my overall Best Passive Income Investments ranking chart.
Rank #8: Peer-to-Peer Lending (P2P)
The least best passive income investment is P2P lending. P2P lending started in San Francisco with Lending Club and Prosper in mid-2000. The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions. What was once a very nascent industry has now grown into a multi-billion dollar business with full regulation.
With a diversified portfolio of 100 or more notes, the leading P2P lenders claim investors can make an annual return between 5% – 7%. The returns used to be higher, but the increased supply of money has brought returns down.
The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There’s something that just doesn’t sit right with people breaking their contract obligations.
Over time, the P2P industry has seen its returns shrink due to higher competition and more regulation. As a result, I believe making money through P2P investing is one of the worst ways today.
Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity: 7, Taxes: 5. Total Score: 30
Rank #7: Private Equity Investing
Private equity investing can be a tremendous source of capital appreciation with the right investments. If you find the next Google, the returns will blow every single other passive income investment out of the water. But of course, finding the next Google is a tough task since most private companies fail and the investment opportunities always go to the most connected investors.
The most liquid of the private investments are investing in equity or credit hedge funds, real estate funds, and private company funds. There will usually be 3-10-year lockup periods, so the Liquidity score is low. These funds should at least provide for some semi-regular passive income distributions. The least liquid of the private investments is when you invest directly into a private company. You could be locked up forever and receive zero dividends or distributions.
Access to private investments are usually restricted to accredited investors ($250K income per individual or $1 million net worth excluding primary residence), which is why the Feasibility Score is only a 2. But the Activity Score is a 10, because you can’t do anything even if you wanted to. You’re investing for the long term. The Risk and Return score greatly depends on your investing acumen and access.
Gaining $10,000 a year in private equity investing is difficult to quantify unless you are investing in a real estate or fixed income fund. Such funds generally target 8-15% annual returns, which equates to a need for $83,000 – $125,000 in capital.
Risk: 5, Return: 7, Feasibility: 2, Liquidity: 2, Activity: 10, Taxes: 6. Total Score: 32
Rank #6: Certificate of Deposit (CD) / Money Market
There was a time when CDs or money market accounts would produce a respectable 4%+ yield. Nowadays, you’ll be lucky to find a 5-7 year CD that provides anything above 2%. The great thing about CDs is that there are no income or net worth minimums to invest.
Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, a CD and money market account are FDIC insured for up to $250,000 per individual, and $500,000 per joint account.
Now you can get an online money market account paying 1.3% as of 2Q2020. Although 1.3% isn’t very high, money market rates were closer to 0.1% back in 2015. Further, any money market rate above 1% compares favorable to the 10-year Treasury bond yield which is under 0.8%.
The problem with CDs and money market accounts really is the low return. It takes a tremendous amount of capital to generate any meaningful amount of passive income. To generate $10,000 a year in passive income at 1.3% requires $769,230 in capital. At least you know your money is safe, which is great during bear markets.
Risk: 10 (no risk), Return: 1 (the worst return), Feasibility: 10 (anybody can open up a savings account). Liquidity: 7 (savings are easily accessible, but not CDs without a penalty). Activity: 10 (you don’t have to do anything to earn passive income. Taxes: 5 (interest income is taxed as normal income). Total Score: 43
Rank #5: Physical Real Estate
Real estate is my favorite asset class to build wealth because it’s easy to understand, provides shelter, is a tangible asset, doesn’t lose instant value like stocks overnight, and generates income. When I was in my 20s and 30s, I thought owning rental properties was the best passive income investment.
The only bad thing about owning physical real estate is that it ranks poorly on the Activity variable due to tenants and maintenance issues. You can get lucky with great tenants who are self-sufficient and never bother you, or you can be stuck with tenants who never pay on time and throwing house-damaging house parties all the time.
Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market, and only after buying two or more properties are you actually long real estate. This is why everybody should own their primary residence as soon as they know they want to stay put for 5-10 years. Inflation is too powerful a force to combat.
In order to generate $10,000 in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50,000 property with an unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental yield, or a more realistic $200,000 property with a 5% net rental yield.
Generating High Rental Income Is Tough On The Coasts
In expensive cities like San Francisco and New York City, net rental yields (cap rates) can fall as low as 2.5%. This is a sign that there is a lot of liquidity buying property mainly for appreciation and not so much for income generation. This is a riskier proposition than buying property based on rental income.
In inexpensive cities, such as those in the Midwest and South, net rental yields can easily be in the range of 7% – 10%, although appreciation may be slower.
I’m bullish on the heartland of America real estate and have been actively buying commercial real estate there through real estate crowdfunding and speciality REITs, which we will discuss more below.
Real Estate Has Great Tax Benefits
The tax benefits of owning physical real estate are very attractive. The first $250,000 in gains is tax-free per individual. If you’re married and own the the property together, then you receive $500,000 in tax-free gains upon sale.
Then there’s the ability to exchange a property you own for another property via a 1031 Exchange so you don’t have to pay any capital gains tax.
If you own rental property, you can take non-cash amortization expenses to reduce any rental income tax. Owning property over the long term is one of the most proven ways to build wealth and generate passive income for the average American.
I believe there is an attractive opportunity to buy real estate in 2020 and beyond due to low mortgage rates, a rotation out of stocks, and the desire for more income and less volatility. I’m personally looking to buy another single family home to rent out.
Further the value of rental income has gone way up since interest rates have gone way down. Therefore, I think buying rental properties in this low interest rate environment is good because rental property valuations have not appreciated as much as the cash flow they generate.
Risk: 7, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6, Taxes: 10. Total Score: 44
Rank #4: Creating Your Own Products
If you’re a creative person, you might be able to produce a product that’s able to generate a steady flow of passive income for years to come. At the extreme, Michael Jackson, makes more dead than alive due to the royalties his estate makes from all the songs he produced in his career. Since Michael’s death, his estate has made over $2.5 billion according to Forbes.
Of course it’s unlikely any one of us will replicate the genius of Michael Jackson, but you could produce your own eBook, e-course, award-winning photo, or song to create your own slice of passive income.
Example Of A Product
In 2012, I wrote a 180-page eBook about severance package negotiations that regularly sells about ~50 copies a month at $87 – $97 each without much ongoing maintenance. The book is updated for 2020 to teach people how to negotiate a severance. Once you have a severance, you have a financial runway for your next chapter in life.
In order to generate ~$50,000 a year in passive income from the book as I do now, I would need to invest $1,250,000 in an asset that generates a 4% yield. To earn $10,000 a year in passive income would therefore need roughly $250,000 in capital.
Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.
Leveraging the internet to create, connect, and sell is something every person should attempt to do given the startup cost is so low. The only risk is lost time and a wounded ego. Here’s my step-by-step guide on how to start your own profitable site in under 30 minutes.
Below is a real income statement of a personal finance blogger who started his website on the side while working.
If you are a creative person who takes pride in making money on your own, creating your own product is one of the best ways to go. The margins are extremely high once your product is produced. The only thing you need to do is update the product over time.
Risk: 10, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 7, Taxes: 7. Total Score: 45
Rank #3: Fixed Income / Bonds
As interest rates have been going down over the past 30 years, bond prices have continued to go up. With the 10-year yield (risk free rate) at roughly 0.7%, it’s hard to see interest rates declining much further. That said, long term interest rates can stay low for a long time and can head to 0%. Just look at Japanese interest rates, which are negative (inflation is higher than nominal interest rate).
Bonds provide a terrific defensive allocation to an investment portfolio, especially during times of uncertainty like during the coronavirus pandemic. If you hold a government bond until maturity, you will get all your coupon payments and principal back. But just like stocks, there are plenty of different types of bond investments to choose from.
Anybody can buy a bond ETF such as IEF (7-10 Year Treasury), MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total Return Fund). You can also buy individual corporate or municipal bonds. Municipal bonds are especially enticing for higher income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.
The main issue people have with bonds is its lower historical performance compared to stocks. However, with the combination of lower volatility, higher coupon payments, and defensiveness during times of uncertainty, bonds are an attractive investment. See below the various bond fund returns in recent times.
Main Concern With Bonds
The main concern for bonds is the future of interest rates. If interest rates do go higher, bonds will decline in value, all else being equal. That said, so long as you hold the bond to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA.
Bonds are a great investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.
Check out Credible, my favorite lending marketplace where pre-vetted lenders compete for your business. Mortgage rates are now at all-time lows. Everybody homeowner needs to take advantage and refinance. Low mortgage rates are really spurring buying demand as well.
If you think about it, refinancing your mortgage or any debt is one of the easiest ways to generate new passive income. I refinanced my mortgage to a 7/1 ARM at 2.125% for no fees. As a result, I boosted my cash flow by $400 a month, which is like boosting passive income!
Risk: 8, Return: 3, Feasibility: 10, Liquidity: 7. Activity: 10. Taxes: 8. Total Score: 46
Rank #2: Real Estate Crowdsourcing
Currently, my favorite passive income source is real estate crowdfunding. Real estate crowdfunding enables individuals to buy a percentage of a commercial real estate project that was once only available to ultra high net worth individuals or institutional investors.
Owning individual physical real estate is great, but it’s like going all-in on one asset in a particular location with leverage. If the market goes down, your concentrated investment could lose big time if you are forced to sell Many did during the last financial crisis.
Real estate crowdsourcing allows you to surgically invest in multi-family or commercial real estate project for potentially 7 – 13% annual returns based off historical data.
My favorite real estate crowdfunding platform for accredited investors is CrowdStreet. They are focused on investing in individual real estate projects in 18-hour cities where valuations are lower and net rental yields are higher.
If you are not an accredited investor and like to invest in diversified funds, you can invest in a private eREIT through Fundrise. Fundrise is the leader in this more diversified style of real estate and has been around since 2012.
Unlike with other passive investments on the list, with real estate crowdfunding, you at least have a physical asset as collateral. Both platforms are free to sign up and explore.
100% Passive Incom Is Nice
For those of you who don’t want to come up with a $300,000 downpayment and carry a $1,200,000 mortgage to buy the median home in an expensive coastal city like SF or NYC, who don’t want to deal with tenants or remodeling, and who wants to sit back after an investment is made, real estate crowdfunding is a great alternative to owning physical real estate.
In mid-2017, I sold my San Francisco rental property for 30X annual gross rent. I reinvested $500,000 of the proceeds in a real estate crowdfunding portfolio to take advantage of lower valuations across the country with much higher net rental yields. Not having to deal with maintenance issues and tenant problems has been wonderful.
Coastal city real estate has become too expensive. I expect people and capital to naturally flow towards lower cost areas of the country, especially with tens of millions experiencing shelter-in-place. The future of work is remote. Take advantage of a multi-decade demographic shift inland.
Further, the performance of Fundrise’s eREITs have been relatively steady during stock market downturns or flat markets, as we saw in 2015 and 2018. I expect the same type of outperformance to continue in 2020 as the S&P 500 remains volatile. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income.
To be able to invest in real estate, but 100% passively is a great combination. You can invest in publicly-traded REITs as well for real estate exposure, however, as we saw in the violent March 2020 stock market downturn, REITs performed even worse.
Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity: 10, Taxes: 7. Total Score: 47
Rank #1: Dividend Investing
The best passive income investment is dividend-paying stocks. The “Dividend Aristocrats” are a list of blue chip companies in the S&P 500 that have demonstrated a consistent increase in dividend payouts over the years.
Let’s say a company earns $1 a share and pays out 75 cents in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the next year the company earns $2 a share and pays out $1 in the form of dividends. Although the dividend payout ratio declines to 50%, due the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.
Dividend stocks tend to be more mature companies that are past their high growth stage. As a result, they are relatively less volatile. Utilities, telecoms, and financial sectors tend to make up the majority of dividend paying companies.
Tech, Internet, and biotech, on the other hand, tend not to pay any dividends because they are reinvesting most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.
Pay Attention To Dividend Yields
To achieve $10,000 in annual passive income with a ~1.8% S&P 500 dividend yield would require $555,000. Instead, you could invest only $154,000 into AT&T stock given its 6.5% estimated dividend yield. It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.
One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. You can also use a digital wealth advisor like Betterment to automatically invest your money for you at a low fee. The key is to invest consistently over time.
In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid. However, given dividend rates are low and volatility is high after a 10+-year bull market, the Return score is lower than in the past.
Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48
Best Passive Income Investments Review
Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:
- Dividend Stocks
- Real Estate Crowdfunding
- Fixed Income (Bonds)
- Creating Your Own Products
- Owning Rental Properties
If you can stomach the occassional volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding and fixed income instead.
There was a time when I loved owning physical real estate the best in order to generate a steady stream of rental income. However, once I became a dad in 2017, I no longer had as much time or energy to manage properties. Real estate crowdfunding through platforms like Fundrise and CrowdStreet are good solutions for my real estate investment capital. 100% passive income is wonderful.
For those who are the creative types, starting your own website like this one and creating products online feels extremely rewarding. Some say making $1,000 on your own is like making $5,000 or $10,000 at a job. However, blogging would score a 1 in the Activity Score since these posts don’t write themselves. Instead, you really want to create products like a book or a course to sell passively.
Finally, owning rental properties is becoming more attractive given how low interest rates have fallen. The value of rental income has increased so much that I’m looking to buy another physical rental property in 2021.
Best Passive Income Investments Table
Once again, here are the best passive income investments. All eight passive income investments are appropriate ways for generating income to fund your lifestyle. The right ones depend on your personal preference, understanding of the investments, creativity, and interests.
Build More Passive Income Today
Enthusiasm for work is strongest when you are young and have very little money. After four years of high school, followed by another four years of college, work sounds like an exciting adventure! But after a while, your job can begin to beat you down.
Perhaps a coworker purposefully tries to make your life miserable because they resent your success. Maybe you get passed over for a promotion and a raise because you weren’t vocal enough about your abilities. Maybe you mistakenly thought you worked in a meritocracy. Whatever the case may be, you will eventually tire.
This is why it is important to take action while you still have the energy. With interest rates at rock bottom levels, building passive income will take a lot of effort and patience. Start now!
My Current Passive Income Investments
Below is my latest passive income streams that I’ve been building since 1999. Our passive income allows both my wife and I to be stay at home parents to two children. Our next goal is to generate $300,000 in passive income by 2023 and relocate to Hawaii for kindergarten.
Saving early and often is no sacrifice at all. Instead, the biggest sacrifice is living a life on someone else’s terms due to a lack of funds.
On your journey towards financial freedom, please diligently track your net worth, analyze your investment portfolios for excessive fees, and regularly calculate your retirement cash flow needs through a free financial tool like Personal Capital.
I’ve been tracking my net worth and my investments with Personal Capital since 2012 and have seen my net worth sky rocket as a result. My favorite tool of theirs is the Retirement Planner that enables me to properly forecast my cash flow.
Remember, if the amount of money you’re saving and investing doesn’t hurt, you’re not saving and investing enough. At the end of the day, nobody cares more about your money than you.
Now you know the best passive income investments, it’s time to get cracking! Your future self will thank you.
I tried the P2P lending site lendingclub.com and returns were abysmal. In fact for the first 2 years I was earning negative returns due to all the defaults. It finally climbed out the basement and is paying me a dismal 2% yield. I can do that well by just having savings account at Ally Bank.
It depends on what P2P loans you invested in, but I do agree that returns have been declining and the risk / reward ratio isn’t what it once was.
I had the same issue with Prosper. The defaults were much higher than I anticipated. Even at the higher credit ratings loans. You’re basically stuck too if you want to get out as there aren’t a lot of options. I wouldn’t do it again
This article proved wonders for me! Thanks a bunch! I am a noob when it comes to investments and financial terms. But after reading this, I understood that you can make money work for you.
I like what you say about the defensiveness of real estate investing during times of uncertainty. I think you’re right that more people will buy real estate, especially with mortgage rates so low. People want a tangible asset that is less volatile and produces income.
Amazing read! Keep sharing.
Excellent article Sam on the stock market! I would love if you could take a deeper dive into the asset classes and funds/stocks that you are investing in if you could.
S&P 500
High Dividend Yield Funds
REITs
Technology Stocks
What asset classes you prefer and like and which ones you don’t and why.
I think that would be a smash of an article and very helpful and informative to the readers of Financial Samurai.
Love all these passive income ideas. I always advise everyone to start a little business on the side. Future is very uncertain and having a side income is essential these days.
Sam – Related to Private Equity what are your thoughts on simply taking a position and investing in Blackstone common stock – BX? I believe Blackstone was previously a publicly traded partnership with complex Form K-1 tax reporting and is now simply a c corporation with no complexity.
Great ranking system! Seems like blogging, index funds, RE crowdfunding are more or less the same in terms of overall benefits, but are all clearly better options than real estate. That would be especially helpful for the many readers who want to be location-independent as well
Real estate is one of the best ways to build money and it offers huge pay offs such as cash flow and leverage. Once you started investing in real estate there are ways to leverage investments for higher cash flow. For example, you buy real estate with $10,000 for a $100,000 property use to $10,000 as the down payment but borrow or finance the $110,000. Normally, you would borrow $90,000 but borrow $100,000 so you have extra cash $10,000 to renovate and then in a few years sell at a higher price then you bought it. The profits can be placed on a 1031 exchange account so taxes are deferred and you can buy a higher valued property that has a larger cash flow then the previous investment.
Financial Samurai – agreed on most points although I tend to think that the only real and pure passive income is long term investing (which requires little on-going ‘maintenance’)
To that effect I was recently thinking on how to simulate an implementation strategy. Market seem to be disconnected from reality which makes the situation even more confusing.
How can one implement a safe strategy and get passive income while focusing on health, family and more important issues (while not having to look at the markets everyday)? More importantly, can it be done so that I don’t have to predict which way the market will go this year? I wanted to spend some time to help investors on how to relatively conservatively deploy their savings for long term returns by limiting downside risk and ran a few basic simulations.
The way I thought about the current investment situation is to assume three potential scenarios:
-Base case – to stay on the conservative side I assume that the current rally is a bear trap that will ultimately reverse. It is likely that the S&P 500 will drop to 2,500 or may retest the lows of March 23rd. Ultimately, I assume that base case goes as low as 2000 points for the benchmark Index and recovers in the second half of the year. This is in line with a number of Wall Street strategists and shouldn’t come as too controversial.
-Optimistic case – this is not a bear trap and market will consistently rally. While I assign a lower probability to this scenario than the Base case it remains a plausible path forward. It can’t be ruled out that one of the c. 700 studies currently performed on COVID-19 will result in (i) a cocktail of medications containing the disease (ii) or/and a successful vaccine on an accelerated timeline – note, that the market always discounts these events much earlier than the economy (e.g. Friday’s rally partially on the back of Gilead study (even if this proves too optimistic the point is that we may be getting much closer to something that works)
-(Extreme) Stress case – this scenario assumes that the S&P drops to 1600 points and subsequently recovers. This broadly assumes medications are not successful in the short term, FED liquidity injection / bridge is not enough and reopening of the economy is a failure (aka multi round – ‘no single round’ which the FED is betting on as per game theory) resulting in massive bankruptcies and potential depression (I don’t even want to think about the ramifications of this scenario, hence I won’t elaborate here)
For sake of simplicity I assume to have max. 130k USD to deploy for long term returns
-This serves only as illustration to show that there are effective strategies for long term returns assuming one has a tolerance for short term losses
-This strategy is based on S&P levels and NOT deployment of capital through regular time intervals. Time interval investing is another way of deploying capital that is not illustrated here
-It has the disadvantage that capital is not fully deployed in Base and Optimistic scenarios – one would need to make additional assumptions here
-However, it has an advantage of partially protecting you from tail risk should the S&P move sideways in the medium term and then plunge. This is essentially why I use this strategy as I always then to remain on the cautious side
-I invest in ETFs to reduce idiosyncratic risks
-Assumes one would have already deployed capital so that at current S&P levels (2850) 60k of the funds are invested in the S&P 500
-For simplicity and to be extremely conservative I assume the S&P recovers to c. 3,400 points over 36 months
-Balance is ‘replenished’ every 5-10% of fall in S&P 500. I also ‘top it up’ by 5k.
While there is a few simplifications here and assumptions that one needs to make the overall result is that your portfolio can make gains over time (from +20% to +50%) with the S&P going back to its February levels no matter what will happen this year.
As such I think the typical saver should focus on building a robust ‘all-weather’ strategy by deploying cash on the way down (or periodically) rather than try to predict the market.
I like Paul Merriman’s strategy, you should check it out if you haven’t heard about him
Sam –
Great article! Do you still invest in a High Dividend Fund with the S&P 500 for additional passive income?
Hi Sam. I enjoy reading all your articles and am especially curious about your endorsement of the relatively new crowd-funded real-estate sites. I’ve been lurking around a couple of the sites and think what prevents me from putting some money to work is concern for the safety of the investment. What gives you the confidence that the site doesn’t just “disappear” one day along with your investment ? Something reassuring about brick and mortar banks and investment companies, FDIC, etc. Also, I read an article indicating roughly 30% of tenants in US chose to not pay rent over the last couple of months. Does that concern you or change the math on anticipated real-estate returns? Thanks and keep up the good work !
Thanks for the link to the article Sam. It appears that you do not invest in international stocks and bonds. Is that correct?
What do you think of a simple portfolio (think you have this portfolio) of S&P 500, Vanguard High Dividend Yield, and US REITs with Muni Bonds?
PIMCO has some products with high dividend monthly income such as PHK, PDI.
Do you think they are good investments?
Do you recommend investing in International stocks and bonds or keep it simple with just the S&P 500?
Here’s a good article: https://www.financialsamurai.com/the-proper-asset-allocation-of-stocks-and-bonds-by-age/
You can search a topic and type Financial Samurai after it and you’ll probably find some good thoughts.
Thanks!
Sam –
If I understand correctly are you essentially investing in the S&P 500 fund? Do you also invest in Vanguard High Dividend Fund? If so what percentage of equity is allocated to that fund?
Do you also invest in an international fund?
Yes, an ETF like SPY, or a higher yielding ETF like DVY. There are many index ETFs.
The death toll keeps increasing. I’m stuck here with little funds. Well, BTCINVESTLIFESTYLE. C O M has been able to keep my finances increased while I wait till outbound flights are available. Temporary neighbors in quarantine. Nobody really wants to get sick.
Sam –
How important as part of the bond fund allocation are inflation bonds? Do you recommend these bonds?
Sam –
Amazing thread and website. Excellent post that I have learned much from. I have a question related to international bonds: what are your thoughts? Most of the world is close to zero or negative yield. Yet, Vanguard continues to recommend a 30% of fixed income allocation.
Shouldn’t a one simple low cost and diversified taxable or tax exempt bond fund be enough?
Bonds are so expensive now, and many of their charts like TLT’s looks like internet stock charts from 2000.
But the goal of owning bonds isn’t to make a lot of money, even though that’s what bond investors are doing right now. The goal of owning bonds is to prevent yourself from LOSING a lot of money, as some stock investors are doing now with the coronavirus pandemic.
I think CASH right now looks attractive. CIT Bank is currently offering a 1.75% interest rate with zero lock-up, while the 10-year bond yield is at only 0.7%. To guarantee you get that 0.7% and not lose principal, you have to hold the bond for 10 years!
I’m also a big fan of real estate and real estate crowdfunding now as affordability rises and money flows out of stocks and into much more defensive real estate. Publicly traded REITs are acting just as volatile as stocks, so I would stay away if you want defense and diversification.
I have started an investment in Groundfloor. It’s peer to peer investing like Lending Club, but instead of loans backed by nothing, these are loans backed up by Real Estate. YOU are the hard money lender. You can invest in loans with as little as $10 per loan. Loans interest rate go from about 7% to 14%. These are 1 year term loans, with payback option of interest quarterly and lump sum at the end, or like most of the loans which are interest and principal paid back at the end.
Sam,
I have read your blog for years and I enjoy your posts. I was also a corporate person for 20 years before achieving FI at age 43.
I like the tools you use to discuss topics. I was with GE at the start of my career and learned all about these tools – I think they are great and I use them to analyze my own projects.
I will continue to enjoy your posts now that I have achieve FI and I am even writing about my own experiences now. Hope to meet you down the road.
How about Import/Export. I’ve been involved part-time for 5 years and would consider it a great return on investment.
Not a very passive income generating activity. The goal of this post is to identify and rank the most passive type of income investments possible. But I’m glad import/export has helped generate you some side income.
Any recent updates about the performance of Fundrise? I am invested but would like more insight before I put more money in.
Best regards,
Moustache Samurai
The 2019 figures for Fundrise look like a ~9.47% return for the overall number of deals and funds, which is higher than the 9.11% in 2018. Pretty steady.
I have a deal that finished with a 14.3% IRR over three years that I will write about soon.
I do like how my real estate deals performed well in 2018 when the S&P 500 was down 6.2%. The diversification and steady income is nice. As a result, I’m also doing a lot of research on CrowdStreet because they are focused on 18-hour/secondary cities with lower valuations, higher cap rates, and potentially higher growth.
Speaking of 2019 returns – I haven’t seen your year end update on your portfolio post – did I miss it?
Not sure. I did do a year in review post. https://www.financialsamurai.com/financial-samurai-2019-year-in-review/
Crowdstreet and Fundrise seem to have good offerings with attractive IRR and yields. I would love to know what you look for when deciding to invest or not in a given offering. While Fundrise has eReits, Crowdstreet has more specific project offerings so would be helpful to have some general criteria for evaluating these since they are so different from traditional stocks and bonds.
Great write up Sam. I’m working on building my passive income streams. I’m investing in the stock market and real estate currently, but may have to take a closer look at some of the other options you’ve brought up. In my area, you can get some cash flow, but a lot of the returns come from appreciation. I have one house that has appreciated $85k since I bought it, but cash flow wise has pretty steadily broken even as I’ve spent pretty much all the income on repairs. They’ve all been the major repairs though that I’ve expected to come so I kept all the income from that property sidelined strictly for the repairs. That one should be good for some years to come and start bringing in more cash flow now that all major repairs are completed.
And real estate does more than just track inflation – it throws off income (which is important to some people and useful to most). And while your underlying asset is appreciating, the income also grows as rents increase over time. And if you make smart and well-timed purchases, both rents and asset values can increase at well above the rate of inflation.
I think that this is a great article and reminds me of Jeremy Siegel and his books “Stocks for the Long Run” and “The Future for Investors”
To take it a step further though I think it would be prudent – given how highly you’ve ranked dividend investing – to suggest that investors start to ween themselves off the frothy S&P 500 Index and instead start to focus on Dividend Aristocrats and areas of the market that aren’t as highly valued.
There’s a treatise to global dividend aristocrats investing.
Interesting article. I do wonder though what influence regions play into this. Either way, it’s certainly something to think about. Thanks for sharing.
I think real estate is the most attractive passive income opportunity in the new decade. Mortgage rates are down, and prices are down, but incomes are up and stock returns are up.
Hey Sam, have you written any articles outlining how you went about creating your eBook? I’ve just written the text for my first, and am at the phase of exploring how to design layout, format, and ultimately sell (as Kindle compatible and / or as a PDF sold on a standalone site as you do). Would love your insight on how you navigated the process, what resources you found most helpful along the way, and potential pitfalls to avoid. Thanks!
Passive income is one of those things more people should focus their attention on. My preference at my stage in life is real estate. However, I am always willing to look at other options.
Reading this post reminded me to consider the inverse relationship between the degree of passivity of a given investment and return on investment. Certainly we all want the highest return we can get. Most of us also want the most passive investment. We can’t have it both ways, but we can use this knowledge to pick the best investments.
Two other things to keep in mind are the impact of tax laws on any form of investment and the ability to leverage our capital (financing).
Given these factors, real estate continues to be at the top of my list. Nevertheless I’ll dig in deeper into other options just to be sure.
Samurai,
Have you investigated alternative passive income investments:
Life Settlements and viaticals
Private loans to businesses
Legal settlements
Your assessment of the net return on rentals in the midwest is accurate. I live in Indiana and own several single family homes (no mortgages). They yield a 9.5-10% net return. The appreciation in Indiana historically on SFH is about 2%. The last few years it’s been an astounding 6-9%, which of course is not sustainable but a fun tidal wave to ride.
Hey Samurai!,
I invest in physical real estate myself. I currently own one single-family home and a duplex as well. In 2020 I think I will be looking to diversify my portfolio with some more “passive” options. Have you had any direct experience with any of the crowdfunding or p2p platforms that you would recommend? Or even a syndicator that you have had a good investing experience with.
Thanks
-Jason L.
There’s a firm Worthy Capital/Bonds that offers bond-like investments that are currently earning 5%, with minimum investment at $10 bond increments. But they’re not like government bonds but rather an unregistered security subject to limits like Fundrise.
And on the Fundrise type investments, for non-accredited investors, there’s technically an investment limit (e.g. 10% of income if over 100k, else 5%, or equivalent net worth to income calculation). So for those unaccredited but want to invest more (say they have savings around just not enough legal net worth to qualify as accredited), what to do? What I’m curious about is it’s not clear if the investment limit is an annual limit or lifetime limit (stuck with limit until you move up the income or net worth ladder to raise the limit some more or become accredited eventually), and whether the limit is per institution (FundRise, and like companies), or across all such institutions. e.g. can you invest to the limit at each institution? Or across all of them have to be no more than the limit?
Do what ever you want to do as long as you completely understand the risks of the investments. No one checks this you just self certify. The government is like a huge wall keeping you from accessing great investments and only allowing rich people to gain access. There should be absolutely no rules keeping you out of an investment if you can go gamble 50k and lose it at a casino or invest in highly speculative penny stocks or use leverage in a brokerage account. The government doesn’t keep you out of these risky activities. If it were me and say I was at my max limit according to the law but I fully was aware of the risk and made an educated decision I would just change the number so it allows me to invest. These rules do not protect investors they keep people from investing like the wealthy do. The accredited investor rule is not protecting you. My net worth is approx. 300,000 I understand various types of investments and yet I can go invest $5,000 into a real estate syndicate that could produce great returns and if I lost that it wouldn’t hurt me where I need protection from it. It’s all a way to keep middle class people in the middle class. If you understand something and all the risks and you are ok with it I wouldn’t let some arbitrary limit stand in my way, if you can just change a number to raise the limit just do it. I am heavily invested in various types of real estate syndications and I am aware I’m taking a risk and I understand the risks so I just update that number to allow me to invest. The only thing that should matter is your financial plan and weather or not that investment would fit into your plan and goals.
Many similar Net-worth profile, $200K-$500K are looking for investment plan & strategy. Passive income can only happen taking individual tax situation and risk profiles in consideration as suggested above.
Also you have to play your own game, someone with $100K vs $1M vs $10M is a very different level of difficulties to preserve The capital and somehow enhance it.
I think there is a business opportunity for who will help define blueprints and pattern for those who seek.
Sam,
Can you tell me more about Fundrise.
How and When can you get your principal back from the investments you make?
What is the liquidity like?
What are the scenarios where you can lose money from fundrise?
In other words when real estate crashes some day how much would you expect the draw down to be in comparison to something like REZ?
Than you so much
Sure, check out my Real Estate Crowdfunding Resource Center than answers all your questions. Thanks
I did take a look. Trying to understand this piece below. Is it secured or unsecured? Didn’t see/read anything on how/when you are allowed to unwind your position. Thank you again for any further input.
2. Unsecured Investment
Real estate crowdfunded investments are generally unsecured investments, meaning that if, say, the platform were to go under, investors could lose their capital. While most investors are aware of the risk, the nature of the security of investments may be changing, and lawyers say investors should keep an eye on that point.
The solution to a real estate crowdfunding platform like Fundrise going under is the hiring of a third party bank who acts as the custodian of all assets. For example, Pershing has over a trillion in assets managed and is not going anywhere even if a REC platform does.
At least with real estate crowdfunding, if there are troubled times, there is the underlying real estate asset that can be worked out, unlike lending money to people via P2P.
Wow! This article is great! There are a lot of points in it that I can really relate to. Especially the part about annoying co-worker.
There are so many great points in your post. Do you really collect $825 from online savings account? That must come from a large amount of cash. Would that cash be better utilized for investments?
I always have 5% – 10% cash handy for investment opportunities and proceeds from various investment sales.
Further, cash is paying 2.1% now from online banks such as CIT Bank. That’s not bad given cash was paying 0.1% before 2016.
To get that kind of monthly return in your online saving account you have to have almost half a million dollars. This seems highly dubious.
(825 * 12) / .021 = 472K
And that’s 5-10% of your cash??
I don’t understand. What’s wrong with having 5% – 10% of your investable net worth in cash when its paying an OK amount?
What percent do you suggest?
MY personal preference with regards to my risk tolerance is whatever I can do with leverage. I love actively investing in the stock market with leverage, however this cannot be done passively with leverage.
With regards to passive income, real estate is my favorite. It’s a cyclical industry so if you get in at a downturn = almost guaranteed money. You can use 2-4x leverage easily with real estate investing, and with good tenants it can be done easily with very few headaches + less risks of drawdowns compared to many other investments.
I liked your starting points:
How much money do I need to achieve what makes me happy?(dangerous question!)
What makes me happy?
It happened to me some years ago to have the chance to spend some years working on the understanding and achieving of some financial peace.
I am still in the process, I am about to getting there and it feels great. It is a wonderful trip. No regrets.
Can you please expand on your muni bond holdings? Thank you.
I’m obviously a huge fan of dividend investing, but one of my other favorite passive income investments is off the wall, stock photography. You take the time to take some great photos, then upload them to a stock photography website and that’s it. If they’re good photos, that creates a nice passive income stream.
Wahoo passive income!
-Andrew Kraemer
Andrew- What sites do you use to sell your images?
Yeah? What sites?
I have tried Lending Club, did ok. About a 6% return. All out now.
I have recently investing in Fundrise in their “supplemental portfolio”. So far, happy.
I like REITs, but I also like some Mortgage Reits, and some other dividend payers.
I also something you have not mentioned.
That would be preferred stocks and baby bonds. Specifically preferreds and baby bonds in Mortgage Reits and REITs and some other. Why Mortgage Reits….those funds are kinda like cockroaches, they will survive a financial disaster. They pay pretty handsomely too.
Do you know of any good mortgage REITs?
Here are some I am invested in: Note – some are a bit pricey now.
I would suggest following “Colorado Wealth Managemnt”, “Brad Thomas”, “Rida Morwa” on SeekingAlpha.com for some more information and research.
AGNCO
AI/C
CDR/C
CIM/B
CMO/E
ECCB
NLY/F
TWO/B
Problem with investing in private equity is that it is hard to get access to the good funds that have consistently generated good returns over multiple cycles.
Nowadays, there is so much dry powder and so many new large funds being raised that it makes me question whether private equity returns over the next decade will even come close to what they have been over the past decade.
So while PE has generally outperformed other investment vehicles (ie. hedge funds), I question whether the out-performance will continue, especially if most investors do not have access to the proven established funds.
Fantastic article!
I think that especially the P2P-lending is more profitable nowadays, at least in Europe. People are getting 10-15% profit from P2P-platforms annually, pretty easily. I have only invested in Mintos, but I will soon divide and invest more in P2P-lending, because it gives pretty decent passive income :) I will post my strategy in my blog soon.
– Nordic Fire
I am new to Financial Samurai and am very excited about about the content you are writing about. Regarding passive dividend investing, what are your thoughts on higher yield mortgage trusts like NYMT or capital investment finance companies like ARCC? They have intriguing dividend yields, but this must come at some risk?
Thanks!!
NYMT and other mortgage REITs generally use some leverage to boost the yield by playing the spread. Some mREITs are very safe as they only invest in mortgages backed by the government otherwise know as agency backed mortgages.
Others mREITs are usually some blend of agency and private mortgages.
So they are generally a pretty safe investment. It’s the spreads that wreak havoc on the mREIT profits and the pre-payment of the mortgages too that can cause problems as then they probably are having to invest in lower yielding mortgages.
Hope that helps.
Hello Sam, I am an avid reader of your blog. Absolutely love it.
Can you please elucidate “Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market, and only after buying two or more properties are you actually long real estate.” ?
My best wishes for you !!
Satish
start with the premise that we all have to live somewhere, and from that we all are short until we own, and dont have to keep paying for the right to make use of what we need to survive.
neutral means that once you own, real estate markets up or down dont hurt you or help you in that the physical need you have is covered, your position isnt so much speculative as just covering your need, and if you sold it you would have to find a way to replace it again.
if you rent, you dont actually own what you need, but are borrowing it and paying rent while you do so. and maybe later you might be betting the market goes down, or probably that your buying power goes up, at which point you can give back what you are borrowing ie your rented property, and instead buy the item you need. your mortgage looks a little like the rent you paid before, but its more accurate to see that as renting the capital you used to buy the home.
going long, means that for a home you are not living in, you are invested in something that provides you something more than covering a basic need, it provides a dividend or yield, which in this case would be rent payments from your tenants. you are exposed to upside if the market goes up, and downside if the market goes down, gains you are free to lock in if you decide to sell, because you don’t need to live in it.
Can you please expand on your muni bond holdings? Thank you.
Nice article and I am glad to see that I have 4 out of the 8 of these options already. Although I used to be very keen on owning physical property as I liked having actual bricks and mortal, these days taking a more active role in REITS. In particular S-REITS as they seem to trigger a healthy annual dividend. That said, the market is high in Singapore and who knows when there will be a correction.
Have you ever looked into Singapore REITS as an option?
Great Post, very useful. I agree with the part of Real Estate having a lot of benefits but also having the main downside of liquidity and that it isn’t as passive as the other investments. I would argue that being long on the housing market is actually a good move, sure the prices fell in the 2008 financial crisis, but they seem to provide some good diversification since stocks and bonds are sometimes very sensitive to the overall economy. I’d have a different ranking because I’d give more weight to returns and liquidity than risk and feasibility but I guess that comes down to whether you’re risk averse or risk tolerant, nonetheless great article and ranking system.
Nearly all of my former colleagues (all are retired now), made their wealth by owning one extra house, duplex or triplex for 20-30 years. That was in the great growth era of the 1960-2005 period in California. And…paying off their home. Our house in Los Altos, CA went from $36,000 to 3.2 million over 40 years. We sold at $330,000 to get out of crowded California to live closer to the outdoors in Oregon. A great lifestyle decision for us.
I am now collecting from P2P (Prosper) after six years or so. I have been happy with it returning 12% in the beginning. Now it is down to 4.5% return. My favorite investment, by far howver, is High Growth Dividend Paying Stocks. I do it myself to hold over the long term, from At&T to MO or IRM, as examples. They work for me, as I invest all of the dividends monthly while living on Social Security and Seasonal Work Income. It’s the first investment where I love it when the market goes down and I buy more stock to increase the dividends. Our backup is in I Bonds (Treasuries) bought when rates were 10% and Social Security.
I only wish I had discovered Dividend Paying Stocks when I was in my 30’s rather than my 70’s. Hey…but that’s life. Now in my 80’s, it’s never too late to learn.
Would you care to explain how you leverage your high Growth Dividend taxes if you are reinvesting them rather than spending/living off them? I too am deploying capital into High Growth DIV stocks and juggling their taxes vs the balance of my other income in early retirement.
I was too busy building a professional building in 2012 to buy more than a couple of rentals. I have since sold one rental to my son. I am on track to retire in 6 to 12 months and am looking for new ways to build passive income. The crowd funding of real estate ventures seems to be cooling off. Real estate on the entire west coast has gotten out of reach for most; I don’t see that buying rentals in most markets will give a positive cash flow now. I am looking for ideas. I have been too conservative in investing over the last 20 years but will be able to retire easily with a good margin. We live below our means. I believe we will have another big correction in stocks and real estate within 3 years; I will buy more rentals once cash flows work. Overall, most vehicles are full valued so what to do now to capture more income? Is it better to build cash now or are you seeing some good opportunities at present values?
“Hello, my millenial son. Buy my boomer house bags”.
– You
Hey David,
Similar experience here in Scotland, Paid off house 1st, bought property, ran a rental empire for 10 years. Discovered John Bogle and passive funds, we now split between Vanguard broad spectrum funds, high yield FTSE 100 shares in tax free accounts and are slowly dissolving the empire. risk/return? I like 7%. All the best in Oregon, I hear its beautiful.
I would like to see how much you’re putting into these vehicles to get the return you are getting. I can do the math based on your rate and return, but too cumbersome. Thank you for the transparency. Does make me more excited knowing that it’s possible.
Saving is definitely the #1 step.
Once you can start a good plan the fun really begins.
Hey Sam,
Great article. So when you say bullish on the heartland do you have any particular areas you think are emerging with nice returns in the next 2-3 years you want to share?
I always have a great deal of difficulty in researching markets that have not already started to peak due to not being able to find any tools that will help me research enough data points. You can find a thousand articles about the “50 best cities to invest” etc, but cannot find any info for small town to mid size underdeveloped cities. I have played around with Mashvisor but feel like the methodology is flawed based on the small number of data points they are using.
I have had the same theory that investing in smaller cities and towns will often have better potential for returns if purchased and researched correctly, but cannot find any source of data that would show me CoC or ROI numbers for a city of 20,000 for example instead of just the top 100-200 cities with their metros.
Great Article. One thing I feel that would be useful is how long it took for you to get to this level of passive income. I am in my mid to late 30s. I am trying figure out how long it will take me to get to even 100K of passive income per year and how much savings I should have.
Since 1999.
CD’s may be no risk now but this hasn’t always been the case. My grandmother often showed me the CD’s she had purchased for a few relatives and myself in the 80’s & 90’s. Years later she passed away without stating where they were. A few of the banks were no longer in business but even those that were stated that during those years they didn’t keep records of them. I’ve tried lost property but no luck. If you have elderly relatives that purchased CD’s keep copies, etc.
Try again. Each state now has a robust online search tool that will produce the records. Federal laws in the US would have required financial institutions to keep these records. You need only try each state.
At the moment, Fundrise is offering another iPO to its current investors. What are the pros and cons of investing through the traditional Fundrise means vs through the iPO offering? Through your recommendations, I’m currently a Fundrise investor.
In general, I stay away from investing directly in private companies. The most I will do is invest in a venture capital fund or venture debt fund, like I am now. I don’t have an edge to pick the winners and losers, as all company private equity investments are long shots.
I like what Fundrise has been doing since its founding in 2012. They are innovators and leaders in the real estate crowdfunding space. I think it’s OK to invest in small percentage if you are a platform user, money that you are willing to lose and not see back for 5-10 years.
As of now, I’d much rather invest in the eREITs and individual real estate deals themselves.
Like everything, no risk, no reward.
Related: Just Say No To Angel Investing