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Ranking The Best Passive Income Investments

Updated: 01/25/2023 by Financial Samurai 473 Comments

If you’re looking to achieve financial freedom before a traditional retirement age (60+), you must build passive income. This post will highlight the best passive income investments in our current economic environment.

Passive income is the holy grail of personal finance. If you have enough passive income to cover your desired lifestyle, then you are free at last! You can say and do whatever you want. Too many people fail to live their truth due to a lack of passive income.

However, the only way to generate useable passive income is by building a taxable investment portfolio, which includes investing in real estate, alternative investments, and more.

Maxing out your 401(k), IRA, and Roth IRA are great moves. Unfortunately, they can’t generate passive income to live on until after you turn 59.5, in most cases. When it comes to achieving financial freedom, the hope is that we achieve it as soon as possible given our time is limited.

Why I Focused On Building Passive Income

After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at our company’s free cafeteria, I decided I had enough. Working in investment banking was wearing me out. I needed to generate more passive income to break free.

There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. Thus, I started focusing on generating passive income in 1999.

However, it wasn’t until the 2008-2009 financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I’m sure many people are feeling the same way about their occupations during the global pandemic as well.

It wasn’t until 2012 when I generated enough passive income (~$80,000) to break free from work. And it wasn’t until 2017 when I was able to generate enough passive income to take care of a family ($200,000).

Today, I estimate my wife and I will generate roughly $380,000 in passive income. We’ve discussed how to get started building passive income for financial freedom before. Now I’d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.

I’m updating my passive income rankings for 2023 given so much has changed since my original passive income rankings came out in 2015. A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.

The best passive income rankings are born from my own real-life experiences. I’ve been working on building passive income since I got my first full-time job in 1999.

Best Passive Income Investments Starts With Saving

By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!

Sounds nice right? If only there was a formula or a chart like the 401k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom.

Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.

If you can max out your 401k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.

It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can’t touch your 401(k) and IRA before the age of 59.5 without a 10% penalty.

The pandemic has shown us that if we WANT to save more, we can. Before the pandemic began, the U.S. personal saving rate hovered around 5% – 7%. Now it looks like the average saving rate may consistently be above 10%.

Let’s take a look at the best passive income investments for 2023 and beyond.

Ranking The Best Passive Income Investments

Below are the eight best passive income investments to consider. Each passive income stream is ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criterion has a score between 1-10. The higher the score, the better.

  • A Risk score of 10 means no risk. A Risk Score of 1 means there is extreme risk.
  • A Return score of 1 means the returns are horrible compared to the risk-free rate. A Return Score of 10 means you have the highest potential of getting the highest return relative to all other investments.
  • A Feasibility score of 10 means everybody can do it. A Feasibility score of 1 means that there are high requirements to be able to invest in such an asset.
  • A Liquidity score of 1 means the investment is very difficult to withdraw your money or sell without a penalty or a long period of time. A Liquidity score of 10 means you can access your funds instantly without penalty.
  • An Activity score of 10 means you can kick back and do nothing to earn income. An Activity score of 1 means you’ve got to manage your investment all day long like working a day job.
  • A Tax score of 1 means the investment is taxed at the highest possible rate and there’s nothing you can do about it. A Tax score of 10 means the investment is generating the lowest tax liability possible or you can do things to lower the tax liability.

To make the ranking as realistic as possible, every score is relative to each other. Further, the return criteria are based on trying to generate $10,000 a year in passive income.

Best Passive Income Investment Chart

Let’s look at my overall Best Passive Income Investments ranking chart. It has recently been updated to account for the ever-changing economic environment. Interest rates will likely stay low for a while, which makes generating meaningful passive income harder.

Compared to the previous best passive income investments chart, Fixed Income / Bonds moved down from 3rd best to 5th best. While Physical Real Estate moved up from 5th best to 3rd best partly due to higher net rental yields and lower prices. Inflation is elevated in 2023, but is finally coming down.

Dividend (stock) investing is still the ranked the best passive income investment. However, it may not be the best for you given its higher volatility and lower relative yields.

Private real estate funds, on the other hand, is much less volatile and provides even higher yields. During bear markets, private real estate funds like those from Fundrise tend to outperform.

The best passive income streams ranked

Best Passive Investment Rank #8: Hard Money Lending / Peer-to-Peer Lending (P2P)

Lending money directly to friends, family, and strangers for passive is tough to do. friendships and relationships are often ruined because of money. Therefore, I don’t recommend doing it unless the person you care about is desperate. In such a situation, it would be best to provide an interest-free loan or a gift.

To make lending money less personal, you could got the P2P lending route. P2P lending started in San Francisco with Lending Club and Prosper in mid-2000. The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions.

The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There’s something that just doesn’t sit right when people break their contract obligations.

Over time, the P2P industry has seen its returns shrink due to higher competition and more regulation. As a result, I believe making money through P2P investing is one of the worst ways to generate passive income today.

Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity: 7, Taxes: 5. Total Score: 30

Best Passive Investment Rank #7: Private Equity Or Debt Investing

Private equity investing can be a tremendous source of capital appreciation with the right investments. If you find the next Google, the returns will blow every single other passive income investment out of the water. But of course, finding the next Google is a tough task since most private companies fail. Further, the best investment opportunities always go to the most connected investors.

The most liquid types of private equity investments are those investing in equity or credit hedge funds, real estate funds, and private company funds. Private debt investments include venture capital and real estate funds as well. There are usually 3-10-year lockup periods, so the Liquidity score is low. These funds should at least provide for some semi-regular passive income distributions.

The least liquid type of private investment is when you invest directly into a private company. You could be locked up forever and receive zero dividends or distributions.

Access to private investments are usually restricted to accredited investors ($250K income per individual or $1 million net worth excluding primary residence), which is why the Feasibility Score is only a 2.

But the Activity Score is a 10, because you can’t do anything even if you wanted to. You’re investing for the long term without the daily noise, which is why I enjoy investing in private funds, even though fees are higher. The Risk and Return score greatly depends on your investing acumen and access.

Gaining $10,000 a year in private equity investing is difficult to quantify unless you are investing in a real estate or fixed income fund. Such funds generally target 8-15% annual returns, which equates to a need for $83,000 – $125,000 in capital.

Risk: 6, Return: 8, Feasibility: 3, Liquidity: 3, Activity: 10, Taxes: 6. Total Score: 36

Best Passive Investment Rank #6: Certificate of Deposit (CD) / Money Market

Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, CD and money market accounts are FDIC insured for up to $250,000 per individual and $500,000 per joint account.

Now you can typically only get an online money market account paying ~3.2% (as of 1H 2023) because the Federal Reserve has hiked the Fed Funds rate aggressively. As of January 2023, another great option to take advantage of is CIT Bank’s Savings Connect account offering 4.05% APY. CD interest rates are also way up.

It still takes a tremendous amount of capital to generate any meaningful amount of passive income with savings now. To generate $10,000 a year in passive income at 3.2% requires $312,500 in capital. At least you know your money is safe, which is great during bear markets.

Relatively low interest rates are why it’s prudent to lower your safe withdrawal rate in retirement and/or build a bigger net worth before you retire. It takes a tremendous amount more in capital to generate the same amount of risk-adjusted income today.

Today, you can get a 18-month CD yielding 4.6% from CIT Bank. Up to $250,000 per person is FDIC guaranteed. The rate is the best we’ve seen in years.

Risk: 10 (no risk), Return: 1 (the worst return), Feasibility: 10 (anybody can open up a savings account). Liquidity: 6 (savings are easily accessible, but not CDs without a penalty). Activity: 10 (you don’t have to do anything to earn passive income. Taxes: 5 (interest income is taxed as normal income). Total Score: 42

Best Passive Investment Rank #5: Fixed Income (Bonds)

Bond yields are finally attractive again! After 35+ years of inflation and interest rates going down, bonds had one of the worst years in history in 2022. With inflation surging higher bond funds have collapsed.

The 10-year yield was at only 0.51% in August 2020. But now, the 10-year bond yield is at ~3.8%. I would take advantage of this temporary spike in bond yields and buy Treasury bonds with 3-month, 6-month, 9-month, and 1-year durations. If and when inflation roles over, you’ll be glad you own Treasury bonds at 4.2% – 4.75% rates.

Long term, I believe interest rates will stay low for a long time. Just look at Japanese interest rates, which are negative (inflation is higher than the nominal interest rate).

Bonds usually provide a good defensive allocation to an investment portfolio, especially during times of uncertainty. If you hold a government bond until maturity, you will get all your coupon payments and principal back.

But just like stocks, there are plenty of different types of bond investments to choose from. Further, the aggregate bond market was down about 14% in 2022, the worst year ever. Hence, even bonds are not always safe havens.

Anybody can buy a bond ETF such as IEF (7-10 Year Treasury), MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total Return Fund). You can also buy individual corporate or municipal bonds. Just know that with bond funds, there is no maturity date. Hence, you will experience higher principal risk if you need to sell.

Municipal bonds are especially enticing for higher-income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.

Main Concern With Bonds

The main concern for bond funds is that their values go down when the Federal Reserve hikes interest rates. That said, so long as you hold individual bonds to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA.

Bonds are usually investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.

Bond market performance by year
2022 was the toughest year for bond investors ever

Risk: 6, Return: 2, Feasibility: 10, Liquidity: 7. Activity: 10. Taxes: 8. Total Score: 43

Best Passive Income Rank #4: Creating Your Own Products

If you’re a creative person, you might be able to produce a product that’s able to generate a steady flow of passive income for years to come. At the extreme, Michael Jackson makes more dead than alive. This is due to the royalties his estate makes from all the songs he produced in his career. Since Michael’s death, his estate has made over $2.5 billion according to Forbes.

Of course, it’s unlikely any one of us will replicate the genius of Michael Jackson. But you could produce your own eBook, traditional book, e-course, award-winning photo, or song to create your own slice of passive income.

Example Of A Product

In 2012, I wrote a 120-page eBook about severance package negotiations. Today, the book is in its 5th edition for 2023 and is 200-pages long. It regularly sells about ~50 copies a month at $87 – $97 each without much ongoing maintenance.

Another way to think about how profitable creating a product can be is to look at the amount of capital it would take to generate the same about of earnings. For example, to replicate the ~$40,000 a year in passive income I can get from the book, I would need to invest $1,000,000 in an asset that generates a 4% yield. To earn $10,000 a year in passive income would therefore need roughly $250,000 in capital.

Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.

Another Example: Royalty Payments

On July 19, 2022, I published an instant Wall Street Journal bestseller, Buy This, Not That: Spend Your Way To Wealth And Freedom. The book took two years to write and has been reviewed and revised 15 times by three professional editors. I figured why not write a great personal finance book during the pandemic.

Once the book sells enough copies to cover my book advance, I will make a 13% royalty based off each hardcover sale. I believe the book will provide at least 100X more value than the cost of the book. You can pick up a copy on Amazon, where it currently has the best sale.

Buy This Not That Book Best Seller On Amazon

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.

Blogging For A Living Income Example: $300,000+ - Best passive income sources

If you are a constant daydreamer, creating your own product is one of the best ways to go. The margins can be extremely high once your product is produced. The only thing you need to do is regularly update the product over time. If you have a great product, the upside is enormous.

Risk: 8, Return: 8, Feasibility: 8, Liquidity: 6, Activity: 7, Taxes: 7. Total Score: 44

Best Passive Investment Rank #3: Physical Real Estate

Real estate is my favorite asset class to build wealth for the average person because it’s easy to understand, provides shelter, is a tangible asset, doesn’t lose instant value like stocks overnight, and generates income. When I was in my 20s and 30s, I thought owning rental properties was the best passive income investment.

The only bad thing about owning physical real estate is that it ranks poorly on the Activity variable due to tenants and maintenance issues. You can get lucky with great tenants who are self-sufficient and never bother you. Or you can be stuck with tenants who never pay on time and throw house-damaging parties.

Maintenance issues can be an ongoing headache without proper preventative maintenance. For example, your roof could leak during the next Bomb Cyclone. Or your water heater could burst and flood your basement. Both have happened to me before!

Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market. Only after buying two or more properties are you actually long real estate. This is why everybody should own their primary residence as soon as they know they want to stay put for 5-10 years. Inflation is too powerful a force to combat.

In order to generate $10,000 in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50,000 property with an unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental yield, or a more realistic $200,000 property with a 5% net rental yield.

Generating High Rental Income Is Tough On The Coasts

In expensive cities like San Francisco and New York City, net rental yields (cap rates) can fall as low as 2.5%. This is a sign that there is a lot of liquidity buying property mainly for appreciation. Income generation is second. This is a riskier proposition than buying property based on rental income.

In inexpensive cities, such as those in the Midwest and South, net rental yields can easily be in the range of 7%+, although appreciation may be slower.

I’m bullish on the heartland of America real estate and have been actively buying multifamily real estate there through real estate crowdfunding and specialty REITs, which we will discuss more below. Owning rental property in an elevated inflation environment is an optimal choice. Renting is not.

Latest rent prices in America and making more passive income through rental property

Real Estate Has Great Tax Benefits

The tax benefits of owning physical real estate are very attractive. The first $250,000 in gains is tax-free per individual. If you’re married and own the property together, then you can receive $500,000 in tax-free gains upon sale.

Then there’s the ability to exchange a property you own for another property via a 1031 Exchange so you don’t have to pay any capital gains taxes.

If you own rental property, you can take non-cash amortization expenses to reduce any rental income taxes. Owning property over the long term is one of the most proven ways to build wealth and generate passive income for the average American.

The value of rental income goes up when interest rates fade. Therefore, I think buying rental properties over the next 12 months is good as interest rates and property prices decline.

Risk: 8, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6, Taxes: 10. Total Score: 45

Best Passive Investment Rank #2: Real Estate Crowdfunding, REITs, Real Estate ETFs

Owning physical real estate has been my key source for achieving financial freedom. My rental properties generate about $120,000 after expenses a year, or roughly a third of my overall passive income streams. However, now that I’m older and have two young children, I really want to minimize the time I deal with maintenance issues and tenants.

Therefore, I’ve been investing more of my capital in real estate crowdfunding, REITs, and real estate ETFs. Real estate crowdfunding enables individuals to buy a percentage of a commercial real estate project that was once only available to ultra-high net worth individuals or institutional investors.

Owning individual physical real estate is great, but it’s like going all-in on one asset in a particular location with leverage. If the market goes down, your concentrated investment could lose big time if you are forced to sell. Many did during the last financial crisis.

My favorite real estate investing platform is Fundrise. Fundrise manages over $3.2 billion in assets and has over 387,000 clients. Fundrise mainly invests in single-family and multi-family investment properties in the Sunbelt, where valuations are lower and net rental yields are higher.

Work from home and migration to lower-cost areas of the country is here to stay. As a result, I believe Fundrise is investing in the real estate sweet spot for the next several decades.

Unlike other passive investments on the list, with real estate crowdfunding you at least have a physical asset as collateral. Both platforms are free to sign up and explore.

Fundrise Due Diligence Funnel

100% Passive Real Estate Income Is So Nice

For those of you who dislike dealing with tenants and maintenance issues, investing in real estate crowdfunding is wonderful.

In mid-2017, I sold my San Francisco rental property for 30X annual gross rent. I reinvested $500,000 of the proceeds in a real estate crowdfunding portfolio. The goal was to take advantage of lower valuations across the country with much higher net rental yields. Not having to deal with maintenance issues and tenant problems has been wonderful.

Coastal city real estate has become too expensive. I expect people and capital to naturally flow towards lower-cost areas of the country, especially post-pandemic. The future of work is remote. Take advantage of a multi-decade demographic shift inland.

Further, the performance of Fundrise’s eREITs has been relatively steady during stock market downturns. Therefore, if there is another crash, Fundrise eREITs should outperform. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income.

Below are the latest returns from Fundrise compared to public REITs and the S&P 500. Notice the significant outperformance in 2018 and 2022, when bear markets occur. I enjoy investing in private real estate given there is less volatility and potentially outperformance during tough times.

Fundrise returns

To be able to invest in real estate, but 100% passively is a great combination. You can invest in publicly-traded REITs as well for real estate exposure. However, as we saw in the violent March 2020 stock market downturn, REITs performed even worse.

Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity: 10, Taxes: 7. Total Score: 47

The Best Passive Investment Rank #1: Dividend Investing

The best passive income investment is dividend-paying stocks. Dividend and value stocks are making a comeback after underperforming growth stocks during the pandemic. After a bear market in stocks in 2022, dividend stocks are offering better value and higher yields.

The “Dividend Aristocrats” are a list of blue-chip companies in the S&P 500 that have demonstrated a consistent increase in dividend payouts over the years. Names such as McDonald’s, P&G, Sherwin-Williams, Caterpillar, Chevron, Coca-Cola, and Sysco Corpare considered some of the best blue-chip dividend stocks. But there are some dogs like AT&T.

Let’s say a company earns $1 a share and pays out 75 cents in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the next year the company earns $2 a share and pays out $1 in the form of dividends. Although the dividend payout ratio declines to 50%, due to the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.

Dividend stocks tend to be more mature companies that are past their high growth stage. As a result, they are relatively less volatile from a stock context. Utilities, telecoms, and financial sectors tend to make up the majority of dividend-paying companies. In 2022, the S&P 500 dividend yield is about 1.8%.

Tech, Internet, and biotech, on the other hand, tend not to pay any dividends. They are growth stocks that reinvest most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.

Pay Attention To Dividend Yields

To achieve $10,000 in annual passive income with a ~1.8% S&P 500 dividend yield would require $555,000. Instead, you could invest only $154,000 into AT&T stock given its 8% estimated dividend yield. The problem is, AT&T stock could decline much greater in value.

It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.

One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. Alternatively, you can DIY and use Personal Capital’s free financial tools to manage your wealth. The key is to invest consistently over time.

In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid.

However, given dividend rates are low compared to real estate and volatility is high in stocks after a 12+-year bull market, the Return score is lower than in the past. You need a lot more capital to generate passive income with dividend-paying stocks and index funds.

Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48

Best Passive Income Investments Review

Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:

  • Dividend Stocks (100% passive but need a lot more capital)
  • Real Estate Crowdfunding, REITs, and Real Estate ETFs (100% passive, higher yields, but less liquidity)
  • Creating Your Own Products (huge margins, low startup costs, takes a while to get going)
  • Owning Rental Properties (tangible asset that’s more stable, but not as passive)

If you can stomach more volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding, rental properties, and fixed income instead.

There was a time when I loved owning physical real estate the best. It was my favorite way to generate a steady stream of rental income. However, once I became a dad in 2017, I no longer had as much time or energy to manage properties.

Real estate crowdfunding through platforms like Fundrise and CrowdStreet are good solutions for my real estate investment capital. 100% passive income is wonderful. I really like the combination of owning a hard asset that generates income. It’s a more stable way to grow wealth.

For those who are the creative types, starting your own website like this one and creating products online feels extremely rewarding. Some say making $1,000 on your own is like making $5,000 or $10,000 at a job. It just takes a while to get going.

However, blogging would score a 1 in the Activity Score since these posts don’t write themselves. Instead, you really want to create products like a book or a course to sell passively.

Best Passive Income Investments Table

Once again, here are the best passive income investments. All eight passive income investments are appropriate ways for generating income to fund your lifestyle. The right ones depend on your personal preference, understanding of the investments, creativity, and interests.

Best Passive Income Investments Ranked

Build More Passive Income Today

Enthusiasm for work is strongest when you are young and have very little money. After four years of high school, followed by another four years of college, work sounds like an exciting adventure! But after a while, your job can begin to beat you down.

Perhaps a coworker purposefully tries to make your life miserable because they resent your success. Maybe you get passed over for a promotion and a raise because you weren’t vocal enough about your abilities. Maybe you mistakenly thought you worked in a meritocracy. Whatever the case may be, you will eventually tire.

This is why it is important to take action while you still have the energy. With interest rates at rock bottom levels, building passive income will take a lot of effort and patience. Start now!

My Current Passive Income Investments

Below are my latest passive income streams that I’ve been building since 1999. Our passive income enables both my wife and I to be stay-at-home parents to two toung children.

Our goal is to consistently generate over $300,000 in passive income to raise a family in expensive San Francisco or Honolulu through the year 2040. The irony of a bear market is that all of us can actually more easily generate even more passive income!

Financial Samurai passive income investments 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 $3.2 billion in assets under management and over 387,000 active investors. Fundrise predominantly invests in single-family and multi-family rental properties across the Sunbelt. The Sunbelt has lower valuations, higher cap rates, and strong demographic trends. I like owning a fund where I don’t have to focus on each investment.

With economies opening up, I’m also actively looking for hospitality real estate deals on CrowdStreet. CrowdStreet focuses on real estate opportunities in 18-hour cities where valuations are lower and cap rates are higher. In addition, CrowdStreet has launched a build-to-rent fund to take advantage of the strong rental market.

Saving early and often is no sacrifice at all. Instead, the biggest sacrifice is living a life on someone else’s terms due to a lack of funds. Keep building the best passive income investments so you can one day be free.

Remember, if the amount of money you’re saving and investing doesn’t hurt, you’re not saving and investing enough. At the end of the day, nobody cares more about your money than you.

Now that you know the best passive income investments, it’s time to get cracking! Your future self will thank you.

More Action Items

Join 55,000+ 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. 

Also pick up a copy of my new bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only does it provide a framework to build more wealth quicker, it also helps you tackle life’s main dilemmas with optimal decision making. It’s the best personal finance book you’ll ever read.

The Best Passive Income Investments is a FinancialSamurai.com original post. I have invested in all products mentioned for years.

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Filed Under: Investments, Most Popular, Retirement

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.

2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.

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Comments

  1. Alex says

    May 29, 2020 at 8:07 am

    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.

    Reply
    • Financial Samurai says

      May 29, 2020 at 5:26 pm

      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.

      Reply
    • Jim says

      May 30, 2020 at 6:18 am

      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

      Reply
  2. Yelena Russo says

    May 22, 2020 at 6:36 am

    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.

    Reply
  3. Tony says

    May 21, 2020 at 7:13 pm

    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.

    Reply
  4. George says

    May 16, 2020 at 5:29 pm

    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.

    Reply
  5. Tony says

    May 6, 2020 at 6:12 pm

    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.

    Reply
  6. Max says

    May 5, 2020 at 10:55 am

    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

    Reply
    • Steve says

      January 16, 2021 at 7:45 pm

      If you have property managers for your rental properties (the smartest way to go and to free up your time and reduce your stress), you can live anywhere you want.

      Reply
  7. Martize Smith says

    May 4, 2020 at 11:55 am

    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.

    Reply
  8. Bankeronwheels says

    April 19, 2020 at 3:26 am

    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.

    Reply
    • Andrew Xing says

      May 1, 2020 at 9:34 pm

      I like Paul Merriman’s strategy, you should check it out if you haven’t heard about him

      Reply
  9. Tony says

    April 18, 2020 at 6:23 pm

    Sam –

    Great article! Do you still invest in a High Dividend Fund with the S&P 500 for additional passive income?

    Reply
  10. Jim lee says

    April 14, 2020 at 10:43 am

    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 !

    Reply
  11. Tony says

    April 10, 2020 at 2:54 pm

    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?

    Reply
  12. Sam says

    April 10, 2020 at 6:08 am

    PIMCO has some products with high dividend monthly income such as PHK, PDI.

    Do you think they are good investments?

    Reply
  13. Tony says

    April 8, 2020 at 6:29 pm

    Do you recommend investing in International stocks and bonds or keep it simple with just the S&P 500?

    Reply
    • Financial Samurai says

      April 8, 2020 at 7:31 pm

      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!

      Reply
  14. Tony says

    April 7, 2020 at 5:48 pm

    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?

    Reply
    • Financial Samurai says

      April 7, 2020 at 6:05 pm

      Yes, an ETF like SPY, or a higher yielding ETF like DVY. There are many index ETFs.

      Reply
  15. Emily says

    March 30, 2020 at 1:52 pm

    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.

    Reply
  16. Anthony J. Buss says

    March 7, 2020 at 1:56 pm

    Sam –

    How important as part of the bond fund allocation are inflation bonds? Do you recommend these bonds?

    Reply
  17. Anthony says

    March 7, 2020 at 1:53 pm

    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?

    Reply
    • Financial Samurai says

      March 7, 2020 at 2:57 pm

      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.

      Reply
  18. The Aiki Trader says

    February 19, 2020 at 7:51 am

    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.

    Reply
    • Ryan says

      February 21, 2020 at 10:06 am

      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.

      Reply
  19. Jay says

    February 17, 2020 at 5:54 am

    How about Import/Export. I’ve been involved part-time for 5 years and would consider it a great return on investment.

    Reply
    • Financial Samurai says

      February 17, 2020 at 6:51 am

      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.

      Reply
      • Kent says

        February 17, 2020 at 10:45 am

        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

        Reply
        • Financial Samurai says

          February 19, 2020 at 7:10 am

          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.

          Reply
          • Chris says

            February 19, 2020 at 11:18 am

            Speaking of 2019 returns – I haven’t seen your year end update on your portfolio post – did I miss it?

            Reply
            • Financial Samurai says

              February 19, 2020 at 11:24 am

              Not sure. I did do a year in review post. https://www.financialsamurai.com/financial-samurai-2019-year-in-review/

              Reply
          • D says

            May 30, 2020 at 5:43 am

            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.

            Reply
  20. Jared says

    February 7, 2020 at 5:19 pm

    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.

    Reply
  21. Tori says

    February 4, 2020 at 11:56 pm

    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.

    Reply
  22. George says

    February 1, 2020 at 12:07 pm

    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.

    Reply
  23. Matt says

    January 31, 2020 at 4:31 pm

    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.

    Reply
  24. Mike says

    January 8, 2020 at 1:27 pm

    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!

    Reply
  25. JC Keen says

    January 3, 2020 at 10:23 am

    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.

    Reply
  26. Ron says

    November 12, 2019 at 10:16 am

    Samurai,
    Have you investigated alternative passive income investments:
    Life Settlements and viaticals
    Private loans to businesses
    Legal settlements

    Reply
  27. A Millionaire Next Door says

    November 12, 2019 at 8:22 am

    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.

    Reply
  28. Jason Luongo says

    November 9, 2019 at 5:52 pm

    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.

    Reply
  29. David says

    November 6, 2019 at 11:37 pm

    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?

    Reply
    • Jeff says

      January 16, 2020 at 11:19 pm

      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.

      Reply
      • Tom says

        February 20, 2020 at 6:30 pm

        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.

        Reply
  30. Barry says

    October 24, 2019 at 2:15 pm

    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

    Reply
    • Financial Samurai says

      October 24, 2019 at 2:25 pm

      Sure, check out my Real Estate Crowdfunding Resource Center than answers all your questions. Thanks

      Reply
      • Barry says

        October 24, 2019 at 8:12 pm

        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.

        Reply
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