If you’re looking to achieve financial freedom before a traditional retirement age (60+), you must build passive income. This post will highlight the best passive income investments in our current economic environment.
Passive income is the holy grail of personal finance. If you have enough passive income to cover your desired lifestyle, then you are free at last! You can say and do whatever you want. Too many people fail to live their truth due to a lack of passive income.
However, the only way to generate useable passive income is by building a taxable investment portfolio, which includes investing in real estate, alternative investments, and more.
Maxing out your 401(k), IRA, and Roth IRA are great moves. Unfortunately, they can’t generate passive income to live on until after you turn 59.5, in most cases. When it comes to achieving financial freedom, the hope is that we achieve it as soon as possible given our time is limited.
Why I Focused On Building Passive Income
After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at our company’s free cafeteria, I decided I had enough. Working in investment banking was wearing me out. I needed to generate more passive income to break free.
There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. Thus, I started focusing on generating passive income in 1999.
However, it wasn’t until the 2008-2009 financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I’m sure many people are feeling the same way about their occupations during the global pandemic as well.
It wasn’t until 2012 when I generated enough passive income (~$80,000) to break free from work. And it wasn’t until 2017 when I was able to generate enough passive income to take care of a family ($200,000).
Today, I estimate my wife and I will generate roughly $380,000 in passive income. We’ve discussed how to get started building passive income for financial freedom before. Now I’d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.
I’m updating my passive income rankings for 2023 given so much has changed since my original passive income rankings came out in 2015. A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.
The best passive income rankings are born from my own real-life experiences. I’ve been working on building passive income since I got my first full-time job in 1999.
Best Passive Income Investments Starts With Saving
By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!
Sounds nice right? If only there was a formula or a chart like the 401k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom.
Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.
If you can max out your 401k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.
It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can’t touch your 401(k) and IRA before the age of 59.5 without a 10% penalty.
The pandemic has shown us that if we WANT to save more, we can. Before the pandemic began, the U.S. personal saving rate hovered around 5% – 7%. Now it looks like the average saving rate may consistently be above 10%.
Let’s take a look at the best passive income investments for 2023 and beyond.
Ranking The Best Passive Income Investments
Below are the eight best passive income investments to consider. Each passive income stream is ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criterion has a score between 1-10. The higher the score, the better.
- A Risk score of 10 means no risk. A Risk Score of 1 means there is extreme risk.
- A Return score of 1 means the returns are horrible compared to the risk-free rate. A Return Score of 10 means you have the highest potential of getting the highest return relative to all other investments.
- A Feasibility score of 10 means everybody can do it. A Feasibility score of 1 means that there are high requirements to be able to invest in such an asset.
- A Liquidity score of 1 means the investment is very difficult to withdraw your money or sell without a penalty or a long period of time. A Liquidity score of 10 means you can access your funds instantly without penalty.
- An Activity score of 10 means you can kick back and do nothing to earn income. An Activity score of 1 means you’ve got to manage your investment all day long like working a day job.
- A Tax score of 1 means the investment is taxed at the highest possible rate and there’s nothing you can do about it. A Tax score of 10 means the investment is generating the lowest tax liability possible or you can do things to lower the tax liability.
To make the ranking as realistic as possible, every score is relative to each other. Further, the return criteria are based on trying to generate $10,000 a year in passive income.
Best Passive Income Investment Chart
Let’s look at my overall Best Passive Income Investments ranking chart. It has recently been updated to account for the ever-changing economic environment. Interest rates will likely stay low for a while, which makes generating meaningful passive income harder.
Compared to the previous best passive income investments chart, Fixed Income / Bonds moved down from 3rd best to 5th best. While Physical Real Estate moved up from 5th best to 3rd best partly due to higher net rental yields and lower prices. Inflation is elevated in 2023, but is finally coming down.
Dividend (stock) investing is still the ranked the best passive income investment. However, it may not be the best for you given its higher volatility and lower relative yields.
Private real estate funds, on the other hand, is much less volatile and provides even higher yields. During bear markets, private real estate funds like those from Fundrise tend to outperform.
Best Passive Investment Rank #8: Hard Money Lending / Peer-to-Peer Lending (P2P)
Lending money directly to friends, family, and strangers for passive is tough to do. friendships and relationships are often ruined because of money. Therefore, I don’t recommend doing it unless the person you care about is desperate. In such a situation, it would be best to provide an interest-free loan or a gift.
To make lending money less personal, you could got the P2P lending route. P2P lending started in San Francisco with Lending Club and Prosper in mid-2000. The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions.
The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There’s something that just doesn’t sit right when people break their contract obligations.
Over time, the P2P industry has seen its returns shrink due to higher competition and more regulation. As a result, I believe making money through P2P investing is one of the worst ways to generate passive income today.
Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity: 7, Taxes: 5. Total Score: 30
Best Passive Investment Rank #7: Private Equity Or Debt Investing
Private equity investing can be a tremendous source of capital appreciation with the right investments. If you find the next Google, the returns will blow every single other passive income investment out of the water. But of course, finding the next Google is a tough task since most private companies fail. Further, the best investment opportunities always go to the most connected investors.
The most liquid types of private equity investments are those investing in equity or credit hedge funds, real estate funds, and private company funds. Private debt investments include venture capital and real estate funds as well. There are usually 3-10-year lockup periods, so the Liquidity score is low. These funds should at least provide for some semi-regular passive income distributions.
The least liquid type of private investment is when you invest directly into a private company. You could be locked up forever and receive zero dividends or distributions.
Access to private investments are usually restricted to accredited investors ($250K income per individual or $1 million net worth excluding primary residence), which is why the Feasibility Score is only a 2.
But the Activity Score is a 10, because you can’t do anything even if you wanted to. You’re investing for the long term without the daily noise, which is why I enjoy investing in private funds, even though fees are higher. The Risk and Return score greatly depends on your investing acumen and access.
Gaining $10,000 a year in private equity investing is difficult to quantify unless you are investing in a real estate or fixed income fund. Such funds generally target 8-15% annual returns, which equates to a need for $83,000 – $125,000 in capital.
Risk: 6, Return: 8, Feasibility: 3, Liquidity: 3, Activity: 10, Taxes: 6. Total Score: 36
Best Passive Investment Rank #6: Certificate of Deposit (CD) / Money Market
Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, CD and money market accounts are FDIC insured for up to $250,000 per individual and $500,000 per joint account.
Now you can typically only get an online money market account paying ~3.2% (as of 1H 2023) because the Federal Reserve has hiked the Fed Funds rate aggressively. As of January 2023, another great option to take advantage of is CIT Bank’s Savings Connect account offering 4.05% APY. CD interest rates are also way up.
It still takes a tremendous amount of capital to generate any meaningful amount of passive income with savings now. To generate $10,000 a year in passive income at 3.2% requires $312,500 in capital. At least you know your money is safe, which is great during bear markets.
Relatively low interest rates are why it’s prudent to lower your safe withdrawal rate in retirement and/or build a bigger net worth before you retire. It takes a tremendous amount more in capital to generate the same amount of risk-adjusted income today.
Today, you can get a 18-month CD yielding 4.6% from CIT Bank. Up to $250,000 per person is FDIC guaranteed. The rate is the best we’ve seen in years.
Risk: 10 (no risk), Return: 1 (the worst return), Feasibility: 10 (anybody can open up a savings account). Liquidity: 6 (savings are easily accessible, but not CDs without a penalty). Activity: 10 (you don’t have to do anything to earn passive income. Taxes: 5 (interest income is taxed as normal income). Total Score: 42
Best Passive Investment Rank #5: Fixed Income (Bonds)
Bond yields are finally attractive again! After 35+ years of inflation and interest rates going down, bonds had one of the worst years in history in 2022. With inflation surging higher bond funds have collapsed.
The 10-year yield was at only 0.51% in August 2020. But now, the 10-year bond yield is at ~3.8%. I would take advantage of this temporary spike in bond yields and buy Treasury bonds with 3-month, 6-month, 9-month, and 1-year durations. If and when inflation roles over, you’ll be glad you own Treasury bonds at 4.2% – 4.75% rates.
Long term, I believe interest rates will stay low for a long time. Just look at Japanese interest rates, which are negative (inflation is higher than the nominal interest rate).
Bonds usually provide a good defensive allocation to an investment portfolio, especially during times of uncertainty. If you hold a government bond until maturity, you will get all your coupon payments and principal back.
But just like stocks, there are plenty of different types of bond investments to choose from. Further, the aggregate bond market was down about 14% in 2022, the worst year ever. Hence, even bonds are not always safe havens.
Anybody can buy a bond ETF such as IEF (7-10 Year Treasury), MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total Return Fund). You can also buy individual corporate or municipal bonds. Just know that with bond funds, there is no maturity date. Hence, you will experience higher principal risk if you need to sell.
Municipal bonds are especially enticing for higher-income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.
Main Concern With Bonds
The main concern for bond funds is that their values go down when the Federal Reserve hikes interest rates. That said, so long as you hold individual bonds to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA.
Bonds are usually investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.
Risk: 6, Return: 2, Feasibility: 10, Liquidity: 7. Activity: 10. Taxes: 8. Total Score: 43
Best Passive Income Rank #4: Creating Your Own Products
If you’re a creative person, you might be able to produce a product that’s able to generate a steady flow of passive income for years to come. At the extreme, Michael Jackson makes more dead than alive. This is due to the royalties his estate makes from all the songs he produced in his career. Since Michael’s death, his estate has made over $2.5 billion according to Forbes.
Of course, it’s unlikely any one of us will replicate the genius of Michael Jackson. But you could produce your own eBook, traditional book, e-course, award-winning photo, or song to create your own slice of passive income.
Example Of A Product
In 2012, I wrote a 120-page eBook about severance package negotiations. Today, the book is in its 5th edition for 2023 and is 200-pages long. It regularly sells about ~50 copies a month at $87 – $97 each without much ongoing maintenance.
Another way to think about how profitable creating a product can be is to look at the amount of capital it would take to generate the same about of earnings. For example, to replicate the ~$40,000 a year in passive income I can get from the book, I would need to invest $1,000,000 in an asset that generates a 4% yield. To earn $10,000 a year in passive income would therefore need roughly $250,000 in capital.
Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.
Another Example: Royalty Payments
On July 19, 2022, I published an instant Wall Street Journal bestseller, Buy This, Not That: Spend Your Way To Wealth And Freedom. The book took two years to write and has been reviewed and revised 15 times by three professional editors. I figured why not write a great personal finance book during the pandemic.
Once the book sells enough copies to cover my book advance, I will make a 13% royalty based off each hardcover sale. I believe the book will provide at least 100X more value than the cost of the book. You can pick up a copy on Amazon, where it currently has the best sale.
Leverage the internet to create, connect, and sell. The startup costs are low and it’s easier than ever to launch your own site. The only main risks are lost time and a wounded ego.
Here’s my step-by-step guide on how to start your own profitable site in under 30 minutes. You want to build an online business that can’t get shut down.
Below is a real income statement of a personal finance blogger who started his website on the side while working.
If you are a constant daydreamer, creating your own product is one of the best ways to go. The margins can be extremely high once your product is produced. The only thing you need to do is regularly update the product over time. If you have a great product, the upside is enormous.
Risk: 8, Return: 8, Feasibility: 8, Liquidity: 6, Activity: 7, Taxes: 7. Total Score: 44
Best Passive Investment Rank #3: Physical Real Estate
Real estate is my favorite asset class to build wealth for the average person because it’s easy to understand, provides shelter, is a tangible asset, doesn’t lose instant value like stocks overnight, and generates income. When I was in my 20s and 30s, I thought owning rental properties was the best passive income investment.
The only bad thing about owning physical real estate is that it ranks poorly on the Activity variable due to tenants and maintenance issues. You can get lucky with great tenants who are self-sufficient and never bother you. Or you can be stuck with tenants who never pay on time and throw house-damaging parties.
Maintenance issues can be an ongoing headache without proper preventative maintenance. For example, your roof could leak during the next Bomb Cyclone. Or your water heater could burst and flood your basement. Both have happened to me before!
Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market. Only after buying two or more properties are you actually long real estate. This is why everybody should own their primary residence as soon as they know they want to stay put for 5-10 years. Inflation is too powerful a force to combat.
In order to generate $10,000 in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50,000 property with an unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental yield, or a more realistic $200,000 property with a 5% net rental yield.
Generating High Rental Income Is Tough On The Coasts
In expensive cities like San Francisco and New York City, net rental yields (cap rates) can fall as low as 2.5%. This is a sign that there is a lot of liquidity buying property mainly for appreciation. Income generation is second. This is a riskier proposition than buying property based on rental income.
In inexpensive cities, such as those in the Midwest and South, net rental yields can easily be in the range of 7%+, although appreciation may be slower.
I’m bullish on the heartland of America real estate and have been actively buying multifamily real estate there through real estate crowdfunding and specialty REITs, which we will discuss more below. Owning rental property in an elevated inflation environment is an optimal choice. Renting is not.
Real Estate Has Great Tax Benefits
The tax benefits of owning physical real estate are very attractive. The first $250,000 in gains is tax-free per individual. If you’re married and own the property together, then you can receive $500,000 in tax-free gains upon sale.
Then there’s the ability to exchange a property you own for another property via a 1031 Exchange so you don’t have to pay any capital gains taxes.
If you own rental property, you can take non-cash amortization expenses to reduce any rental income taxes. Owning property over the long term is one of the most proven ways to build wealth and generate passive income for the average American.
The value of rental income goes up when interest rates fade. Therefore, I think buying rental properties over the next 12 months is good as interest rates and property prices decline.
Risk: 8, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6, Taxes: 10. Total Score: 45
Best Passive Investment Rank #2: Real Estate Crowdfunding, REITs, Real Estate ETFs
Owning physical real estate has been my key source for achieving financial freedom. My rental properties generate about $120,000 after expenses a year, or roughly a third of my overall passive income streams. However, now that I’m older and have two young children, I really want to minimize the time I deal with maintenance issues and tenants.
Therefore, I’ve been investing more of my capital in real estate crowdfunding, REITs, and real estate ETFs. Real estate crowdfunding enables individuals to buy a percentage of a commercial real estate project that was once only available to ultra-high net worth individuals or institutional investors.
Owning individual physical real estate is great, but it’s like going all-in on one asset in a particular location with leverage. If the market goes down, your concentrated investment could lose big time if you are forced to sell. Many did during the last financial crisis.
My favorite real estate investing platform is Fundrise. Fundrise manages over $3.2 billion in assets and has over 387,000 clients. Fundrise mainly invests in single-family and multi-family investment properties in the Sunbelt, where valuations are lower and net rental yields are higher.
Work from home and migration to lower-cost areas of the country is here to stay. As a result, I believe Fundrise is investing in the real estate sweet spot for the next several decades.
Unlike other passive investments on the list, with real estate crowdfunding you at least have a physical asset as collateral. Both platforms are free to sign up and explore.
100% Passive Real Estate Income Is So Nice
For those of you who dislike dealing with tenants and maintenance issues, investing in real estate crowdfunding is wonderful.
In mid-2017, I sold my San Francisco rental property for 30X annual gross rent. I reinvested $500,000 of the proceeds in a real estate crowdfunding portfolio. The goal was to take advantage of lower valuations across the country with much higher net rental yields. Not having to deal with maintenance issues and tenant problems has been wonderful.
Coastal city real estate has become too expensive. I expect people and capital to naturally flow towards lower-cost areas of the country, especially post-pandemic. The future of work is remote. Take advantage of a multi-decade demographic shift inland.
Further, the performance of Fundrise’s eREITs has been relatively steady during stock market downturns. Therefore, if there is another crash, Fundrise eREITs should outperform. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income.
Below are the latest returns from Fundrise compared to public REITs and the S&P 500. Notice the significant outperformance in 2018 and 2022, when bear markets occur. I enjoy investing in private real estate given there is less volatility and potentially outperformance during tough times.
To be able to invest in real estate, but 100% passively is a great combination. You can invest in publicly-traded REITs as well for real estate exposure. However, as we saw in the violent March 2020 stock market downturn, REITs performed even worse.
Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity: 10, Taxes: 7. Total Score: 47
The Best Passive Investment Rank #1: Dividend Investing
The best passive income investment is dividend-paying stocks. Dividend and value stocks are making a comeback after underperforming growth stocks during the pandemic. After a bear market in stocks in 2022, dividend stocks are offering better value and higher yields.
The “Dividend Aristocrats” are a list of blue-chip companies in the S&P 500 that have demonstrated a consistent increase in dividend payouts over the years. Names such as McDonald’s, P&G, Sherwin-Williams, Caterpillar, Chevron, Coca-Cola, and Sysco Corpare considered some of the best blue-chip dividend stocks. But there are some dogs like AT&T.
Let’s say a company earns $1 a share and pays out 75 cents in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the next year the company earns $2 a share and pays out $1 in the form of dividends. Although the dividend payout ratio declines to 50%, due to the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.
Dividend stocks tend to be more mature companies that are past their high growth stage. As a result, they are relatively less volatile from a stock context. Utilities, telecoms, and financial sectors tend to make up the majority of dividend-paying companies. In 2022, the S&P 500 dividend yield is about 1.8%.
Tech, Internet, and biotech, on the other hand, tend not to pay any dividends. They are growth stocks that reinvest most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.
Pay Attention To Dividend Yields
To achieve $10,000 in annual passive income with a ~1.8% S&P 500 dividend yield would require $555,000. Instead, you could invest only $154,000 into AT&T stock given its 8% estimated dividend yield. The problem is, AT&T stock could decline much greater in value.
It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.
One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. Alternatively, you can DIY and use Personal Capital’s free financial tools to manage your wealth. The key is to invest consistently over time.
In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid.
However, given dividend rates are low compared to real estate and volatility is high in stocks after a 12+-year bull market, the Return score is lower than in the past. You need a lot more capital to generate passive income with dividend-paying stocks and index funds.
Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48
Best Passive Income Investments Review
Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:
- Dividend Stocks (100% passive but need a lot more capital)
- Real Estate Crowdfunding, REITs, and Real Estate ETFs (100% passive, higher yields, but less liquidity)
- Creating Your Own Products (huge margins, low startup costs, takes a while to get going)
- Owning Rental Properties (tangible asset that’s more stable, but not as passive)
If you can stomach more volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding, rental properties, and fixed income instead.
There was a time when I loved owning physical real estate the best. It was my favorite way to generate a steady stream of rental income. However, once I became a dad in 2017, I no longer had as much time or energy to manage properties.
Real estate crowdfunding through platforms like Fundrise and CrowdStreet are good solutions for my real estate investment capital. 100% passive income is wonderful. I really like the combination of owning a hard asset that generates income. It’s a more stable way to grow wealth.
For those who are the creative types, starting your own website like this one and creating products online feels extremely rewarding. Some say making $1,000 on your own is like making $5,000 or $10,000 at a job. It just takes a while to get going.
However, blogging would score a 1 in the Activity Score since these posts don’t write themselves. Instead, you really want to create products like a book or a course to sell passively.
Best Passive Income Investments Table
Once again, here are the best passive income investments. All eight passive income investments are appropriate ways for generating income to fund your lifestyle. The right ones depend on your personal preference, understanding of the investments, creativity, and interests.
Build More Passive Income Today
Enthusiasm for work is strongest when you are young and have very little money. After four years of high school, followed by another four years of college, work sounds like an exciting adventure! But after a while, your job can begin to beat you down.
Perhaps a coworker purposefully tries to make your life miserable because they resent your success. Maybe you get passed over for a promotion and a raise because you weren’t vocal enough about your abilities. Maybe you mistakenly thought you worked in a meritocracy. Whatever the case may be, you will eventually tire.
This is why it is important to take action while you still have the energy. With interest rates at rock bottom levels, building passive income will take a lot of effort and patience. Start now!
My Current Passive Income Investments
Below are my latest passive income streams that I’ve been building since 1999. Our passive income enables both my wife and I to be stay-at-home parents to two toung children.
Our goal is to consistently generate over $300,000 in passive income to raise a family in expensive San Francisco or Honolulu through the year 2040. The irony of a bear market is that all of us can actually more easily generate even more passive income!
As you can see from our passive income chart, roughly half of our passive income comes from real estate. Real estate is my favorite asset class to build wealth because it is relatively stable, generates income, and provides utility.
My favorite real estate investing platform is Fundrise, with over $3.2 billion in assets under management and over 387,000 active investors. Fundrise predominantly invests in single-family and multi-family rental properties across the Sunbelt. The Sunbelt has lower valuations, higher cap rates, and strong demographic trends. I like owning a fund where I don’t have to focus on each investment.
With economies opening up, I’m also actively looking for hospitality real estate deals on CrowdStreet. CrowdStreet focuses on real estate opportunities in 18-hour cities where valuations are lower and cap rates are higher. In addition, CrowdStreet has launched a build-to-rent fund to take advantage of the strong rental market.
Saving early and often is no sacrifice at all. Instead, the biggest sacrifice is living a life on someone else’s terms due to a lack of funds. Keep building the best passive income investments so you can one day be free.
Remember, if the amount of money you’re saving and investing doesn’t hurt, you’re not saving and investing enough. At the end of the day, nobody cares more about your money than you.
Now that you know the best passive income investments, it’s time to get cracking! Your future self will thank you.
More Action Items
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The Best Passive Income Investments is a FinancialSamurai.com original post. I have invested in all products mentioned for years.
Wow you make $50k a year from your book sales? I’ve considered self publish a personal finance book (I am a writer for a living after all) but my blog doesn’t get the type of traffic yours does nor do I reach the same affluent audience. But — wow, if I could make 50k a year from an eBook I’d be in heaven! You are my idol!
Hah, well, I don’t think it’s very impressive since I first published it in 2012 and it has gone through four revisions to be ready for 2021. What would be more impressive is if the sales growth grew with this site’s traffic growth since 2012. If so, the book would be generating more like $200,000+.
But it’s all good. What I really should do is write more books, but it’s hard work and I’m trying to enjoy the moment do what I want to do.
This article is getting me closer to trying things because I definitely want to build passive income and I want to start now, I just don’t know how to do or get started doing more than half of these things, and the terminology throws me in for a loop. I could definitely check out Fundrise, I don’t qualify for anything like CrowdStreet. Are there any other resources I should look into to actually physically put my money in these places related to the article?
Hi Chris,
Not sure exactly what you mean when you write “Are there any other resources I should look into to actually physically put my money in these places related to the article?”
But you can invest in rental properties, but that requires probably leverage and more active management. You can also invest in a publicly-traded REIT ETF like VNQ.
I like Fundrise because they have funds that are diversified. And their track record is pretty good and the returns are not very volatile, unlike the stock market. You can read my Real Estate Crowdfunding Learning Center and all the linked pages to learn more.
Yes actually I was interested in real estate crowdfunding, and I am currently learning more. I will definitely check this out.
To put my question in context I am always hesitant and reserved in investing because I know I could lose out. I always had this feeling that investing is something that can be very complicated as well and overwhelming. So when it comes to finances and growing them I always have this feeling of uncertainty. If I were to truly start investing my money like I have not been over the years, I always want to be sure and confident in what I am doing. Looking up other resources that can guide me (like baby steps for a non-finance person) how I can start putting my money in places that will allow it to passively grow is what I was trying to ask for in terms of recommendations.
Hi Sam,
I respect your story and what you’ve done with Financial Samurai. Having said that, I am curious why you are a proponent of allocating money into crowdfunding sites such as Fundrise? If I want the real estate allocation, I’d rather invest in REITs; there are some mortgage REIT’s with a dividend yield equal to if not greater than whatever the crowdfunding sites claim for cash on cash. Even if the yield is a bit less, at least I’d have liquidity and know that I’m invested with the likes of a Blackstone, Starwood, or another institutional investor/operator. Anyway, to each their own — cheers.
Sure. Check this article out: https://www.financialsamurai.com/how-does-real-estate-get-impacted-by-a-decline-in-stock-prices/
During the March 2020 correction, many of my REITs corrected even greater than stocks. So one of the reasons why I invest in private real estate is to reduce volatility and diversify away from my public REITs and real estate ETF holdings. I really dislike volatility.
I like the diversification and focus on single family rental properties as well. In a recent quarterly report, some of the funds grew massively. As someone with over 10-figures of real estate exposure in SF and Tahoe, I am building up my heartland real estate position.
Please share the real estate you own.
Thanks!
Great article, I remember reading the original version a few years back and wanted to circle back and say thank you. It helped push me to continue to build passive income streams. I now have 3 rental properties a good investment portfolio and have started a blog as a way to create my own product.
The one I really like is rental properties as it is a great tangible asset you can drive by and see. Of course, there are concerns with tenants but what has worked well for me is I call the prospective tenant’s second landlord as that person has no incentive to lie to either keep the tenant or get rid of them. They are able to tell the truth about the tenant. It has worked well for my wife and I for our three rental properties over the years.
Great work both inspiring and helping many others, Sam!
How do you contact their past landlords? Because I feel like if you ask for the landlords contact information from the prospective tenants they wouldn’t give it or they’d fake it.
Great article! Regarding the sale of your rental, Did you 1031 the proceeds into the crowdfunding platform. Also if you don’t mind sharing, what has been your returns?
Thanks again,
I looked for a 1031 exchange property, but couldn’t find one. Therefore, I decided to reinvest my sale proceeds into stocks, municipal bonds, and real estate crowdfunding in roughly 33/33/33 increments. The real estate crowdfunding returns have been about 12% a year so far.
Related: Reinvestment Ideas After Selling Your House
This is the first time I’ve read one of your posts, but it won’t be my last. Great article! I was especially interested in your “create your own product” information, since that’s what I’ve been doing since retiring from teaching in 2018. You could say I was looking for validation, which I definitely found. The only thing I regret about starting my own passive income business is that I didn’t begin sooner.
Welcome to Financial Samurai! Yes, I actually wish I started Financial Samurai sooner than 2009 as well b/c I had the idea back in 2005-2006. But I had just finished going through 3 years of business school part-time while working 60 hours a week and was exhausted.
Better late than never! GL!
Great discussion here, Sam!
In my opinion, physical rental properties are undersold here vs. other types of passive income. My strategy has been to invest in high cash flow markets (Memphis, primarily), buy & hold rent ready properties, and use a professional property manager. It’s still not as passive as equities or REITs, but it’s still very passive after I acquire the properties.
And the returns are MUCH higher. It is remarkably easy to achieve 15%+ cash on cash returns, which doesn’t even count mortgage paydown or appreciation. I’ve done the math a hundred ways, and it just seems that there is NO faster way to build wealth or achieve FI than with rental properties.
It seems to me that the Walter Payton of
Passive income is investing in Renaissance Tech’s Medallion Fund. 66% annualized returns from 1988-2018 borders on science fiction.
It’s closed to only employees of Renaissance tech. But why hasn’t another company or group of mathematicians been able to replicate to some degree Medallion’s success?
At 10 bill in assets the fund is poised to disrupt everything. The company has apprx 300 employees.
I believe everyone is in a ROTH IRA in the company.
So, if it has an annual expense of 26% your left with 40% annual Return. In 10 years they will have 280 bill AUM for 300 employees. In 20 years it would have 8 trillion AUM.
This is fascinating yet scary. How does Medallion do it?
Sam –
What do you think about US REIT and International REIT funds?
I own several publicly-traded REITs. They are fine, but as we discovered during the March 2020 meltdown, they are often MORE volatile than stocks. See: How Does Real Estate Perform During A Stock Market Selloff
Therefore, I like a combination of publicly traded REITs and private eREITs. I personally hate volatility, which is why my net worth is so diversified and conservative. Besides, my wife and I don’t have day jobs and have accumulated enough capital to live comfortably. I’m not interested in hitting home runs anymore.
Sam, does the return on your rental properties include principal paydown?
It doesn’t. But paying down principal certainly builds wealth.
Excellent updates Sam! What do you think of Vanguard US High Dividend fund and also Vanguard International High Dividend fund as possible additions to a passive income stream?
Those are definitely some of the top choices for dividend investing. The question is whether now is the right time to add positions in equities.
For me, the answer is no. Not beyond my normal SEP IRA and Solo 401k maximum. I’m building cash and looking for real estate deals.
Follow-on question: how long would you look before you leapt into something if you had cash sitting around and wanted to avoid your cash inflating away?
PS I’m amazed by how much you make annually, passively. Awesome.
Enjoyed this post.
Back in the 80’s I started a high income JOB, rife with office politics & blatant nepotism within the ranks, so I started buying properties to get OUT!!!.
After I watched my colleagues take a beating during black Monday ’87, I have NEVER lost any sleep over the stock market, nor have I ever invested in it.
After a few year of buying ‘dumps’, busting knuckles rehabbing, then renting every room to pay down double digit interest rates I was burned out.
By chance I met a very classy real estate agent & could not believe her std of living & after a few ‘meetings’ she confided her strategy: short term financing of investment properties &/or holding high interest notes on those she decided to sell.
It changed my life & since the 90’s (I retired in ’98) it has been an exponential Rule of 72 ride.
I have taken back a few deed-in-lieu-of, but have only ever had one foreclosure & that turned around quickly for no loss & another 12% note for double my original cost.
Pat , I thought it was no longer possible to create a note with that double digit do to Dodd Frank?
Thanks Financialsamurai for enlightening me on this topic, would look forward in these type of posts more often.
I and my brother found the following in the comment very useful, specially during this pandemic.
hope you find it useful as we find it to be!
Great Thanks!
Thanks. Enjoyed being exposed to some new ideas, having some existing ideas confirmed, and special thanks for the inspiration to continue the push to create my own products.
Samurai are known for a focus on death. Dying well often meant everything. You could write a badass masterpiece on passing on wealth. Id love your ideas on setting up trusts. Im sure Id learn a lot. Thanks again
The trust is the least of your concerns. Educating and providing a good financial foundation to your kids (and grandkids) is everything.
My big concern is my grandkids squandering the nest egg or not having ambition.
Financial Samurai,
Have you looked into Constant? Stumbled upon it and looks promising in the P2P lending arena. All loans are backed with 150% collateral of the loan. Much less risk than Lending Club or Prosper from what I can tell.
Appreciate your feedback!
FS,
What about commodities? Where would they rank and do you own physical gold/silver or another commodity investment?
Best,
RT
Is your venture debt fund investment through a specific platform?
I have a direct investment in two venture debt funds run by a private venture debt company. One of the founders is a business school classmate from Berkeley.
Hi Sam, great post – I would love it if you could do a post on how you do your due diligence on deals on Crowdstreet.
Sure, here’s are two posts to read:
What To Look For When Investing In Real Estate Crowdfunding
Deciding Between Debt and Equity Investing In Real Estate Crowdfunding
The Risks Of Real Estate Crowdfunding To Be Aware Of
Hi. Great post as usual. Just couple of points. I managed to retire early at 43 on rental income. I write about it on my blog. There IS a bit of hassle with it and I believe index fund investing is top at least based on research.
I would not focus only on dividend investing as top passive income. It is at the discretion of the company to pay dividends and many cancel them to preserve capital as happened now due to coronavirus. In Australia and NZ many banks significantly cut dividends after increasing them for last few decades. This caught short many retirees. Also some banks stock dropped partly due to decreased dividends.
Thats my 2 cents.
Cheers
Mr Whyninetofive
Excellent read as usual. I’m currently in a position where I’m not quite able to max out my or my wife’s 401k, but we are maxing out our IRAs. Should our next goal be to max out our 401k’s? Or just get the employer match, and then invest the rest in something like Fundrise? I was under the impression one should always max out their pre-tax investments before post-tax, but perhaps I’ve misunderstood.
Thanks for your insights Sam!
Hello, I have been following Financial Samurai for a while now and find your writing very informative and helpful in formulating my own thoughts, thanks for all your insights.
I have only a simple question. For real estate, is your passive income as stated net of all maintenance, mortgage and holding costs (but before tax)? I find it difficult to generate high passive income from real estate on a net basis.
Hi Lydia,
The real estate income is income after all expenses but before taxes.
One of the reasons why I diversified into the heartland of America is because the Cap Rates are so much higher than San Francisco. We’re talking 4-5X higher. Combined with the fact I can earn the income passively, it was a good solution for my real estate capital.
S
Thanks Sam. Can I ask if there are mortgages on your investment properties? For me, the largest expense is the interest payments and I find that unless I pay down the loans, it is very hard to earn decent passive income on rentals.
So I am thinking of using any spare cash I have to pay down loans, which seems a bit of a waste at times given the low interest rates. But then the stock market seems risky to me now given how fast/far it has recovered since March so I am hesitant putting my savings there.
Some do, some don’t. It takes a while to expand the cash flow. But it’ll happen over time as inflation increases rents and your mortgage stays fixed. Real estate is one of my favorite asset classes to build wealth given it is simple to understand.
That said, I’ve diversified as I’ve gotten older b/c I don’t want to manage real estate as much anymore.
Good update of a popular post. Thanks. Would love to see you take a deeper dive into the #1 rank – dividend paying stocks. I believe there are considerable differences between investing in dividend paying stocks directly vs a dividend stock etf (DVY VYM). For me, a diversified portfolio of 30 – 50 companies with “secure” dividend payout fits my risk tolerance. The key is assessing the safety/security of the dividend per investment – PNG, PG, PSA, CSCO & T for example. Their NAV usually goes up more slowly in an up market and down more slowly in a down market. Less volatile. The dividends don’t change much. I dipped my toe into Real Estate Crowdsourcing and got bit. I know you love this area, but outside of my comfort zone. I have a couple old/good CDs but nothing available now. This is a tough time and environment for retirees seeking passive income. Even your favorite – real estate – is getting sketchy in many parts of the country.
In my humble opinion wealth only papers over with racism with mostly half – hearted politeness. I am a minority and I have been both rich and poor. I have found that racism in the US changes it’s form depending upon the minority’s economic circumstances and environment. I have also found that there are wealthy and poor racists, educated and uneducated racists and democrat and republican racists. When I have been stopped (questioned ) by the police they don’t know that I have a masters degree in finance, that I have FINRA securities license designations (series 7, 63 and 79) , that I am also a licensed real estate broker or that I that I have been a volunteer for the Boys and Girls Club for over ten years they only see that I am black and what I have in terms of wealth, education or character is secondary to the image and expectations that they expressly and implicitly carry with them about what a black male 6 feet tall weighing approximately 180 pounds means to them . On a good day I live beyond that encounter but on a bad day I might not because they fear my blackness and if they have to make a split second judgment and they have all the power (in that dynamic)
I (and many people who look like me) might not get the benefit of the doubt because I am a perceived as a threat and/or they feared
for their life.
Sincerely,
A relatively well off black male sick and tired of the systemic racism, implicit bias and excuses for them. I will acknowledge that the slope for progress is positive in some areas but boy there is a lot of variance!
P.S.
I am old enough to have to attended legally segregated schools in my elementary school years in the south , then integrated middle and high schools and then college in the Northeast, guess what, there was varying degrees of racism at at every level. I have been married to the same woman for 29 years (an interracial couple) guess what racist did not like us very much back then and some don’t like it now. We had one daughter graduate from an Ivy League college and has been in Forbes magazine, guess what, she’s faced racism in school and even now as a CEO. All said money may make things more comfortably for an individual but it does not seem like it will eliminate the problem of racism or antisemitism towards a group. The Jewish story in Europe and then in America would seem to bear that out, every seems nice until the majority gets fearful over something and the old familiar antisemitic tropes come out …..again.
NM, based on what you’ve written above, it sounds to me like you have a book (or ten) to write…..and I’d read every single one :) Your stories need to be told – please consider publishing a book.
Best regards,
Kari
Not sure what this has to do with the article, or anything in the comments thread
Impressively detailed article as usual! This was a refresher for me as I read it awhile ago.
The ability to participate in real estate and achieve high returns with low risk is highly dependent on where you reside. For example, for me personally, return is a 10 with rental portfolio over 17% for 2019, and risk is a 10 as non-leveraged Class C property purchased well under market value will never be worth less than purchase price.
Real estate crowdfunding is definitely higher risk than managing our own rentals as we have no *control* with crowdfunding. (Disclosure: I have small investment in Fundrise.)
We could also argue “liquidity” is irrelevant as the intention is passive income *forever*, so no need to sell a good income generator. Rental property investors are typically in for the long haul, and may hold for life or 27.5 when depreciation benefit is gone.
So, for me, or anyone living in the midwest or South, rental property is easily #1.
– Mike
I wanted to wait till the dust settle on my job to post this.
I’m 25 and despite the stock market drops and job market will be pulling in 280k this year working in NYC. My income at 24 was 220k and at 23 was ~180k. I work at Facebook as a machine learning expert so only around 20-30hrs per week and very stable relatively.
I hate business/markets with a passion so I’m only buying index funds until I get close to my FIRE age – 35 – at which point I’ll put my new cash flows into Bonds. Online business is not an option since I can’t sell – unless it’s an algorithm – but obviously you can make infinite money if you’re smart – see Sergey Brin.
Just wanted to point out that Tech is _even better_ now than anyone can even believe. If you’re good at mathematics, it’s by far the best place you maximize the dollar value of your talents, regardless of whether you’re an employee, small business owner etc.
What would you say is your after tax, after living costs, net amount? Like how much of that $280k would you say ends up in your bank account for investments?
There are state tax calculators, based on that it’s a little over 165k post tax. I spend 60-72k per year so up to 100k invested. I also get 50% 401k match so you can tack on another 5k in free money.
Sam – great job on creating such diversify passive income streams. I’m a proponent of creating at least 3 revenue streams. It’s awesome to see that you have created more than 3 revenue streams – and passive to boot.
How sticky is your passive income stream? Any stress from COVID-19?
This pandemic does provide us with an opportunity for our revenue streams to be stress tested. If they can still continue to produce in today’s environment, they are pretty good during the next economic turmoil.
So far it’s pretty sticky. However, I suspect a couple investments in hotels in my real estate crowdfunding fund are hurting right now. I’m doing an income analysis in a new post with a potential to have a 20% decline if things get really bad.
Hey Sam, thanks for taking the time to update this post. I’ve always loved this post since you published it before, lots of great food for thought. Why haven’t you ever dabbled in commercial real estate investment? I know you do commercial crowdfunding but what’s the reason for never buying a small building to rent out to a business? Full disclosure, I’ve never owned a residential or commercial rental. That being said, I’m looking to purchase a small commercial building in the next year or so to see if I like it. Mainly I’m attracted to not having to deal with tenant repairs or anything like that. If something breaks down in a commercial property, the tenant has to handle and pay for it. Commercial properties basically seem like more work when it comes to finding tenants to rent the space but then less little headaches to deal with in terms of repairs. Plus I like that you can do legwork on commercial property to instantly increase the value. If you buy a building that is 70 percent occupied and you hustle and work hard and get it to 85 percent occupancy, then you just created additional sweat equity. I feel like it’s harder to do that with residential (unless you are a handy person and can do repairs and upgrades yourself on the property but I’m not handy at all). Anyway, thanks again for the post. I feel like you’ve been throwing down an abundance of great articles lately. Seems like you’ve upped your publishing cadence so kudos on that!
Also if anyone on here has dabbled in commercial and residential, let me know which one you prefer and why. Thanks all!
Hi Jon, let me know how your foray into investing in physical commercial real estate goes!
The main reason why I sold my main SF rental property in 2017 was to simplify life. As a father of two young kids now, I don’t have the energy or the desire to manage as many properties any longer. I want to spend as much time with my children as possible. Real estate crowdfunding has been a great solution for my real estate investment capital.
I wish you good luck and please keep us updated!
Great post Sam, I used to always come back and refer to you’re 2015 report.
At the moment I am pretty heavily into stocks and corporate bonds, but used to have holdings in crowdfunded real estate.
The crowdfunded real estate was a pretty good investment in terms of returns, but I started to have growing concerns about platform risk and eventual liquidity.
In the next few years I am going to start to diversify from the US total market and either add some international exposure, or start looking at REIT’s
P2P lending does interest me, but I am slightly concerned with platform risk over here in the UK, but will reserve my judgement and see what happens.
Keep the content up, love your stuff!
Josh
Great updates and very impressive passive income streams! Thanks for inspiring all of us with so many different ways to earn passive income.
I personally prefer investing in stocks but this post gave me some ideas on how to diversify my investments even more. I would like to invest in real estate, but I think that real estate in my country (Croatia) is overpriced at the moment. Do you think that real estate prices could decrease in the following months on a global scale?