Welcome to my annual passive income update. I don't do these updates more often because nothing changes too much on a month-to-month or quarter-to-quarter basis. Do you really want to see that I increased or decreased my passive income by $1,000 from the month before? I think not.
Here are some immediate reasons I can think of for why building passive income is a good idea:
1) You likely won't want to work forever, no matter how much of an eager beaver you now are.
2) Unfortunately bad things happen all the time e.g. layoffs, financial meltdowns, theft, etc.
3) It's nice to provide as solid a financial foundation as possible for your family and loved ones.
4) You broaden your knowledge and expertise across various topics so you can seem erudite but remain a little dumb.
5) You'll reduce financial stress and feel happier that not all your income is tied to one main source.
6) You will decrease your chances, your spouse's chances, and your children's chances of ever having to depend on the government to survive.
7) You will have more freedom to do things you truly want to do. This feeling becomes more intense as you grow older given you become more aware of the finality of life.
8) You can push yourself financially beyond what you think could ever be possible. Who doesn't love a good challenge except for the people who have everything handed to them?
This is my third annual passive income report where I have a goal of making $200,000 in relatively passive income by mid-2015 after leaving my job in early 2012. I started off with roughly $78,000 a year and I'm currently up to a projected ~$150,000 a year if all goes well after renting out my old primary residence. Life is uncertain, and I'm sure things will change.
To clarify the meaning of passive income, I do not include income from consulting, freelancing, asset sales (stocks, bonds, real estate, baseball cards etc), and business income. I've got other targets for these revenue streams that I might discuss in a future post, but probably not. The goal of passive income is to have the income largely come in without doing much work at all. But in order to not do much work for money, we've first got to work very hard for our money!
One thing to note is that I started my passive income journey before writing about Stealth Wealth. $78,000 a year is roughly the median income in SF, so it wasn't a big deal. But I promise that if I ever breach $200,000, I will go dark and never write any specific figures again. If I do, you'll know that I'm lying to blend in because that's what Stealth Wealth is all about.
THE 2014-2015 PASSIVE INCOME CHART
* I keep track of all my assets for free with Personal Capital. PC tracks my net worth and cash flow for me so I don't have to. Have you ever felt stressed having a long list of errands to do, but once you wrote them down you felt much less stressed? It's kind of the same thing when you aggregate your accounts online.
CD Interest Income Analysis
From 1999-2012 I religiously invested anywhere from 25-35% of my savings into risk-free CDs because I wanted the guaranteed 4% annual return. 4% is my baseline target for increasing overall net worth each year. The other 65-75% was invested in stocks, bonds, private businesses, and real estate.
Two, five-year CDs expired at the beginning of 2014 which left me with a choice of either: 1) reinvesting the proceeds in a 2.1% yielding 5-year CD, which is not great since the 10-year yield is over 2.5%, 2) investing the proceeds in the stock market and bond market at record highs, 3) buying real estate, 4) investing in private equity, or 5) do nothing.
I did nothing for two months once the money expired so I could slowly formulate what I felt comfortable doing. It's easy to go nuts when there's a financial windfall, even if it's your hard-saved money to begin with. In the end I decided to buy a new primary residence ~50% cheaper than my existing residence, rent out my existing residence of 10 years to capitalize on the rental income, pay down about $200,000 in another rental property mortgage at 3.375%, and invest in a venture debt fund my business school classmate started.
The mobilization of the two CDs into other investments left me with about $15,600 less in CD interest income a year for a total CD interest income of around $21,000. But that still leaves me with four additional CDs from two banks.
CD interest income equals 14% of total passive income.
Related: CD Investment Alternatives
Dividend Income Analysis
My dividend income has declined from $24,500 in 2013 to $21,360 because I have been selling my old work company stock every time a tranche hits my E*Trade account. Company stock is part of my deferred compensation that was negotiated during my severance. I've sold two-thirds of my stock with one year left of deferred stock to go. By mid-2015 I will have sold all my previous employer's stock and reinvested the proceeds elsewhere.
The after-tax portfolio line item includes my Fidelity and Citi Wealth Management account where I've got several structured notes, index funds, and growth stocks. I try and practice “tax location” where I allocate more growth oriented securities that pay little-to-no dividends in my after-tax portfolios. You should consider doing the same. If I wanted to switch the entire portfolio to dividend stocks, I could double the dividend payout. Given I just bought another property, I'm allocating 90% of my after-tax savings toward my after-tax portfolio to get the balance right again.
My pre-tax portfolio includes my SEP IRA, rollover IRA, and solo 401k. I'm slowly shifting these portfolios towards more dividend-producing, lower volatility stocks and index funds. I was spending way too much time punting around my rollover IRA with uninspiring returns. These pre-tax portfolios should be steady and cause the least amount of stress. I plan to contribute the maximum to all three portfolios to the extent I'm allowed by law.
Dividend income also consists of 14% of my entire passive income stream.
Related: Growth Stocks or Dividend Stocks?
Real Estate Analysis
The main change is buying a new property to live in and renting out my old residence of 10 years for $8,700 a month. After taxes, insurance, maintenance I clear roughly $4,700 a month or $56,400 a year. I screened eight tenant applicants in order to get the best possible choice. They come from a reputable school and have a combined annual income over 40X the monthly rent, which is one of my key requirements.
The $8,700 a month in rent is actually only a net increase of $7,700 a month because I was renting out my garden room for $1,000 a month. This is why you still see three rental income properties in the spreadsheet. From a property management point of view I'm pleased because I don't have another property to manage in a different location. I've simply gone from renting out a room for $1,000 to renting out a house for $8,700 a month.
The property that I really need to work on is my Squaw Valley, Lake Tahoe property. I switched property management companies because the new management company provided a $34,600 a year guarantee in order for me to switch. $34,600 a year is the net operating income I was receiving from the previous management company. The pitch was that they would not only guarantee I make the minimum I did for the previous 12 months, but work on upside income as well. So far, that upside hasn't materialized and I need to help them, help me because I don't really want to go back to the old management company for now. I'll write a post about my vacation property in the future, and perhaps some of you will want to rent it out throughout the year.
Rental income accounts for 59% of my total passive income. I plan to reduce this percentage down to 40% by aggressively increasing the amount of money I'm contributing to dividend stocks and a venture debt fund.
Related:
How To Properly Analyze And Value Rental Property
Increasing Passive Income Through Leverage And Arbitrage
Other Income Analysis
My book sales are slowly growing, but at a slower rate than the growth of my site. There are waves of high sales during the beginning of the year and the end of the year when people think, “This year, I will no longer be miserable!” or “I'm outta here after they pay my year end bonus!” or “Life is too short to work for a micromanaging boss that makes me miserable!” or “I don't want to miss seeing my kids grow up!” or “FML! But I've got no plan!” I've heard all the reactions, and I empathize with every last one of them.
The main way to increase book sales is to find more affiliate partners who write about career, lifestyle, entrepreneurship, and early retirement. There's only one book in America I know of that teaches employees how to negotiate a severance and engineer their layoff, and that's my book. There are plenty of books out there on how to get promoted and paid.
P2P lending has continued to be on the back burner. Fundamentally, I think P2P lending is not only a great business, but a great way to make some passive income as well. But knowing me, I will get pissed off if and when someone defaults on my loan because I'm a huge stickler for always honoring your word. Nothing makes me madder than people who say one thing and do another or welch on their promises. Honor is super important on Financial Samurai and I'm not willing to get bent out of shape for money.
Total other income accounts for roughly 13% of my total passive income. Ideally, I'd like this figure to rise to 25%.
Related: How To Engineer Your Layoff
A $50,000 GAP IS HUGE
To put $50,000 into perspective, one would need to accumulate $1,250,000 in capital and return a relatively risk free 4% to generate $50,000 a year in passive income. Therefore, it doesn't look like I'll achieve my goal by June 2015 of generating $200,000 a year in passive income. I guess I could invest all my stock portfolios into strictly 3% or higher dividend stocks to get close, but I'm not that low on the risk profile yet where I no longer want to hunt for unicorns.
One of the things I've discovered is that ANYTHING CAN HAPPEN so long as you are in the game. Perhaps over the next 12 months some CNBC producer might e-mail me out of the blue and ask me to come on air to share some talking points on how to empower employees to negotiate a severance and find a more lucrative job given the declining median house hold income. That TV segment could literally sell $50,000 worth of books in a couple weeks.
Actually, in August 2018, one of my posts on CNBC went viral and I ended up generating record revenue.
Or maybe I do find a herd of unicorn stocks that go from $100,000 to $1.25 million. All the proceeds could then be easily sunk into a portfolio of telecom and utility stocks that generate $50,000 a year in dividend income. I won't know unless I go searching.
Or maybe I just blow myself up like I sometimes do in the stock market because I think I have an edge. Maybe there's a 9.0 earthquake that demolishes all of San Francisco and all I'm left with is the land. Damn, now I'm worried. Let me go check on my property, car, life, and umbrella insurance policies!
Good and bad things happen all the time. We must do our best to analyze new and existing investments, rebalance our portfolios, and continue to aggressively save. Don't count on the Bank of Mom & Dad, an inheritance, a rich Aunt, or the government to save you.
Updated 4Q2018: I ended up selling my SF rental house for $2,740,000 and reinvesting $550,000 of the proceeds in real estate crowdfunding for a target 15% annual return. So far, so good as everything is passive and heartland real estate has more room to run than coastal city real estate.
Passive Income X Factor – Online Media Company
I started Financial Samurai in 2012 and I'm actually earning a good passive income stream online. The top 1% of all posts on Financial Samurai generates 31% of all traffic. The average age of the top 1% posts is 2.3 years old. In other words, after putting in the hours to write some very meaty content over two years ago, 10 posts consistently generate a monthly recurring income stream that's completely passive.
I never thought I'd be able to quit my job in 2012 just three years after starting Financial Samurai. But by starting one financial crisis day in 2009, Financial Samurai actually makes more than my entire passive income total that took 15 years to build. If you enjoy writing, connecting with people online, and enjoying more freedom, see how you can set up a WordPress blog in under 30 minutes like mine. It's cheap and easy to start!
Photo: The day I realized an online business could really work. Santorini, Greece, 2015.
Well. In that case, you have earned more than one can imagine. To generate $7000 net rental income per month requires over $1.5-2M in investments, paid for. To have paid for such, requires a saving rate of $200K over 10-12 years. To be able to save $200K per year requires an income of over $300K per year, after taxes, even if saved 100%. And this is ONLY for rental income part, let aside CDs etc. I dont get it.
Yes, simple math really, and a lot of hard work, sacrifice, Savings, risk taking, and LUCK of course.
People should never confuse revenue with operating profits or cash flow.
What about you? How old are you and where are you in your financial journey?
Check out this post:
https://www.financialsamurai.com/ranking-the-best-passive-income-investments/
Looking at your CD section, to obtain $21,000 a year in income you must have at least $2.0MM invested correct? I think you could get much better returns on Investment Grade Corporate Bonds. Not Bond Funds, but individual bonds. My portfolio gives me 6% average, the funds are not guaranteed like the CD money but are pretty safe. Your $21K could turn into $120K a year.
A Balance Sheet is incomplete without liabilities. This is passive income, what is the passive liability? Please do not tell me that you get over $7000 in rental income pm, with all of them paid for. Perhaps, you should write an article on “ranking passive liabilities”.
Thanks.
Good thing I’ve made it easy for you and other readers to understand that the income figures are net of all expenses.
[…] In fact, by the end of the conversation, he convinced me that I would be crazy to take the role. The most they could pay would be maybe $135,000 along with 0.5% equity. And the more I thought about it, the more I agreed with the CEO! Why would I dedicate ~50 hours of my life working for a company that paid me less than my passive income stream alone? […]
[…] paid out in 2012 was no more, and I didn’t have a job to pay my bills. All I had was my passive income and a tiny salary I drew from my online media company. I had no desire to pay the employee and […]
Hi Sam,
I enjoy visiting your website on a regular basis. Your information is unique and well written. I was just reading your post above and was wondering why you haven’t included your affiliate marketing in your passive income chart.
Thanks,
David
Good question. I’m beginning to think I should.
Two reasons:
1) I don’t believe it’s appropriate to share what one makes on activr work
2) Online income isn’t passive since I’ve got to write all the time, although old articles provide recurring traffic and revenue
Here’s my personal take: https://www.financialsamurai.com/never-tell-anyone-how-much-money-you-make/
I really enjoy your blog and would love to generate passive income for myself.
I’m mid 40’s living in my townhome that’s paid off and will buy a single family home with my significant other next year.
I want to rent out my townhome but I’m not a Mr. fix-it landlord type. So I would have to hire a property manager to find tenants and handle their repair complaints. I can handle paying association and property taxes myself.
Is it worth it? Do you use property managers for this purpose? I wonder what’s the best way to handle this?
I’d give it a go and rent it out. I do things myself and leverage the Internet to find good handymen. Everything is possible. It just takes money.
[…] and the monthly cash flow increase is $516 or $6,192 a year. That’s a good move towards my unwavering quest to generate $200,000 a year in passive […]
Wow! How are you earning so much off CD’s. I have a 12-month CD of $5,000 earning .40% so it’s less than $2 per month of income. Am I doing something wrong?
Looks like your doing awesome! So many blogs I read online ignore real estate as a form of diversifying and increasing your passive income streams. My father actually bought a few condo’s in Boulder, CO while I was in school and they now bring in 10% of property value each year. Not a crazy return or anything, but the consistency is nice when other income streams are down. Great to see you’ve been successful with it! Gives me the faith I need to pull the trigger on buying my first property. Best of luck with everything!
Just comparing blogging to poker for a second, you could “stake” another blogger that has some reputation/decent site etc with profit sharing in mind. It works in poker, but not sure how it would work in the bloggersphere of personal finance.
Good idea! I imagine it will get hairy sometime in the future though. Also, a lot of blogs don’t make it b/c they simply give up within a year.
It’s hard to keep a steady schedule of post publication unless you absolutely love to write.
Agreed it is tough, I think I”m throwing a party when I hit 1 year, probably a brewery tour, seems the most appropriate for me.
First off, your passive income portfolio is very impressive! No one can argue that this money from things as simple as CD’s, stocks, etc is remarkable.
However I’m disappointed that you don’t discuss more of your online business ventures (such as the affiliate marketing, etc) as part of this overall topic. Granted – they many not be completely passive, but I think it would still be of incredible interest to your readers. I know I’d like to know more.
If I ever turn into a blogger who blogs about blogging, I might include my online income. But for now, I won’t and most people here aren’t interested.
The blogging audience is less than 5% of my readership. For blogging related stuff Yakezie.com is where it’s at.
Congrats on the passive income its a great accomplishment Samurai. As the rents increase and the CD income will eventually go up as well, you can inch up to the 200K level soon enough.
Thanks, although my CD income is going down as rates have declined, hence the reinvestment in a new, cheaper home.
FS, nice $56K/yr bite towards the $200K/yr goal! Realizing this is strictly a snapshot of ‘passive income’, another metric that would be interesting for analysis is your cashflow. You have acquired another primary residence, and the Property Tax, mortgage interest, and other expenses must be significant. Would you say that the $56K/yr income covers the outflow for the new property?
If it comes anywhere close, the years will fly by and eventually that acquisition will be free-and-clear (or leveraged for further investments, as you wish). You are working your plan, and your plan is really happening! Congrats.
Cash flow is good. It’s really just accounting really whether I “live for free” now in my new home or whether I have $54k more in cash flow from renting out my old home.
Either way, the increase in cash flow has provided more financial security even though I’ve taken on more debt. I truly can’t believe I was able to find a panoramic ocean view home for this price.
The main optimization really is just lifestyle.
It looks like things are coming along nicely for you. How did you determine your goal for passive income? How does it compare to your goals for other income streams?
quick question, do you reinvest your passive income and live from other active income or do you reinvest all the passive income? I’m presently in the process of figuring out my own financial freedom goals, I’m thirty and plan to retire in the next 12 years. I already have a pretty good passive income stream from bonds and treasury bills – btw if possible, you should look into investing outside the US, good rates on government bond to be had elsewhere. I am wondering if I should reinvestment all passive income and live off income i plan to receive from part time lecturing at a local community college or vice versa.
If i live off passive income, the underlying pool wont get to appreciate and I wont have a hedge against inflation, I wont be working as such to add more money to the pie, it would just be to keep my brain ticking. If I reinvest passive earnings, I’m worried the part time gig might not be enough to maintain the standard of living i desire. What do you do?
I reinvest/save all my passive income and live off my other income.
I’m just trying to match income with expenses and prevent co-mingling as that’s what gets folks in trouble, at least me.
I pay myself just enough to live comfortably from my business and save/invest the rest. There are multiple active income streams I can draw from if you check out the post: https://www.financialsamurai.com/the-best-way-to-gain-financial-security-is-to-develop-financial-buffers-for-your-financial-buffers/
If I were you, id keep one foot in the door with PT work. It’s fun and safer. You don’t need much to survive.
I’d say your best bet is to work on another product or book to help you hit that passive income goal. It would help diversify your passive income further, it would probably be the most rewarding area to focus on, and whatever it is, I’m sure it would provide great value to your readers. Sounds like a win / win / win situation to me :)
I imagine you’d never consider doing another corporate stint just to boost your income, which you could pour into stocks / real estate to help build towards the $200,000? I guess an extra years salary wouldn’t do a huge amount for you, even with your previously high salary, and going back to work would probably defeat the purpose of what you’re trying to achieve anyway…
It actually took a lot of effort to put together my 100-page book on negotiating a severance. Dozens of revisions, editing, applying for registration with library of congress etc.
I’m still recovering :)
But, I plant to put together another ebook before year end.
18K is great and your farm’s principal value is rocking yeah?
Yes, thank you. The land appreciated 28% last year according to a government assessment. And thanks to my 8:1 leverage my $20K initial capital has returned 200% so far in one year :) All paper money for now though. Fingers crossed property values don’t crash.
Why work, when you can get 200% annual returns?!
Bull market 4 life, until the next crash.
The problem I’ve been having lately with P2P lending is the small fees that they take off of each transaction. I don’t have a lot in lending club but every time I get an $.85 payment or something lending club chops off a penny. When my returns are starting to average down to about 8.5% I get frustrated that I lose more than 1% on each transaction. Perhaps they are really adding up just fractions of a penny until I reach a certain amount and then they collect it but that’s why I’m not so keen on P2P lending at the moment. My reasoning is that I wouldn’t buy an index fund or mutual fund with a full percent of management fees so why would I do that for P2P lending? It’s not like I actually know the people I’m lending to and feel a warm fuzzy feeling inside knowing that I’m helping them out, it’s just an average return with a high fee slapped onto it. Sure it is a different way to diversify, but I’m still not sure about it.
As for my investing, I really like growth stocks. They have done wonderful things for my portfolio, but after so many great years in a row I find that all my new money is being allocated more towards solid dividend companies at the moment. Also if one of my stocks takes off I take a little off of the table and find some other investment that will lower my overall beta. I don’t think I will outsmart the market and see warning signs of when to get out so I’m trying to be a little more defensive as my portfolio gets larger. Honestly, I’m just waiting until the next crash or the next big pull back. I want to see blood in the streets because that’s when I hope I’ll want to suck up my fear and buy.
-Zee
I know A LOT of people who are waiting for a pull back. I’ve got a chunk of change as well waiting for a 5-10% downward move.
Data shows millennials are under invested as well.
Hence, will the markets ever correct a great deal if there are so many of us waiting? Eventually, but who knows.
I try and overcome my fears with structured notes that have downside protection and people I trust who spend all day long making investment decisions.
There was a 7% drop earlier this year, did either of you get in on that one?
Yes. A little bit in tech and internet.
I’m curious if you’ve considered AngelList as a speculative play? Uber was listed on there in 2009 as was many others that have made it big. Only problem is you can’t cash out until there is an exit strategy by the company.
I’ve subscribed the AngelList. They are a great platform for following tech startups, investment opportunities, and job ops.
Tons of $65k-$200k jobs on there.
Sam, have you considered getting into RE note investing? I’ve been investigating it for some time and it’s a way to diversify out of rentals while still keeping good returns.
I haven’t. What is that vs. REITs etc?
The idea is that you buy what essentially is a mortgage but, because of the time value of money, you can purchase it for less (and often substantially less) than the face value of the mortgage. When the mortgage holder pays on it, it generates a monthly income stream for you. But that’s not the best part.
On average, people move every 7-9 years. When that happens, the due-on-sale clause is triggered and you get paid out: not for the amount you bought it for but for the face value of the note, minus what has already been paid in principal. And I believe this one-time payout is taxable as long-term capital gains.
I’m still doing research, but next year if everything goes ok, I’m going to try it out.
The risk, though, is that the person stops paying on the note. At that point, there’s a foreclosure, so, like all things RE, you make your money on the buy, not on the sell. The discount you get on the purchase needs to cover you in this event.
Very interesting Jason. Keep me updated on this type of investment and good luck.
You should add another reason to your list:
10) To enjoy a Mythos overlooking the Caldera in gorgeous Fira.
To make sure I understand, part of your passive income is off limits because it is in retirement accounts?
Also, why do you exclude capital gains?
Correct. A small portion of my passive income is off limits b/c they are in tax advantageous retirement accounts.
I don’t touch any of my passive income, which is something I’ll clarify in the post.
CD interest is allows reinvested.
Rental income is used 100% to pay the mortgage and all expenses, and the $88K a year is reinvested.
Dividend income is reinvested.
Other income is saved and reinvested as well.
I live off my business work income that I pay myself just enough to live comfortably so I can automatically save and reinvest the rest. You can take distributions if you want more money from your company. Just need to make sure the income and distribution ratio is close.
I exclude capital gains because they are not recurring. They are one off. You can win and can lose. I want this report to be as pure passive as possible.
I was wondering about that rental income Sam. You posted $88k in rental income, but without mentioning that it goes to paying the mortgages and all expenses in addition to reinvesting the extra, it appeared that your best bet would have simply been to buy a lot more real estate and keep sitting on properties while tenants pay the rent.
I was initially under the impression that the $88k was above all expenses for the properties, which would be pretty doggone good.
As always, the best to you! :-)
Yes, $88,000 is after paying for all expenses associated with the rental property. $88K is the Net Operating Profits Before Taxes.
I haven’t sold any properties and don’t plan to. I use the $88K to pay down principal, save in risk-free assets, invest in the stock market and debt market, and invest in private equity deals.
I have a dilemma.
I own two properties in Washington DC.
The first is a row house is a very desirable neighborhood which nets about 40k/yr from rental income.
I also own a 80yr old 4-plex in a gentrifying neighborhood not too far from the first property, however I live in one of the apts. This property is under performing and I am currently getting about 10k/year income form the 3 apts. I did some comps from rentals near by and I think with some renovation I could also get around 40k/year on this building. My goal is to be at 200k/yr and I think i will need another 2-3 properties to do that.
My problem is that if I were to do this I would be kicking the tenants out and they most likely would have to go to the suburbs. I have a moral conflict between knowing that my decision has real impact on peoples lives, yet I want this to be my business (not a charity) and this is slowing me down from my goal. I am ready to buy another 4-plex which I don’t want to do until this one is performing at 100%.
Also, I dont like having a building which constantly needs maintenance. I would rather fix it up and be at peace.
Any input is much appreciated.
You can offer to buy your tenants out. In SF, the average tenant buyout is $21,000 according to a summer 2014 report.
I would probably not do that because it is not required. I can simply increase their rents substantially higher to push them out because their rents are low (even w/o renovations) compared to market.
How does the venture debt fund your business school classmate started work? How often do you get distributions? I don’t understand why this would be categorized as “passive income” rather than a “speculative investment”.
Why are you decreasing real estate income as a percentage of your passive income? Will there be negative tax consequences? Did you buy new home primarily to increase passive income by renting the old home?
Debt funds have an IRR and focus on income. It’s a very diversified portfolio with warrants as an equity upside kicker.
How are you doing with your passive income?
Check out: Increasing Passive Income Through Leverage And Arbitrage
I’m getting an average 12% yield on my passive income investments (ie / non retirement account investments), where I am 100% in real real estate and a debt instrument secured by real estate, leveraged at the moment because I don’t have as much faith in the economy right now as you. I guess I’m going with the, “do-what-you-know” approach At best I could afford to live in a developing country on my passive income, so I’m not quitting my day job anytime soon! Enjoy following you strategies.
With the success of your book sales you might consider creating another product that builds off of your book, or tackle another subject altogether. You have the audience here & possibly already have some demand from customers who really loved your book & want more from you!
Easier said than done! But I plan to do one thing once a year in order to build up a portfolio of things 5 years from now.
How are things with you mate?
Not much about this passive income game is easy at the start :)
Things are great, just trying to adjust back to reality now that the wedding and honeymoon are behind me. I have to get myself back on a writing schedule again real soon too!