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.
About The Author
For background, I've been building passive income since 1999, when I first got a job at Goldman Sachs. In 2009, I helped start the modern-day FIRE Movement to help people achieve financial independence sooner. In 2012, I retired from finance with a net worth of about $3 million and $80,000 in passive income. I haven’t returned to full time work since.
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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) in San Francisco, California.
Current Passive Income To Fund Our Lifestyle
Today, I estimate my wife and I will generate roughly $300,000 in passive income. We were on track to make $380,000 in passive income but blew it up after we bought a real forever home in 4Q2023. As a result, after 12 years of financial independence, we're technically no longer financially independent because our annual expenses are greater.
However, we figured the best time to own the nicest house you can afford is when you have kids. And with both kids going to school full-time starting in September 2024, it would be nice to earn some part-time active consulting income to keep busy for 20 hours a week. I can’t play tennis and pickleball all day!
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 2025+ 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, unless you enact Rule 72(t). But in general, you want to keep your tax-advantaged retirement portfolio invested for as long as possible.
The pandemic proved that if we WANT to save more, we can. Before the pandemic began, the U.S. personal saving rate hovered around 5%. Then in March 2020, the personal saving rate rocketed to 32%! Sadly, it's dropped down below 3% in 2024. Financial freedom is a choice. You owe it to yourself to make better choices.
Let's take a look at the best passive income investments for 2024 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.
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 stocks.
We're past the bottom of the latest real estate downturn and I expect real estate prices to move higher in 2025 given the strength of the economy and stock market. The Fed is cutting rates and there is tremendous pent-up demand for real estate, which is in undersupply by 5+ million homes in America.
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.
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 and venture capital 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. I don't recommend individual investors make angel investments. You'll get the worst deals and you'll have the least amount of edge.
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.
Investing In Artificial Intelligence
I’ve invested over $160,000 in Fundrise Venture due to my desire for more private company exposure since they are staying private for longer. Fundrise invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 75% of the product is invested in artificial intelligence, which I'm extremely bullish about. The investment minimum is also only $10, as Fundrise has democratized access to venture capital as well. Most venture capital funds have a $200,000+ minimum.
You can listen to my latest conversation with Ben Miller, founder of Fundrise about democratizing access to venture capital.
The issue with venture capital investing is earning passive income. You likely won't earn any passive income or distributions for 5-10 years given the fund is investing in highly illiquid private companies.
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 Funds
Thanks to higher interest rates, CDs, high-yield savings accounts, and money market funds are now paying higher rates. 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.
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 5% requires $200,000 in capital. But at least you know your money is safe, which is great during bear markets.
In a high interest rate environment, it's easier to generate more passive income. As a result, it's also easier to achieve financial independence too.
Conversely, in a low interest rate environment, 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.
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 attractive, but are coming down again given inflation is also back down.
The 10-year yield was at only 0.51% in August 2020. But now, the 10-year bond yield is at ~4.55% and likely heading lower with the Fed cutting rates through 2025. I would take advantage of this increase in bond yields and buy Treasury bonds with 3-month, 6-month, 9-month, and 1-year durations. Elevated bond yield rates won't last forever.
Long term, I believe interest rates will resume back on its downward path. Just look at Japanese interest rates, which are negative (inflation is higher than the nominal interest rate). As a result, buying bonds today for higher yield plus potential principal appreciation looks attractive.
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. For more security, you may want to invest in an individual bond and hold to maturity instead of a bond fund.
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.
Bonds are usually investment to help decrease volatility in your portfolio. But if you own individual bonds and have to sell before maturity, you could lose a lot of money if interest rates rise during the holding period.
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 6th edition for 2024 and is 240-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 bestseller. Use the code “saveten” at checkout to save $10.
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! As a result, the older and wealthier you get, the less you'll want to own too many physical rental properties.
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, especially with Trump likely to become the 47th president. As a result, I have been actively buying multifamily real estate there through Fundrise 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 $3.5 billion in assets and has 500,000+ 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. Meanwhile, mortgage rates are declining meaningfully, potentially pushing real estate prices higher in 2025 and beyond. 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. Further, the income and returns are 100% passive, unlike the semi-passive income generated from being a landlord.
Strategically, you want to be buying real estate at the beginning of a multi-year, multi-rate-cut cycle, which is now. There's been a nice correction in the commercial real estate market and I'm buying ahead of the impending upswing.
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 funds has been relatively steady during stock market downturns. Therefore, if there is another crash, Fundrise funds may outperform. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income during times of uncertainty.
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 made a comeback after underperforming growth stocks during the pandemic.
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, higher-quality 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.
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.
Just know that dividend income isn't free money. A company is returning capital to shareholders, which means the balance sheet of a company goes down by the amount of the dividend payout.
Pay Attention To Dividend Yields
To achieve $10,000 in annual passive income with a ~1.6% S&P 500 dividend yield would require $625,000. Instead, you could invest only $154,000 into AT&T stock given its 8% estimated dividend yield. But the problem is that AT&T has been a terrible performer, which has caused shareholders a tremendous loss in principal 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 Empower'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. The older you get, the more you will enjoy the 100% passivity of dividend stocks.
If you want less volatility with likely higher yields, invest in real estate crowdfunding, rental properties, and fixed income instead. As you get older, you may also want to experience more stability.
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.
Note: if you decide to investing in individual deals, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital. So is building a diversified portfolio.
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!
Here's my latest estimated passive income investment after buying a forever home in 4Q2023 and renting out my previous home. In 2025, I will likely sell one rental property and reinvest the proceeds in 100% passive income investments.
As you can see from our passive income chart, more than 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.
Favorite Private Real Estate Investing Platforms
My favorite real estate investing platform is Fundrise, with over $3.2 billion in assets under management and 350,000+ 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.
Another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside due to higher growth rates. You can build your own select real estate portfolio with Crowdstreet.
Both platforms are long-time Financial Samurai sponsors and I've currently invested over $300,000 in Fundrise so far. Below is a snapshot of my dashboard as I position myself for a recovery in commercial real estate and a continued AI boom.
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.
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The Best Passive Income Investments is a FinancialSamurai.com original post. I have invested in all products mentioned for years. Fundrise and Crowdstreet are sponsors of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise. Thanks for your readership and support.
Enjoy reading your content Sam, I am in my early 30s and working on my path to achieve financial freedom, I am also based in SF bay area.
Fundrise Venture Fund – what happens to one’s private equity investment if a company in that fund goes public? Example (with made up numbers) – you have $100k in Venture Fund and, assume, $10k of that is allocated to DataBricks. What happens to your $10K allocation in the fund if Databricks goes IPC/public?
It’s a great question. Once public, the value of the shares gets updated daily in the fund’s NAV. So you will start seeing more frequent changes in your balances. Then it will be up to the Fundrise Venture committee to decide whether to hold, sell, or buy more.
The $10K allocation will fluctuate per the public market valuation, and be reflected as a percentage of the overall fund.
I was wondering if there are any organizations or groups that are like fundrise and crowdmeet that are accessible to those living in New Zealand and Australia? Any that you recommend? Would really appreciate your input.
I was wondering if there are any organizations or groups that are like fundrise and crowdmeet that are accessible to those living in New Zealand and Australia? Any that you recommend? Would really appreciate your input.
Hi Chad – I’m not aware of the local offerings in New Zealand and Australia. All I know is that U.S. real estate is so cheap, even in our most expensive cities, compared to real estate in Auckland, Wellington, Christchurch, Sydney, and Melbourne!
One of the few positives of COVID was that it throttled the capital of foreign investors buying U.S. real estate, so Americans could buy. And now with the Fed cutting rates, the demand for real estate will likely pick up. So a platform like Fundrise and its investors I think is well positioned to capitalize. They are a sponsor and I’ve invested $280,000+ with them so far.
Related: Why Is U.S. Real Estate So Cheap Compared To The Rest Of The World
I am terrified of money… I make a decent income as an engineer. I have a financial advisor because I wasn’t taught good money habits growing up. I don’t own any property. I am 30. I want to start trying to build passive income and a better life. Wish me luck.
Good luck! Your financial advisor is well worth it then.
I spoke to a financial professional when I was 35 years old in 2012. And he helped highlight a blind spot I had and positively changed the direction of my finances over the next 10 years.
See: How speaking to a financial professional, saved me from myself
Investing in bonds as interest rates decline sounds like a good move. So does investing in real estate if we are really going through a multi-year rate cut cycle.
Buy your home and rental properties before rates get too low people.
Yes, real estate should do well as interest rates declining. Interest rates declining is an even more powerful tailwind that increased operational efficiency.
Agree with article, as being retired now – I am buying dividend stocks that pay only monthly. A lot can happen in 89 days or longer and I want to book my passive income monthly not quarterly or longer. It also begs the question “what is indirect on the payroll staff doing the other 59 days they are not processing dividend distributions? Currently I generate $1,400 in monthly passive income in REITS. With rates coming down in the next 24 months, I expect to get a lot more growth in my REITs investments. Fundraise – may give you a lot of growth – but it looks illiquid, if something happens in a short time. Look what happened 2 days ago in a rally in PA. I’ll just stay with my REIT stocks, and know I can sell them at any time thru my broker. It is very simple.
I don’t think I’d consider most of these “passive income” because you have to keep the money invested in order to make money, especially for it to compound, so it’s not an income, but rather, an investment. All of your funds are tied up, and so are your profits. To me, an income is something I have immediate access to.
Interesting view. You often need money to make money. Dividends, rental income, distributions, royalties, product sales can be seen as profits that can be earned with minimal-to-no-effort, and can be used for whatever you wish.
If these aren’t passive income and semi-passive income investments, what are in you opinion?
Related: The Difference Between Active And Passive Income
I’m interested in early retirement and was motivated to read your post. Do you offer coaching?
I’m new to your site and I appreciate your fantastic posts. Your Passive Income Streams are impressive and inspirational. I’m going to have to buy your books now! Thank you!
I am so grateful for this article! Thank you for the step by step plan on how to create passive income. I am a visual person and motivated only after all the-details paint the bigger picture. I’ve often asked others on the “how to create “.. looking for leadership but only to receive radio silence. I didn’t know how to monetize my strengths until after reading this email! I need a Craigslist accountability partner! I’ve I ever make your income annual.. it’ll be a proud moment! I do have the savings practices in place and actively accruing. My weakness which I need to pivot is my corporate America income climb, passive income business and real estate which is lacking in my portfolio!
Thank you!
Kelly
I see your estimated income and your past income however I don’t see a summary of your expenses. Perhaps I missed something I do follow you for years now very good articles and I have purchased how to architect your layoff book thank you. Perhaps you have a loan on your new home forever even though I thought I read that you sold stocks to pay for it.. so me guessing that some of your income is going into investments which I would agree should be 15% of your income for investments minimum.. however that still leaves many numbers untold. Taxes would be in that I assume but why assume can you provide a link to a prior conversation of your expenses?
I’m retired age 67 and my wife 65. I’ve been watching very detail since 2018 of the outgo before retiring. Wow what a disappointment of the rapid inflation we’ve had since then. Not all things have gone up 30% but many items have in a very short time. My models of inflation were based on 3% each year. For all expensive for the two of us not including any taxes with a $400 a month mortgage is $60,000 a year. Both cars are paid for. The top 5 expenses are health 22%, home 20%, food 18%, utilities 11%, vacation 8%. You should be able to compute the cost outlay based on those percentages for those five items. We rarely go out however we do pick up to go at a nearby restaurant once a week. In summary not knowing your expenses I could only guess that for a family of four with investments, 529 tuition and taxes and no mortgages and no car payment that $150,000 should be ample amount for your family.
Sam, based on the recent changes in the market with CDs and Fixed Income, how would you reallocate the rankings or would you keep them the same based on historical numbers? It seems that in the short term you could net higher returns with lower risk on CD and Fixed Income investments versus dividends. Corporate earnings, while still positive, could take a hit if the looming recession ever takes hold and potentially cause corporations to pause or slash dividends. I’m curious what your thoughts are for the short and medium term.
Thanks!
I’m a big fan of getting over a 5% yield on treasury bonds and CDs at this point in time. Longer-term, risk assets like real estate and dividend paying stocks have provided greater returns.
great stuff sir. new reader
Thanks for the reply Sam.
Sorry, I am either confused, or missing something. Consider the following. You stopped being a wage-slave in 2012 and had a passive income of $80k. Now, 11 years later, that passive income has grown to $380k. You have also stated in other posts that you seek, based on your risk profile, returns of between 3% and 5%. Let’s use 4% to illustrate my point. That means in 2012 your net worth was around $80/.04=$3.2m. Now it is worth $380/.04=$9.5m. To grow $3.2m to 9.5m in 11 years requires an annual compounded return of 10.5% (and that is without any withdrawals by either the taxman or yourself to live). This 10.5% is more than double the top-end of the return-range you suggest to aim for. Probably triple if you allow for living expenses and the taxman.
So what am I missing?
I assume, but correct me if I am wrong, that you have made substantial amounts of money from things other than the 3% to 5% return on your portfolio. Other things such as this website. And those other things, such as this website, can hardly be described as passive, given the effort that goes into them, right?
So, for some one today, who is giving up being a wage slave, and has a portfolio of around $3.2m and a passive income from that portfolio of around $80k, there is NO WAY they are going to grow that to $9.5m with an income of $380k in the next 11 years UNLESS they do additional things that are not passive, right? Or unless they invest that $3.2m in things that come with substantinally higher risk, so they can both live off the porfolio and grow it at over 10% a year (after tax).
Am I right? Please correct me if I am wrong, as I would love to grow $3.2m to $9.5m in 11 years, without lots of additianal risk and without having to work hours developing a blog or some other income stream that takes a lot of effort and becomes like another job.
Thanks.
Mark.
Hi Mark,
Thanks for your interest in my finances. Leaving work in 2012 was fortuitous due to the 10-year bull market that ensued. But leaving work in 2012 also was unlucky b/c compensation began to rebound for 10 years and I missed that period as well.
The power of compounding is real, especially after 10+ years. Even compounding at 8% for 11 years would turn $3 million into $7 million. And taking a 4% withdrawal rate would lead to $280,000 in passive income. No brains or effort necessary for this to happen. Just investing.
More than 100% of my net worth was exposed to risk assets because I took on mortgage debt to own multiple properties. So the returns from my real estate holdings, which account for about 50% of my net worth, have been greater than the 10.5% you used.
Real estate is my favorite asset class to build wealth. But I’m at the max in terms of the number of physical rental properties I want to manage (4), hence why I’ve invested in private real estate like Fundrise. Fundrise focuses on Sunbelt/heartland real estate, where I want to diversify due to demographic trends and WFH.
Since 2012, I’ve done some consulting at private companies, wrote a severance negotiation book, wrote a traditional book that become a bestseller with a big publisher, and run this site. These activities are enjoyable and have provided supplemental income, which I’ve mostly reinvested in assets that can generate more passive income.
The ability to do what you want and follow your Ikigai is one of the best things about financial independence.
Please tell me more about yourself, your age, current net worth, asset allocation, and goals. It’s always good to learn more about readers as everybody is different.
Cheers,
Sam
Thanks for the reply Sam. My apologies if my post came across as intrusive about your finances. Was just trying to understand how you grew your passive income like you did, which your reply answers well.
About me. Age 58. Retired at 54 after burnt out working in banking/technology for too long. Net worth ~$4.3m. Portfolio made up of 2 rentals (40%), equities (30%), and cash (30% – larger %age cash than most would hold). Portfolio average return ~3.8%/$163k. Annual living expenses ~$100k. Am now a “nomad”. Am In Thailand right now. 3 months in Europe/UK/Ireland coming up. Australia and New Zeland later in the year. Oh, and married (wife retired and travelling with me!) and 2 independent adult daughters with their own lives and careers.
I have one other question from your reply. That is, after retiring, how did you manage to get mortgages? Banks ususally refuse to lend to those without a salaried income. I even got rejected for a credit card recently because I don’t have a salaried income!
While you suggest aiming for a return of 3% to 5% it does seem you are somewhat of a risk taker – to take the plunge of leaving behind a salary AND then leveraging-up, was actually a risky move (although I guess a calculated one). It paid off for you. Congratulations.
For me, at my age, with my net worth, I hear Buffet’s words-of-wisdom ringing in my ears often – “don’t risk what you have and need for what you don’t have and don’t need”. If my portfolio generates ~$160k, and my expenses are ~$100k, leverage to build wealth faster does seem like risking what I have and need for what I don’t have and don’t need.
What “niggles” at me though, is my desire to create generational wealth, ultimately for the benefit of my 2 daughters. $4.3m is not enough to be considered generational wealth. It was because of this and how you grew your passive income prompted me to write the earlier post.
Mark.
Hi Mark, thanks for sharing. I would encourage you not to compare too much. We are different people with different cost structures and goals. If you’re living in Thailand, my living expenses have to be at least five times more expensive if not 10 times more expensive.
And since you are already retired, you are happy with the money you have, otherwise, you wouldn’t have retired, no? Because if you still want money, you could still work or earn freelance income.
I would just do things productive I bring you joy and the kid also generate some side income. I love to ride, regardless, if I get paid or not. My interest in writing as why I have published three times a week since July 2009. And due to the consistency, my site ended up generating bonus income.
I’m not sure if you’ve read this post, but I think you’ll like it if not: Generational Wealth And The Angst Of The Not Rich Enough Class
One of the main lessons is to stop comparing!
100% agree. Actually, I am not comparing. What I try to do is learn from others – especially others that may be more successful than me. With additional learning/knowledge from how others have done things, I can then choose to apply not apply those learnings to my situation.
I suppose seeking information to learn from others could easily be seen as comparing though. I find one of the great things about retirement is and being totally out of the rat-race, is the temptation to compare, and “keep up with the Jones” is gone. We live our lives exacty where and how we want on our terms now.
I will continue to read your articles. Really enjoy them. All the best.
Sounds good. Hopefully you will be satisfied with your $4.3 million net worth and no longer feel that niggle at some point. $4.3 million is a lot.
If you have two or more years of freelance income, you can get a mortgage. If you have a lot of assets, you can get an asset based mortgage as well.
I also have a few hundred $K in Fundrise and I think we’re about the same age.
Curious what your Fundrise allocation is?
Mostly Supplemental Income?
Or do you have some of the Core/Opportunistic offerings?
Great site, I read it daily!
The Fundrise returns in ’22
Flagship Real Estate Fund 0.56%
Income Real Estate Fund 2.13%
Growth eREITs
Growth eREIT 1.35%
Growth eREIT II -0.46%
Development eREIT -2.04%
eFund 0.02%
Growth eREIT III -2.37%
Growth eREIT VII 1.35%
Balanced eREITs
East Coast eREIT 0.59%
Heartland eREIT -0.71%
West Coast eREIT -0.54%
Balanced eREIT II -0.75%
2022 Average -0.87%
Thanks for highlighting the Fundrise returns. That’s some huge outperformance compared to the S&P 500 (-19.6%) and the FTSE All Equity REIT (-24.95%) in 2022. The Heartland eREIT was up 41% in 2021.
I’m glad I diversified. But I wish I diversified more into private real estate. So much more stable than stocks in a bear market, especially.
Hi Sam,
love your articles, I am Going to retire this year It would be very helpful for me, and I agree that “Real estate is in best 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 over ongoing period of time.”
Nevertheless, how do you feel about real estate risks related to climate changes. To be more specific, I live in India in Delhi, and own two homes (one I live in, and second one rental).
Please, have you any opinion to share about the risks associated with Rental Properties and
I have invested in 4 passive investment vehicles: index funds, stocks, crypto and mutual funds since 2021. And so far, the most profitable is index funds by a whopping 43% profit. The lowest return has been in crypto with -85% loss. Such a shame but I learned my lessons :)
For a retiree do you consider IRA withdrawals to be passive or active income?
Yes.
I am winding down my experiment with Groundfloor. This is crowdfunded Real Estate loans for Real Estate investors needing capital to do property builds, property rehabs, flips and the like. Too many loans get extended past their maturity date and a few defaults.
Good to know. I looked at groundfloor briefly before, but concluded very quickly that I didn’t want to give out loans for remodeling. Remodeling and construction is a royal pain in the butt, and with the amount of regulations and red tape and the pandemic now, it just takes longer and cost more to remodel and construct.
This is an amazing article and I have it featured on my blog as top read for this week. I encourage everyone to have atleast 1-2 passive income streams running on the side.
Love this post! I hope more people learn about this. I love how in depth you go into the topic, with examples and little tips.
The only thing I do not agree on is this: “Best Passive Income Rank #4: Creating Your Own Products”.
Creating your own product is all but passive. It requires an incredible amount of effort and skills. The only advantage is that you can do the effort upfront and then you can enjoy the revenues from a beach in Hawaii drinking your cocktail
Sam, great article – I definitely agree that dividend investing is the way to go for most.
Wanted to get your thoughts on generating passive income by selling shareholder voting rights. I found this company Shareholder Vote Exchange svegroup.com that allows investors to do so. What do you think?
Thanks!
I’ve never heard of such a passive income potential. Feel free to summarize and share the pros and cons. Thanks.
Here’s how I’d summarize the pros and cons of selling shareholder votes:
Pros:
– Ideal for passive investors who don’t exercise their votes
– Generates additional income from stocks you already own
– Increases your long-term rate of compounding
Cons:
– May be unable to capture significant value in the short-term
– Takes some time to verify and sell your shareholder votes
For more information, check out the Shareholder Vote Exchange website.
Sam, new to real estate crowdfunding, and wanting to invest 100k in this, what would you recommend I invest in now.. is it worth waiting another 6 months before real estate cools off. awesome website.
Hi there,
Welcome to Financial Samurai. I would first read everything on real estate crowdfunding on this page and the links within the page first. It’s so important to understand everything you can before making an investment. Please pay special attention to the capital stack as well.
Once you’re comfortable and have the desired asset allocation, I would invest in a fund first. For the vast majority of investors, investing in a diversified fund through ones like Fundrise is the most prudent move. Most don’t have enough time or interest to pick individual deals and assemble their own portfolio. You can leg into a fund and build a position over time.
Whereas with individual deals, the minimums are often $10,000 – $25,000. With $100K to invest, you may only be able to invest in four individual deals, which may be enough or not enough for diversification. It depends on how big your overall investment portfolio is. If you’re looking for individual deals, check out CrowdStreet and RealtyMogul. I’ve met them many times before and they do good due diligence. But in the end, it’s up to you to decide what vetted deals are best for your portfolio.
Regards,
Sam
P2P Lending sounded incredible when it first came on the scene. However, poor underwriting standards by Lending Club basically decimated the industry.
Not sure why they couldn’t apply the same underwriting standards as large banks….(notwithstanding 2000s mortgage underwriting).
The same thing happened w YieldStreet, they put a really bad taste in everyone’s mouth when it came to alternatives…