I love passive income!
Passive income has given me peace of mind, and the freedom to focus on things I am passionate about. With enough passive income you have F*ck You money and can live life on your own terms. But what is passive income and how can I acquire it? Let me explain.
Passive income is generated from certain investment assets. Examples of such assets are real estate (rent), stocks (dividend), bonds (interest) or even a savings account (interest). Basically it’s an income where you don’t trade your precious time for money. And you generate income all day, even when you sleep. In addition, some passive income is also taxed lower than normal salary income. Great right?
So with that out of the way, how do I get started? Well in most cases you need cash to generate passive income. The earlier you start save and invest the better. In my case I didn’t seriously start until my late 20s. But better late than never! However in the case of real estate, you can lend money and use as leverage. I’m usually against debt, except in the case of investment real estate property.
To help out my fellow man with some passive income ideas, I’ve decided to share my passive income sources. And you’ll notice I have several of them. This is all part of the plan because I put my eggs in many baskets, and not relying on just one source. This gives me many passive income streams. And if one goes bad, I still have many others cranking out my greenbacks.
Stock and Bond Portfolio
This is my buy and hold long term portfolio. I’m in for the long run and have no plans to sell for many years. The portfolio consists of individual stocks and exchange-traded funds (ETF). And the sectors are pretty diverse, ranging from Real Estate (REITs), Health Care, Energy, Tech to Finance.
As I mentioned earlier I like to diversify, so in addition to stocks I own Bond ETFs and Gold (through the GLD ETF). My Bond ETF portfolio consists of US Government Bonds, US Muni Bonds, US Corporate Bonds and Emerging Market Bonds.
Nowadays I invest using a strategy called Dollar Cost Average (DCA). This means I invest roughly the same amount of money every month. No matter if the market is moving up or down. I actually like a steep selloff. Things get cheaper!
When I research stocks, I’m looking for high quality and undervalued companies with dividend yields in the 5% to 10% range. I use the methodologies defined by Ben Graham (The mentor of Warren Buffet) with some added criteria to ensure dividend sustainability.
If you want to learn how to research and pick undervalued stocks like Warren Buffet I recommend this great book by Ben Graham.
I own physical real estate, and real estate through crowdsourcing. The physical asset is a California condo that I rent out long term. Sadly my condo building doesn’t allow short term renters, so Airbnb is not an option. My renter is great and gives me very little headache.
In addition I’m invested in Real Estate crowdsourcing. It’s a relatively new investment concept, and it allows an investor to lend money from ordinary people for different real estate projects. It could be someone that plans to renovate and flip houses, another that plans to build a property from the ground up, or a third that plans to buy a multi-unit building and generate rental income. On these crowdsourcing platforms you’ll also find commercial real estate deals.
On average my crowdsourcing returns are ranging from 8% to 12%. I’m using RealtyShare which has been giving me great returns.
Peer-2-Peer lending is similar to real estate crowdsourcing, but the borrowers can use the money for a variety of reasons. Most common is to refinance credit card debt. But it can be everything from house improvements, healthcare cost, to buy a wedding ring(!).
Investing in Peer-2-Peer loans is very easy and fun. And you can get started with very little money. On the lending platforms you can create filters to weed out borrowers that have low credit score or too heavily in debt. In addition you get statistics on the returns and how the notes are performing.
After I left corporate America, I moved my 401K retirement savings to a Rollover IRA. In general, you can’t touch this money until you are 59 ½ years old. And if you start to withdraw money earlier, you’ll get hit with a 10% penalty.
However there’s a clever way to withdraw money earlier without paying this penalty. There’s one little known rule called “Internal Revenue Code section 72(t)”. The rule has a formula where you can calculate an amount which you can legally withdraw every year. Penalty free but taxable. The inputs for this formula is the current Federal Mid-Term rate and your IRA balance. Note that you’re only allowed to withdraw this amount, and you have to do it annually until you’re 59 ½ years old. If you stop earlier you have to pay the 10% penalty retroactive.
I will start using the 72(t) rule at the end of this year, and I plan to write more about my experience in a future post.
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