The Holy Grail of Passive Income

credit: Freedigitalphotos.net by Scott Chan

credit: Freedigitalphotos.net by Scott Chan

When I told my mom that I bought a rental property, she was a little worried. “What happens if you can’t find a tenant?” “What if there’s an expensive repair?” “How do you know the property manager won’t rip you off?” Granted, most of worries were because it was an out-of-state property, but some of it seemed to be the belief that passive income is not possible. Actually, I see this mindset very often with owners of rental properties. Many believe that if you have to outsource management, you lose control and will not make money. I have a contrary view. If you spend all your time dealing with the day-to-day minutia, you can’t possibly have the time to scale your business. A few months after the conversation with my mom, she mentioned that my cousin, who has a full time job, took on a part time job as a real estate agent. “Oh that’s good, he’ll earn some extra income,” she commented. This made more sense to her. You work. You earn money. Nothing against taking on a side hustle as a real estate agent. It’s actually something I considered when I was younger, but now with a family, I don’t want to take on a second job. I don’t want to trade my time for money. I want to earn money even when I’m asleep. I want my money to make more money.

Cash Flow Quadrant

Robert Kiyosaki’s CashFlow Quadrant lists the four ways that you can earn money. Most of us are on the left side of this quadrant. On this side of the quadrant, you are trading time for money. In quadrant E (employee), you have a job. You are an employee and you work for the “Man.” The employer controls how much you make and determines your hours as well as whether you are allowed to take off from work. Like most people, I mostly reside in this quadrant. In quadrant S (self-employed), you own a job. You have a little more control over your time and how much you make. However, the downside is that you have more responsibilities and those in this quadrant often work long hours. Before my father retired, he owned a wine and spirits store. His peers and family members sometimes made assumptions about how well he did financially because he was his own boss. However, when he bought the business, he really only bought a job for himself and my mother, who helped him. If the store wasn’t open, no money was made, so it was open 11 or more hours a day, 6 days a week. So while he was technically his own boss, it might not necessarily be better than being an employee.

On the right side of the quadrant is where I strive to be. In quadrant B (business), you are a business owner where you own a system and other people work for you. While my dad owned his business, he was not in the business owner quadrant because if he was not working, he wasn’t making any money. In quadrant I (investor), your money works for you.

There are plenty of passive income businesses and investments that might bring in some extra cash and I’ll list some of the ones that I’ve considered, am considering, and some that I’ve done. For me, the business or investment I’d consider would be something that didn’t take up a lot of my time. I’m looking for a passive income stream, not another full time job. I have no problem if it takes some time to set up but it would have to run somewhat on autopilot afterwards. I’m not in the stage in my life where I want a second job. Heck…I barely want a first job!

Amazon FBA

Retail Arbitrage

I’ve sold things on Amazon before and made a few bucks. I think I used Amazon instead of eBay as I found it easier to list items if others were selling it. I’ve made a decent profit selling old things I had, valuable books that people placed in the compactor room as well as some items found at deep discounts either at thrift stores or the clearance section. I could also have used Craigslist but I’m paranoid about meeting people to exchange goods and didn’t want to have to spending time having to meet up.

It got even more lucrative to sell on Amazon when Amazon FBA was introduced. FBA stands for “Fulfillment by Amazon,” which allowed 3rd parties to ship things in bulk at a discount to Amazon warehouses and have Amazon would fulfill the orders. The orders would even qualify for Prime 2-day shipping. I was shipping orders after I received the request and it was definitely not 2-day shipping so I knew this would be the way to go. I looked into it but ultimately, selling things I own and don’t want and finding things that others don’t want was okay but not sustainable nor was it a predictable source of income. Finding things at deep discounts also required a good amount of work. Money could be made using this method but it was just too time consuming for me. You can read more about it at Side Hustle Nation.

Private Label

Another strategy I considered was to find a product that I thought would sell, source it from China via a site like Alibaba.com, mark up the price and sell it on Amazon. I looked into this idea but it’s probably a little more complicated than it first appears. Michael who blogs at Financially Alert detailed how complicated it can be to get started and decided to throw in the towel, but apparently is back at it. Alex who blogs at Cash Flow Diaries says he “failed miserably” and also goes into details of what went wrong. So I’ll put this one on the back burner as it seems a little too time consuming and complicated.

Laundromat

I first came upon this idea when I read a post on Mr. 1500 Days’ blog. He wrote about Laura who bought unattended self-service Laundromats which seemed like it could be manageable even with a full time job. She says that she spends about 10-12 hours managing the business. I also listen to a real estate investing podcast where the host interviewed someone who made great returns buying Laundromats. I think the guest quit his day job when the Laundromat business proved to earn more than his day job. Owning laundromats might not sound lucrative but apparently they can be.

Self-Storage Units

Much like Laundromats, this business seems like it can be lucrative without too much time. I don’t recall where I read about it, but it’s possible to have a set up where the storage units are self-service and unattended. And even if some type of staffing is needed, it can be minimal. I do feel that unlike Laundromats, the self-storage unit business might suffer during a recession while Laundromats will continue to do well since people still have to wash their clothes! With both the Laundromat and self-storage units, there will be a big upfront capital investment and I’d have to do a lot more research before diving in.

Vending Machines

It sounds like easy money right? You buy the machine, place it and the candy/chips/soda sells itself! You make money while you sleep and restock when necessary. I haven’t done much research into it but I’m sure it’s definitely not as easy as it sounds. Jamila mentioned on her Journey to Launch podcast that she tried this and it sounded like finding a high-traffic place that would allow you to place the machine, even for a fee, was not all that easy. She has much more hustle than I do so I’m not sure if this would work for me.

Dividends

I’m a fan of index investing but there are many who are strong advocates for dividend investing as they like the quarterly cash flow. I’ve owned a few stocks that paid dividends but my individual stock portfolio is very small, and the individual stock portion that pay dividends are even smaller. My issue with using this strategy is that dividend yields are relatively low at 2-3%, so you’d need a lot of capital to generate a decent amount of passive income.

Peer-to-Peer Lending

I opened a Lending Club account years ago where you can lend money in increments of $25 to borrowers. Many borrowers are looking to consolidate and pay off debt. Others want to pay for home improvement, wedding, or start a business. I’ve heard people make pretty good returns investing there but my returns were always in the 6-8% range. The rate started dropping with defaults. Being that the loans are unsecured, I’m reluctant to invest more especially if another recession hits. Actually, I’m in the process of slowly liquating my investment.

Kindle Publishing

Not only has Amazon made it easy to sell things, it has made it easy to self-publish books. No longer do you need to beg and plead a book publisher, you can do it all yourself on this platform. Writing a book seems like a huge task, but, hey…I do write on my blog…occasionally…almost never. But if I could create a masterpiece, self-publish, and earn passive income with it, that would be awesome. After reading through a few e-books, I wasn’t sure I was up for the task. I was considering the fiction genre and my writing skills are not up to par. The non-fiction genre would probably be personal finance related and that niche is pretty saturated. Also, as I barely publish blog posts, what made me think I could tackle an entire ebook?! But what if I didn’t have to!!

On an podcast episode on Side Hustle Nation, the guest said that he made $4260 a month on Kindle and he didn’t even write the books! He outsourced that responsibility to someone he found on Upwork or a similar site. I am really considered doing this but that market seems very competitive.

Blogging

I’ve heard you can make income blogging. Who knew? Not me apparently. Running a blog is a lot of work and I honestly wouldn’t know since I don’t do much of that things that need to be done to make a blog financially successful. While there is a lot of work involved, once you are making some income, I’m sure there is a way to cut down on many of the technical and administrative tasks by hiring a virtual assistant. Michelle from Making Sense of Cents is pretty successful in making money through her blog so check out her tips.

Real Estate

Long Term Rentals

No, real estate is never completely passive but my first rental property is as passive as it gets. The property manager contacts me if there is a repair above $250, otherwise I check my owner’s dashboard to make sure I got paid rent or if there were some minor repairs that were necessary.

Short Term Rentals

This is the strategy that I’ve been focused on the last few months. It’s probably part of the reason why blogging has taken up a backseat. While I had an decent experience with my long term rental, the cash flow was just okay. I did have a good amount of repairs which cut into my profit, but I’ve been reading about renting out houses short-term, mainly via AirBnB to really increase your earnings. A property earning $1000 a month might earn two to three times that much if you’re renting it for $100 or more a night. Obviously, this doesn’t sound like a passive income, which is why I didn’t originally consider it. However, if you hire a property manager, you can offload a lot of the day-to-day duties. While it will never be completely passive, it can be very manageable. I am actually in the process of purchasing a property for this exact purpose. Stay tuned!

Crowdfunding Platforms

Some of the big companies like Fundrise, Realty Mogul, and Realty Shares gives investors the opportunity to invest in big real estate deals. It could be a new apartment development or a commercial building. There are also crowdfunding platforms like Peer Street and Patch of Land which allow you to invest on the debt side, basically being a real estate lender. I’ve dabbled in this area. I put some money in a lesser known crowdfunding company called Holdfolio which invests in houses and now apartment buildings in Indianapolis and Ohio. The returns are about 10-12% with possibility of a higher return if the properties have appreciated when they refinance. (I believe the big companies I mentioned earlier only took accredited investors at the time which is why I went with the smaller company) I’ve also put a small amount of money in a crowdfunding company called American Home Preservation where you can invest in increments of $100 with a preferred 12% return to investors. The company buys non-performing mortgage notes and try to get them performing again. Basically, they buy mortgages at a discount as the homeowner has stopped paying, they try to work something out with the homeowner to make it a win-win.

What other passive investments or businesses have you been involved in or are considering? I want to hear your ideas!

7 thoughts on “The Holy Grail of Passive Income

  1. Joe

    Good luck with your rental property. Having a good property manager is the way to go.
    I didn’t have much luck with property managers so I’m managing our rentals myself. It’s okay for now, but not for the long term. I prefer less work and responsibilities.
    I like real estate crowdfunding. It’s been good so far, but we’ll see if it will work out in the long run. Real estate markets are still going up so everyone wins for now.

    1. livingrichcheaply@gmail.com Post author

      Thanks. Fortunately, my property manager has been doing a decent job for the most part. It’s too far for me to self-manage so I have no choice. I like real estate crowdfunding too but it lacks leverage and tax incentives.

  2. Jason

    I think I need to do a better job of thinking about passive income. Right now it is solely focusing on investments, but the closer I get to FI and potentially decide to move to another position I would like to have a cash cushion buffer that flows every month.

    1. livingrichcheaply@gmail.com Post author

      Yea, I had been focused on investments but there’s not much I can do with them anymore. I just invest in index funds and it’s probably best I don’t tinker too much. So I have to focus my energy on other investments.

  3. Done by Forty

    I similarly have been out of state landlording since 2014. I think you already know my thoughts on it: the juice ain’t worth the squeeze, at least for the two houses we had.

    Now, we have a preposterously small sample size and I similarly just don’t seem to have the personality type to deal with real estate. I think that for many (most?) that it’s actually a great gig if you have capital to deploy, are comfortable with leverage, and can handle the swings (lumpy expenses when tenants move out, trash the place, don’t pay what the court says they must, etc. etc.). If you can stick it out long term, there are a ton of advantages and, yeah, it’s pretty damn passive.

    I heard ATMs are a nice little passive-ish income stream, too.

    For me, I think I’m realizing I’m just content being a W2 worker. For me, it is WAY less stressful compared to being a business owner, who gets all the profit, sure, but takes all the risk, too.
    Done by Forty recently posted…A Funk in April’s Budget PornMy Profile

  4. Dividend Diplomats

    Right now, I am focused on improving my dividend income. But I plan on branching out once I’m comfortable with the level of dividend income I’m receiving annually. Thanks for the great listing and brainstorming session for me. I’ve tried the Amazon/Ebay flipping game before, where I’ve bought items that are on clearance and sold them. However, my results have been pretty limited. But I am confident it can work with more time.

    Bert

    1. livingrichcheaply@gmail.com Post author

      That sounds like a good plan. I think Paula from Afford Anything said that if she had to start all over again…that’s what she would do. I think it can be quite lucrative but I just don’t have the time yet.

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