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Passive Income Investments – Fact or Fiction

By in Bond, Investing, Make Money, Stocks | 17 comments

 

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul Samuelson

Passive income investments are touted as a way to keep the money flowing without the work. In other words, with passive income streams your passive income investments are set up once to deliver regular cash flow. You’ll learn whether investing in real estate, stocks, and bonds are true passive income opportunities and ways to create that future income stream. 

My Passive Income Investments History

Is real estate a road to passive income?

When I first started out, I bought a rundown piece of real estate, made some repairs, and rented out the property. With the help of my dad, I assessed the property to find out what needed repairing. Then I found workers, monitored them daily, found tenants, screened them, fix repairs when the tenants called, followed up when they were late on the rent, and found new tenants when they moved out (usually after leaving a big mess). 

Don’t think all this work can be farmed out to a property manager, while you collect the checks. The property manager must be monitored and paid. So, the real estate you buy must have enough cash flow to pay you and the property manager. This isn’t an easy task. 

Owning rental real estate is a lot of work, and not actually a passive income opportunity.

Passive income investments, strategies, streams.

Passive Income Investments Ideas

Review these passive income investments to uncover which opportunities are truly passive.

1. Investing in rental real estate:

What is it? Buy an apartment building, house, or condo. Rent it out, and gather the income. At a later date, sell the property at a profit.

Pro: If you buy at the right price, maintain the property, keep it rented and invest in a growth area, you can make a nice profit over time. Additionally, it is possible to receive a positive cash flow.

Con: Investing in real estate is not for the faint-hearted. Before you start ask yourself if you have a lot of free time to search, manage and maintain the property? Do you have cash for a down payment and good credit to get a loan? Math skills are required to determine the price to pay so that after expenses (planned and unplanned), mortgage payment, taxes, etc. you have a positive cash flow. Can you afford the payments for a couple of months when the tenant moves out or is evicted? There’s a lot of work and money involved in owning real estate

Is investing in rental real estate a passive income investment?

 Successful real estate investing requires enough time to devote to this endeavor, buying at the correct price, and maintaining sufficient cash for unexpected costs.  Presently, real estate is richly valued across the country with a lack of true bargains. If you want to invest in real estate, do your research first, and go in with your eyes open. A mentor is very helpful in real estate investing. Investing in rental real estate is not a true passive income strategy. 

2. Investing in individual stocks and bonds:

What is it? Take your money; buy financial assets such as individual stocks or bonds. The stock investment is buying part ownership in a company. The bond investment is lending money to a company that pays you dividends or interest and returns your initial investment at the bond’s maturity. 

Pros: Long term research suggests that most stock investments increase in value over the long term (+10 years). A diversified mix of stocks and bonds will temper the volatility of your the individual investments. If you buy at the right price and hold your investments for the long term, you are likely to make a decent return. Plus, some stocks and bonds yield high dividends. The high dividends can provide a long term income stream, without too much oversight. 

Cons: Individual stock and bond investing require hours of research and maintenance. You need a large amount of cash for a diversified portfolio of stocks and bonds. The value of these investments will go up and down and if you paid too high a price you will likely lose money.

Is investing in individual stocks and bonds passive income investing?

In general, active stock pickers spend a fair amount of time reviewing their investments to ensure that they continue to grow and pay dividends over the long term. If you buy blue chip stocks and investment grade bonds, these individual investments require less oversight than investing in rental real estate. Although not completely passive, you can create a semi-passive income stream by investing in stocks and bonds.

And if you’re interested in getting help with your individual stock investing, you might consider Motif or M1 Finance. These two platforms combine DIY investing with investment guidance. 

3. Investing in high dividend paying ETFs and mutual funds

What is it? Exchange traded funds (ETFs) and mutual funds are groups of individual stocks, bonds or other financial assets. They come in a multitude of varieties. High dividend paying funds and ETFs own stocks and/or bonds that pay dividends. 

Pros: You are diversified by the many holdings within the ETF or mutual fund. Funds are easy and economical to own. You don’t have to pick and choose the individual securities. You can target certain sectors of the investment world with one fund. REITs or real estate investment trusts are an easy way to invest in the real estate markets.

Here are several examples of high dividend paying funds:

Fund Name Fund Symbol Dividend Yield
Vanguard High Dividend Yield Index Fund VHDYX 3.02%
Wisdom Tree International LargeCap Dividend Fund DOL 6.19%
Fidelity Real Estate Income Fund FRIFX 3.89%
Schwab Dividend Equity Fund SWDSX 1.45%
iShares Core U.S. Aggregate Bond ETF AGG 2.40%
iShares TIPS Bond ETF TIP 2.06%

Cons: The underlying value of your investment may fluctuate. These funds charge fees, so make sure to look for lower fee ETFs and funds before investing. 

Is investing in individual stock and bond funds passive income investing?

Yes, this would be akin to passive investing. You buy the fund and reap the dividends. This doesn’t mean that you will never suffer a loss. Ultimately, you’re responsible for keeping an eye on your investments, even if they are in a fund, to make sure they continue to meet your investment criteria. 

Bonus; How to Turn Freelance Income Into a Robust Passive Income Stream 

Passive Income Investments Takeaway

My husband has written 6 books and now receives royalties for those books. Now, the income is truly passive. But the amount of time it took to write the books was monumental. And some sell exceptionally well with nice royalties, while others less so.

I’ve written 3 books and also receive a trickle of passive income from those book sales.

Previously, I invested in rental real estate with positive rewards. Why aren’t I doing it now? It is incredibly time consuming and it’s also quite difficult to uncover real estate with positive cash flow potential. Also, I became annoyed with middle of the night phone calls and tenants tearing up the property.

  I’ve invested in stocks and bonds for many years and generated wealth over the long term. My constitution is well suited to handle the volatility of the markets. Beware; a reactionary disposition can lead to impulsive missteps.

In summary, passive income is a misnomer. The only truly passive income is “gift income.” When someone gives you money, now that is “passive.”  But for additional income with varying amounts of extra effort, these and other approaches may lead to diversified income streams. 

Approach these money making strategies with your eyes open and a commitment to devoting extra time and money to oversee your passive income investments.

What are your experiences, pro & con, with real estate, stock, and bond market investing?

A version of this post was previously published.

 

 

    17 Comments

  1. I would have to agree with you that gifts in cash are true passive income. Unfortunately, we do not get alot of those!

    On the other hand, I would call passive income any income you make from a side activity you enjoy (such as blogging).

    I would reinvest any such income in dividend paying stocks to maximize its value.

    BeatingTheIndex

    September 28, 2010

  2. Hi Beating- Yes, I’m not sure how to drum up the “gift getting.” I like your idea of reinvesting income in dividend stocks, although I lean more towards div paying etf’s and mutual funds.
    thanks for stopping by.

    Barb

    September 28, 2010

  3. Nice sum up. I appreciated the real estate part as I’d like to some day soon own my first property. I’ve been hearing more and more lately that there are a LOT of potential problems with it…Though it seems like if you buy a fairly new place that half of those problems can be alleviated?

    MFO

    September 28, 2010

  4. Real estate is an excellent way to build wealth. Caveat, buy at a “value” price and be prepared to spend lots of time on the endeavor. Many parts of the country today offer unbelievable bargains. I wish I was in Florida right NOW!

    Barb

    September 29, 2010

  5. Barb… I really wish I could invest in real estate. In fact, I was just looking into it today. I have the fantastic credit score and decent valued homes in my area. The only thing keeping me is a down payment! Even if it was only 3%-5%. Sigh.

    Money Funk

    September 29, 2010

  6. Money Funk, Don’t despair, start a Smarty Pig account for real estate “down payment.” Good luck!

    Barb

    September 29, 2010

  7. My mother in law has done quite well with real estate, inheriting two homes that she rents out and buying one in the 70s in the Silicon Valley. You can imagine that the return on that investment is awesome!

    Hey, Barb, congratulations for hitting page 1 of the Wisebread Top 100!

    The Saved Quarter

    September 29, 2010

  8. Hi Saved Quarter- I’ll let you in on a secret, TIME & compounding are the greatest paths to wealth. Anyone with a couple of bucks can be rich if they live long enough. BTW, your mom in law is a wise woman!

    Barb

    September 29, 2010

  9. Barb,
    I appreciate the candid view of “passive” income. Some might be more passive than others, but, unless it is a gift, all of it takes effort, time and scrutiny.

    Joe Plemon

    September 30, 2010

  10. One day, I will probably consider renting the condo out as me and the gf either buy a house or do something else. I don’t know if I would want to get highly involved in real estate due to the headaches, though. Dividend income, capital growth, and online income are pretty cool, and the laws are biased against the landlords around here! And then they complain why 80% of the apartment stock is cheap 1970s and 1980s construction and deteriorating…

    Invest It Wisely

    September 30, 2010

  11. P.S. I have a thought: What happens when everyone compounds and then tries to live off of their compounding interest? It only works if some people do it. If everyone does it, asset prices and income fall to the floor until some people get working again (or society becomes fabulously wealthy and productive) 😉

    Invest It Wisely

    September 30, 2010

  12. @Joe-Thanks for weighing in!
    @Kevin-It’s not a bad (future)idea to rent out the condo. The last time el Carino and I did that was in San Digo after we moved from our 1st condo. The last straw was when we had to fumigate the entire condo due to FLEAS.
    Re 2nd post-:) you are always thinking!!! I like that!
    Best regards to both of you! Barb

    Barb

    October 1, 2010

  13. I agree with you that passive income is not really passive. But since most of these ideas take research and planning rather than physical labor, I can see why some call it passive. As you said, only gifts and safe investments that generate a return can be considered passive. Many take this too far and just buy a stock or mutual fund and then sit back and wait for the income – losing money along the way!

    Khaleef @ KNS Financial

    October 3, 2010

  14. Khaleef, I like your characterization that these strategies don’t require physical labor! Yet many of us with desk jobs would be able to call our work passive!

    Barb

    October 3, 2010

  15. I have had mixed results with investing in stocks. For too many years I was only focused on short term gains as I was very inpatient. Now, I focus on allocating the best blue chip stocks that pay dividends.

  16. @John, You are not alone, no investor has avoided losses! Sounds like your following a more promising approach. Good luck.

    Barb

    October 4, 2010

  17. “Passive” income is really passive for tax purposes only! It is taxed at a more favorably since you don’t have to pay Self Employment taxes on it. (15.2%). So, as it isn’t really “passive”, it does save you in tax money when compared to “Earned” Income!

    Todd

    October 5, 2010

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