“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 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.
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.
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.