The best way to create passive income

[crosses]

I don't usually wander into this section of the forums, but I do have a question. What is the best way (in your opinion) to create passive income to help supplement your retirement savings. Is there any tried and true method of doing this or am I not making any sense?

[terry1156]

Save money! The more you can save, the more interest you'll eventually have to live off when you retire.

[Bruce Wayne]

If you can build websites with advertising then this could work but it's a difficult market to break into.

[Snoopy2645]

I think having a house that is paid for when you retire is a big step. My grandma always said you dont want to retire in debt. Also maybe invest in savings bonds that you can put up & in retirement they will be worth more. Also work hard while you are young because you never know in retirement you may not feel like working but it maybe nescessary if its necessary.

[rchiang]

Ugh, curse Robert Kyosaki and his newfangled terms. Most investment vehicles pay a return on the money you put in it. In the early days of your saving and investing, this return is often called "growth" (since that's your goal). Late in life (or earlier if you're lucky), you take out this money and the return is usually for income purposes.

The important difference is that early in life you can make risk/return tradeoffs (this is your *savings* after all) compared to later in life. After all, would you like your income to vary from 8% to 1% like it did from 2001-2004? If your so called "passive investments" at 8% gave you $80k in interest/dividends/etc, then 1% becomes $10k/year. Ouch!

Now here's the hard part. Let's assume that you can "safely" get 5% on average. For every $10k/year of income that you want, you need to have $200k somewhere in savings. So, 50k requires $1M and $100k requires $2M. Getting to $1M+ in savings (i.e. real dollars sitting in a bank account, stock or bond mutual funds, Treasury bonds, etc.) isn't necessarily easy.

Of course, there are other investments (e.g. real estate), but the "return" is still the same thing. You would have to be able to rent any property or properties that you own for more than the mortgage (or get the full rent if you've paid it off).

There's nothing really fancy going on here. Just keep in mind that once you treat any return on your investment as "income" it stops contributing to growth. So, say you have $1M and can live off $50k/year. Assuming nothing unusual happens, you'll still have $1M 15 years from now instead of $2M if you let that money grow instead of using it as income.

I hope that helps.

-Ray

[jmjj215]

You could also figure out how much above the "return" you could withdraw from the principle based on how long you're going to live. CFPs do that type of thing all the time. Dave Ramsey also advocates such an approach.

[VJW]

Rental property is where most people receive passive income. It represents about 80% of the category. Income from an LLC or limited partnerships is also a way that a lot of people receive passive income.

#

[jmjj215]

And if you're income is under some threshhold (I'm thinking it phases out above 125k AGI, but not sure), you can take up to $25,000 of passive losses against your ordinary income (verses having to take passive losses only against passive income).

Rentals can sometimes have paper losses, but positive cash flow (because of your ability to depreciate the property as a non-cash tax expenses). It's pretty nice. I plan on slowly moving into rentals to generate more passive income - although I don't buy into the whole OPM junk that goes on.

[Russell]

I looked into rental properties and I couldn't come up with positive cash flow even if I bought most of the property on cash...which isn't a very smart thing to do. So either I'd have to wait a long time to generate positive cash flow which still would be very little or I'd have to count on selling the property in 20 yrs near my retirement and hope that it'll be worth more than what I paid for it.

I know its the tried and true way of funding your retirement but unless you own a 100+ unit apt building I don't see how that would generate passive income right away.

[jmjj215]

What % downpayment were you considering? In what area? At what time?

[Russell]

I played with a few different senarios. See my post (post #12) here:

Out of state real-estate investment advice

[jmjj215]

That calculator you used - talked about "yearly addition to net worth", of $5k-6k every year. On a $50,000 investment that's pretty good. Am I missing something in there? Not including the possible equity increase, you're making 4% - I think the equity increase is the kicker there - it makes a big difference.

[Russell]

If you plug in the numbers I used in my example (their default numbers are too optimistic) it shows Cash Flow of $2500/YR which is what a passive income would be - and its peanuts ($200 per month). But wait, this also this doesn't include the property management fee, unless you manage the property yourself. Furthermore, it doesn't take into account the number of months the property would be vacant each year. So in the end you might actually have a negative cash flow.

As far as "Yearly addition to Net Worth" I agree and that's precisely what I said earlier and to quote myself:

... or I'd have to count on selling the property in 20 yrs near my retirement and hope that it'll be worth more than what I paid for it.

However, I don't think the property value would grow as fast as 6% (their default value) each year for the next 20 yrs, unless maybe it was in NY city or California but in those areas your rent will never catch up with the mortgage...

The only way I see making money off rental properties is by having several of them and as you retire you start selling them one at a time and live off of the selling price which will hopefully be all profit at that point.

Again, my idea of passive income is to make at least a decent amount each month/year while I'm young - so that I can also enjoy my life now

[jmjj215]

Since I'm very interested in this strategy, I'm interested in digging a bit more to see how it can work to create a good amount of passive income over time. The main component of my strategy is that I would/will only hold one mortgage at a time, funnel all rental profits into paying down that mortgage, then lather, rinse and repeat.

I think having 10 rental homes paid for would provide a nice passive income. But again, my initial calculations were higher than $200 per month per unit, more like $500.

[34saving]

I think the biggest thing with income properties is to not pay TOO MUCH in the beginning. That's hard now-a-days since everybody seems to think they can get rich in real estate, so they're driving the market up. I think a good strategy is 1) Buy distressed in good area. 2) Fix what's wrong with it. (Several of the properties I've been looking at lately probably need a good $30,000 to $40,000 of work.) 3) Sell with a lease-option (be sure to check the legal ins and outs of your state.) 4) Lather, rinse, repeat. This strategy (as with all real estate strategies in my opinion) is not passive though. It takes work.

[jmjj215]

I suppose nothing is ever truly passive. Even if you're just living off of interest, you're still probably monitoring and such.

Good points 34saving - thanks!

[sweeps]

Have been enjoying this thread, although I have little to contribute.

Came across this article though... http://news.yahoo.com/s/cmp/20051110/tc_cmp/173601281

How about taking out a mortgage on an online property?

[katwoman]

If RE is the way you want to go, stick to college towns. The big ones. No vacanies and you can still get the apt rented while being a slum lord. At least, that's the way my old landlords did it and they were millionaires.

[baselle]

The best way is a number of "ways" to produce a revenue stream: fixed income investments, savings bonds, CD ladders, dividend stock, even insurance and SS.

I always thought that the best use of RE (for the unknowedgeable) is to simply have a house to live in that's paid off. Rent and mortgage is always going to be the bulk of your spending each month, and if you can eliminate that your passive income streams don't have to work as hard.

[jmjj215]

your passive income streams don't have to work as hard

that's a great way of putting it. Well said.