Introduction to Passive Income
Here are the top six passive income streams to make your money work for you, coming from someone who’s worked in finance for over seven years.
Passive Income Investment 1: Real Estate (REITs)
Overview
Starting Passive Income Investment 1 with real estate, and you don’t need a million dollars. You could start with a 100 or even $10 with REITs. REITs stand for Real Estate Investment Trust. In simple terms, these are companies that own a bunch of real estate like warehouses, Office Buildings, or apartment buildings, and if you buy a share of that company, AKA that REIT, in the stock market, then you’ll get some certain passive income benefits.
How It Works
The one benefit you’re probably interested in is that REITs are legally required to pay 90% of their income back to shareholders like you, which basically means you’re receiving rent payments in the form of RE dividends. But there are two things you should keep in mind. The first is you want to get a good understanding of the type of real estate that specific REIT specializes in, because some real estate types might be more futureproof than others.
Choosing The Right REIT
For instance, everybody is talking about AI right now, and if there’s one thing that tech companies or AI startups spend money on. So, knowing that, you might consider looking for REITs that specialize in data centers. On the other hand, we know that remote work is slowly becoming the new Norm, meaning office spaces are becoming empty and the demand for them is falling, so that might mean REITs that specialize in office spaces might not be it.
Things To Consider
You also want to consider just how leveraged the REIT is, which means how much money the REIT is borrowing to buy these properties. It’s pretty similar to when you take out a mortgage to buy a house; you have this down payment and then you borrow the rest of the money. REITs do the exact same thing so they can buy more properties and grow faster, but you want to make sure that the REIT you’re investing in isn’t super leveraged, meaning that its debt to equity ratio isn’t too high. Otherwise, that might mean that if it has a lot of debt, all that additional interest payments could cut into its profit, which reduces how much cash you receive.
Passive Income Investment 2: Buying a Small Business
Overview
Next, you can buy a small business. Most people don’t realize this, but you don’t need a hundred billion do to buy a small business. There are many small businesses out there that you can buy for just a few thousand, and I’ll share some sites in a bit. But if you want this to be as positive as possible, you want to look for businesses that can run with minimal effort; think of things like Amazon FBA stores or affiliate marketing sites.
Real Example
One of my friends who exited his Tech startup around 5 years ago, he wanted to do something different, so he decided to buy an existing Amazon FBA store. He found one that he thought he could improve with a little TLC. The FBA store he bought was profitable, but the owners were looking to retire, and the great thing is that the store already had a lot of five star reviews, they had a team in place, and basically all the systems up and running already.
Things To Look For
If you’re looking to buy an existing business, there are three things you need to look out for. First, look for businesses that have a positive cash flow, meaning that they bring in more money than they spend each month. If a business is making 5K a month in profit after expenses, that’s 60k a year going straight into your pockets.
Understanding The Model
Next, you want to be sure that you understand the business model and how they make money; like do they rely on one-time sales, a subscription model, or is it more of an ad-based revenue? For instance, content websites generally rely on affiliate marketing and earning through commissions by promoting products, while a lat on the other hand, they generate steady revenue from people washing their clothes.
Improving The Business
And third, but most importantly, ask yourself, can you improve the business? Before you even think about buying a business, you should have an idea of how you’re going to scale the business based on your expertise, whether that’s reducing cost, or implementing new marketing channels, or negotiating more favorable deals. What is your special sauce that you can bring into the business and help it grow?
Resources
If you’re interested, you want to check out sites like Flippa and bis Buell. Just browse through the listings for fun, and you can easily find businesses that you can buy for just a few thousand dollar or even less nowadays.
Passive Income Investment 3: Renting Your Car on Turo
Overview
Next is renting your car out on Turo. Think of Turo like the Airbnb for cars, where you essentially put your car on its Marketplace and other people can rent it out. I actually have a friend who owns a small Fleet of vehicles that they rent out, and he’s making a healthy amount of money.
Example
He was able to grow his Turo business really quickly by focusing on minivans and SUVs, basically cars that Target families coming on vacation, because he knew that since they have kids, they’re generally safer drivers, and since he has multiple Vehicles, he actually partnered with a local Car Rental Management Service that takes care of everything from cleaning to communication, which makes the whole process really passive.
Key Factors
If you’re considering Turo, there are two main things to look out for. Number one is location matters; a car in a bustling City or tourist hotspot will get a lot more bookings than in a sleepy town. For instance, listing in Los Angeles or Miami, they see a lot higher demand you around due to the constant tourist traffic. Second, the type of vehicle you own makes a big difference.
Profit Breakdown
From Turo’s calculator, higher end cars earn more per year on average. For instance, renting out this Porsche can earn you close to $30,000 a year. In contrast, lower-end cars earn less per year, with the highest earner being the Chrysler Voyager topping out at 10K per year, and while that’s a difference of around 20K a year, this doesn’t tell the whole story.
ROI Comparison
For instance, take a Fiat 500 which is worth around 12K and a Lincoln Navigator which is worth around 68k. The Lincoln Navigator can potentially make 25.3k a year while the Fiat can only manage around 7K, but the Lincoln Navigator costs around 13k in car loans, and that’s not counting maintenance and insurance, which is more expensive for luxury cars, while the Fiat only costs around 2.5k, which means from an ROI perspective, the Fiat 500 is the better option, returning almost 180% while the Lincoln only returns 70%.
How to Get Started
If you want to get started on Turo, there are a few things you want to know. First, the easiest option is to start by listing a vehicle you don’t use daily, so if you have a Toyota Camry in your backyard, Turo estimates that you can make around 7.8k a year, and if you have a car that’s fully paid off, then that’s pure profit minus the maintenance and insurance cost.
Expense Analysis
But if you don’t have a car that’s fully paid off, or you’re thinking of getting one specifically for renting it out, then let’s look at some numbers. The average going price to rent a Toyota Camry on Turo is around $41, from which the host gets around $33. Assuming that your car is booked or rented out 65% of the year, that means you’ll be earning around $652 a month, or $782 every year, which is on the revenue side.
Loan and Costs
On the expense side, we need to consider the loan payment; a Camry is worth around 21.6k, and assuming a 10% down payment and a standard loan term of 60 months at 4.5% interest, the monthly payments come around to $400. If we tack on around $45 a month for insurance, $50 maintenance, $40 parking, and $40 cleaning, this comes out to around $6,900. Assuming you sell the car at the end of the loan term when it’s fully paid off at around $111,000, then you’ve made a tidy profit overall of around 14k over the 5 years.
Passive Income Investment 4: Dividend Stocks
Overview
Next, dividend stocks. So, in simple terms, when you hold a stock, you own part of a company. If the company makes a profit, then it’s going to have extra cash on hand. Now that company can either reinvest that cash to grow the company or pass on that cash to the owners, AKA you.
Dividend Yield
It’s sort of like if you have a rental property; you basically own the property, but you receive payments every so often. Dividend stocks typically make payouts every quarter, and this can be a steady stream of passive income.
What to Watch For
But while this all sounds great, not all dividend stocks are created equal. Here are three things you should look out for. First, the dividend yield, which tells you how much return you get relative to the stock price; for example, AT&T, the price per share right now is trading around $21.22, and the dividend yield is 5.23%.
Example Calculation
This means that if you buy a share of AT&T at $21.22, then you’d earn about $110 at the end of the year. While at first this might not seem like a lot of money, imagine if you held 100 shares, or a thousand shares, or 10,000 shares. Over time you’re going to make more and more money in the form of dividend payouts.
High-Yield Warning
Now, most people at this point start thinking, I’ll just pick the dividend stocks that have the highest yield, but here’s the kicker; a high yield isn’t always a good thing. Companies that offer unusually high yields could mean they’re in financial trouble; for instance, if the yield is higher than 7%, then you want to do a bit more research into it.
Payout Ratio
Next, the payout ratio, which is a percentage of the company profits that the company will pay out as dividends. For instance, if a company made $100 in profit and their payout ratio is 75%, that means they’ll distribute $75 to its shareholders. While you might think a high payout ratio is a good thing because you get a bigger chunk of that profit, the downside is that company has less money to reinvest in itself to grow the company.
Consistency Matters
Next, watch out for companies that have a history of reducing their payouts during tough times, cuz generally this means you can’t rely on this passive income stream to keep flowing. If you’re interested in dividend stocks, you want to look out for ones that have been around for a long time, they’ve consistently grown their dividends, and they have good management with a good track record. For instance, there’s an elite group of companies known as Dividend Aristocrats that have been consistently making dividend payouts for at least 25 consecutive years.
Passive Income Investment 5: Dividend Index Funds
If looking for individual dividend stocks is too much work, then check out dividend index funds. You can think of them Like A well-stocked Buffet of dividend paying stocks; you enjoy a spread of companies without having to pick out each dish. So, instead of buying individual dividend stocks, you can buy a single fund that holds a basket of dividend paying companies.
Expense Ratios
One thing to look out for when picking out dividend index funds is the expense ratio, which is the annual fee that the fund will charge you to cover admin costs like marketing expenses and transaction fees. Now, these fees are generally unavoidable, so for the most part I’d suggest you look for funds with lower expense ratios.
Passive Income Investment 6: High Yield Savings Accounts (HYSA)
Overview
Next, my absolute favorite passive income stream is within HYSA, which stands for high yield savings account. Many people don’t realize what they’re missing out on when they use big Banks like Chase, Wells Fargo, or Bank of America. The problem with these National Banks is that they offer terrible rates, as low as 0.1% for their savings accounts, and here’s what the difference a few percentage points could actually look like.
Example Comparison
If you deposit $10,000 in a Chase savings account at a 0.1% interest rate, you’d earn $1 in interest by the end of the year, but if you put $10,000 into a high yield savings account like UFB Direct at 5% interest rate, you’d earn $500 by the end of the year. That’s literally a 500 times difference, and I don’t say this a lot, but opening high yield savings account was actually one of my very first sources of passive income.
What to Watch For
It continues to pay me thousands of dollars in interest every month without doing anything. But while an HYSA seems really good, there are three things you want to look out for before you pick one. First, interest rate matters; you want to know how much interest rate these accounts are actually paying you, because you’re trying to get the most out of your money.
Fees and Safety
Second, fees; make sure that there are zero fees, otherwise those fees are just going to eat into any interest you earn. Third is FDIC insured; you want to make sure that the online bank they’re FDIC insured, because this will protect your money up to 250k in case there’s a bank failure.