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Financial planning for financial independence

Content, resources, and services to help people make intelligent decisions with their money in route towards financial freedom

Growing Your Passive Income Streams

If you know me, or have visited my website, I'm sure have grown to realize that I am a supersized advocate for passive income.  I believe that growing a diversified balance of income streams will set the foundation for financial independence more quickly than savings and traditional investing alone.  The concept is not hard to understand for most, but implementation and knowing where to begin in this path can pose a challenge.  So today, that's exactly what we're going to address.  I will highlight some different methods of passive income investing in addition to the pros and cons, and possible barriers to entry for each product.

Luckily, we are in a great period for the passive income investor, as technology and financial services are blending together to make opportunities more readily available and transparent than ever before.  There are some new players on the scene due to this marriage of new and old, which fit nicely into our first category of passive income investing.


Crowdfunding

It seems there are are an endless array of platforms out there that allow you to help kickstart someone's small business or artistic dream.  The problem is that many of these sites only offer small gifts of appreciation in return for your capital.  While this can be heartwarming, we are here today to discuss real money back in your pocket.  Here are some interesting platforms that allow you to put your money towards good works in the community, while also paying you for that generosity.

AHP Fund (American Homeowner Preservation Fund):  This is a rather unique investment opportunity, as the fund buys distressed mortgages from banks for cheap, then works to renegotiate terms with the homeowner to keep them in their home.  The goal of AHP is to help families at risk stay in their homes and build stable communities.  As an investor who supports this goal, AHP is targeting to yield you a 12% return before they take additional earnings.  There are no investor fees, but one could expect their money to be tied up for up to 5 years.  The fund is open to all (unusual in the crowdfunding space) with a $100 minimum deposit.

Crowdfunder:  This platform allows you to be a venture capital investor from coziness of your recliner.  Simply create a profile and start browsing an array of interesting business ideas in which you would like to help seed.  All the detail needed for each business opportunity is provided online, so you don't have to do any heavy lifting.  You can choose to invest in a company directly, or through a diversified fund that Crowdfunder manages for you.  The only issue here is that you have to be an accredited investor to participate.  Unfortunately, this is fairly commonplace for the crowdfunding space, which weeds out the majority of the investing public.  An accredited investor is someone that either earns at least $200k/year or has a net worth of at least $1M (not including a primary residence).

Wunder Capital:  This investment will pull at the heart strings of those who have a passion for environmental issues.  As an investor, you can contribute money to help fund pre-vetted solar projects across the United States.  Targeted returns for your capital are between 6 and 8.5% annually, over the course of 7-10 years.  The minimum investment of $1,000 isn't a high hurdle, but the two funds they currently have available are only open to accredited investors (like Crowdfunder).  I hope this changes as we go forward.

As with any investment you make, please note that there is no guarantee on returns.  Each organization referenced above lists a target of what their investors could expect to receive; however, this is no guarantee.  Approach each situation with the premise that you could potentially lose some, if not all, of your money.

Dividends

Passive income can feel magical

Dividends are a stream of money paid to a company's shareholders out of the cash it earns from operations.  As an investor, this is about as passive an income stream as you're going to find.  One gets paid for simply buying and holding a stock which is simple and straightforward.  But as with anything in life, when something is really easy to do or obtain, the reward isn't necessarily going to be highly lucrative.  Dividends are no different. An investor should expect a well diversified dividend portfolio to pay them anywhere from 3-6% in return.  Anything more and you are likely investing in high risk assets that will have a large amount of volatility.  And volatility is a roller coaster ride in which most investors can't tolerate for long.

When investing in dividend paying securities, I recommend you educate yourself before making a purchase.  Look for companies which have a solid track record of consistency and/or growth in their earnings.  This can be measured by a ratio called Earnings Per Share (or EPS).  Also, screen for companies that aren't paying out nearly all their earnings in the form of dividends.  This means they aren't able to reinvest in and grow their business.  You can measure this by looking at the Payout Ratio of a company.  Both ratios can be found by using an online resource such as Morningstar, and looking under the "Key Ratios" of a company you search.

Bonus note:  I plan to publish my own dividend model (Income Portfolio) at a future date.  Keep an eye out for more details on that in the near future.

Peer-to-Peer Lending

Technology has allowed us to side step the traditional bank lending system.  Instead, both borrowers and lenders can now lend direct to each other through online applications.  This allows for an open marketplace with fewer middlemen.

The returns for an investor could expect to receive will vary based on the risk level of the loans you target.  The two largest companies in this space presently are Lending Club and Prosper.  A good comparison of the two platforms was conducted by Rob Berger of Dough Roller.  Both have a fairly extensive underwriting process, so investors should feel they are receiving a quality analysis of their perspective loans in order to make an informed investment.  Both also have an excellent user interface and charge the same 1% annualized fee.  Just note that the platforms are not open to investors in every state (presently not in PA for either, otherwise I would be testing them both), so make sure to check to see if your state is open to investors before proceeding. Other than the state restrictions for some, most anyone can sign up to invest as the minimums are very low at $25.

Bonus note:  Please keep in mind that these platforms have only been around post-2008.  It is unknown how peer loans will perform during a major market correction, but historical evidence would suggest that they are susceptible to a high amount of risk.  These loans are high yield in nature, and by comparison, the high yield corporate bond space saw a decline of nearly 24% in 2008 (as measured by the iShares iBoxx High Yield Corporate Bond ETF, HYG).

Real Estate

One of my cash flow kings

Cash flow positive real estate is one of my favorite passive income streams, but requires more due diligence and time from an investor than all the other passive income sources referenced here.  Buying the right property is key to making a smart investment in real estate, so education on the topic before initiating a purchase is a necessity.  In turn, the payoff for a good purchase can be very lucrative.  Whereas other passive income sources generally yield between 3-8% of your cash investment, real estate can push you into double digit yields fairly quickly (in addition to the principal pay down of your loan, appreciation of the property, and tax benefits).  This will really boost your odds of securing early financial independence!

If looking to get started in real estate, the folks at BiggerPockets have a ton of great information on their website and a tremendous following.  Join their community, poke through the forums, and start listening to their podcast to help kickstart that education.  Books such as Rich Dad Poor Dad have also influenced many a person down the path of real estate.

When analyzing potential investment property purchases, I recommend you stick to the 1% rule to help you weed out those locations that might prove to be a drain on your wallet.  This means that projected (gross) monthly rental income should be at least 1% of the total purchase price of a property (closing costs included).  Of course, there are many other variables that will impact the profitability of a real estate investment, but utilizing the 1% rule will help assist in your path towards purchase of only those properties that will be cash flow positive after all expenses (principal, interest, taxes, insurance, vacancies, maintenance, capital expenditures).  Remember, we are focused on passive income here, not appreciation, which is another form of investing all-together.  Check out my real estate resource page for a couple of good providers of turnkey investment properties.  They tend to have a nice selection of locations that fit this 1% rule.

You can also crowdfund projects in the real estate space as well.  Sites such as Fundrise, Groundfloor, Realty Mogul, and Small Change are making it easy to invest in all sorts of real estate developments.  Each has their own specifics, but they all generally have products available to both accredited and non-accredited investors, while seeking to yield you between 8-12% on your investment through the term of the loan/project.

Bonus note:  I write about and track the performance of my own real estate investments in my blog, and will be digging into further educational items regarding real estate going forward.  Make sure to sign up for my newsletter at the bottom on the page so you don't miss out.

Retirement Accounts

To round things up, I am going to throw traditional retirement accounts into the passive income conversation.  Certainly, if you're over the age of 59 1/2 and already retired, you can bank on steady withdrawals from these accounts to provide for your living expenses.  That is exactly what these were designed to do.  But something not known to all is that even early retirement enthusiasts can look to the money saved in their IRAs to supplement their living needs.  And penalty free!  This can be done through the Substantially Equal Periodic Payment (SEPP) program.

The SEPP program is allowed through IRS Rule 72(t), which permits for penalty-free withdraws from traditional IRA accounts, provided the owner takes at least 5 years worth of payments as calculated by one of 3 IRS-approved methods.  Bankrate has a good online calculator if you are curious about finding how much you could receive (monthly or annually) for annuitizing your IRA account.  All three calculations are listed on their site.  The "reasonable interest rate" is any rate less than or equal to 120% of the Federal Mid-Term interest rate.  You can find those listed rates here.

For those looking to achieve financial independence earlier in life (hopefully you all are!), taking advantage of the SEPP program will allow you to access your IRA funds while avoiding the 10% penalty you would otherwise face on withdrawals from those accounts before age 59 1/2.  Score one for the good guys.


Do you have any good passive income investing ideas or tips?  Feel free to share them below!