Finding Passive/Alternative Income Streams

Even though this site is all about my million dollar net worth journey, I personally consider passive/alternative income to be more important. Why?  As I’ve mentioned before, I would consider myself financially free the day that I no longer need my 9-5 job to cover our expenses.  Imagine the day that you don’t “need” to work to pay the bills.  That, my friends, is what I think wealth accumulation is all about.

Now some people really love their jobs and wouldn’t consider leaving until they’re old and can’t do it anymore.  More power to them as they are truly lucky to have found their passion.

Me?  I “like” my job but it’s not my life calling.  If I had enough in alternative income streams to comfortably support my family, I would seriously consider dropping my career and pursue my passions full time.

What are some ways of obtaining passive/alternative income?

Dividends

I’m a big fan of strong dividend paying companies (like the ones listed in the Claymore ETF).  These companies have a consistent track record of paying and increasing their dividends over the years.  Not only do I like the annual raises, I really like that dividends are taxed favorably.

The only issue with this method of alternative income is that you need big capital (or time) to get enough in dividends to make it worth while.  For example, if you average a 3% dividend in your portfolio, in order to get $10,000 / yr in dividend payments, you would need a $333,333 portfolio.

Of course the beauty of strong dividend paying companies is that they are known to increase their payments at least once a year. Increased dividend payouts from these companies usually result in higher stock prices.  Providing that you start investing in dividends early, then with time, the dividends will become increasingly more significant.

Don’t have a lot of cash to invest at once?  Look into SPP and DRIPs that companies like BNS and ENB offer.  That will enable you to purchase as little as one stock at a time with the dividends reinvested in partial shares.

Rentals

This is another income stream that can really pay off and give you great return for your invested money (b/c of leverage) if you do it right.  Owning rentals is not really passive unless you hire a property manager.

What I like about rentals is that you get monthly cash flow (hopefully) along with capital appreciation.  In addition to this, there are huge tax write offs.  The real down side of this is dealing with tenants which can be a job in itself.  If the cash flow allows, hiring a property manager can really reduce the workload.

Side Business

Another way to increase your alternative income is to do something that you are passionate about.  No matter what you are passionate about, there is usually a business opportunity somewhere.  Whether it’s photography, a specific sport, yoga, cooking, writing or creating websites, do what you love and you’ll be surprised at how money will follow passion.

It’s pretty clear that I’m enthusiastic about personal finance and investing.  Whether it’s talking, blogging, saving or investing, I really enjoy it.  There’s no way that I could keep up on the posting schedule on MDJ if I didn’t enjoy the topic so much.

Final Thoughts

As the story goes, there are 3 ways to increase your savings:

  1. Spend Less than You Earn
  2. Make More Money
  3. Do Both

I’m partial to option number 3.

So ask yourself, what are you passionate about?

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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S
7 years ago

@ Alpha,
1) Rentals have to cash flow from day one, otherwise you are speculating, not investing. I have a strong dislike of REIN. I find them creepy and cultish. Too many pros (agents, JV partners, tiny REITs, small management operations) trolling for new money based on unrealistic fables of success. Ridiculous monthly membership fees. Take everything they say with a good dose of scepticism.

2) REIGs are a good way to invest in RE private equity but they should have a long history; 25k per unit. Also, early stage financing through large well known firms is something I’ve been looking into. You get first dibs (before pre-construction sales) to buy a condo in the the high end major developments (Toronto- Hazelton Lanes, Ave & Bloor, etc.) they put together financing for; also 25k per unit.

SST
7 years ago

Woah! I thought I was the only one on here to trumpet that four-letter word: Private Equity.

I am an staunch endorser of PE, both as an investment avenue and as a generator of wealth. Private equity is what the human race has been operating on for the last 5,000 years. It is what has built and will continue to build true wealth, something not derived from the new fangled public equity markets.

As mentioned, a couple of the important caveats which occur with PE (as should with public equity): understand both the sector and the company in which you are investing, and management track record.
(as well as distinguishing between a PE fund and principal PE.) If you are not qualified or want a third-party opinion, hire a lawyer and an accountant to survey the books and contracts. That few hundred bucks could make all the difference.

Once you ascertain if the company is viable for you or not, a couple other significant PE market idiosyncrasies apply.

Most times there is a J-curve associated with PE, which can be very uncomfortable to public equity investors used to looking for immediate short-term “confirmation” gains on their money.

The other major “fear factor” with PE is liquidity. Once you invest, your money is almost always locked in for whatever term you agreed, usually 5-10 years. Unlike the public equity markets, you can’t buy and sell willy-nilly. In my opinion, this is the single source of severe anxiety for people used to only stock market investing.

The good news is, there is almost always a liquidity premium for these illiquid investments. An example of return vs. liquidity would be: T-bills<Public Equity<Private Equity. Pound for pound, illiquid stocks should provide you with a better return than liquid stocks. As an added bonus, with your money locked away, you won't have to worry about it daily. Spend the next 5 years enjoying life or planning and developing your next investment strategy.

Perhaps the biggest argument FOR investing in Private Equity is the fact that the Canada Pension Plan (CPP) Investment Board is one of the largest and most active PE players in North America. They are a conservative and precise group of people who are very good at their job. If THEY think it's safe to invest *your* CPP money in PE, it's probably safe.

I can only speak from research I've personally undertaken, and, more importantly, actual investments I've procured, both in PE funds and true PE. Let's take a look:

PE Funds
Farmland (First Investment): 26.5%/yr (2010-current);
S&P500 annual total return = 15%/yr

Farmland (Second Investment): 65%/yr (2013-current);
S&P500 annual total return = 22%/yr

Private Equity Fund: ???%/yr (2013-current)
(This is a Berkshire-type fund whose value will most likely not be fully realized until wind-up/exit.)

Principal PE
Oil Management Co.: 46%/yr (2010-current);
S&P500 annual total return = 15%/yr

Oil Well Co.: 55-70%/yr (2013-current);
S&P500 annual total return = 22%/yr

It has taken me some time and effort to discover suitable deals and shift into these investments, but no more than sifting through thousands of stock and mutual fund data; as demonstrated, the returns have been very well worth it.

Above all, the most valuable component of my PE investments has been the professional contacts I've made during the last few years. As the old saying goes, it's who you know…

Happy Canada Day!

Alpha Centauri
7 years ago

Great comments here! I, too, tend to agree that passive income, not net worth is the key to true financial freedom. Though, clearly the two go hand in hand. Even if you live in a million-dollar home – definitely possible if you live in an expensive city like Toronto or Vancouver – you cannot retire or live off passive income unless you sell it. It’s a nice, nice asset, but you cannot retire.

Passive income is what pays the bills. Creating passive income is the way to go. Simultaneously, increase net worth.

What I’ve been working on are the following:

1) Rental properties. I have two. One recommendation I can’t over stress: they, must, must, must be cash flow positive from day ONE! The 2 rental condo suites I have sure as hell weren’t cash flow positive. However, with aggressive mortgage payments, less and less is spent on interest. Now, after 7 or 8 years, they are finally cash flow positive! But it’s a toil, and a drain. I recommend not to overpay based on what you can realistically charge in rent. I’ve read that gross annual rents should be at least 8 % of the purchase price. Say, for instance, a property costs $200 000, then you should be able to collect 200 000 X 0.08 = $16 000 annually (ie over $1300/month). And that’s just a starting point. There are a lot of unforeseen expenses associated with real estate. Budget for them! I recently was invited to a REIN (Real estate investment network) meeting. Could be worth developing if you’re serious about real estate.

2) Private Equity. Private equity is basically smaller start-ups that are not listed on a stock exchange and don’t have all the regulatory requirements as regularly-listed stocks. The caveat emptor is that you should research, and become a sophisticated investor before dealing with these. Plus they usually require big money to start (usually at least $5000). If you’re interested in these, then make sure you find a reputable broker with a track record. Find out what criteria they use to “accept” investments. The private equity funds are usually REITs, smaller equity firms, resource companies, other types of real estate, or mortgage firms. I pick only ones that pay a dividend, plus have a track record (ie have been around in some form for 10 or more years). Plus, I make sure I understand their business model. Does it seems viable? Can they realistically keep paying dividends? Phone up the companies yourself. Look at their financials. Scrutinize above and beyond just what the broker tells you.

Happy investing!

Green Stickman
10 years ago

This is great article! I am also writing article about active and passive income. I may say that this is an interesting post as well. Thanks for the info!

More power to your site! :)

More Online Backup Software, Book Winners and Weekend Reading | Million Dollar Journey
12 years ago

[…] Going through the archives, approximately one year ago, i wrote about finding alternative income streams. […]

Marketingtips
12 years ago

Must confess I am one of those people who found my calling n my day job and hope never to have to give it up. However there is the issue of security especially financial security and no matter how much you love your job, the risks still remain. For this reason I have built a stream of passive income, which I actually also find quite interesting. Sometimes it’s not about giving up the day job

winston
13 years ago

On rental streams – if you don’t have the capital for an investment property, you can even use sites like RayStay to list a spare room, or a couch to travelers.

Paul
13 years ago

Even as i have already RSS-ed your blog into my reader, i still found your this post thru a search engine.

Cool. You have great content and yes, I am sure you are reaping a stream of income via this blog as well.

Any posting soon on how big a stream this blog is contributing?

cheers and kudos!
Paul
http://www.passivelifeincome.com

Dividendgrowth
13 years ago

I would be interested to see how much your “passive/alternative income” has reached since your last update in September 2007.

Tim
13 years ago

Owning rental property is a tough business, even with a property manager. I’ve found that tenants lie, cheat, and steal, and managing them is like dealing with children. I’ve also found that some property managers lie, cheat, and steal. Rental property is a game of constantly managing people, and keeping aware of situations that surround the area your property is in. It surely is not passive income…On top of the dealing with people aspect, there’s a ton of paperwork, especially in some cities with strict code enforcement of rental properties. Fixing up the rental properties was the fun and easy part of it..the rest of it is all a pain in the butt. Just think how much it sucks when you have all the copper pipes stolen out of your property…Property Manager or not, this becomes a huge expense.

Check out some of our thoughts on rental property at The Money Kings