In the spirit of overworked bankers & finance professionals who are looking towards the eventual light at the end of the tunnel, let's explore the topic of creating sustainable sources of income outside one's daily W-2 grind.
Personally I've given the idea a lot of thought lately as I'm aware there is an expiration date on my career, whether the end is through my own doing or not. In this vein, the "5 year plan" for me, and I think any banker, is to save up as much capital as possible in order to deploy it in other ventures, whether I decide to stay in my career or not.
Without further ado, below are exploratory ideas I've come across which would be great to get others' input on. These obviously all entail varying levels of time commitment, investment capital, and professional expertise.
1) Building a small property portfolio through the purchase of cash flow generating rental properties
-would require scouting properties, talking to real estate professionals & management professionals, personal education
2) Acquiring an existing cash flow generating small business platform, i.e. any consumer retail business, or buying into a franchise
-websites available for prospects & you need to heavily diligence
3) Acquiring an internet business
-websites available for prospects & you need to heavily diligence
4) Acquiring a stake in small business as an LP or silent partner through the infusion of growth equity
-less familiar with this concept but I'm sure its out there. think less PE capital and more on the small investment side. would likely have to come through family business contacts or personal network
5) Investing in equities that pay dividends or bonds, and other high yielding income generating securities
-would require a large base of capital and discussion with financial planners / wealth advisors
Would be great to hear anyone's personal experience with any of the above, any golden nuggets of wisdom, or other ideas I may have missed. Thanks.
yo
LT capital gains Spanky. Why the hell you want to pay marginal tax rates on dividends?
This topic has been on my mind a lot lately as well. It might be selective bias since I've been thinking about it but it also seems there has been more discussion on WSO recently about passive income/side hustle/FIRE (financial independence, retire early).
Gonna preface that I don't have any actionable items to add, but I would like to continue the discussion further with some thoughts.
Beyond the monetary benefit, I'm struggling with the idea of whether the time investment in passive income endeavors is worth it. I'm currently working in equity research, and have the professional goal of MBA -> buy-side. The question is, am I better off using my time and energy to becoming a better investor or pursuing something like a real estate rental.
After certain tough stretches of work, ideas of FIRE become stronger. I think there was a thread recently about how much money is enough. Two answers that stuck out was 1. when your passive income > spending 2. when you have control of your time.
It feels like the only way to accomplish this is through entrepreneurship, and the question to ask changes to: is pursuing something entrepreneurial worth giving up a well-paying job and more importantly the potential for exponentially higher earnings if we follow our current professional plan? I'm a fan of Tim Ferriss's podcasts and only finally began reading 4-hour work week which tackles these questions.
Would love to hear from people further into their professional careers and how they tackled some of these questions.
I agree with a lot of this but also disagree on some points. I feel like your point on becoming a better investor vs pursuing something like real estate rental - it doesn't have to be mutually exclusive. Real estate is just one example [maybe more time consuming], but I think the limiting factor in any side business endeavor is capital. Given a large enough base of capital, you can deploy your money in a way in which it is working for you. Do the proper diligence before deploying. The only factor you have to solve for is what kind of return is sufficient for you given the amount of dollars you're deploying and risk, and that should guide you to the proper channels of ideas.
I also can relate to the tough stretches of work making the FIRE drive stronger. But I view it differently - I view it as 1) a hedge to my job and 2) a supplement to an already good W-2 lifestyle. If through time I can scale whatever endeavors I'm doing to a large enough income stream, I'm in control of my destiny and can continue working with the peace of mind that even if I get fired, I'll still be good. I think this is the ultimate benefit for your psychological health at work and would probably even help with performance.
But again, I don't think work and side ventures are mutually exclusive, given a large enough base of capital to deploy.
No business you purchase is really going to be 100% passive, especially if you don't have a good operating skill set/experience building systems/hiring GMs.
If you want true passive income, the only way to make it works is by getting really good at hiring amazing GMs + buying high quality businesses. Unfortunately you won't find a high quality business for under $10M.
Thanks m_1 , understood about high quality businesses. It doesn't have to be a high quality business that is generating millions in FCF though. I just want supplemental income that is large enough to at least come close to equaling gross W-2 wages.
I'm thinking more along the lines of building a base stream of income that can eventually be scaled by either 1) scaling one successful venture, or 2) running multiple moderately successful but less profitable ventures. Option two is a nice hedge against the risk of revenue concentration but would probably take up all my non-work time. Option 1 is has more concentration risk and would probably be much harder to achieve - so that lends me to think that #2 is better.
Any thoughts?
The problem though is that you won't find something easy to automate unless it is generating enough cash flow to hire great management and doing 1 or 2 that you mentioned is a ton of work. Scaling a venture is not something you can do part time as per your OP either unless you have years of operating experience. Not saying not to do it, but don't do it expecting it to be passive.
Couldn’t agree more. I’ve now been part of 2 businesses with revenues of several million usd and several hundred k ebitda. One is online retailer the other is a multi clinic medical practice.
While they both can run with an absentee owner - it won’t work for very long as you don’t make enough to hire super competent employees/management to run the business without the owners supervision and careful thought put into every big decision. Both businesses still require a ton of effort from the ceos without whom they would likely be unprofitable within a year or so.
Keep in mind this only applies to the smaller businesses.
Very interested in keeping the conversation active.
I do t have any RE experience but It seems that a great passive cash flow opportunity could be from either single or multi family real estate holdings that you buy and have managed by a property management company. I’ve considered Reits before but I don’t like the fact they are highly correlated to the overall equity markets which I feel are way overbought. Alternatives such as Fundrise are a bit scary since they are new and unproven and could have major liquidity issues down the road.
are there any “safe” and passive investments that can yield closer to 5%? Perhaps some tax free munis? Really trying to avoid equities even if they have good dividends.
Next year-ish after interest rates have been hiked a couple more times, maybe some investment grade corporate bonds? Think there will be a ton of corporate debt supply on the horizon due to coming maturities. Not sure how accessible these markets are to non-accredited investors
5 is the only passive one on the list. All others require some work on your part.
The list is impressive and all look tempting to start. But does it cut it? I doubt. Most of us are looking for something more instantly rewarding. I will share a strategy I saw from another forum
If necessity is the mother of invention, then security destroys it. I have the problem of receiving carry and the ability to co-invest. 1st world problems right? The problem is, there is the thought in the back of my mind continuously, how would you be doing on your own, pushing it, hustling, being creative? I have created multiple streams of income, but I need the discipline to put more effort into the side hustles. Different strokes for different folks, but it seems many of the individuals that I have met in finance have a great business mind and could do well on their own if they took the risk.
To the OP's original question: Real estate > maximize depreciation schedules > build taxable losses to offset ordinary income > 1031 exchange indefinitely
The issue is that if you're not actively managing the property, you're not making any money. It's easy to say "earn enough for a down payment, take leverage, and profit". It's much harder to actually make that work. Either you spend a lot of your time managing the building, or you sub that out and as a result, your NOI goes into the shitter. With no offense meant (especially because it seems like you are in the RE business) this is the kind of terrible advice that gets people into trouble. Being able to put together a model and understand the financial concepts behind the business isn't even at the point of scratching the surface of what it takes to successfully operate a RE asset.
Yeah, you can buy some small buildings, do little to no work, and make a 7-8% return in some parts of the country. You could also pick up a high yielding muni bond that's far more liquid and has a low absolute default rate, too.
Real estate is one of the, if not the most popular way people diversify their assets/generate income. The "problem" and note I'm speaking about non-institutional, is dealing with tenants/repairs/management companies etc. 1031s are great, but at some point you're either going to sell and pay the cap gains or have a house chained to you (not the worst thing in the world) that you have to take care of/potentially teach your kids to take care of.
That being said, if you're qualified you can roll over property gains into an UPREIT (Black creek exchange), which is basically a 1031 but rather than own a house you own a black creek reit that pays 4.5% income annually plus whatever it gains (you real estate pros will have to look at the actual properties in the fund though) and save the pain of managing a property. Note: if you have "extra" from a 1031 (new property value is like 1M less than old so you have to pay cap gains on 1M) you can also roll that over.
Don't work for black creek but thought it was cool that there's finally a more concrete tie between real estate and securities for individual investors. PM me if you want some details etc.
The tenants are going to be the biggest hurdle, along with the maintenance of the building.
If you can find a great property manager that lives on site, plus great tenants, then you are well off. However, the maintenance and issues will cause headaches. Fix one thing, something else happens. Rinse, repeat.
I had considered it, and still do. I wouldn't purchase anything below 4-units in terms of rentals.
How are restaurants or companies to purchase? m_1 - what is considered high quality to you?
This, a million times this. Real estate is not just a bond-like equivalent, where you plunk down your down payment and the cash flows in on a monthly basis. It takes a ton of time, and honestly, a decent amount of liquidity. What happens when the hot water heater goes out? As a landlord you're obligated to provide hot water. What happens when someone smells gas and your local utility provider shuts down the gas line, and you need to switch to more expensive #2 oil or an emergency boiler?
Real estate is the absolute worst investment for someone who doesn't understand the asset they're buying inside and out.
I can't agree with this enough. I've had it happen to me personally where someone smelled gas and NatGrid came and shut off the gas. Nobody in the building had hot water/heat because the boiler uses gas. We ended up having to replace the headers for all 12 units and by sheer luck we didn't have to touch the risers, because with 100-year old housing stock in NYC nobody is going to pass a pressure test. This would mean either going through each tenants wall and replacing the gas riser, or switching to electric stoves, or renting a portable boiler to connect to the building at a cost of 20k a month. We luckily only had to come out of pocket 8k...could have been a lot worse.
Real estate is only worthwhile if you can outsource the tenant selection and maintenance issues to a property management company. Doing this after having purchased the property on margin (i.e. with a loan) is going to all but destroy your profit margin. You will be lucky to service your monthly payments with the net income from the property, let alone make any sort of profit.
The people who really make money in RE without getting their hands dirty are those than can afford to buy the property outright. Thus, I see real estate as having one of the highest barriers to entry in the alternative investment space and the embodiment of the "it takes money to make money" mantra.
I've been experimenting with side-hustles and passive income for some time, with various degrees of success. I'll share my 2 cents. And it has always come to a trade-off in time + capital expenditure vs income. Time is often the biggest gating factor. Since for me having a day-job in finance is fairly lucrative, I need to minimize time outlay to SH.
funds mgmt: currently my wife and I generate $120k / yr (60 each) with no work. 0 time outlay, 0 capital investment, I don't want to go into too much detail on it here around that, but it leverages our funds mgmt experience.
capital raising consulting I have done capital raising consultancy. That did not work so well. Generally, funds want to pay a success fee only, and no retainer. That sucks, because most funds who take on independent help are not top flight funds. Capital raising is VERY time consuming (making PPTs, researching which LPs to call on, having LP calls, arranging roadshows, etc.) it's a time to invest, in the hopes that just maybe that fund manager can close a check, and then honor his commitment to pay. That work sucked.
real estate We're in Asia, Real estate has been a low-yield game, but oh, those capital appreciations. RE has gone up 10x in value in our portfolio in the past decade. We are sitting on a lot of value, but yields are still low, and in many cases negative, so it's more like we're feeding the beast. I was at a BB in 2010, so I wish I'd bought US property then. Damn. So maybe doing more emerging markets real estate investing (or waiting for a downturn to buy distressed) is a better way to go. My wife is the queen of distressed-seller real estate.
general (non capital raising) business consulting I had 4 consulting gigs running in parallel, and it was a disaster. Mostly, I've found clients are NOT understanding of the time limits. They expect to have you all to themselves, and are judging by results, not time spent. It's like having having 4 unsatisfied and demanding b*tch girlfriends, and even tho you told them it's non-exclusive, they are not understanding. They all felt under-served even tho I said "well, you're paying my for 15 hrs / wk, and so I can't give you more." One of them in particular took WAY MORE TIME than we agreed to originally, and I didn't fire the client, though I should have. They paid $7k/mo which in our agreement was enough for 15-20 hrs a week max, but they ended up taking consistently north of 35hrs/wk. This one gig cost me my other consulting gigs, which eventually melted down.
Other Side-Hustles I've heard worked well for others:
import export from China-to-global (maybe pre-fab buildings, pre-fab interiors, etc.) EB-5 consulting 7, advising startups on capital raising
Most real estate investing requires scale or it isn't worth the effort. The relative costs associated with property management, capex, etc. are all much higher with say a 4 unit portfolio than a 400 unit portfolio.
If you really want to clip coupons from real estate on the side, buy shares in a REIT.
$EPR $STAG $IRT $GLPI are all net lease REITs paying dividends in excess of 4.5%
Thank you.
Good insights. I respectfully disagree though. i can't get excited about a 4.5% yield. And realizing this, I moved to China, and bought property that has increased in value 10x in last 15 years. And a couple years ago we bought some distressed property that ought to yield us 4-5x on cost within the next 3-5 years once it gets redeveloped. So while special situations real estate may be difficult to come by, it's well worth it if found. I also don't think all real estate requires a huge amount of scale. I think there's more opportunity at a small scale than in the larger and more competitive larger scale.
But I could be wrong. But then again, because good special situations real estate is so hard to come by, it's hardly a reliable side-hustle, so doesn't qualify re my criteria.
I agree that a lot of people who work in finance, law, medicine are more paid than others. And yeah, there are a lot of opportunities now for financial growth because of the covid-19. But, you have to be really careful because there are also a lot of scammers now. I graduated from a faculty of arts and since covid-19 began I couldn't find any job. So, I found some virtual assistant courses and decided to try this job. The most interesting thing that surprised me was the salary. And, obviously, it was the reason why I wanted to become a virtual assistant.
Anyone who works with his or her brain and not with the muscles is, anyway, paid better than other people.
what about stone cold Steve Austin
Out of all of the things you have listed, I am currently investing in equities for a long-term passive income dividend stream. I am one year in on this journey and the most shares I have of a listed company (commercial bank) are around 200. I invest approx 10,000 every month in my portfolio and have invested Rs. 100,000 in this.
I would love to hear thoughts of the other guys on this forum who are investing in equities for long term dividends.
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