A few days ago my friend Gail posted a question on BiggerPockets, asking for the best and fastest way for a newbie to get to $10k/month. I recommend reading it here.
Worth noting that this is something Gail has already done, she was asking for her younger friends.
I had my own response, which you can see here.
But over coffee this morning I found I was still thinking about her post, and the answers to her question, which I thought were inadequate across the board. I realized that in order to get an answer we needed to reframe the question.
The goal is $10k a month passive income. Passive is the key word, though it isn’t mentioned in the title. But even passive income is actually a matter of degrees. A turnkey property is considered passive income, and so are stock dividends, and so is bank interest. But bank interest is actually more passive than turnkey properties. At any rate, let’s use “passive” in the broadest, most forgiving sense and assume that you will still have to do a certain amount of maintenance, just not so much that it interrupts any of your other endeavors or weighs on your time, or brain.
With that goal clearly stated the first question is actually: How much capital do you need to acquire a passive income stream that large?
I would say there are even two, maybe three, answers to that first question. I’m going to use rough math here so try to follow along. You need, in theory, either $500,000 or $1,000,000 in available liquid funds that you don’t owe money on.
If you have $500,000, and good credit, it’s possible, if you’re careful and do the research and have awesome credit (750 or higher) to get a commercial loan at 4% enabling you to purchase $2million worth of property that “passively” covers your mortgage and expenses and sheds $10k in profit per month. I’m reasonably certain that if your property generates 1.5 to 2% of the purchase price in rents with a property manager, or even 1.3% (hard to do in cities) without a property manager, that you would make $10k in profit monthly. You’ll have to do your own spreadsheet, I’m intentionally leaving a little room. This is rough math, but I think if you apply this to your situation, you’ll see it works out. Now, that's a pretty high performing property, but it's very possible to achieve. A property like that won't just fall on your lap (and if it did it would break your legs), but you'll be able to find it eventually. No point in getting too far ahead of yourself though.
So that’s how you do it with $500,000 and great credit.
With $1,000,000 it’s a little easier and there are more options. Now you’re just asking for 12% return. That's a great return but again, well within the range of possibility. You could purchase performing banknotes at 80% of their value that should give you this kind of return easily, though you’ll have to keep purchasing them as they're paid off. And that’s being conservative.
You could purchase $1mil in real estate that rents at around 1.3% or higher of the price of the property (a little more if using a property manager). You could do a combination of notes, dividend stocks, and real estate. All without taking loans. It’s very possible to generate 12% “passively” with one million dollars. And even more “passively” and with less risk to generate 8% with 1.5 million dollars.
In other words, we're reframing the original question to what is really being asked, which is: How much money do I personally need to achieve $120,000 annually in passive income, and what’s the quickest way to get there.
The quickest way to get to, say, $500,000 liquid, is to not be passive, obviously. There are a number of ways, but they are all extremely active, require tons of legwork and research, and probably a certain amount of risk as well. Some of the best, it seems to me related to real estate only (I haven’t done all of these) are
- - AirBnB properties (much more active than standard rentals, this is an area I know inside out). Riskier because of neighbors, high tenant turnover, local laws, etc. Yet certainly not rocket science.
- - Purchasing and working non-performing notes, which Gail is expert in.
- - Purchasing foreclosures (steep learning curve, very high risk and competition).
- - Fix and flip.
- - Wholesaling.
Keep in mind you'll also go a lot quicker if your frugal and smart in the rest of your endeavors. Get a Costco card. Don't carry credit card debt. I'm not going to get into all of that here, but it's important especially for people in a hurry.
Based on this formulation, you really have 3 questions to answer, since the goal is already known:
- 1. How active can I be in generating and saving income?
- 2. Keeping in mind the ultimate goal of 10k passive income per month, do I need to get to $500,000, $1mil, or $1.5mil?
- 3. Of the high return active investments (side note, active investments aren’t really “investments”, they’re businesses) which ones speak to me, what are my strengths and what are my limitations (i.e. Can I move? Is my credit good? How much start-up cash do I have? Am I an impulsive person who likes to gamble?). Because if you know your limitations, you’ll find it much easier to succeed within them. And if you don’t think you have limitations you might want to put gaining self-knowledge on your list of things to do as well.
