Passive Income - What's Your's?

[DRS]

Oh Boy am I in trouble. I'm working on 2 freedom 55 programs

I'll be 110 before I can retire

[George Wade]

Originally Posted by Red Mantis

I realize it seems counterintuitive, but the market bottoming out when you're in your 30s is a actually a good thing. They say that the secret to making money in the market is "Buy low, sell high." We young guys have before us a very good opportunity to take advantage of the first half of that maxim.

My recently retired parents, on the other hand, are having a hell of a time trying to do the second...

What is not intuitive is waiting long enough to see if it really has bottomed out, yet. Then deciding what to do about inflation.

My dad bought a house for $4,500 in 1947. It went up 100 times by 2,001 when we came to manage it. It was not worth 100 times inflated money, though. The house's value would have bought 4,000 cases of beer then and about the same when it sold. Just taxes went up in value in that 55 years. You have to move money around the way the fat cats do without becoming one of them. Ride speculative waves and switch.

Or find a better set of tricks to live by.

[Talbot]

Not trying to rock anybody's boat, but 401k or freedom 55 dont mean anything to me. Thus the value of this thread to anyone not from US is very low.

My plans were nearly complete with retired mil pension, plus pension from my own consultancy plus income from a house rental whilst cruising.

Like all plans, this did not survive the divorce!

I am now scratching round for boat funds, but expect to be living on about $2300 a month after tax, which I reckon is doable.

[cat man do]

Originally Posted by Christian Van H

If you invested in real estate you have recently lost a full 1/3 of your investments value. If your income comes from real estate rental, please explain how you manage your properties while cruising, without paying someone an arm and a leg to look after them for you? I'm having a hard time imagining trusting someone with my investment while I'm 12,000 miles away in the tropics...

Has every property in the US lost 1/3rd?

I was under the impression some had lost that and others had gone up.

As for managing while cruising, get a good property Manager. Ours costs a flat 5% and handles most problems herself. We have been away for 2 months at a time testing and check emails once a week and during those periods have only had contact once.

Money just turns up in the account, new leases are renewed, very painless indeed.

[hellosailor]

"Has every property in the US lost 1/3rd?"
No, not at all.

The problem has been that over the last 15-20 years there have been a lot of tv "make money in real estate!" seminars (heck, 30 years ago they really started) and some folks were really hyping semi-legal schemes or outright illegal schemes and getting rich by charging $1000 a head to sell their "systems" to the rubes. Who believed it was a money-making machine that couldn't fail.

A little under ten years ago, thanks to CountryWide and some other institutions taking advantage of regulatory changes and a "new" investment idea, things got really dangerous. The new idea was that you could get a mortgage with no proof of income and no proven assets. Well, DUH, I GUESS I SHOULD HAVE JUMPED ON THAT BUS! So then you have some magician writing adjustable mortgages that the buyers haven't read, don't understand, and frankly often committed mortgage fraud by claiming incomes that didn't exist.

The whole basis of this was that the junk mortgages could be packaged and resold to investors--so the banks wouldn't get stuck with them, after the banks closed their eyes and ought them from the originators like CountryWide.

And the investors were told "buy your home at any price, because home prices only go up, so before your rates go up you can resell it at a profit!" MAGIC!

This whole thing was a house of cards, a scam, and most of the players involved knew it had to collapse.

On the other hand, folks who bought property carefully, where there was intrinsic value, have held steady and in some cases stayed ahead.

If you bought a home for a reasonable price five years ago, the "value" and taxes skyrocketed in the last five years--but your home is now still worth more than it was. As long as you didn't over-mortgage it in the interim, you'd be all right.

Meanwhile there's blood in the streets and a glut of housing. Oddly enough, there's been a mini-boom in NEW housing in many areas as well, as some folks still have the money and credit to buy new, and they don't want to get involved in the finance mess, foreclosures, or used houses.

Gonna be a long interesting ride. And as usual, the real culprits are the robber barons who engineering it, mainly legally, and will be able to hose down their teflon and carry on, richer than ever as they snap up the now devalued properties. Even going back into the 80's there were plenty of folks who set up co-op building conversions and variable mortgages and other deals, INTENTIONALLY set up so that if the new buyer defaulted--the seller would get to keep all the monies paid AND get the original property back.

Nice way to do business, isn't it? Maybe we need to pass a new law: If you haven't passed college-level economics and math courses, you're not allowed to buy property. Not to worry...someone will start to sell seminars teaching how to beat that, too. (sigh)

Its like drunk boating or buying a powerboat with zero experience or training. There's just too much money in the hands of folks who really never should have been able to accumulate it, and the predators came and took it away. A protectionist state and an end to individual freedom of choice (including bad choices) is the only alternative, and that hasn't worked out very well in many places either, has it? Cuba and China perhaps?

[aspiringsailor]

i have yet to even buy a boat yet, but my strategy is to just stick it out in the military an retire. at 42. a check every month, pretty much guranteed.

[S/V Willow]

We have real estate. Bought over many years and paid off as soon as possible.

Now as to questions about whether it is a good idea to have a management company look after it? Well we do but it took some time and a little heartache to find a company we like - and more importantly - trust.

We don't own any expensive houses and no commercial properties so yes the value does go up and down or stagnates but that doesn't matter to us. We buy and hold not buy and sell so the actual value doesn't matter. What does matter is the tenant and the rent coming in. We have taken risks in the past with tenants that look really bad on paper (single unemployed mum with disabled daughter) but she has worked out to be the best tenant we have ever had.

Our property manager deals with the others and despite her fees etc we still have a good passive income. We assume that there will always be one tenant goofing off and not paying but with several properties you have one always 'off' and the others still generate income.

We are currently in NZ and our properties are all in Australia and we never hear from our property manager at all. She posts out our monthly statements/reports/balances/account receipts she has paid for us and that is it. We have to say though that having a manager that we both like and trust is rare and we were lucky to find her. Our previous big name manager were dreadful, rude, incompetent, fraudulent, liars, lazy and useless so a big company may not be the way to go IMHO.

So that is how we do it - it is not for everyone and you have to start really early building up your portfolio, you have to give up a LOT to pay each house off as quickly as possible and you have to be focused. Works for us and with this recession we haven't been affected at all. If we were considering selling that would be a whole different story and we would have lost a little on the values but not in comparison with the initial price we paid so we are sitting comfortably. We don't buy unnecessary things, we do without alot of the time, we keep an incredibly rigid record of expenses everyday - and we don't divorce! (the biggest killer of fortune) so there you have it. Hope this helps.

[READY2GO]

My stratagy (actually the only way I can do it) work six months, cruise six months, work six months, cruise six months. etc. etc. Not the best plan, but better than work 12 months, work 12 months, etc. etc.

[barnakiel]

In reference to what Christian said:
"...
If you invested in real estate you have recently lost a full 1/3 of your investments value. If your income comes from real estate rental, please explain how you manage your properties while cruising, without paying someone an arm and a leg to look after them for you? I'm having a hard time imagining trusting someone with my investment while I'm 12,000 miles away in the tropics..."



- well you lost or you gained, depending on when you got the property,
- you lost only if you sold the property,
- I was talking about buying the property to get income from rent, not from speculative sale of the property,
- I never said US property,
- I said diversify - get many small, 'rent-able' pieces, not one huge mansion,

Yes, one can manage property without paying an arm and a leg. One way is to rent the property for periods long enough to let you sort any issues during your annual flights in to visit the family. I do not really believe that with 3 or more pieces of property you will face any problem if one of them briefly 'does not work'.

I hold on to the point that US govt bonds are NOT a good investment right now. I believe the risk of inflation rising to the level where interest will be eaten up is very high.

This does not mean all govt bonds are bad - you can buy bonds in economies where the domestic and foreign debt are at safe levels - (like Sweden or Denmark).

b.

[onestepcsy37]

and some more info for hydrogonian on bond laddering.

i didn't really give you a complete answer on two points -

1) how much income does my investment produce?

like i said, i calculated recently that my bonds averaged 6%, so i am getting 6K a year for each 100K i've got invested. but that's just me. if you think 6K a year is too much money, you can get a lower return by investing entirely in U.S. government bonds. the upside is that there is no risk; the downside is your return will be lower. if you think 6K a year is not enough, you can invest in riskier bonds which tend to pay higher rates. you can go as far as buying 'junk' bonds and get really high rates but then you assume a higher risk. time is also a factor. the longer the bond term the higher the rate you will get. so 6% is what i'm getting right now; depending on your penchant for risk, your return will be higher or lower. or maybe the same.

there's also a tax factor. if you live in a state that has an income tax you may be able to buy bonds issued by that state or one of it's municipalities and pay no income tax on it. i live in florida which has no state income tax so it means nothing to me.


2) what kind of bonds do i buy?

i kind of gave you a glib answer. the two main categories are corporate and government. then there are sub categories, particularly in government bonds. they may be U.S. government, state, city, county, municipality, or state or federal corporations. they may be foreign government too. since government bonds are considered less risky they tend to pay lower rates. they may also have tax free status if you live in that state and it has an income tax. most government bonds are backed by the taxing power of the issuer, meaning that the state can raise taxes to pay off a bond if the issuing agency defaults, but be sure to check this out before buying such a bond.

i strongly suggest you read up more on bonds at some of the big investment company websites. also look at www.investinginbonds.com - they have an interesting website.

[osirissail]

- - The figure "6%" is a very important number. Within the retirement & investment sphere it is an axiom that over a fifty year period - costs increase and inflation increases at an average 6% per year. So you need investments that can grow - on average - 6% per year just to maintain your original capital value. Some years you make 20, 30, 50% or more; other years it goes exactly in the same amounts in the negative direction. But over a "working lifetime of 50 years" the 6% number is valid.
- - This number - 6% - is also the "magic number" that determines when you can retire and live securely (as if any thing in the investment world was "secure"). You can calculate, realistically, how much money you need to support your desired "retirement" lifestyle. You need to factor in the removal of huge costs factors as the "cost of working" which includes transportation, clothing, entertaining, taxes and other factors. On average the cost of working for a living equals about a third of your income. On the other hand, buy a used sailboat and an equal amount of money will have to be factored back into your equation.
- - So anyway, after you have a realistic amount of money (passive income) you will need to live after retirement - divide that by 0.06 and you will get a minimum amount of investments you will need before retiring. That is assuming no other retirement income from other sources. I personally do not factor in Social Security as it barely pays enough to keep me in beer and bottom paint. But other "secure" retirement income streams can be factored in. Just be careful as more than a few company provided "defined benefit" retired plans have either disappeared with the disappearance of the company or are abandoned by the company/corporation and taken over by the Federal PBGC and payments are 50% or less than the initially proposed benefits.
- - So the "6% rule" is an important number to know if you want to "sail off into the sunset" with minimal worry about how to pay for it all.

[markpj23]

Originally Posted by aspiringsailor

i have yet to even buy a boat yet, but my strategy is to just stick it out in the military an retire. at 42. a check every month, pretty much guranteed.

I can tell you that the REAL value of the military pension is health coverage. Yeah the income makes the boat payment / whatever, but that peace of mind having health coverage has meant the most to me.

25 years, 6mos, 13 days in uniform..... and YES it was worth it!

[osirissail]

Right on Markpj23 - When you leave the waters of the USA and its associated islands, you leave your medical behind, private policy or Medicare/medicaid and military. So you need to seriously investigate the cost of International Medical Insurance, Med-i-Vac insurance, etc. and add that into your required minimum retirement income.

[hellosailor]

Mark, how'd you get them to give you a six month and 13 day re-up? (VBG)

And thank you for the many years of service.

[aspiringsailor]

The health insurance is a great thing, but i never use it. I have actually needed stitches and such but rather than going to the er i just use tape and super glue. i went around for a couple days with a torn ligament in my foot until my supervisors saw it in the locker room (it was black) and personally made me go to the er. Personally i think the only insurance i will get will be for the boat.