Passive income = the best

[ExFlyBoy5]

The thing is you worked a very lot of non-passive hours to earn your pension.

That is a good point, but I spent several years traveling the world seeing some very cool places on the tax payers dime. Then again, I spent quite a while trying my best not getting killed, too!

 

[ERD50]

... My active dividend-paying stock and bond portfolio is 40% of my net worth and returns 4.88% (dividends only) which pays 35% of my monthly spending.

This is definitely an active pursuit as I continually adjust its makeup for reliable long-term performance.

You'll note that the stock&bond portfolio is larger than the real estate portfolio, but provides only half the income.


So if one were to grade the EFFICIENCY of these two portfolios, the real estate would vastly outperform the stock&bonds.
...

I must disagree, but before I do, I want to be clear that I have nothing to say about you liking to have real estate and having it work for you, that's your choice, and it's fine.

But, you (maybe unknowingly) are putting up a straw man argument against a portfolio. A couple things you just have wrong:

1) A portfolio must be measured by Total Return. It's basic arithmetic, it's the only thing that matters. If it didn't, not a single person with a single functional brain cell would purchase BRK, it provides zero "income", and has an almost zero chance of ever providing "income". Yet many people have done very well with it. It's not an illusion, it is real money. Total Return. Period.

A balanced portfolio 70/30, returned ~ 10.99% in the past 12 months. More than double the number you are using. Using the 10.99 number, your 40% portfolio should have provided 78.8% of your monthly spending. Sure, that number will vary more than the divs alone, but it also will outpace divs alone in the long run.

2) A stock/bond portfolio does not require active pursuit. A "couch potato" portfolio has been shown to out-perform most attempts at active management.

-ERD50

 

[Joylush]

But didn't you have to work to earn the money to buy your rental properties, the same way a pensioner had to work all those hours to earn his pension?

Well kind of but no more than anyone who saves some of their income and invests it in other assets.

And in the case of mortgages you don't need much of your own money. You can make the asset work for you using other people's money to purchase and eventually pay off the asset which you then own free and clear. You don't have that option with more traditional-passive investments.

Recent Example: My significant other purchased a distressed property using all borrowed funds. House cost $54,000. He borrowed $70,000 so as to have rehab funds which he spent on the property. He nets (after costs) $5,000 a year on the property (bought in Sep 2014). So he's earned roughly $20,000 in rental income to date. In addition the property is now valued at $115,000 and he owes about $65,000 on it. So he's potentially earned $70,000 on the property in 4 years having spent zero of his own money (excluding his original sweat equity).

 

[pb4uski]

I must disagree, but before I do, I want to be clear that I have nothing to say about you liking to have real estate and having it work for you, that's your choice, and it's fine.

.... A portfolio must be measured by Total Return. It's basic arithmetic, it's the only thing that matters. If it didn't, not a single person with a single functional brain cell would purchase BRK, it provides zero "income", and has an almost zero chance of ever providing "income". .....

Exactly what I was thinking... price appreciation is such a significant part of owning securities that have different dividend yields that it needs to be included in order to make a fair comparison....as would property appreciation which is typically modest in most areas.

 

[pb4uski]

... My rental income is generated working 40-60 hours a year. I'd consider it for the most part quite passive. If nothing else I'm paid a significant amount for the actual work it takes if calculated by hourly wage. .....

Interesting perspective..... now consider the hourly wage of owning an investment portfolio... while I play around with mine because I like it and it is a bit of a hobby, I could easily restructure it so it would take no time at all... so if a $1 million portfolio returned $70k in a year and took 2 minutes of effort a year, then that is $2,100,000/hour. Just sayin.

 

[97guns]

Calculate my rate of return on this deal, probably my least lucrative property with having a new AC unit and 2 evictions with rehabs during this 9 year period.

Purchase price 90k now 280k

Rental income 9 years = 80 months for vacancy $88k

Tax ($8400) manager($6440) repairs/evictions (16k) total expense $30,800

 

[pb4uski]

You've done very well, but numbers like you have quoted are not common for real estate investments.... just like numbers for the angel investors in Apple are not common either.

 

[scrabbler1]

Interesting perspective..... now consider the hourly wage of owning an investment portfolio... while I play around with mine because I like it and it is a bit of a hobby, I could easily restructure it so it would take no time at all... so if a $1 million portfolio returned $70k in a year and took 2 minutes of effort a year, then that is $2,100,000/hour. Just sayin.

Similarly, it depends on where you draw the line between actual time spent "working" on the portfolio versus simple "hobby" time such as basic record-keeping and monitoring.

My portfolio is very simple on both counts, especially the former which includes rarely rebalancing, using excess dividends to buy new shares, and changing the distribution option for dividends once in a while. I spend maybe 2 hours a year on these tasks, so a $40k income translates to earning $20k an hour!

 

[Clone]

Can't we all agree that my ___ is bigger than your ____?

 

[Joylush]

You've done very well, but numbers like you have quoted are not common for real estate investments.... just like numbers for the angel investors in Apple are not common either.

Not all real estate purchases are good investments. Not everyone is a good landlord. But obviously there are many who are and who do make good investments which is evident by real estate investors who post here.

Those who had poor experiences aren't likely going recommend real estate investing.

I've had excellent results but have been doing it for 30 years. So I'm going to tend to be pro real estate investing. Admittedly though it is not for everyone.

 

[flintnational]

...........I've had excellent results but have been doing it for 30 years. So I'm going to tend to be pro real estate investing. Admittedly though it is not for everyone.

My DW and I ran into a friend in Home Depot the other day. The friend was thinking about buying a rental. She knew we had owned rentals and asked about our experience. At the same time, I blurted out "great" and the DW blurted out "terrible". Obviously we owned the same properties.

So much for getting this forum to agree. I can't even get agreement on this topic in my own household with the same properties.

 

[ERD50]

My DW and I ran into a friend in Home Depot the other day. The friend was thinking about buying a rental. She knew we had owned rentals and asked about our experience. At the same time, I blurted out "great" and the DW blurted out "terrible". Obviously we owned the same properties.

So much for getting this forum to agree. I can't even get agreement on this topic in my own household with the same properties.

We need some of your wife's posts for balance! While I'm kidding, it actually is quite telling that she views it the opposite of you.

I've explained my B&H, simple broad-based index investing approach to DW, and she 'gets it' (I did play with more active approaches in the past). She would have no problem taking over for me, but would probably hire someone to do the taxes (or maybe one of our kids would walk her through it, since I've taught them how to do theirs). Though I'll add that our B&H portfolios add very little effort to our taxes. Some divs, maybe a capital gains distribution, and maybe an occasional sale for cash flow (generally not even more than 1x per year).

-ERD50

 

[pjigar]

My DW and I ran into a friend in Home Depot the other day. The friend was thinking about buying a rental. She knew we had owned rentals and asked about our experience. At the same time, I blurted out "great" and the DW blurted out "terrible". Obviously we owned the same properties.

So much for getting this forum to agree. I can't even get agreement on this topic in my own household with the same properties.

My wife and I would probably have the same reaction! The reason is, I am looking at ROC on both equity and labor while my wife would be looking at my time away from family!

 

[flintnational]

My wife and I would probably have the same reaction! The reason is, I am looking at ROC on both equity and labor while my wife would be looking at my time away from family!

Yep. I calculated the return and she calculated the hassle factor.

 

[flintnational]

We need some of your wife's posts for balance! While I'm kidding, it actually is quite telling that she views it the opposite of you. ..........-ERD50

Hey, wait a minute! Maybe she is already on this forum and I don't know it. That would explain the occasional push back I get with some posts!

 

[Amethyst]

This description totally grossed me out, and has haunted me ever since. Maybe it is the thought of such willful negligence on the tenant's part - I mean he might be ancient, but he had to know what a wastebasket was. At least it wasn't a young woman, or you know what she'd be flushing!

Then there was the WW2 vet who flushed his blue plastic Q-tips, which, in time, made a basket weave across the outlet horn of the toilet. A snake would move the Q-tips, then they would reweave. Pulled the toilet, then fought with a drain line that was plugging up for the next few months - that was mostly from his flushed dental floss.

 

[Walt34]

Actually, I can sleep all day and it still hits the bank. Can you get ANY MORE passive than that?

Well, a little. With my pension all I have to do is have a pulse. I could be in a coma, and still get paid.

 

[MichaelB]

Well, a little. With my pension all I have to do is have a pulse. I could be in a coma, and still get paid.

That's passive. You probably want to keep that coma thing to yourself. No need giving ideas to other interested parties. Always better to let them think they're better off when you're healthy.

 

[Aslowdodge]

+1

I wonder what it costs OP to pay his brother and trusted friend for all the (seemingly) hard work they are doing to manage and maintain his rental properties and provide him with all this "passive" income.

As Chuckanut rightly points out, the vast majority of us have no such people we can rely on to help us generate substantial passive income via rental properties, whereas everyone has access to low-cost, diversified mutual funds and ETFs that can provide ample passive income for most people over time.

True. Sometimes involving family in a business can get really sticky

 

[calmloki]

This description totally grossed me out, and has haunted me ever since. Maybe it is the thought of such willful negligence on the tenant's part - I mean he might be ancient, but he had to know what a wastebasket was. At least it wasn't a young woman, or you know what she'd be flushing!

why yes, I do. Those mostly plug the main lines.

 

[Aslowdodge]

On the first part, I would love to see the citation where the IRS states that a non-passive activity can be used as a tax shelter... put up or shut up.

On the second part, the only way your rentals can shelter other income is if the rental shows a loss ... in which case the rental isn't a good investment.

Ignorance is bliss.

Yes but keep in mind that the loss can be a paper loss for example like accelerated depreciation or regular depreciation. If your rents broke even with expenses but the depreciation gave it a loss of say 20K you might be able to count that against you income. I know I did. At the same time the property might go up $100K so it could very well be a good investment.

 

[Aslowdodge]

I must disagree, but before I do, I want to be clear that I have nothing to say about you liking to have real estate and having it work for you, that's your choice, and it's fine.

But, you (maybe unknowingly) are putting up a straw man argument against a portfolio. A couple things you just have wrong:

1) A portfolio must be measured by Total Return. It's basic arithmetic, it's the only thing that matters. If it didn't, not a single person with a single functional brain cell would purchase BRK, it provides zero "income", and has an almost zero chance of ever providing "income". Yet many people have done very well with it. It's not an illusion, it is real money. Total Return. Period.

A balanced portfolio 70/30, returned ~ 10.99% in the past 12 months. More than double the number you are using. Using the 10.99 number, your 40% portfolio should have provided 78.8% of your monthly spending. Sure, that number will vary more than the divs alone, but it also will outpace divs alone in the long run.

2) A stock/bond portfolio does not require active pursuit. A "couch potato" portfolio has been shown to out-perform most attempts at active management.

-ERD50

Would you include any tax benefits in this calculation?

 

[calmloki]

I must disagree, but before I do, I want to be clear that I have nothing to say about you liking to have real estate and having it work for you, that's your choice, and it's fine.

But, you (maybe unknowingly) are putting up a straw man argument against a portfolio. A couple things you just have wrong:

1) A portfolio must be measured by Total Return. It's basic arithmetic, it's the only thing that matters. If it didn't, not a single person with a single functional brain cell would purchase BRK, it provides zero "income", and has an almost zero chance of ever providing "income". Yet many people have done very well with it. It's not an illusion, it is real money. Total Return. Period.

A balanced portfolio 70/30, returned ~ 10.99% in the past 12 months. More than double the number you are using. Using the 10.99 number, your 40% portfolio should have provided 78.8% of your monthly spending. Sure, that number will vary more than the divs alone, but it also will outpace divs alone in the long run.

2) A stock/bond portfolio does not require active pursuit. A "couch potato" portfolio has been shown to out-perform most attempts at active management.

-ERD50

Don't know about other rental owners, but I don't include appreciation of property when figuring the profit I make. As with the BRK, I don't figure I've made anything till it sells. Unlike BRK, there is liable to be a long stretch between offering a rental for sale and getting a check, which is a big BRK advantage. I do use the tax man's "real market value" to divide into the rental profit, so the higher he says the value is the lower my stated profit percentage is. I do use the tax man's RMV when figuring our net worth, but that is just for guesstimating - when we sell it will be for an unknown amount and the taxes and costs of sale will be substantial.

 

[pb4uski]

Would you include any tax benefits in this calculation?

It depends on whether you are calculating a pre-tax or post-tax return... if post-tax, then yes, but also include taxes due on sale as if sold.

 

[ERD50]

Would you include any tax benefits in this calculation?

Sure, after tax is what matters, but that is very specific to the individual situation. And complex. Like depreciation, you pay later. With a Trad IRA, you pay later. With a ROTH, you pay now, but not later.

LTCG may be zero if you keep your taxable income down.

It's hard to do any clear apples-apples. But it does seem to me that some of the tax advantages of a business are overblown by some. I've heard some business owners say "I can write that tool off!". OK, what is your marginal tax rate? They don't know, they don't know that the tool is only discounted by their marginal tax rate. And you had to buy the tool!

You haven't made those claims, I'm just saying it's tough to compare, and my impression is that the tax advantages of rentals aren't so very great, but I might be wrong about that.

-ERD50