Passive Income for the Simple and Unadventurous

This post may contain affiliate links. Please read our disclosure for more information.

I suppose there are more kinds of passive investments, but my pedestrian mind can only think of four: real estate, authorship, pensions, and Wall Street. Here’s my take on all four:

Real Estate

When Mrs. Groovy and I relocated from Long Island to North Carolina in 2006 we dabbled a little bit in real estate. The glories of landlording were still being trumpeted in late-night infomercials (I curse you Carlton Sheets!), and the prices of rental properties in the Charlotte metro area were very enticing. You could literally buy a decent three-bedroom home in a decent neighborhood for $70,000. So Mrs. Groovy and I went full-mentally challenged, purchased three rental properties, and hired a property manager. Here are the results:

Condo One

The tenant secured by our property manager paid rent for the first six months or so. Then the tenant flaked out and stopped paying. We asked our property manager to initiate the eviction process, but the husband-wife team suggested it would be preferable to negotiate the tenant’s removal. The tenant was given a month to leave, and all it would cost him, providing he didn’t trash the condo, was his security deposit (a half month’s rent). The three missed rent payments would be forgiven. The tenant agreed and lived up to his side of the bargain.

Mrs. Groovy and I considered renting out condo one again, but we came to the conclusion that we were in over our heads. We sold condo one for a little bit more than the purchasing price. When you factor in the closing costs of buying and selling, and the unpaid rent and vacancy costs, we barely broke even.

Condo Two

Our experience with condo two mirrored our experience with condo one—only the tenant flaked out and the discontinuation of rent payments happened in year two rather than year one. And our response to tenant two’s flake out and the discontinuation of rent payments mirrored our response to tenant one’s flake out and the discontinuation of rent payments: we negotiated the tenant’s removal and lost several months of rent payments.

We sold condo two for less than the purchase price. I don’t remember the exact loss we suffered. I think it was around $5,000.

Detached Home

Our experience with the detached home was much better than our experience with condos one and two. The tenant secured by our property manager was gold. He was a family man with a wife and three small children. He paid his rent on the first of every month and took well-care of the property.

Since this tenant was so honorable, Mrs. Groovy and I decided to forego property management. The husband and wife team wasn’t doing anything more than collecting rent payments. Mrs. Groovy and I were nowhere near competent landlords, but even we could handle the elementary task of collecting rent payments.

And everything continued to run smoothly once we assumed all landlording duties. In fact, things were running so smoothly, and we had so much respect for our tenant, we decided to reward him by never raising his rent. His rent remained the same for the ensuing five years.

But then tragedy struck in year six. Our tenant, who was from El Salvador, had a lapse in his work visa. And while he was waiting for his new work visa to be processed, he was a passenger in a car that got pulled over for a traffic offense (I think his friend ran a red light). Unsurprisingly, the police checked the identities of the driver and our tenant, discovered that our tenant’s work visa had expired, and then shipped our tenant to an ICE facility in Atlanta.

Our tenant was the sole breadwinner in his household. And nearly all of the savings he had was going to an immigration lawyer to resolve his confinement and visa issues. There was no money for rent. Just money for food and utilities. If I were a real landlord in this situation, I would have started the eviction process. But Mrs. Groovy and I weren’t real landlords. There was no way we were going to evict a mother and three small children—especially after they’d been dream tenants for five years. We just decided to forego rent for as long as it took our tenant to return home.

Happily, our tenant’s immigration problem was resolved in four months. He returned home with a new five-year work visa. But our tenant’s immigration kerfuffle was the last straw. Mrs. Groovy and I finally admitted to ourselves that we weren’t cut out to be landlords. We informed our tenant that we were selling the property, and three months later it was sold.

We bought the detached home in 2006 for $72,000. We sold it in 2012 for $57,000. Just how much money we lost is difficult to say. Nearly seven years of rent netted roughly $8,000. We also saved money on taxes by claiming a depreciation expense annually. But we had to replace the HVAC during our landlording tenure and that cost $3,700. We also spent $2,500 in various upgrades to get the house ready for sale. My guess is that a full audit would have revealed a net loss of around $10,000.

Conclusion

Landlording is the management of property and people. It is anything but passive. It’s work, and it’s headaches. In order to do it properly and make money, you must have a keen business mind and a certain degree of hard-heartedness—you have to be deaf to excuses, it’s either pay rent or get evicted. Mrs. Groovy and I weren’t cut out to be landlords. I suppose that this is the case for most Americans, especially those looking for easy money.

Authorship

Once the upfront costs in time are completed, authorship is a great way to generate passive income. You write a book, upload it to Kindle, and then Amazon starts sending you monthly royalty payments.

I did this three years ago by self-publishing my opus, The Groovy Guide to Financial Independence. And to this date, Amazon has dutifully sent me a royalty payment nearly every month (monthly royalty payments have only recently become hit or miss).

But authorship is hardly the road to riches. All told, my opus has netted me roughly $1,500. For the first few months, the royalty payment was around $200. Then it dropped to $30-$40 a month. Then it dropped to $5-$10 a month. Now it’s under a dollar a month. Last month (November), the royalty payment was $0.00. And the month before that, it was $0.04.

And there’s a perfectly good reason why authorship is unlikely to become the road riches. The vast majority of books published aren’t worth reading. My book is certainly proof of this. Sure, it’s a perfectly fine contribution to the anals of personal finance. But is it anything special? Does it break any new ground and advance human knowledge to any appreciable degree? Nah. It’s just a pedestrian story of a pedestrian husband and wife team following the pedestrian principles of personal finance written in pedestrian prose.

Conclusion

Once the writing is done, authorship truly does provide passive income. You do nothing and every month Amazon deposits money into your checking account. But the ROI just isn’t there. The odds of you becoming the next Stephen King in any given field are spectacularly small. If you write a book, write it because you love writing. Don’t write it because you want to generate a lot of passive income.

Pensions

For 21 years I toiled for a municipality on Long Island. This service entitled me to an annual pension of $19,750 starting at age 55. I’ve been collecting this pension for five-plus years now and it’s been great. Every month, New York State dutifully deposits $1,643.75 into my checking account.

Conclusion

Pensions are the perfect form of passive income. Once you’ve worked the required number of years to become eligible for a pension, the work is done. You just sit back—once you’ve reached retirement age—and watch the pension payment arrive monthly.

The big problem with pensions is that they’re becoming rarer and rarer. The only employers who are seemingly committed to providing a pension are government employers. And even here, you have to be careful. A pension is only as secure as its managers. New York State actually does a good job of managing its pension plan. According to one study, it’s 96.1 percent funded. But other states don’t manage their pension funds nearly as well. Here are the five states with the poorest funding ratios:

Illinois: 38.9%
New Jersey: 39.7%
Connecticut: 44.4%
Kentucky: 44.6%
Rhode Island: 54.5%

Wall Street

In 2006, Mrs. Groovy and I began our investing career. We opened a brokerage account, and we each opened a Roth IRA and began contributing to our workplace retirement options (a 401K for me and a 403B for her). And each month, because we were debt-free and had little wants, we were able to contribute a total of $5,000-$6,000 to our various accounts.

Our investment strategy has been anything but exotic. We invest mainly in low-cost total market stock and bond index funds and maintain a moderately risk-averse allocation of 70 percent stocks and 30 percent bonds. Occasionally we have taken a flyer on an individual stock, but have never devoted more than two percent of our portfolio’s value to such a gamble.

The results of this ho-hum investment strategy couldn’t have been more fruitful. In 11 years, our portfolio grew to 25 times our annual expenses and we were able to retire. We have been retired for five years now, and on average, our portfolio has produced $25,000-$30,000 in dividends and interest annually and well over a hundred thousand dollars in capital appreciation annually (if I told the exact amount of annual capital appreciation, Mrs. Groovy would kill me).

Thank you, Bush, Obama, Trump, Biden, Bernanke, Yellen, and Powell.

Conclusion

Wall Street is my favorite means of generating passive income for three reasons:

1. Anyone with money can open a brokerage account, and anyone with a job can open a traditional IRA or a Roth IRA.
2. There are plenty of discount brokerage firms that have very low-cost management fees. Fidelity’s total stock market index fund (FSKAX), for example, has an expense ratio of 0.015 percent. For every $1,000 you have invested in this fund, you’ll pay an annual management fee of $15.
3. It doesn’t take any work to generate satisfactory returns. Pick a low-cost broad-based stock index fund (i.e., FSKAK, VTSAX, SWTSX, etc.), and then set up an automatic monthly contribution to your chosen fund via your checking account. Easy-peasy. You’ll get what the market returns, and in most years, what the market returns will be better than what the typical actively managed fund returns. Fidelity’s FSKAK fund has returned 15.91 percent annually over the past ten years.

The only downside to Wall Street for passive income is that it takes years of consistent investing to reach the promised land. Mrs. Groovy and I didn’t start receiving life-easing passive income from our portfolio until year 10 or 11 in our investing career.

Final Thoughts

Okay, groovy freedomist, that’s all  I got. What say you? I say Wall Street is the best way for the average schlub to generate passive income bar none. It’s available to all, and the transaction and management costs of investing are extremely small. Any well-manicured ape with an income and a modicum of discipline can thus get the ball rolling. And then, after ten or so years of automatic monthly contributions to low-cost broad-based stock and bond index funds, the magic of compound interest takes hold: you sit on your arse and do nothing and watch tens of thousands of dollars of passive income being thrown your way annually by Wall Street.