In a previous article, I mentioned that Donald Trump
Considering that his networth is estimated at $43 billion that’s less than 5% of his networth. Quite a lot less than the average American has tied up in his house!
The house will be 27 stories tall and will have 400,000 sq ft of living space. I bet they’ll have maps with “you are here” arrows scattered through-out the house, along with handheld GPS device’s for guests. Maybe the’ll even geocaching tournaments too!
Anyone remember Apprentice winner Kendra Todd? No, I didn’t think so. Anyway Donald Trump (aka “The Donald”) used her previous experience as a real estate agent and had her doing some renovation work on a house he wanted to flip.
But this wasn’t any old flipper house. This was a multi-million dollar West Palm Beach Mansion that Trump bought for $41 million in 2004.
Russian Fertilizer Billionaire, Dmitry Rybolovlev, paid $95 million dollars for this property. Can you imagine the home insurance and property taxes on this thing? I wouldn’t be surprized if they ran a whopping $4 million a year.
The debate over renting versus owning isn’t dead. According to the WSJ, you can buy a 2 bedroom condo in Miami with a wrap-around balcony and stunning, jaw-dropping views for $400,000 (and this is after the market has already correctedly significantly). Apparently they come fully loaded too!
“You’ll have at least one private pool in the building, along with saunas and fitness centers and all sorts of other conveniences. Of course, you have a 24-hour concierge and valet parking. Many have private cinemas, bars, restaurants, spas and the like. They’re like cruise liners on dry land.”
But these facilities cost money. About $1,100 every month or $13,200 a year!
Assuming you put down 20%, and finance the remaining 80% at 6% interest rate, that’s going to cost you $19,000 per year. Then you still have 2.25% property tax which is another $9,000. Add everything up and your annual costs are $41,200.
And how much can you rent it out for?
Only $2000/month (that’s only $24,000/year). And the rents are dropping too! Even if you pay cash for the condo, your annual profit is $1,800 on a $400,000 investment! Even a bank CD pays more than that!
For speculators who bought at the top of the boom, real estate is turning out to be a lousy investment. But atleast renters can live well on only $2,000 a month!
I’ve been lumping in my online income with my passive income, but it isn’t really passive. It may not be very strenuous and it gives me geographic flexibility and I don’t have to show up for work every day, but there is some effort involved. Unfortunately I’m not as clever as Courtney Tuttle, who says he has a site that makes $3,500/month with no ongoing maintance. (If you’d like to buy an existing site that generates income, check out the online businesses for sale on my business & investment store). I’ve just had some limited success with Domain Parking, buts that the extent of my truly passive online income.
Simply put, my online income isn’t really passive. It’s a lot more passive than the website and seo consulting work I do by a huge margin, but its not as passive as dividneds or royalty checks.
So what are the best ways to earn really Passive Income?
1. High Dividend Stocks
There are a lot of stocks that paying quarterly or yearly dividends. Over time, the power of compounding (with a little help from inflation) can substantially increase the value of your dividends. My mother bought the Indian subsidiary of Unilever (Ticker: UL) called Hindustan Lever about 20 years ago. She’s being reinvesting most of her dividends and today her annual dividends are larger than the value of the original stock purchase. American Capital Strategies (ticker: ACAS) has been growing its dividends approximately 10% every year. According to The Dividend Investor,
If we invested $100,000 in ACAS on December 31, 1997 we would have bought 6906 shares. Your first quarterly check would have been $1,726.50 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $17,095 by December 2007. For a period of 10 years, the quarterly dividend has increased by 300 %. If you reinvested it though, your quarterly dividend income would have increased by 890%.
Yes, reinvesting the dividends in companies that have historically kept increasing their dividends is key. Even though you might get only 2.5% return today, eventually with the increase in stock price and rise in dividends, your annual return should be greater than 12%. This concept is very well explained in Prof. Jeremy Siegel’s excellent book, The Future for Investors, which I highly recommend.
2. Oil & Gas Royalties
While there is a lot of fraud and speculation in direct oil drilling programs, they can be very, very lucrative for investors. Charlie Munger invested about a $1,000 in such an oil drilling program in the 60s and he’s estimated that its paid out over $500,000 in royalty payments since then. Apparently it still pays out $2,000 a month. Of course, most people NEVER see these sort of returns, but for the average person, investing in Canadian Oil & Gas Royalty Funds (or Income Trusts) is the next best thing. I’ve invested quite a bit of money into both the direct oil wells and the Canadian Income Trusts (or Canroys) and the overall result has been pretty positive in both (which is in excess of 12%).
3. Royalties on Books and Patents
Royalties on Books and Intellectual Property Rights can be even more lucrative. However writing a best-selling book or creating a something thats worth patenting can extremely time consuming and expensive. For most authors and inventors, its a labor of love – something that they would pursue even if there was no monetary reward to it. But many ebook writers who sell get-rich-quick books about “making money online” are getting very wealthy. Most of these books are garbage and the only people getting rich are their authors and resellers. Not a very ethical way to make money.
4. Rental Income on Properties Bought at the Bottom of a Real Estate Cycle.
If you bought rental buy and hold property in California, Nevada, Arizona or Florida during 2005 and 2007, my heart goes out to you. A lot of smart people got suckered into buying at the top of the market and are paying for it. However, if you buy correctly, preferably at the bottom of a real estate cycle, real estate can provide excellent passive income and fantastic tax advantages as well. According to Charlie Munger at the 2008 Wesco Financial Annual Shareholder meeting, “most real estate investors don’t pay any income tax, except once every 20 years or so“. Bought correctly (that is based on value, not speculation), rental properties can provide a steady stream of cashflow that is somewhat inflation-indexed. I say somewhat, because in the short-term anything can happen, but over a long period of time, real estate is going to match the rate of inflation.
5. Investing In Timber
Similar to Canroys, there are companies that grow trees specifically for timber and pay pretty decent dividends. There are also direct tree-planting programs where you can invest a minimum of $5,000 and own a portion of a timber operation. The company does all the work for you and supposedly cuts you a check once a year after a specific time interval. The endowment funds of Harvard and Yale have apparently been investing in timber for several years now with great returns.
6. Domain Parking (or Embarking)
There are many people who buy and hold hundreds of domains (I know a guy who owns 750). They either park them with Sedo or another domain-parking service. These services stick relevant (and sometimes not-so-relevant) ads on your site. The idea is that if someone comes to the site through browser type-in traffic and clicks on an ad, you get paid a portion of this ad revenue. I had hosted several sites with Sedo and made a whopping 2 cents per month. I’ve recently been trying out a new service called Domain Embarking that is working pretty well for me.
Property prices in India have been on a tear for quite a while now. One of the condos I bought in Ahmedabad in 2006 doubled in just over a year. While the growth has been pretty tame since then, I was nonetheless quite surprised.
But in other parts of India the market has actually begun to correct. After the housing downturn of America, UK, Spain and Australia, it’s finally India’s turn to feel some pain. According to the Economic Times of India, prices are cooling down. The real estate prices in some cities have come down as much as 25%.
Land prices in the national capital region (NCR), Mumbai suburbs, Bangalore and Hyderabad have corrected by up to 25% as property developers slow down their land purchases. Poor sales and lower availability of credit at higher cost have prompted property developers to end the mad rush to acquire land. Some of the developers have even backed out of land deals which were agreed upon as the slowdown hit the sector.
Prices have come down by up to 25% in Mumbai’s distant suburbs, including Thane and Belapur, and pockets of Hyderabad and Bangalore, according to property consultancy firm Knight Frank India.
I think the reason why Ahmedabad shot up so fast between mid-2006 and mid-2007 might have been because it was declared a mega-city and thus suddenly popped up on everyone’s radar. Despite being invested in the market, I wasn’t entirely happy to see prices shoot up so much. I guess that was because we had paid cash – if I had been fully leveraged with 10% down, I might be singing another tune!
Regardless, property prices still seem exorbitantly high in many places in India. Hopefully the 25% correction will bring some much need relief to the average middle class family.
I’m going to kick it it off with my own submission on How I Made $2,667 in Passive Income In March. Of course, if you’ve already read it, you can read about the Tax Benefits of Passive Income or about Earning Passive Income from Domains.
Dobromir presents Emerson Electric (EMR) Dividend Analysis posted at Create Rising Passive Income From Dividend Paying Stocks.
Geoff presents How did I make 5-figure Passive Income in 2007? posted at Wealth Monkeys.
Writers Coin presents Why I Quit One Source of Passive Income posted at The Writer’s Coin, saying, “Moral issues far outweighed the desire to make money by deleting emails”
Will presents Why I Still Love Real Estate Investing: Being A Landlord posted at Your Finish Rich Plan, saying, “I’m a sucker for passive income. My idea of financial freedom is that of rental and dividend income totaling roughly twice my expenses, leaving me free to pursue other interests (which may very well be other money-making ventures). That’s why despite everything that happened in the real estate market the past couple of years (or maybe because of it), I want to be a real estate investor, and more specifically, a landlord.”
The Dividend Guy presents Considering REITs In a Dividend Portfolio posted at The Dividend Guy Blog.
Tyler McKinna presents Dividend Growth Fund Stratgies Revealed posted at Dividend Money, saying, “An article outlining dividend growth investing strategies and how major mutual fund managers approach stock selection.”
KCLau presents How to Identify and Invest in the Hot Stocks of Tomorrow posted at KCLau’s Money Tips, saying, “A review of the book “Finding the Next Starbucks by Michael Moe””
Mark @ TheLocoMono presents Tracking Your Prosper Portfolio with Money Plus posted at Just Personal Finance, saying, “Using Money Plus to track your Prosper income can help you simplify your knowledge of how much money you are making and project your cash flow/growth.”
FIRE Getters presents Etrade’s Quickplan – Personalized & Easy Retirement Planning! posted at FIRE Finance.
Lulu presents Got My Repayments from Lending Club posted at How I Save Money.net.
We end with an article about music and money, which not quite relevant, is still pretty good nonetheless. Jeremy Zongker presents All I Really Needed to Know About Managing Money I Learned From Music posted at Destroy Debt.
That concludes this edition. Submit your blog article to the next edition of Carnival of Dividends and Passive Income using the carnival submission form. The next edition of this carnival will be on the 7th of May, 2008.
Technorati tags: carnival of dividends and passive income, passive income,
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Since this is tax season and this site is dedicated to earning passive income, I thought I should post something about the taxation of passive income. From the IRS’s point of view passive income is any income that you get without having to to materially participate in. Examples of passive income include rental properties and partnership returns.
Unlike earned income, passive income has great tax benefits. Earned income is subject to self-employment tax which is just over 15.5% (if you’re W2 employee, your employer pays half of this). Your passive income isn’t subject to this tax. If you own rental property, you also claim depreciation. Depreciation is the replacement cost of equipment used in a business and is spread out over its useful life. For residential real estate, the IRS deems the useful life to be 27.5 years. However, the useful life of a house could well exceed 60 years. This results in you being able to claim a tax loss which doesn’t really result in any loss to you. Because of this, depreciation losses are sometimes termed as phantom losses.
Let me give an example. Suppose you buy a rental property for $325,000. The tax bill says the land is worth $50,000 and the improvements (everything else thats built on the land) are worth the remaining $275,000. Based on the IRS’s straight-line depreciation method of deducting the cost of the improvements over 27.5 years, you get to claim $10,000 a year in depreciation. Assuming you have a mortgage of $275,000 at 5%, you’ll pay about $13,750 in mortgage interest payments. Assuming the property tax rate is 1.5% (its about 1.25% in California, 0.07% in Utah, 3% in Texas and a whopping 6% in New York) and the insurance and miscellaneous expenses are another 0.5%, you’ll be paying another $6000/year. In all you have actual expenses worth 19,750 per year plus depreciation loss of $10,000 bringing your grand total to $29,750. If you’re getting $1750 per month in rent, that works out to $21,000 worth of rental income. Since your actual costs are $19,750, you’re making a profit of $1,250. However, according to IRS passive income rules, you’re technically making a $8,750 loss!
Not only do you not pay taxes on your $1,250 worth of rental income, but you also get to deduct the $8,750 phantom loss from your regular earned income! In a 30% tax bracket, thats a $3,000 tax saving! You can deduct upto $25,000 worth of passive income losses on your taxes every year! If you have more losses, you can carry these forward until you can offset them against passive gains (like the sale of the property).
The flip side to this rule is the depreciation recapture rule which means you need to add back in the depreciation losses when you sell the property. However, this can be somewhat avoided by the use of a 1031 exchange (also called a Starker exchange).
Note that there are many nuances to this grossly simplified example so please don’t flame me, especially if you’re a qualified tax professional.
Qualified stock dividends are also another form of passive income that attract favorable tax rates. Instead of being taxed as ordinary income, the maximum tax rate is now 15% for most people. In fact, if your tax rate is 10% or less, you’ll pay only 5% income tax on your qualified dividends! There are certain restrictions that come with these lower taxations. The corporation issuing the dividends must be a domestic US corporation or a qualified foreign company. There is also a holding period of 60 day before the ex-dividend date and 59 days after the ex-dividend date.
What I term as passive income from my websites does not necessarily match the IRS’s definition of passive income. It is ordinary income and is thus subject to ordinary income tax. So I channel that income through a corporation. This is a form of income splitting. By creating a separate tax entity, I reduce the effective tax burden. I use that corporation to pay necessary and customary expenses required for the generation of this income, like my internet & phone service, computer equipment, investment newsletters, etc. Whatever is left after expenses, is taxable income. For US corporations that make $50,000 or less in profit, the tax rate is 15%. There is also question of double taxation for corporations (both the corporation and the shareholders have to pay taxes on the income that is distributed), but for now that doesn’t affect me. I’ll worry about it when it becomes an issue.
The income I get from direct oil well drilling programs is also taxable but it comes with depletion credits. As a result, 15% of the income is tax-free.
The IRS definitely gives a lot of tax benefits to passively earned income. If you have to work for your income and get paid as a W2 employee, you have the least number of tax breaks and will usually pay the highest taxes. Creating passive income streams is not only a better alternative to working, but you even get favorable tax treatment. If you’re looking for ways to generate passive income, make sure you read all the passive income posts. and check out my investment store.
Note: I am not a tax professional, nor do I play on on TV! Please consult your tax adviser before you make any financial decisions. If you’re subject to exemption phase-outs or AMT this advice may not apply to you.
I have two rental properties in the mid-west. They were supposed to be cash-cows but with lousy tenants that keep moving out, I’m not cash-flowing at all. The last tenant was terrible.
Despite having a decent job as a nurse, she stopped paying the rent. I had to pay $500 to get her evicted and another $800 to get a judgment against her. Not only did she live rent-free for 3 months, but she trashed the place. I had to spend $3,000 on new carpeting and paint. The good news is that I now have a judgment for $11, 428.32 against her.
The bad news is that its going to cost another $500 to get her to pay. I have to file a petition that she hasn’t paid the judgment amount and issue a bench warrant against her. If she has a job, then I get to garnish her wages. Of course, if she’s changed employers and I can’t locate her, that means I can’t serve her. And if I can’t serve her, the judge won’t issue a warrant or garnish her wages. Even if I do locate her and she doesn’t have a job, there’s nothing to garnish against, so I’m back to square one.
If I get her to pay her $11,428.32, I not only get to cover my losses, I only stand to make about $4,500.
Is it worth the additional expense? When do you come to the point of diminishing returns and cut your losses? I probably will fight it out because she has a job. I let the last tenant walk away because he developed cancer and diabetes and didn’t have a job.
Why don’t they have a debtor’s prison like they used to in England prior to 1867?
Based on my own experiences of being allowed to borrow 40 times my annual income to purchase investment property, I knew the real estate party was going to end badly for many borrowers, banks and eventually tax-payers. I had tried shorting Countrywide, which was the largest lender of mortgages, last year when the stock was trading at around $36. Unfortunately, I was a little early and closing my position at $39 incurring a substantial loss. If I had held on to my position, with Countrywide currently trading in $6-$7 range, I would’ve have been handsomely rewarded.
Hopefully, I’ll have the fortitude to hold onto my positions next time. Right now I think the Commercial real estate is the next bubble to burst.
Easy liquidity and the willingness of investors to settle for low rates of return have squeezed the margins on commercial properties over the past few years. Commercial construction has been on tear and new malls have sprung up all over the place. There’s also been a contraction in commercial liquidity owing to the sub-prime fiasco. Added to that is the slow-down in consumer spending which will affect the bottom line of retailers and the amount their willing to spend on employees and rent.
I’m currently short Simon Properties (SPG), which gets 25% of its income from retail malls in California and Florida and the Dow Jones Real Estate Index (IYR). Lets see if I can hold on to these positions during the coming few months which will probably be quite volatile.
Since I’ve been a homowner, landlord and tenant in my neighborhood for the past 6 years, I follow the real estate market pretty closely. I recently noticed that there was a condo on Realtor.com listed at $264,900. Since I bought my 2nd condo in 2003 for $270,000, I was curious to find out more info on it.
![[Picture of a foreclosed condo for sale in San Diego]](http://www.livingoffdividends.com/wp-content/uploads/2008/02/propertyx.jpg)
I emailed my friend who’s an agent and she sent me the list details. Apparently its bank-owned. The previous owners bought in 2001 for $170,000 and refinanced it last year for $260,000. The mortgage company has it listed at $265k to break-even on it.
These condos were sold at a peak price of $375,000. I sold both of mine on either sides of the peak at around $350,000 each. A sale price of $265,000 represents a 30% drop from the peak. I’d be amazed if it sold at the asking price.
If I was in a hurry to buy property, I’d be tempted to make a low-ball offer. When I bought my condo in 2001 and again in 2003, there was usually only 1 for sale at a time and usually several buyers. Right now, its the opposite, several for sale and not a single buyer!
Even though the pricing looks good, I expect things to get considerably worse.