Canadian Money Forum banner

1 - 20 of 55 Posts

·
Registered
Joined
·
30 Posts
Discussion Starter #1
In 5 months I will be mortgage free, and my condo is worth around $300K. I would like to live off passive income so that I can use my free time to work on my projects. My lifestyle is pretty frugal, I spend on average $12-15K a year, and no more than $20K.

I have thought of buying a town house for $250,000 and renting out my condo, which after maintenance fees, property taxes and mortgage would give me a profit of $200-$300, or around $2000-$3600 a year..Definitely can't live off that. I could also try renting out the town house, but I would prefer the extra room as my condo is too small for my needs.

I could also sell my condo for $300,000, and buy a townhouse for $250,000, and use my line of credit ($170,000) + $50,000 for generating passive income. However bank interest rates would probably negate any passive income in the long run.

A third option is to buy 1-2 pieces of real estate, flip, and sell, and then I wouldn't have to work the remaining year.

Any ideas?

Much appreciated.
 

·
Registered
Joined
·
3,936 Posts
Your plan sounds way too complicated. It would be much easier to simply get a job/keep your existing job.

The idea of flipping real estate as a way for the average person to make money is nothing more than an urban legend. That only works if you can bring a skill or capital improvement to the property or if you are your own RE agent etc.
 

·
Registered
Joined
·
5,464 Posts
Most of your ideas aren't really passive income strategies. The "buy and flip houses" idea is probably the polar opposite of passive income.

IMO you don't have enough income-generating assets (actually, you haven't described *any* income-generating assets) in order to make this work.

If you did sell and then borrow to invest, what would your investing strategy be? Looks like you'd need to clear a minimum 7% after-tax, after-costs, real return in order to generate $15K per year. How would you plan on doing that?

(And where is your emergency fund?)
 

·
Registered
Joined
·
30 Posts
Discussion Starter #4 (Edited)
What do you consider income generating assets? The point of this thread is so that I can get a picture of how to start generating passive income.. not necessarily do it overnight. I'm looking for anything that will help me reach my goal.

What resources could I look that will help me start with passive income? My first goal was to get rid of debt, which is what I will be doing come 5 months.

Thanks.
 

·
Registered
Joined
·
1,455 Posts
Once you get rid of your debt, put your old mortgage payment + savings towards investments that produce passive income. Do some reading on dividend stocks, bonds etc.

It may take a while to get to financial freedom using that method, but you'd be on your way.
 

·
Registered
Joined
·
5,464 Posts
What do you consider income generating assets?
Assets that generate income. ;)

My point was just that right now, in the situation you are currently in, you have one large asset - a principal residence - with little to no debt against it. However, you did not say that you have ANY other assets (i.e., an unregistered investment portfolio) that could be used to generate income. So, in order to generate passive income from assets, you will need to acquire some.

You have talked about some strategies which make use of your existing asset, but the tax, inflation and interest hurdle rate on that strategy is very high.

FP has suggested a way you can generate passive income, using dividend-paying stocks. You would need to build up an asset base sufficient to generate the income you require after taxes, fees and any other costs, such as interest.
 

·
Registered
Joined
·
3,932 Posts
Unless you have a lot of the following:

Money
Time
Handyman Skills
Connections/Contacts

Flipping Houses is a liability. (In my opinion, of course ;))

Renting a house out is a good idea, but you just dont have the capital. You're forgetting that your $3600/year will slowly be eaten away by vacancies, repairs, and any other issue that comes up. The only thing that will be passive about that investment is the mortgage. Which, wouldn't meet your goal. (It would meet mine, though!)

Like FrugalTrader said, what you need to do is grab some investments. Dividend Paying Stocks, Mutual Funds, Bonds, ETF's, Money Market. If I were you, I would get a mix of most of those. I would grab some Dividend Paying Stocks (as well as some "SAFE" non-dividend paying stocks for a little growth/capital gain). I'd also grab some bonds. Since you are in debt, ETF's are not a good choice for you because they are only efficent if you have a lump sum of money to invest. Because of this, you should invest in a Mutual Fund. (BMO has a pretty good Monthly Income Fund. Its about $8/unit and pays a guaranteed $0.06 per share every month, plus capital appreciation if there is any. Its cheap. Its reliable. The only downside is that it's BMO :p) As for Money Market style Securites and T-bills and all the like -- they're basically useless and won't generate anything worthwhile.

Look up some online stock trading brokers (discount brokers) such as www.questrade.com and set up an account to purchase some dividend paying stocks. You can also purchase ETF's this way. Also, go to your current bank (and others) and speak to them about their "Fixed Income" mutual funds.

Remember, there are ALWAYS fees to investing. Some brokers charge more, some less. Some Mutual Funds have a higher MER (Management Expense Ratio) than others, but it does not mean they perform better.

And Passive income is a fantastic idea, just remember that the more capital you have, the more passive income you can make. It may be wise to work for a year (or more) and invest everything into passive income.

Are you planning to retire soon, or just take a break from work? Switch careers? Why the need for 20k worth of passive income? Do your "projects" that you want to work on generate income?
 

·
Banned
Joined
·
7 Posts
As others have mentioned you now have a lot of flexibility to pursue traditional investing - which has its faults but a few less than trying short-term arbitrage in an emotional market you don't know very well :)

Aside from the usual question of return rates and fees/taxes, one of the biggest things that determines the relation between investing and living off the returns is the ratio of what you invest to what you spend. Since you have low expenses and soon no mortgage you may be able to invest a multiple of your expenses every year, considerably shortening the time you'll need to spend in this phase.

It also sounds like you're not quite at traditional retirement age and you want to be doing a lot after your expenses are covered (just not the same things you're doing now). It might be worth considering if any of these are worth money. When you compare the income you can get from working one month a year to the investments you would need to replace it, and consider that you can choose when you work, what you do, and who you work with when you aren't risking unpaid bills, it might not be a bad way to knock off 8% of your asset needs.
 

·
Banned
Joined
·
356 Posts
Honestly, I don't think you have enough money to live off of at this point unlike you're ok with just dipping into your savings while you work on your projects.

Keep in mind the real estate commission fees, legal fees, moving expenses etc. when considering selling your condo.
 

·
Registered
Joined
·
2,892 Posts
Yeah...real estate agent fees may knock your 50K profit from your home sale down to 40K....then when you buy your new townhome you would have to pay a lawyer....leaving you with 35K.

Add that to a 170K LOC....205K total....invested to give you 5-6% passive income (preferreds/dividends)....would be 10-12K a year in passive income...although if you were going to make LOC payments towards at least the interest (which would be tax deductable) you would be left with less than 10K.

So a few more years of work to pad the savings....at least you are thinking about it, too few are not.
 

·
Registered
Joined
·
1,165 Posts
This question reminds me a bit of that old Steve Martin "Wild and crazy guy" comedy routine of "How to make a million dollars and pay no tax ". Ie first you make a million dollars. in this case the answer is "first you get some assets"
 

·
Registered
Joined
·
30 Posts
Discussion Starter #12
Unless you have a lot of the following:

Money
Time
Handyman Skills
Connections/Contacts

Flipping Houses is a liability. (In my opinion, of course ;))

Renting a house out is a good idea, but you just dont have the capital. You're forgetting that your $3600/year will slowly be eaten away by vacancies, repairs, and any other issue that comes up. The only thing that will be passive about that investment is the mortgage. Which, wouldn't meet your goal. (It would meet mine, though!)

Like FrugalTrader said, what you need to do is grab some investments. Dividend Paying Stocks, Mutual Funds, Bonds, ETF's, Money Market. If I were you, I would get a mix of most of those. I would grab some Dividend Paying Stocks (as well as some "SAFE" non-dividend paying stocks for a little growth/capital gain). I'd also grab some bonds. Since you are in debt, ETF's are not a good choice for you because they are only efficent if you have a lump sum of money to invest. Because of this, you should invest in a Mutual Fund. (BMO has a pretty good Monthly Income Fund. Its about $8/unit and pays a guaranteed $0.06 per share every month, plus capital appreciation if there is any. Its cheap. Its reliable. The only downside is that it's BMO :p) As for Money Market style Securites and T-bills and all the like -- they're basically useless and won't generate anything worthwhile.

Look up some online stock trading brokers (discount brokers) such as www.questrade.com and set up an account to purchase some dividend paying stocks. You can also purchase ETF's this way. Also, go to your current bank (and others) and speak to them about their "Fixed Income" mutual funds.

Remember, there are ALWAYS fees to investing. Some brokers charge more, some less. Some Mutual Funds have a higher MER (Management Expense Ratio) than others, but it does not mean they perform better.

And Passive income is a fantastic idea, just remember that the more capital you have, the more passive income you can make. It may be wise to work for a year (or more) and invest everything into passive income.

Are you planning to retire soon, or just take a break from work? Switch careers? Why the need for 20k worth of passive income? Do your "projects" that you want to work on generate income?
Thanks KaeJS, this post has been very helpful. To answer your question, yes my projects do generate income, and they're passive as well. They're products that I sell to engineers and they will stay passive for a year.. Haven't done it in a while because I'm working a full time job..
 

·
Registered
Joined
·
30 Posts
Discussion Starter #13
Thanks, FT, KaeJS, rgarand, Cal, and everyone else for your input!

I think what I'll do is, once my mortgage is fully paid off I will work on my income earning projects, but at the same time try to build a passive income portfolio.

I will research some more passive income earning vehicles..
 

·
Registered
Joined
·
7,252 Posts
I will research some more passive income earning vehicles..
The only truly passive income is a pension, such as CPP or a DBP pension.
Off the top, following is how I would stack sources of passive income in order of their passivity:
- Govt. pension (CPP or DBP)
- Private DBP pension (Teacher's, Health Care, City/Municipal, etc.)
- Govt. 5-year bond ladder
- Investment grade corporate 5-year bond ladder
- Dividend stock portfolio, including income trusts & REITs
- Rental properties
- An established single proprietorship or joint partnership business (food franchise, etc.)

And oh wait, #1 passive income idea: write books about how to make passive income :rolleyes:
 

·
Registered
Joined
·
5,464 Posts
Oh, let me assure you, writing a book is not a passive income technique.

And here is a quick fact for you: royalties on a book deal in Canada are typically about 10% of sale price. My book sells for $16 at Chapters. TOTAL royalties payable on that sale are $1.60. There are two authors...you do the math. ;)
 

·
Registered
Joined
·
3,061 Posts
Oh, let me assure you, writing a book is not a passive income technique.
It requires a lot of work up-front, of course, but once it's out in the wild and your initial publicity stint is over it can generate income for years. Obviously not enough to live on unless you write a few books that happen to become hugely popular.

When I was a freelance science writer, a few of the magazine articles I wrote got syndicated and I would get royalty cheques out of the blue, years after I wrote the articles. Composing music is like that too; I've had a few of my tunes published and several have been recorded, but so far I think I've made a grand total of 10 bucks.
 

·
Registered
Joined
·
7,252 Posts
Oh, let me assure you, writing a book is not a passive income technique.
Oh, I know that.
That statement was a tongue-in-cheek comment more for sarcasm than anything else.
And if wasn't directed towards you at all.
If anything, it was directed at another dearly MIA forum member.
I didn't want that to distract from the rest of my post, which was in all seriousness.
My apologies if it came across that way.
 

·
Banned
Joined
·
429 Posts
Book Royalties

MoneyGal:

Hmmm, I think the amount of money I've made on my books equals the ink and paper used in writing them. (or at least, it feels that way.)
 

·
Registered
Joined
·
3,423 Posts
Oh, let me assure you, writing a book is not a passive income technique.

And here is a quick fact for you: royalties on a book deal in Canada are typically about 10% of sale price. My book sells for $16 at Chapters. TOTAL royalties payable on that sale are $1.60. There are two authors...you do the math. ;)
Sure, but two authors = half as much work. ;)
 

·
Registered
Joined
·
5,464 Posts
Harold! No offense taken. I was just taking a shot at you AND MYSELF in the process!

FP: you'd THINK, wouldn't you?!
 
1 - 20 of 55 Posts
Top