2020 is a tough year for many of us. It started off well, but the economy went into lockdown when the pandemic hit. A lot of people lost their job and it’s a mess. Our income dropped too, but we have several sources of income so we are still doing okay for now. My online income is still going down every month. That’s tough to see, but at least I’m still making some money. Our passive income is still okay, but there have been some dividend cuts and payout freezes. I expect our passive income to drop by about 20% this year. We’ll have to wait until the end of the year to see the whole picture, though. There is so much uncertainty right now.
Fortunately, our spending is way below normal as well. There aren’t too many things to do locally yet. The only luxury thing we spent money on since February was getting take-outs. We wanted to support our friends in the restaurant business. It has been really tough for them and the future doesn’t look good. Most offices are closed or minimally staffed until the end of the year. The lunch crowd will be very light in the near term. I don’t know how small restaurants can survive in this kind of environment. It’s a tough year.
Okay, let’s go over our passive income for the first half of 2020. First, I’ll review the basic info and then share the details after that.
*FI ratio = passive income / expense
Passive Income is Key
Passive income is one of the keys to a successful early retirement. Once you generate enough passive income to cover your cost of living, then you have achieved financial independence. I retired before our passive income was there, but I had an alternate source of income – blogging. Luckily, early retirement worked out very well for me over the last 8 years. However, we are still working to surpass 100% FI ratio consistently. I’m sure we’ll get there at some point, but it will take time.
Currently, we support our moderate lifestyle with the combination of these income streams:
- Mrs. RB40 works full-time. She plans to take a year off in 2022 and retire early soon after that.
- I blog a few hours per day and make a few bucks online.
- Passive Income – We generate passive income from the stock market, real estate crowdfunding projects, rental properties, and other investments.
The FI ratio is a simple way to measure progress toward financial freedom. Personally, I think 100% FI ratio is overkill because nobody stops working completely after early retirement. But it’s better to err on the side of caution.
In the first half of 2020, our FI ratio was very good. We didn’t spend much and our passive income was good. As a result, our FI ratio was 121%. It dropped a bit from 129% in Q1, but this is still really good. I’m not sure how the rest of 2020 will turn out. Our passive income will drop, but our expenses will be lower than usual as well. We’ll have to wait and see how 2020 turns out.
Real Estate Crowdfunding Income: 2020 target $5,000
I started investing in real estate crowdfunding in 2017. My experience has been mostly positive. There were some problems, but I still think it’s a good way to invest in real estate. However, this is a new way to invest and it could be risky. I plan to cap our asset allocation to 5% for this class of investment.
This year, I’m primarily investing with CrowdStreet and PeerStreet. They both have a very good track record. I like CrowdStreet more because there are fewer turnovers. PeerStreet is good, but you have to keep reinvesting. That takes more time than I’d like.
Real estate crowdfunding is great because you can diversify to different areas of the country. Portland’s real estate market is slowing down tremendously and there are too many new landlord-tenant rules.
Here are the projects I invested in.
Real estate projects I invested in
*Some sponsors are suspending distributions due to the uncertainties from COVID-19. This is expected, but it still sucks.
- CrowdStreet – Currently, we have $65,000 invested with CrowdStreet. CrowdStreet is the best RE crowdfunding company on the market right now. Their commercial projects are first class and should weather the downturn pretty well. One project froze the payout. I’ll keep you updated on this. Check out their project by signing up for a free account at CrowdStreet.
- PeerStreet – PeerStreet is good too. This is strictly hard money lending so the income potential is not as high as equity deals. One project suspended payout.
- An apartment in Arizona ($10,000.) This equity deal is going well so far. The estimated cash on cash return is 10% per year. After 5 years, the property will be sold. The estimated total rate of return is about 16% per year.
- An apartment in North Carolina ($10,000.) There was no distribution in Q1. I’ll keep an eye on this one.
Completed in 2020
- A strip mall in Arizona($8,000.) This was an equity investment. The estimated total rate of return is about 17% per year. The property was sold at the end of February, before COVID blew up. All in all, we invested $8,000 and received $11,085 over 3 years. That’s below the estimated rate of return, but it is still very good. Also, I’m very happy they were able to close before COVID got worse.
A fast-food restaurant in Florida ($5,000) This project is in default. The borrower has no funds to complete the project. They found a buyer and agreed to pay investors back 100%, but I’m not sure how COVID-19 will impact this deal. We’ll have to see how it goes.
*Estimated ROI is just that, an estimate. There are risks with any investments including real estate. If you’re not comfortable with real estate crowdfunding, I recommend REITs. They are more established and also have good returns. We have some REITs in our dividend portfolio.
If you’re interested in real estate crowdfunding, sign up with these companies below and check out their projects. You don’t have to invest if you don’t see something you like. Some of those projects are quite impressive.
- CrowdStreet – CrowdStreet focuses on commercial properties across the USA. They have apartments, hotels, self-storage units, strip malls, office buildings, and more. The minimum investment here starts at $25,000 which is a bit higher than other companies. They have some great projects lined up, though. Sign up for free with CrowdStreet and check them out.
- PeerStreet – PeerStreet has a very good reputation. Investors can invest in private lending with real estate backing. The only issue I’ve had is early completion. Some projects finished very quickly and I had to spend time to find a new project to invest in. PeerStreet only accepts investment from accredited investors*.
- RealtyMogul – All investors can invest in REIT deals at RealtyMogul. In addition, accredited investors can invest in private projects and do a 1031 exchange.
- Fundrise – Non-accredited investors can invest in iREIT here.
*Accredited investor needs to have over $200,000 of income over the last 2 years or a net worth of over $1,000,000.
Rental Property Income: 2020 target $3,500
Currently, we have 2 units in our rental property portfolio. However, I plan to consolidate to just the duplex where we live. I can’t be a DIY landlord anymore because I need to travel more. My parents live in Thailand and they are getting older. They will need more help in the years to come. At this point in life, I’d rather invest in heartland real estate through RE crowdfunding. Being a landlord is a great way to build wealth, but I need to be a more passive investor in the future.
2020 is a tough year for landlords as well as renters. Landlords have to pay the mortgage, property tax, and all sorts of upkeep expenses even if the tenants can’t pay rent. Fortunately, our tenants have secure jobs and they are paying the rent on time. Whew! It could have gone much differently if I picked different tenants. We had a few big expenses in Q1, but Q2 was much smoother. I have to fix a few things in Q3 so 2020 is still uncertain.
2020 YTD rental income: $1,949
In 2020, we have 2 rental units left and they are both rented out. They should generate about $500/month this year if there are no big repairs.
- 2016 rental income: $1,974
- 2017 rental income: $10,973
- 2018 rental income: $8,999
- 2019 rental income: $716
- YTD 2020 rental income: $1,949
Dividend Income: 2020 target $16,000
Dividend income is my favorite form of passive income. Investors own a small part of these public companies and they work for you. These days, I focus on companies that consistently grow their dividend income over the years. This strategy will ensure that our dividend income keeps growing even if we don’t add new money. Currently, we reinvest all the income from this portfolio, but we may use it to pay our expenses once Mrs. RB40 retires. If you’re a new investor, here is a helpful post – How to Start Investing in Dividend Stocks.
As for reinvestment, I don’t DRIP in this portfolio. I just accumulate the dividend and invest in a stock or real estate crowdfunding whenever I see good value.
For 2020, I hoped to generate $16,000 from our dividend portfolio. The first half of 2020 was okay, but we’ll see how the rest of the year goes. Some companies will cut dividends because of the COVID-19 recession.
For new investors, I highly recommend Firstrade. Firstrade is a great discount brokerage that I used for many years. Recently, they lowered their trading fees to $0. That’s great news! Young investors can buy stock without having to worry about the fees. Other discount brokerages are following suit and offer no trading fee now.
YTD dividend income = $6,917
Tax-advantaged Income: 2020 target $37,000
New investors should read these posts first.
The money in these retirement accounts isn’t easily accessible at this time (I’m 46), but they still count as passive income. Once we both retire full time, we’ll build a Roth IRA ladder to access our traditional IRAs so we don’t have to pay the 10% early withdrawal penalty. Most of the investments in these accounts are invested in low-cost Vanguard funds. The dividend income here will be reinvested via DRIP (back into the funds). You can see our YTD income in the spreadsheet below.
Somewhat Passive Income – Blogging
Blogging isn’t very passive for me at this point so this is not part of my FI ratio. Usually, I spend 20-30 hours per week writing, networking, responding to comments, and maintaining Retire by 40. Someday, I’d like to cut it down to around 10 hours per week. That goal is a few years off, but I will cut way back on work in the summer. I’m working 10-15 hours per week until the end of the year. Being a stay-at-home dad is job 1 during the summer break. I’ll work more after New Year.
Anyway, blog income is a huge bonus. When I started Retire by 40 in 2010, my goal was to generate about $500/month. After 9 years, my blog income has grown tremendously. I’m very grateful for your support. Thank you!
2020 YTD Blog Income: $22,913 YTD
My blog income was great in January and February then it slowly decreased. In Q1 we made $15,339. We made much less in Q2, $7,574. The rest of the year looks even worse. It’s pretty depressing to see this kind of drop. I don’t know if my online will ever recover. It’ll be a long road back. At least, my running cost is low so I’m still profitable.
In March, blog income slowed down tremendously, but it hasn’t been reflected in the accounting yet. The payment usually comes 30 or 60 days after the month is over. Q2 will be really bad. I estimate my online income will drop by at least 50%. I still feel fortunate because we don’t really need this income. Many families are in a lot bigger trouble than we are. Hopefully, COVID-19 will be under control by the end of summer. The economy should recover pretty quickly.
Here is how we generated online income in 2020.
- Banner ads: $14,845. These are the banner ads you see on Retire by 40. I hope to make about $2,000 per month with these ads. This is dropping due to lower traffic and budget cut from advertisers.
- Affiliates: $12,430. These are referral fees from affiliate links. If a reader signs up for a service through our affiliate links, then we mayreceive a referral fee. I’d like to see about $2,000/month. This category dropped significantly. I suspect it will drop to almost nothing very soon.
- Private ads: $600. Occasionally, we worked with a company to advertise their products. I rarely do this anymore. This income will be very small in 2020.
- Business: -$2,703. Business equipment, internet, hosting, email service, CDN, cell phone, etc…
- Travel and meals:-$680
- Employee: -$1,437. This year, RB40Jr is our part-time photographer/model. I’ll pay him $25 for each image and video I use in a blog post and $4 per image on social media. This income will go straight to his Roth IRA. I’m excited to see how this experiment will turn out.
Here is the 2020 graph of the revenue, expense, and net income. We can see the income decreasing. I really hope it bottoms out soon.
H1 2020 Wrap Up
Here is our passive income spreadsheet since 2016.
The first half of 2020 was okay for us. The passive income looks low compare to previous years, but that’s because we receive more payouts in Q4. We’ll have to wait until 2020 is over before we can compare them.
At least, our FI ratio looks good right now. We’re stuck at home and we’re not spending much money. I hope you’re staying healthy and weathering this downturn well.
What about you? How is your passive income holding up?
*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. I log in almost every day to check on our accounts. It’s a great site for DIY investors.
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.
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Originally posted at https://retireby40.org/2020-passive-income-update/