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The Passive Income Pyramid

June 3, 2019 by Lazy Man 2 Comments

Passive income is difficult to come by. Sure we’d all like money for doing nothing, but that’s hardly sustainable. Some have argued that passive income doesn’t really exist. We’ll have to save that question for another day. Today, I want to talk about income that is “passive-ish.”

Every month, I write an article about our five income streams. I focus on the four that are “passive-ish.” Here is one visual representation of those income streams:

This is my passive income pyramid. The income stream at the bottom is not passive at all. As you move up the pyramid the income streams take less and less work.

Navigating the Passive Income Pyramid

Let’s work our way down from the top:

1. Investment Income (Passive Income – 100%)

This is any interest or dividend income that you earn from various investment securities: Stocks, Bonds, CDs, REITs, etc. Look for this income in your brokerage or bank account. You typically don’t need to do any work other than the initial purchase of the investment.

The big downside to this type of income is that you have to earned the money before you can invest it. If you are a fan of the 4% “rule” a million dollars will likely provide you with $40,000 of passive income for a reasonably long pyramid of time.

2. Real Estate (Estimated Passive Income – 80-95%)

Being a landlord is clearly a job. However, it’s often just a few days of the year. There’s work in changing tenants and when appliances break down. The rest of the time, you can mostly cash rent checks.

Like the investment income above, you have to earn the money before you can invest it. However, due to leverage, you may only need 20% (or less) of the money to start with.

Note: I used a range of estimated passive income as a property manager can take the work out of being a landlord.

3. Dog Sitting (Estimated Passive Income – 70%)

Dog sitting is clearly work too. However, it’s work that my kids can do or at least help with. I’ve made over $50,000 dog sitting on Rover. (Read my review here)

There are some downsides with dog sitting. It doesn’t pay a lot. Some people don’t like dogs. It’s much easier to do if you work from home. It helps to have a house with a yard. You give up flexibility of travel or going out.

However, I can make some money while I’m doing a different job, watching Netflix, or even running some quick errands.

4. Blogging (Estimated Passive Income – 50%)

Blogging for dollars is a lot of work. Most people don’t make anything. I think I was lucky that I got started a long time ago. With around 2500 articles over 13 years, this website brings in some solid passive income. I have had some months where I was away on vacation and there was still a decent base income.

The downside is that it takes a lifetime to write all the content. You also have to promote the content which means being active on social media. It took me approximately 2 hours to make the above graphic as I struggled trying to figure out how to edit EPS vector graphics files in LibreDraw. I finally gave up and used a regular graphic editor, which still took more time than you would imagined.

5. Career / Job (Estimated Passive Income – 0%)

This is straight up work. You put in the hours and are paid accordingly. You don’t work, you don’t get paid (with the exception of standard vacation time.)

You could reasonably argue that this doesn’t belong on the passive income pyramid at all. I decided to include it as a comparison for everything. Also, it’s likely the main source of income of people reading this.

My main motivation for creating this pyramid was to highlight the “passive-ish” levels above this. These levels form what I call “alternative income.”

What is Alternative Income?

I’ve been writing about alternative income streams for years. Other than my alternative income report, I don’t write about them too often, because they are hard to come by.

While these four are our alternative income sources, you might have another source. Maybe you wrote a book (even an ebook) that sells 100 copies a month. Maybe your first 4 mambos didn’t pay off, but you Lou Bega’d some big music royalties on the 5th try. Maybe you developed an eCourse and people pay to learn that skill. Maybe you own a bunch of vending machines and collect many quarters every month.

Where do all those fit on the Passive Income Pyramid? I’ll leave that as an exercise for you. I’d put Bega’s towards the top and the vending machines towards the bottom.

While I happen to have to have more of these alternative income streams than most, quantity doesn’t beat quality. There are many people with a huge amount of investment income that can live a 100% passive income lifestyle. My wife’s military pension will fall into that category as well. Some have real estate empires that they’d automated well. To live a passive income lifestyle, you don’t necessarily have to have a lot of alternative income streams, just one really good one.

Can you think of some more alternative income sources that could fit on our pyramid? Let me know in the comments.

Alternative Income Update: April 2019 ($8,469.38)

June 9, 2019 by Lazy Man 2 Comments

It’s the middle of the month, so that means that I have the final alternative income numbers for last month. It always takes awhile for the tenants to have their rent checks in and for us to get all the money moved.

April was another busy month for us. In addition to all the financial stuff below, there was a lot of family stuff going on. The kids are still taking swim classes and one moved up a level. We reached a crucial milestone where if they fell into a pool they wouldn’t drown (I think). The older, 6-year old was one of the stars of a school play, so we’ll probably be investing in children theater classes in a few months. The younger, 5-year old seems to have acting in his blood, but he’ll have to wait until he’s 7.

They accidentally got renewed in a cooking class after school, so we just rolled with that. It’s great money-saving skill to learn at a young age. However, it means that we have to miss the local chess club. In a text document somewhere I have some research into Android apps that may fill the gap as long as they are still interested.

This also happened:

Found a bunch of a games at a yard sale. Picked out 8 classics. The seller wanted a dollar a game. I offered a $20 and she was so excited. pic.twitter.com/15pn17PJew

— LazyManAndMoney (@LazyManAndMoney) April 28, 2019

Both kids asked me if they could learn Japanese so they can work at The Pokemon Company someday. We’ve got more than 20 straight days on Duolingo together. We’re also learning French because their school starts that in Kindergarten. We’ll have to plan a trip to Canada in a little bit.

I’ll mix in some pictures throughout the financial update, because numbers can be boring.

If you are a new reader, you’re going to want to refer to my Alternative Income FAQ as you’ll have a lot of questions.

Lazy Man’s Alternative Income – March 2019

In looking at our alternative income, I break it down to 3 main sources… each with their own caveats.

1. Blogging + Dog Sitting Income

This summed up our dog sitting in April:

I got 99 problems… pic.twitter.com/501wLKof1m

— LazyManAndMoney (@LazyManAndMoney) April 7, 2019

Sometimes it felt like we had 101 dogs during the month. It was just a tremendous month where we were at our limit for a little while.

Blogging income for April was far above average as well. For some reason, advertisers were coming out of the woodwork and business was great.

In March, we were on vacation and these combined for a total of $2,148.86. In April, it was:

Total Blogging + Dog Sitting Income: $4,975.38

Ba-BAM!!

That’s the best these categories have done since 2017 and it’s nearly double what I’ve been averaging for a long time. The only downside is that I don’t think I discovered a secret that could lead to sustained success.

Here’s a historic chart with the red line being a 3-month average:

2. Rental Property Income

Zillow kept the value of our rental properties about the same. Like every month, we paid off a couple thousand of mortgage debt. It was boring, but in a great, slow and steady way.

We now have 55.20% of the equity in our properties with an estimated combined rent of $3,325. The rent number is after insurance, property taxes, and condo fees. That’s so we can estimate what we’d really be taking home after expenses.

If you multiply $3,325 by 55.20% you get $1,835 in estimated monthly alternative income. When I started tracking this (beginning of 2017), we only owned 36.4% of the properties and they had lower rents. The math worked out to $1,174 back then. So in 27 months, we’ve seen the number grow $661/mo. That’s like giving ourselves an annual $8,000 raise until the end of time from where we were just 2+ years ago.

The kids put on some fancy clothes for Easter Bunny.

As the years march on, the ratio will grow to 100% of the $3,325 monthly inflation-resistant rent. That’s what gets us to that annual $40,000 income I mentioned in the FAQ.

In the previous report, the rental property income was $1,819. This number always moves slowly. This number only changes if one of two things happen: 1) The properties go up in value. 2) We charge more for rent. Later this year, we should be able to raise the rents a bit.

Total Rental Property Income: $1,835

3. Dividend Income

April did nothing for our portfolios. The stock market soared in April, but I didn’t get to take the numbers until May 11 – after Trump escalated the trade war with China causing the markets to give up their gains

Total Dividend Income: $1,659

Last month, it was $1,656, so we gained $3 of theoretical monthly money from theoretical dividends. Earlier in the month, I think this would have been $1,700 or close to it. This is an all-time new record for us, but obviously not exciting.

Very Close to Passive Income

Our “very close to passive income” is a combination of rental property income and dividend income. If there were some residual income from books, movies, or music, we’d include that here (but we don’t have that).

The stock market goes up and down fast which makes the dividends calculation fluctuate a bit. The rental property income keeps going up because the mortgages are always getting paid down every month. Unless there’s a housing market crash, this should continue to happen.

The Kindergarten didn’t just act in the play, but made the sets. I was only useful at consuming paste at this age.

Having both types of income working together for us is great. The diversification gives me great confidence that we’ll be better prepared than most people in the case of an unfortunate event. We’ll still likely get rent checks if there’s a brief trade war in China. We’ll still get dividend checks if a tenant is late paying one month.

Very Close to Passive Income: $3,494

Last month it was $3,475, so it’s up $19. Last month was an all-time high, so we continue breaking records. It has grown from a combined $2,354 in January 2017. Since then, this has gone from an estimated annual income of $28,252 from these two sources to $41,933. It’s worth noting that, once again, these are fudged numbers that aren’t “real” yet. However, I’m looking forward to 9 years from now when the mortgages on the investment properties are paid off. Add in stock market growth (of a conservative 4%) and this number could reach $85K/year or more.

Final Alternative Income

When you add up “dogs and blogs” to the “very close to passive income” you get:

December’s Very Close to Passive Income: $8,469.38

That would be $101,632.56 a year. I’ve been trying to get this number over $100,000 and we’re finally there. However, I don’t think we’ll stay over $100,000.

That largely hypothetical annual income for writing on a blog, and taking care of dogs, and investments feels a little like a dream. In the long term, that 100K+ would be a lot more income than we’d need. Here’s what our expenses for the next 45 years looks like.

This is what happens when you have a bazillion bad cavities. Pikachu and Squirtle for moral support.

These numbers don’t include any of my wife’s bread-winning pharmacist income, her NOW VESTED military pension or some of the freelance work I’ve been doing over the last several months.

As always, I’m still hoping to write a book someday. I’m probably going to tip my toe into self-publishing soon. I would love to talk to a real a publisher, but I don’t want to take on the “job” of writing. If you know someone who I could talk to contact me.

Net Worth Update

My net worth updates aren’t very exciting as I don’t share the exact numbers. That’s why it’s little more than a footnote here.

I truly believe that net worth is one of the most important numbers in personal finance so it is worth sharing in some way. Showing relative growth can be useful, I think? (Let me know in the comments.)

I use Personal Capital to track my net worth and it makes everything easy. It’s free and you should give it a try. For full disclosure, I might make a few dollars if you do.

With the stock market not doing much and Zillow valuing our rental properties the same, there wasn’t much to impact our net worth. However, a neighbor sold their home and I think it triggered to Zillow to update their math as the value of our home went up. Our total net worth went up 0.95%. For the year it’s up 20.76%, a large percentage of that was based on a website sale that I had at the beginning of the year.

I always have to remember that percentages can be weird due to the law of large numbers. Imagine someone with a net worth of $100 finds a $100 bill on the ground. Instantly it doubles his/her net worth. As our net worth grows larger, the percentage of growth will come down too. You’d rather have 10% growth of a million dollars ($100,000 gain) than 20% growth of a $100K ($20,000 gain), right?

There’s a big wild card in calculating our net worth. Now that my wife’s pension is vested, it’s reasonable to ask Should I Include a Pension in Our Net Worth?. I decided that it does make sense to do it. Later this month, I’m planning to write how to make such a calculation. It’s a big pension that’s potentially worth $2 million or more.

However, because that would ridiculously dominate our net worth, I think I’ll include it as two separate numbers in our spreadsheet. Since I don’t share the numbers anyway, except for these hints, it shouldn’t matter much.

How was your April? Let me know in the comments.

Are You Successful?

April 25, 2019 by Lazy Man 5 Comments

That’s a loaded question for three simple words, right?

The only way to get started is to come up with a definition of success. A couple of days ago, Joe from Retire by 40, asked, “What Does Success Mean to You?”

That question indirectly leads us to a definition of success. You are going to have to create a definition for yourself. Maybe you must be a banker to be fulfilled in life. While that may work for a sitcom, chances are your definition of success is much deeper.

Is Money the Measure of Success?

This is a blog about money… it’s in the name. And most discussions of success are going to lead back to money. After all, in the impeccable wisdom of Liz Phair:

It’s nice to be liked
But it’s better by far to get paid
I know that most of the friends that I have
Don’t really see it that way
But if you can give ’em each one wish
How much do you want to bet?
They’d which success for themselves and their friends
And that would include lots of money
I would surely include lots of money
You’ve got to have sh**loads of M-O-N-E-why, money

As you might be able to tell, Ms. Phair values money as a great sign of success. However, I think we can agree that it isn’t the only sign of success.

Most people would consider Saint Teresa of Calcutta as very successful, but money wasn’t a part of that success. Additionally, we have all heard the stories of lottery winners who have been unhappy. Joe made the great point that the richest person in the world failed at marriage.

Joe did what I would have done. He made a spreadsheet of the qualities that he considered important to success. Hopefully he doesn’t mind that I share it here, because it makes it easier to see where I’m going with this:

In his article, Joe then goes through each one and gives a little explanation about why it’s important and why he gave it the score he did. He chose to score each of them equally on a scale of 1 to 10 and average them out.

I (obviously) loved the idea or I wouldn’t be writing about it today. However, I thought I could make a couple of improvements. I love to tinker, especially with spreadsheets.

The first thing I did was take notice that some things are related. Joe has money, material things, and experiences all listed. If money is high (which it is for him) he can trade some for material things. The reason he doesn’t is that he doesn’t value a lot of material things as high as he does his freedom, another item on his list.*

I’ve started to do some mind mapping recently and I’d group some of these related items together. There’s a Four Burners Theory that says you have to split your efforts across family, friends, work, and health. It’s almost impossible for everyone to have enough gas to have all of them on full power.

I decided ~~blatantly steal~~ borrow Joe’s list and put the items in some categories. It’s not perfect, because I’d rather get your thoughts on this draft and evolve it. (That’s a hint to please leave a comment.) I also decided to allot 100 points among all the categories. The categories with more points are more important to me.

For example, Ebenezer Scrooge might have 90 points in the money category… and he might award himself an 85 for his success in getting money. In this system, he will have likely rated himself a great success. Saint Teresa would likely have put most her points in the philanthropy and spirituality categories and rate herself as a great success.

Here’s what mine looks like:

The first thing you might notice is that my 1 to 100 scale only goes to 70. That’s because I’ve reserved the last 30 points for relationships, family and friends. I’ve decided to keep those private.

One important thing to keep in mind is that the numbers are very subjective. I just went with my gut and quickly filled up a 100 possible points. Then I spent 30 seconds thinking about whether I valued one thing more or less. In fact, I did this so quickly that just before publishing, I realized that I left health completely out of the spreadsheet. (It would have been an average 50% score.)

In the future, I may value material things less, but I bumped it up to an even number so that I could give myself half the points. In hindsight, the overall money category is worth the same amount as relationships (30 points), which needs some adjusting in a future draft.

Lazy Man’s Success Breakdown

Money Category

We have a very nice house and some nice things. However, I’m inherently frugal. I don’t mind Dollar Tree utensils for cooking. I’m very happy to wear an old Patriots sweatshirt from 1993 most of the time. We do have a fancy OLED TV and a luxury SUV. We also have a futon from Wal-Mart and our bedroom furniture is what I got after graduating college.

We have plenty of good experiences which includes our trips to Aruba and Disney World. We live on an island that is 5 minutes from the beach. Our kids get (mostly) the best education money can buy.

We are doing well with our finances. I hope to update this old article this summer, but we should have $200,000 a year in retirement income after my wife’s pension, rental properties, investments, social security, and some hobbies that make money.

Work

Joe included his engineering career and his blogging career. I’ll do the same and throw in my dog sitting career. I wasn’t the best software engineer, but I had some big accomplishments I can be proud of. In 13 years of blogging, I’ve managed 12 million page views and have been nominated for a Lifetime Achievement Plutus Award. I haven’t been featured in Rockstar Finance and I am still Susan Lucci/Ash Ketchum when it comes to winning a Plutus Award.

This is life on the blogger roller coaster.

Others’ View

I didn’t know what to call this category of fame, power, and legacy, so “others’ view” was my best attempt. I don’t care to much for fame and only a little bit about power. I care more about legacy.

I rated myself highly on legacy for things that have mostly flown under the radar. They are the things that show up in the 12 million page views and that Lifetime Achievement nomination. I’d like to write more about this someday, but I’m a little humble. Also, I don’t want it to trigger too much fame.

Own View

I gave myself a 3 of 5 when it comes to philanthropy. Some would look at money that I’ve donated and say that 3 is generous. However, I’ve devoted thousands of hours to helping people not get tied up into pyramid schemes and other scams.

I need to work on spirituality. It should be a larger in both possible points and awarded points.

I was perhaps generous in giving myself a 6 in contentment. It’s something that I actively have to work on.

Freedom

Finally, I gave myself a freedom score of 6 of 8. Maybe freedom should have more possible points, but it shares some of the Money’s points. The score of 6 is based on our financial situation and ability to work from home in a variety of different ways. It’s not going to be perfect because it’s not like we can just pick up and go to France on a moment’s notice. It’s hard to be truly free when you are raising a 5 and 6 year old.

Final thoughts

So I scored 45 of the 70 points. That’s nearly 65%… a solid D grade. Part of the reason it isn’t higher is that I didn’t believe in giving myself a perfect score, as there’s always someone else doing it better. So realistically it is 45 of 59 (I did give myself perfect fame) which is more of a C.

If I go buy a few nice things, win a Plutus award, and meditate my way to higher contentment, I should be able to pull of a solid B.

Now I’m off to go look at my old, very popular how to be successful article and see how I can make it better.

* I may be projecting my thoughts about Joe, but it’s my interpretation after reading his blog for a long time. While I could be wrong, we can still move on as if it were true for the purposes of the exercise.

Alternative Income Update: March 2019

April 18, 2019 by Lazy Man 10 Comments

It’s past the middle of the month and that means I have the numbers (and time to process them) for last month’s alternative income.

This month I’m doing something a little different. The software engineer in me extracted 90% of the 2500 words that give background information each month and put them in a FAQ. For now, I’m including the FAQ in the beginning of the article. However, in future months, it will probably be a separate page… or maybe something that expands when you click on it. Please bear with me if there are some errors on this. It’s more complicated than it looks.

If you are a regular reader and just want to get to the numbers, there’s a link to jump you over the FAQ and to the month’s update

Before we get all the boring numbers, I need to give you March’s back story.

You’d think that the biggest thing that happened in March is that we spent two weeks in Orlando, Florida. (You’d be wrong.)

Indeed we did Disney World and Universal Studios. With two weeks, we took some much needed days off in between. Two weeks is a long time to be away with kids ages 5 and 6. I’ll write a longer article about the trip, but I’ll also share some highlights here because it was a large part of the month.

Going on vacation for two weeks is a great test of alternative income. If the alternative income stays high, I’ll probably continue to do well if I am home and earning money from hobbies.

You’d think that the biggest thing that happened in March is that I turned 43. (You’d be wrong.)

I had a great birthday, perhaps the best ever. My wife surprised me with a much-needed suit. I can finally donate the 20 year old ones that don’t fit anymore. I’m not sure where I’ll wear my new suit, but something usually comes up once a year or two.

You’d think that the biggest thing that happened in March is I received a Tweet from a HUGE celebrity who I have been a card-carrying fan club member for over 20 years. (You’d be wrong.)

I’ll be sharing that Tweet in this email.

You’d think that the biggest thing that happened in March was my wife reaching 20 years of military service and a pension worth around $55,000 a year.

This time you’d be right!

It’s obviously a huge deal – the whole inspiration for creating this blog. I’ll have more to write about this over time, but for now I’m just speechless and blessed.

Skip the FAQ and jump to the monthly update

Alternative Income FAQ

In 2006 I started tracking my alternative income on this website and continued it for years. Life intervened, as it does, and I stopped.

In January 2017, I publishing monthly reports again. Since most of the reports are very similar, I decided it would be best to create this FAQ for new readers. This will give you the background information to get you up to speed. This helps regular readers zero in on the monthly update of “what’s new.”

Q. What is “Alternative Income?”

A. I coined “alternative income” in 2006 to be purposely vague.

I needed something to cover the small amount of blogging income I was making. On one hand, blogging is not passive income – it’s work. On the other hand, there’s a residual nature to the income. If I go on vacation for a couple of weeks, I still make money from the previous articles I’ve written.

Alternative income was more passive back in 2006 before social media, podcasting, and video. Today it seems like every blogger talks of hustling (as in moving quickly, not grifting people) and “being everywhere.” I’m sticking to my dinosaur roots as the only one dumb enough to just keep writing blog posts without cool, “pinnable” images.

Alternative income is best described as income where you don’t directly trade your time for money. Some common alternative income sources include collecting rent, dividends, royalties, and blogging. It’s very subjective. Your definition of alternative income may be a little different than mine. That’s okay, many people have different definitions for “retirement”.

I believe we all get the concept. That’s the important part.

Q. How Do You Make Alternative Income?

A. Currently, it’s blogging, dog sitting, and two types of investments: rental properties and securities (stocks/bonds). I’m extremely likely to add another type of alternative income by the summer. It’s already in the works. After that I really need to get started in writing a book to increase royalties that way.

Q. How Do You Spend Your Time?

A. This is important. Someone with few dependents or responsibilities can focus their energy more on creating alternative income sources. If you have to work 2 full-time jobs just to pay rent and childcare, it is going to be difficult to create alternative income.

My first priority is to be a stay-at-home dad. My military wife works long days on top of getting an online MBA (to add to her Pharm.D.) from a prestigious school. For promotion, she’s strongly encouraged to take on a number of other committee head positions. Yes, she “brings home the bacon.”

The kids are in school/camp during the day, which gives me time to do the basic family errands (shopping, cooking, dishes, laundry, walking the dog, etc.). There’s this blog, dog sitting business, and managing the rental properties. In the middle of 2018, I took on two ongoing freelance jobs that take about 20-25 hours of week of my time. The hours are flexible and the pay is good.

It’s hard for me to put a specific label on what I am. I can’t label it myself. However, as you can see I’m not under a palm tree sipping a Mai Tai… well not always.

There’s more detail on my Now page.

Q. Can you Tell me More about Your Blogging and Dog Sitting Income

A. I don’t publicly break out the difference between blogging income vs. dog sitting income. One impacts the other. When I have a lot of dogs, I don’t have as much time or the focus to blog. When I’m blogging a lot, it’s usually because I don’t have too many dogs to sit.

Dog sitting can be high in the summer as people go on vacation. Blogging can be low in the summer with internet traffic low… as people go on vacation. They end up complimenting each other quite well. It’s almost like a school teacher opening up an ice cream shop.

Q. Dog sitting income doesn’t seem like alternative income to me.

A. That’s not even a question!

It is true that both seem like trading time for money. However, this is one area where alternative income is subjective.

Sitting dogs itself isn’t a time-intensive job. While there is more overhead than you might think between booking dogs and meeting dogs for suitability, we do often have regular clients that are very easy.

The important differentiation with dog sitting is that I can “double-dip” and earn money from something else (such as blogging) at the same time. It’s very different than being an Uber driver. Double-dipping doesn’t work there as the police tend to frown on blogging and driving.

If you are interested, I wrote a very detailed article on how to make money dog sitting.

Q. Blogging doesn’t seem like alternative income to me.*

A. Again, that’s not a question.

Like dog sitting, blogging isn’t directly trading time for money either. If I write an article for the blog today, I don’t necessarily get any significant money for it. The money I make from blogging now is a direct result of having built a reputation and a collection of nearly 2500 articles over 13 years of blogging.

Q. What’s the background on your rental properties

A. We have three rental properties in our real estate accidental “empire”. (“Empire” is in quotes for a reason – it is a joke.) They are all on 15-year fixed mortgages. This means that we don’t make money on them now, but we are paying down those mortgages more quickly than most people. In 2027, we should be able to collect an estimated income of $40,000 a year (in today’s dollars, after expenses) on them.

Q. How do you calculate rental property alternative income

A. Most landlords just calculate how much money they make after their expenses. That’s the easy way.

However, most landlords choose a 30-year fixed to keep their expenses low. We wanted to pay them off quickly. Thus our mortgages are high and we don’t make money on a monthly basis.

I came up with an alternative calculation that effective gives us the percentage of the rent that is ours. That is opposed to the percentage of the rents that are the bank’s. Imagine that you and a friend bought a $200,000 property and each owned 50%. If the property brought in $1500 a month in rent after expenses, each person gets $750 a month. This is what I do.

I add up all the properties’ equity (what we own) and estimated value. (Zillow is very accurate for these condos.) I calculate the percentage of the property that we own by dividing the equity to that estimated value.

Then I calculate the rents of all the properties as if they were owned free and clear. I subtract the expenses (condo fees, maintenance, etc.). I then multiply the percentage of the property that we own by that adjusted profit number.

If you are confused this article on calculating cash flow of cash flowless real estate explains it in more detail.

Q. What about inflation of the real estate? Won’t that eat into the buying power of $40,000

A. Since rents are typically rise in line with inflation over the long term, we don’t have to adjust the numbers for the future. We’ll raise the $40,000 rents now to $80,000 at some point in the future, but it will still have roughly the same $40,000 buying power of today.

Q. How do you calculate dividend alternative income?

A. We don’t focus on putting our money in dividend stocks, but I’m going to pretend that we do for sake of this exercise. In reality we a vast majority in index funds, but I do some stock picking with a small percentage of our portfolio. Though the index funds do pay dividends, it’s not their core goal.

We can pretend that I moved all the money into a dividend focused portfolio. I estimate that we could easily earn 2.50% in dividends. This gives us a conservative number that we could expect to have.

However, since almost all this money is in retirements accounts, we can’t access it in a practical way without tax penalties. We’re going to ignore this for the sake of the report. In the end we need to capture around 20 years of mostly maxing out retirement contributions and compound interest.

Q. What’s “very close to passive income
A.

This is the income that is almost universally considered passive income. For us that would include just the rent payments and dividends. Maybe someday it will include royalties or book sales. I’m not counting blogging or dog sitting income in this.

* While on the topic of blogging, I’d like to add that it isn’t all about the money. I highly recommend personal finance blogging. I wouldn’t aim for creating the greatest blog in the world. Instead, I’d think of it as a way to keep yourself accountable. That’s worked for me. Here’s how to get started blogging with any type blog you might be interested in.