Passive Income Update: October 2020

It’s a little before the middle of the month, so I’m a little earlier than usual to review October 2020’s passive income. Many other bloggers get their review published on the first day or two. I can’t do that. I like to wait until the tenant checks have come and our mortgage payments are deducted from our accounts. Around the 5-7th of the month, our checking accounts seem to stabilize with all the typical big bills paid off.

Everyone knows that this year’s Halloween was a little different. As you’ll see in the pictures here, the kids still had a good Halloween even though it was socially distant. Most all the neighbors left out bags of candy. The Navy base had a walkthrough of Halloween displays with chutes of candy. The kids got to go on a Cub Scout overnight. They had a karate duel. We had the first snow of the year. We went to a farm for cider donuts and then learned to make them at home with a Raddish monthly kit (review coming eventually). I introduced the kids to Stratego, one of my favorite games growing up. I like the vintage game, which says it’s good for 10 to adult, but I think most 6-year-olds can probably handle it.

As for the adults, we were focused on completing the 1031 exchange, buying our new investment property. My wife was “virtually deployed” to help with the COVID response. I picked up a little more contract work. I did more work cleaning and decluttering the garage and basement. At my current pace of a few hours a week it may take all winter (or longer), but I don’t mind. I like having something that I can see slow, steady progress with.

I find myself taking more pictures of events so that when I review the month, I can realize all the things we did. The individual days go by very fast. Typically the morning is rushing the kids to school. The early evening is picking them, making dinner, getting their homework done, doing karate/boy scouts, etc. I think most families are like that though. There’s a lot of routine, which works well for us. On the weekends we add a lot of random events in.

That’s enough lead-in… let’s start the Passive Income report. I used to call this the Alternative Income Report, but everyone loves passive income better. While I transition to the new terminology, there may be some “alternative income” mentions including the FAQ. If you are a new reader, you’re going to want to refer to my Alternative Income FAQ as you’ll likely have a lot of questions.

The way I calculate these numbers requires that long explanation – it isn’t intuitive at all. The reason why I do things a little differently is that this catalogs a journey. For example, we don’t have passive income from our rental properties while we are paying down their mortgages. Instead, I calculate the percentage of equity we have to show where on that journey we are. Each month you see that the bank owns less and we own more. When we get to owning 100% there will be no mortgages and all that rental income can be used for living expenses.

Lazy Man’s Passive Income – October 2020

I categorize our passive income into 3 main sources that are largely represented in my passive income pyramid. For this report, I ignore the bottom section, “career/job” – that’s not passive at all. (I do have some income in that area, but that’s not the focus of this report.) I combine dog sitting and blogging into one section of “somewhat active” income. I leave real estate and investment income as their own separate main sources of very passive income.

1. Blogging + Dog Sitting Income

This just hasn’t been the year for dog sitting. People aren’t traveling so they need me to sit their dogs. We’re getting a few customers each month. That’s very good considering COVID and most families are working and schooling. We’ll have to lower our expectations for 2020. When I get some time, I’ll make some business cards.

We went to a cider donut farm. They were the best donuts I’ve ever tasted until…

The September cooking kit from Radish had cider donut molds and a recipe. Better than the cider donut farm. It seems perverse to talk about “silver linings” to this pandemic, but the kids learning to cook is nothing to sneeze at.

My blog income continued to recover. The core advertising that we consistently have is up, which is very good news. We also got above-average one-time advertisers.

In August, dogs and blogs combined for a total of $1329.27. In October, it was:

Total Blogging + Dog Sitting Income: $1767.85

That’s still below average, but we’ll likely have to live with it until COVID ends or I can create a new income stream. I have some ideas on that new income stream, but it will be January before I get very far with that.

One of my favorite games growing up, Stratego. They had one of the best games I can imagine – the kids’ third game against each other. One had almost all his pieces left, but no miners. The other had his own #1 and #2 and defeated his brother’s spy, #1, and #2 with a flag surrounded by bombs. The brother with almost all pieces had to sacrifice them all until he had no movable pieces.

With dog sitting starting to come back my kids can get back to work and pitch in to help. My 8-year old is so good with dogs at this point. He can feed them, let them out, and play with them in the yard. My 6-year-old is good too. This help means that I can pay them a legitimately earned income (a small percentage of the overall dog-sitting income). Because the income is earned they can save money in their kid Roth IRAs and it will be money that they’ll never pay tax on. I want to get them more involved in blogging, taking pictures, and things like that, but it’s going slow. I have a plan for them to be able to help with an article or two by the end of the year. They’ve also helped clean an investment property. It’s not a lot of work, but it all adds up.

(Note: The blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

2. Rental Property Income

We recently sold a condo, but couldn’t close on the replacement purchase in October. It didn’t… our bank created a mess because we were an investment property LLC. Maybe this is a spoiler for next month, but we did close on it a few days ago.

My wife found an awesome ketchup costume for Halloween. The kids reminded me that ketchup is Pikachu’s favorite food. We decided to flip the script for this picture and create Pikachu’s nightmare – fitting for Halloween, right?

As for October’s numbers, we stayed exactly the same as we had in the past. The condos lost a little value and we continued to pay them off.

That moved us from having 60.64% of the equity in our properties to 60.63%. Previously, I calculated that, after insurance, property taxes, condo fees, and estimated maintenance we’d make $3,325 a month. That number because it represents our net gain. I recently updated this with the new property and it looks like we’ll be at $3,387.50 – a minor difference.

Our mattress, at 12 years old needed replacing. We tried a Zinus mattress (that we found for cheap), but it was terrible. We ended up using our old mattress, the Zinus mattress, and a feather bed to create a “Frankenbed.” It lasted a couple of weeks before we broke down and bought one good, albeit expensive mattress. The kids loved Frankenbed and had a night on it to themselves while my wife and I happily traded for their more comfortable beds.

If you multiply our expected net rent, $3,387.50, by the amount of equity we have (i.e. where we are on our journey) 60.63% you get $2,054 in estimated monthly passive 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 44 months, we’ve seen the number grow $880/mo. That’s good passive growth in almost 4 years.

It looks like the formula still works with the property switch.

As the years march on, the ratio will grow to 100% of a rent that should net $3,400 monthly after expenses. Since rent is inflation-resistant, we can raise it as costs of living go up, we don’t have to factor in inflation like other investments. So we can think of it as $40,800/yr. of income in today’s dollars buying the same value of stuff in the future. That should be enough money for us to live on with our own home paid off (plus our solar panels, frugal shopping habits, and military healthcare.)

In the previous report, the rental property income was $2,054. Hopefully, we’ll start putting this number in the right direction as we get a renter in the property.

Total Rental Property Income: $2,054

3. Dividend Income

For this section, I assume we will earn a 2.5% dividend yield on our holdings. That could be from a high-dividend ETF or from simply holding strong companies that have a long history of dividend growth. For that we’ll look at making passive income with dividend kings. If I wanted to simply retire on this dividend income, I would get Sure Dividend’s newsletter to try to get closer to a 4% average dividend yield. That link to the newsletter has a special discount rate and in full disclosure, I make a few dollars if you sign up for it.

At this Cub Scout overnight, the kids accomplished much of the year’s requirements. Unfortunately, I missed much of it to take care a dog (as well as our own.) It was an income of around a $75 and a savings of $75.

On the last snapshot, October, the market was doing great. There was a little dip, but that has mostly recovered. Our portfolio is at an all time high. We’ll see if investments can continue to grow. With COVID cases continuing to rise, there may be another shutdown in the future.

We continue to get a profit-sharing check since I bought (a lot of) a company. The business is doing well. It’s actually almost ideally positioned in this pandemic due to its virtual nature. The investment income from this is essentially the same as dividend income. It is taxed differently, but for the purposes of this report, it makes sense to group together all stock ownership in this bucket.

Total Dividend-ish Income: $3,143

Last month, it was $3,010. We are past the pre-COVID numbers. We aren’t far above it, but it’s amazing that we are even close.

The kids continued to advance their karate career. Their sensei pulled out foam noodles for some “combat” training. They quickly learned that they could defend themselves by making their making their target area small (crotching down). That made them go low with their noodly strikes. The 6-year-old executed a perfect jump on a swipe at the legs from his older brother and scored a hit. It was straight out of the movies – I almost fell out of my chair!

Annualized, this monthly $3,143 is $37,721. If our mortgage was paid off, we might be able to live on this by itself. However, because most of our investments are in retirement accounts, we can’t use much of this potential income for now. (We can use the profit-sharing check as it goes straight to our checking account.) We’ll let this investment continue to compound for another 15 years until we are 59.5. Then we’ll have to see if we want to tap it or let it continue until we are required to take some of it at age 72.

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 royalty income from books, movies, or music, I’d include that here. I’m too tone-deaf to have a rockstar music career, but maybe I’ll write a book someday.

We had an October snow! Not much of it stuck on the ground, but that didn’t stop the kids from playing.

The stock market goes up and down fast, even more so nowadays. That makes the dividend calculation fluctuate a lot more than it normally would. We don’t even know if companies can reliably pay dividends anymore. Without customers and profits, many companies have cut their dividends.

The rental property income typically 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. We haven’t seen any kind of crash yet.

For a few years, I’ve been saying:

I love having both types of income working together for us. I think everyone interested in FIRE should have stocks and real estate income streams. The diversification gives me great confidence that we’ll be better prepared than most people in the case of an unfortunate economic event. We’ll still likely get rent checks if the stock market crashes. We’ll still get dividend checks if a tenant is late paying for awhile. Of course a bad economy may impact both at the same time, but that’s what an emergency fund is for.

Here we are in month 8 of an unfortunate economic event. Stocks went down a lot, but then went back up. Real estate has held steady. Overall, the plan keeps rolling along, even during COVID-19.

While the stock market is doing well, the real economy is very bad. It used to be terrible, but people are getting back to work and jobs are coming back. It looks like we’ll finally get a president who won’t ignore COVID and hope it disappears. We’ll finally get a president who is going to start to reverse the climate change disaster that sees so many natural disasters ravage the United States.

Very Close to Passive Income: $5,197

Last month it was $5,064. The $5,197 is tied for an all-time high that we hit a couple of months ago.

This would be more $62,000 a year of almost completely passive income. What’s better is that there would be no need to touch the investments themselves. We wouldn’t have to sell stocks or get a reverse mortgage. Property maintenance and taxes are already factored in. We would still have all the underlying assets (property, stocks, etc.) and be able to pass these to the kids for them to build on – unless we choose to draw them down for more fun, charity, or other spending.

Halloween 2020 wasn’t what we thought it would be, but it was great nonetheless.

A trip to the church’s Pumpkin Patch fundraiser. Normalcy is rare, so we’ll take this slice of it and make the most of it.

This “very close to passive income” has grown from $2,354/mo. in January 2017. It’s worth noting that, once again, these are fudged numbers that aren’t “real” yet (except for that profit-sharing check). In a few months, we’ll get to four years of tracking this number, and we may have gained $3,000 in passive-ish income. I wonder if we can get to $8,000/mo. in passive income by the start of 2025 (which will be another 4 years).

Final Passive Income

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

Passive Income: $6,964.85

Last month it was $6,393.27. Things were going in the wrong direction last month, but we’re back up to around our average. I’d like to see this get closer to $8,000 in 2021, but I need a plan for something new. For now, I’ll just be happy that with four different income streams (and two consistent ones), there isn’t much room for everything to drop.

This nearly ~$7000+/mo income is ~$83K+ a year. That largely hypothetical annual income for writing on a blog, taking care of one dog, and investing isn’t half bad. In the long term, $75K would be a lot more income than we’d need – given our necessary expenses for the next 45 years. Of course, those necessary expenses aren’t going to cover all our spending, but it’s a large percentage of it.

As 2020 has proven, you never know what bad news is lurking around the corner. This preparation gives us the financial flexibility to fight it.

None of the numbers here include my wife’s bread-winning pharmacist income, her vested military pension (more passive income), or the freelance work I’ve been doing over the last couple of years (which isn’t passive at all). That’s the fuel that drives the passive income engine – it allows us to live well and invest. My income doesn’t match my wife’s, but I’m good at stretching a dollar in almost all our spending.

As always, I’m still hoping to write a book someday. That would add some more passive income. My wife will probably get her book out first. She’s had an incredibly interesting life until she met me – I am so boring. I may tip my toe into self-publishing sometime next year. I would love to talk to a real publisher, but I don’t want to take on the “job” of writing. That’s probably a deal-breaker. If you know someone who I could talk to contact me.

My favorite thing about the graph below is that it doesn’t dip down too far. It’s been above $6,000 for a while now. Though we are getting close to dipping below that $6,000 mark.

(Once again, the blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

Net Worth Update

My net worth updates aren’t very exciting as I don’t share the exact numbers. That’s why it’s just 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.

Like most investors in October, our net worth did very well. We saw it jump by 2.41%. For the year overall, our net worth is up 17.03%. If you didn’t know better you might think 2020 was another boring year – a typical saving and investing plan for us. In fact, growing our net worth 17% in a year might be above average. With the Rule of 72, we’d double our net worth in a little more than 4 years.

Diversification helps a lot in bad times. Even when the stock market was way down, we were still grounded with our real estate. We can’t control the market, but we can be happy that the amazing river of compound interest has been working well for us over the years.

I feel it’s important to acknowledge that everyone is in a different place in their financial journey. I’ve been blogging about personal finance for 14 years. FIRE wasn’t a “thing” back then, but it’s in the news all the time now. We naturally are further along in that journey than some younger readers who may be more towards the beginning of their journey. If you are one of these readers, I hope you won’t be discouraged by some of the numbers above. I didn’t start many of these graphs until year 11 of blogging (year 13 of early retirement planning). Please try to use it as motivation for what may be possible (depending on your circumstances and market luck) over 10-15 years.

There’s a big wild card in calculating our net worth. Now that my wife’s pension is vested, it’s reasonable to ask whether to include a pension in your net worth. I decided that it does make sense to include it. She could have earned more direct monetary compensation if she didn’t work for the government. That would have boosted all the numbers across the board. Calculating pension value is not easy, but here’s the best way to know what a pension is worth. In the end, it seems my wife’s pension may be worth $2.3 million. However, like most of the money mentioned in this article, this isn’t money we can spend right now.

Because the pension would dominate our net worth, I’ll note two separate numbers in my personal spreadsheet. I don’t share the numbers anyway, aside from these hints, so I don’t think it should matter much to you. It’s not like I’m suggesting that you might want to make a financial-based decision on a pension.

I always end this article by asking how your last month went. I know that COVID-19 makes everything difficult and that cases are going in the wrong direction. I have more hope as I publish this than I have had in a long time. Feel free to use the comment space to vent, I try to give a thoughtful reply to every comment I get.