I only recommend two passive income investments. All others are not worth the time, risk, or both.
The Only Good 100% Passive Investment
First, if you have enough money in an S&P 500 index fund, such as Vanguard’s VFIAX, you can live off the dividends and a withdrawal of up to 4% per year. If you have $1,000,000 in a portfolio of mostly such an index fund, you can likely spend up to $40,000 per year for the rest of your life.
With a passively managed index fund, you don’t pay high fees compared to other investment opportunities. You can let the money sit in your brokerage account and never touch it. Watch as the stock market goes up and down over the years and decades. It doesn’t matter. Leave your money there. It will all work out in the long-term like it has for the past 100+ years.
There’s one problem…You have to get enough money into your portfolio in the first place to live off 4% or less. Saving up $1,000,000 or more is no small feat.
This challenge brings us to the only other passive investment opportunity that’s worth our time and money…
The Highest Potential Return Passive Investment
If you want a source of cash flow and asset appreciation with unlimited potential, nothing beats owning your own business. An online business offers the best passive investment opportunity and lowest startup cost.
Before we dive deeper and I lose all credibility, I have to admit my bias upfront. I’ve been building online businesses since 2009. In fact, online businesses are the only businesses I’ve ever built – it never made sense to spend a bunch of money and all my time in a retail store just to make money. One of my main companies teaches people how to build commerce businesses. As you can see, I’m all in on this second passive investment option, and for good reason…
Six Reasons Why an Online Business is the Best Passive Investment in 2023 and Beyond
- Low startup costs: You can start an online business for as little as $500 that can scale to millions of dollars in cash flow and value
- Tailwinds: Warren Buffett talks a lot about tailwinds and headwinds in business. It’s far easier to succeed in a business with economic forces pushing you forward. Online businesses offer such an opportunity. The internet economy grows every day.
- High cash flow potential: An online business offers cost advantages over a lot of other businesses. This is why Amazon, with almost no retail locations, has become four times the value of Walmart. I know a guy who just sold a multi-million dollar software business with over 70% net profit margins. That’s the potential of the low cost structure of online companies.
- Unlimited growth potential: Google, Microsoft, Amazon, Facebook, and Snapchat all started as tiny companies with just a few employees. Today, they some of the largest companies in the world. There’s no upper limit to the potential of an online-focused business.
- Sellable: You may not want to run your online business forever. Unlike a professional service company in which you provide most of the services, you can sell your online business. You can produce good cash flow in the short-term and, if you want, sell your business for a large chunk of cash when you’re ready.
- Can be run by other people: I currently own 40 to 93% of three multi-million dollar companies. If I wanted to do nothing for a month or two and let the businesses run, they’d do fine. You can’t get any more passive than that! (…other than maybe selling all of them and putting the money into an index fund.)
Top 5 Online Businesses as Passive Investments
Here are my top five recommendations for online businesses to start if you want to build passive income:
- Ecommerce business in which you own the brand (not drop-shipping)
- Software business
- Mobile app business
- Service business in which other people provide the services
- Information product business in which other people create the products
The Two Worst Passive Investments Recommended by Other People
1. Real Estate
This has to be the most common “passive” investment recommended by others. My guess is most of those recommended it have never actually used it to completely fund their lifestyle passively. In theory, it sounds great. You buy a property, get a renter, and let them send you checks. The truest version of “mailbox money” we can get. In practice, things turn out a bit different…
When I made my first million dollars, I bought three single family homes over a year. Each house cost about $250,000 to $300,000 and was paid for with cash. We signed good renters for each within a few months.
The rental income on each property was about $2,000 per month. $24,000 in income on a $250,000 to $300,000 investment is good. Plus, we received a depreciation deduction on our taxes which made it even better.
However, after repairs, income taxes on the rental income, and property taxes, the returns didn’t look as appealing. Then, about once a month, we’d have a new issue with one of the properties. For example, the HOA for one of the houses was getting annoyed that the renters were leaving their trashcans in the wrong place. On another, an AC would go out. Each time, we’d have to deal with the issue.
I calculated our financial return on these properties and compared it to a 100% passively managed index fund investment. The hassle didn’t make any sense. We could earn 10% before tax, or about 7.5% after tax, letting our money compound in an index fund. Completely liquid. Zero management. Zero hassle.
We sold the properties and put all our money into true passive investments.
(Note: Yes, I could have used debt to finance these houses and it would have increased the percentage returns. However, I think taking on $200,000 in debt to make a few hundred dollars a month is a bad tradeoff. In fact, I recommend zero debt – here’s why.)
Putting money into a speculative asset like cryptocurrency is a bad idea if you want passive income.
First, there’s no multi-decade track record of reliable appreciation. It could go to $0 or go higher. Nobody knows.
Second, talk to anyone with a significant amount of money in crypto and they’re about as stressed as it gets. They spend hours a day watching crypto price charts and reading about people speculating on these speculative assets.
The goal with a passive investment is to be able to sleep well at night knowing your money is safe. You can’t get much further from that reality with any meaningful amount of money in cryptocurrencies.
If someone is pushing a “passive” investment on you, check their incentives. Will they make money if you buy it? (This includes me too.)
If you go to Amazing and buy one of our training courses, I will make money. So be skeptical about my advice to start an e-commerce business.
However, I have no way to make money if you start any of the other businesses I’ve recommended above. I also have no way to make money if you start an e-commerce business on your own or take someone else’s training. There’s definitely no way I make money if you buy an index fund.
Do your own research and think rationally. Build a substantial passive investment base and you’ll never have to work again.