Eric is a Real Estate investor, founder of MartelTurnkey, and author of Stop Trading Your Time for Money.
At one time, I felt like my equity wasn’t working for me. It was as if it was sitting at home on the couch watching TV while I was putting in a full day of work. I kept wondering: How can I make that money work for me off the couch?
Are you asking yourself the same thing? Let’s say you have some money sitting around. Maybe it’s in your 401(k), an inheritance, equity in property you own, etc. How do you convert that money into a stream of income and achieve financial freedom?
I will explain a few of the most common methods of converting money into an income stream and demonstrate why buying real estate rental properties is my top recommended method for accomplishing this goal. To better illustrate these methods, let’s use a concrete example: You and your spouse are 55 years old. You have $500,000 in the bank and you want to convert that into a stream of income.
The Bond Ladder
The first potential method is the bond ladder. This means investing in a series of bonds with different maturity dates. As you continue rolling over maturing bonds, you can live off the interest. This helps diversify your portfolio and increases your liquidity.
One potential drawback of this strategy: A bond ladder doesn’t produce great returns in a low-interest environment. The current yield is being slightly outpaced by the inflation rate right now, so this strategy may not make sense until the interest rate rises again.
A Dividend Portfolio
Another option: build a dividend portfolio, i.e., buying stocks that are paying out dividends. Your intention here is to keep the stock long term and live off the dividend rather than selling the stock. Instead of chasing high-growth companies like Apple or Amazon, you’ll want to buy stocks in well-run, well-known companies that have a long track record of success. Typically you can expect a yield of 3% to 6% with these types of stocks. So in this strategy, if you invest $500,000 in one of these stocks with a 4% average yield, you can expect to earn about $1,600 a month in passive income.
Annuity is one of the most marketed strategies to generate passive income — and possibly one of the worst ways to do so. It’s heavily promoted because insurance companies and brokers stand to profit greatly from selling annuities. There’s often a large upfront fee and commission when you purchase an annuity, and your payout could decrease more if you sign a rider to give yourself more security.
For example, you want to be sure your spouse still receives payments after you pass away. So, let’s say you use your $500,000 to buy an annuity, you pay the hefty commission and then with what is left over, you wind up with roughly $1,650 a month in passive income. I strongly discourage this strategy because it does nothing for multi-generational wealth. Once you and your spouse pass away, your children would not receive any payments. Unlike with stocks or bonds, once you purchase an annuity, that $500,000 is no longer your money.
Asset Withdrawal Method
The 4% asset withdrawal method is another popular option. This strategy assumes you’re investing money in the stock market, which has a historical return rate of 7%. In the first year, you’d withdraw 4% of your total assets. So if you had $500,000 invested, you’d take $20,000 out, averaging out to about $1,600 a month for that first year. You then adjust your withdrawal amount for inflation. So, withdraw an additional 1.4% that second year on top of the $1,600 a month.
Of course, this portfolio is dependent on how well your stock portfolio is doing. In a down year, you may eat into the core of your portfolio, but over a long period of time the highs and lows should even out. If you’re comfortable with the fluctuations of the stock market, this could be a good strategy for you.
Covered Call Method
The covered call method is a strategy I’ve been examining more recently. This strategy is especially valuable for investors who already own stocks and are familiar with options. The idea is that you sell the right for someone else to buy your stock at a specific price by a specified date and you would be paid for selling that call option. If the stock price exceeds the strike price, you have a forced sale and you can use that money to buy the next stock. You lose some profit on the upside but you gain cash flow on the initial premium. It’s a relatively passive investment; you only have to check a few times a week. One problem with this strategy is that it’s very dependent on stock market fluctuations, which makes it difficult to estimate average returns.
Buying Turnkey Rentals
The last strategy, and the one I recommend, is buying turnkey rentals. On a $100,000 turnkey property, you’d put $20,000 down and, after expenses, earn roughly $250 a month in cash flow. So, if you purchased 25 rental units like this with your $500,000, with the average unit providing $250 a month in cash flow, you’d be earning a monthly total of $6,250 from your initial $500,000 investment.
This is a much higher return than the previous strategies discussed, and there are additional benefits beyond that yield. You will receive tax benefits due to depreciation of the properties. This cash flow will not be taxable. The properties themselves will appreciate, and if you sell any of them, you can use cash deferment to avoid capital gains tax — an option that isn’t available with stocks. Hands down, I believe this is the strongest strategy in turning a large amount of money into passive income.
You can of course use a combination of strategies to diversify your portfolio, but I hope you found this article helpful in demonstrating why turnkey properties are an effective way to generate passive income.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.