JF2410: The 15 Best Ways to Generate Passive Income | Actively Passive Investing Show with Theo Hicks & Travis Watts
Today, Theo will talk with Travis about the 15 different types of passive income streams that he is somehow involved in. They’ll share insights about investment opportunities, private placement investing, the concept of being a passive investor, and the effective ways to generate passive income.
If you have questions for us or have a topic you want to discuss, you can email that to me at email@example.com, and we’ll cover it on the Actively Passive Investing Show.
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Theo Hicks: Hello, Best Ever listeners and welcome back to another edition of the Actively Passive Investing Show. As always, I’m Theo Hicks, here today with Travis Watts. Travis, how are you doing today?
Travis Watts: Doing great, Theo. Thrilled to be here.
Theo Hicks: Today we’re going to talk about the 15 different types of passive income streams that Travis has somehow been involved in. Travis is going to go over the purpose of why we’re talking about this topic today. It’s something that I was very interested in, because I know a lot about multifamily, and I guess real estate in general, but I know that there’s a lot of other different types of passive investments out there… And just understanding what other opportunities there are, how they compare and contrast to multifamily, I thought, would be a very interesting topic for our Actively Passive Investing Show. Before we jump into those 15 different passive investments, Travis, why are we talking about this today?
Travis Watts: Thank you, again, for bringing this topic up. We were talking about this before the show. Sometimes I just run out of ideas ,and I think this is a good one, because we’re always saying terms like passive investing, passive investor, or LP (limited partner), but we’re not really honing in on what each of these really is. What does it mean to be a passive investor, which – we have covered that topic. But more importantly, what are you talking about? What are you actually putting your money into? So that’s what this show is. I just chose 15, give or take – it might be a little more than 15 examples. Most of these I have done, not all. I just want to throw some additional examples in there in case whatever I’m doing isn’t up your alley – well, there are some more ideas for you.
So that’s kind of what it is, I want to turn the theoretical into reality. It’s really what this show is all about. So I’m excited to talk about it… We’ve never done this on the show, I’ve never done this on any podcast, so I think this would be really beneficial for anybody looking to diversify, or wonder what investment options are out there. Of course, a lot of people know me as the multifamily guy, the apartment investor cash flow guy, but there’s so much more to it. I’m always about the concept of being a passive investor more than I am an actual asset class specifically… Though I love multifamily, and we’re going to talk about it.
The last thing before I dive in is a couple of disclaimers – as always, not financial advice at all. Theo, nor I, are licensed CPAs or attorneys, or financial planners, or anything like that. So please seek licensed advice. This is not to advocate that you should do anything, it’s just an educational platform here that we’re sharing some ideas, and I’m sharing some things that I’ve done personally, on a personal note. That’s what this is all about. So with that out of the way, Theo, did you have anything before we dive in?
Theo Hicks: Yeah, I wouldn’t be curious, because you mentioned that you’ve not necessarily invested in all of these things. We’ve got a pretty long list, I don’t want to have you say 25 different things for each point, but maybe let us know if you’ve invested in this, and then very quickly, why you chose to invest in this. For the ones you haven’t invested in, obviously, just say “I haven’t invested in this, but I know that this is a passive investment opportunity.”
Travis Watts: Sure, absolutely. I’d say 90% I have, so I’ll cover that on each thing. At the tail end of these bullet points I will go into a few that I have not. So – good stuff. Alright, let’s kick it off.
The first thing we’ll just get right to it is what we talked about most on the show, it’s private placement investing. This could mean multifamily, this could mean self-storage, this could be mobile home parks, this could be industrial… A private placement is just a private offering, with private investors. There’s no publicly traded market for these securities and these types of investments. You’ve got, say, some general partners, or a general partner, you’ve got limited partners like myself, people that are just kind of silent partners or passive investors… The general partners go out there and they find a deal. They find that 400-unit apartment building, they put it under contract, they get legal docs with their attorneys, they put it together, they send it out, and they raise capital from investors. That’s what makes the deal happen. Again, we’re going to talk about next is the publicly traded stuff, but this is just a little more stable, consistent, less volatile, things like that. This is what I mostly invest in, are private placements.
We’ve covered that numerous amount of times on this, I’m not going to go too much more detail on it, but that’s one broad category where I’m not an active participant in the business model. I am a passive investor, I am the person saying “I like your business plan. I like that deal. I want to take part in it. Here’s $50,000. Send me the checks.” And that’s kind of how that works.
Now to contrast that with publicly traded REITs, real estate investment trusts, or high dividend-paying stocks, things like that – these are on the stock market. They hold similar assets. You could invest, for example, in a publicly traded REIT that owns multifamily nationwide. They have a whole bunch of apartment buildings inside of a REIT structure. By the way, REITs can be private as well, or they could be public.
When they’re public, this is kind of how I view it. By the way, yes, I invested in private placements, yes, I invested in publicly traded REITs, high dividend-paying stocks… Pros and cons. The thing I like about publicly traded is the liquidity. I can go put 10,000, 50,000 or whatever into it, and if I decide tomorrow, because the market went way up all of a sudden, I can just sell and I can just get my profit out and be done with it and be back in cash. That’s a pretty beautiful thing you can’t do, in most cases, with private placements. The cons are it’s subject to the volatility of the market. Sometimes the market’s sky-high and quite frankly, you’re just overpaying for what it is this REIT is holding. Other times the market crashes; that could be an opportunity.
About a year ago, in April 2020 and March 2020, the stock market collapsed, basically. Not as bad as 2008 or 2009 but with COVID, lockdowns, everyone was scared, sell, sell, sell, panic mode… Some of these REITs were down 40%, but I knew that the underlying portfolio wasn’t being heavily affected, because I have so many investments in the private space, which at the end of the day, these are all the same types of asset that we all hold. I knew collections were still coming in, and nobody knew the future. But I did know one thing – that was 40% off, and the private placement was not. So I got into some of that stuff… Buy the dip, I guess.
I can’t predict the market for the life of me, but that’s not what this is. This is just – you flip on the news, and you see the facts… There’s a big sale today, stocks are on sale. I just chose to buy in. That’s all it was. I had a little bit of liquidity. Unfortunately, not enough, because most of that stuff recovered 100% now. I could have doubled the money in a year, that’s pretty crazy. But anyway, that’s REITs and dividend stocks and kind of the pros and cons, and a little bit of what I d,o but not heavy, because I don’t like volatility.
Theo Hicks: That’s interesting about syndications versus REITs… I was talking to a neighbor, and really whenever I explain to people the company that I work, for they always think it’s a REIT. It’s just interesting how still not that many people know about private placements and investing in syndication. They understand they can invest in a fix and flip or a one-off single-family house, or they think that need to be a massive company that owns thousands and thousands of doors… There’s also that in-between of investing in syndications, plus other asset classes, too. So it happens — literally, everyone I talk to thinks that I work for a REIT.
Travis Watts: Well, our training, so to speak, as Americans in the world of investing is all stock market-based. What are the billboards that you see down the highways? Your Fidelitys and your Schwabs… What are the TV commercials? You’re not seeing private placement syndication on Nightly News or whatever. You’re seeing all the Wall Street stuff. So yeah, a lot of people are familiar with REITs. That’s still a level of sophistication above just a 401K plan and some mutual funds and whatnot. But, a great point.
While we’re on the topic of publicly-traded stuff and stocks, there’s one thing I want to cover, and that is selling covered calls. This is kind of an interesting strategy. I’m in no way, shape or form an expert on this; I have done it, but – basically, it works like this, if you’re not familiar. Let’s say I like a company in the stock market and I just want to hold that company long-term. I’m just bullish on the future of that company, whatever it may be, XYZ Corporation. You have to own increments of 100 shares to do this strategy. So I buy 100 shares and I say, “Quite frankly, I don’t care what the market does, up, down, sideways. I like this company. I’m a 10, 20, 30-year hold or whatever.” You’ve got to love the fundamentals of this company, you’ve got to do your due diligence, like with any of these investments. So I buy this company, and what I can do is sell essentially a contract for somebody else to buy my shares from me at a higher price and at a future date if the stock goes up to that price, at that future date. The way it works is, I’m essentially forcing cash flow off of my holding, because I’m going to get paid for this premium, is what it’s called. It’s like a contract premium.
So somebody else – the benefit to them is they don’t have to fork up the money for all the stocks right now, nor do they have to take any risk that the stocks fall down and plummet, because they’re not actually holding them. They’re buying my contract to potentially be able to buy my stock in the future at a higher price, and they only fork up a small amount of money for that premium. But for me, that’s almost like a dividend. When I sell this contract, maybe I make –I’m just making up numbers here… 200 bucks. But I like the stock anyway, I’m holding the stock anyway. So my risk is essentially that, let’s say, I own the stocks at $10 per share and I sell a covered call option at 12, meaning if it goes up to 12, I might have to give away or sell my shares. The risk is if they go to 15, someone’s going to call me out on that option and they’re going to get to buy my stock at 12. I’m going to lose out on that upside potential. But the way I see it, it’s still a profit. I still bought some shares at 10, I sold at 12, and I collected a cash flow premium from the option.
It may be complicated. I hope that makes a little bit of sense to folks; go research it on your own. I’m not an expert in it. But I put it under the passive category because, the truth is, you just have to do a little research; like with any investment, you have to make a decision. But literally, to do this in action could take you two minutes. You could do it once a month, you could do it once a year, you could do it every few months, one time… So it’s not very active. It’s not day trading. You’re not logging into your brokerage every day and looking at the ups and the downs. You’re owning what you own because you want to own it, and then you’re getting some premiums off that. So that’s covered calls, perhaps a little less risky, in fact, than just holding the stock. So many people just buy a stock; it’s like why not make some premiums off of it too?
Travis Watts: I want to move on to note lending, or being a hard money lender, we’ll say. Let’s say I have a buddy and he says “Hey, man, there’s an opportunity for me to go flip this house. I don’t have any cash though”, or “I only have 20,000 bucks, and it’s going to take me 100,000 bucks to do it.” Well, that friend could come to me and say, “Can I borrow that 100,000 from you and let me pay you 10% interest on it. I’ll pay you back in six months.” That’s being a hard money lender, essentially. But that’s not how I do it, personally. I do it through investing in, again, private placement funds, sometimes publicly-traded, where they are the professionals out there in the industry loaning to new construction projects, loaning to fix and flippers, loaning to businesses, hard money, short-term, at a higher interest rate, and then of course, they clip a little fee for themselves for putting this whole thing together and then they give the investors, like myself, what’s leftover. Sometimes that can be 8% a year, 10% a year; it just kind of depends on the structure. But it’s a way to get some monthly passive income. Really no equity upside there, you’re just loaning out money. But I like the diversification in a fund model, rather than just saying, “Hey, Joe Schmoe, here’s 100 grand.” And then he says “Oh, I made a mistake and your money’s gone.” A little more risk in that, but people do it both ways.
Additionally, on hard money loans, something to point out – there are all these crowdfunding platforms now, there are all these different services popping up all the time… Peer-to-peer lending has become a popular thing. There are these platforms that people need money for different reasons and they’re willing to pay different interest rates for it, and then you go in there and for very small increments of cash, you can diversify yourself and say “Well, I’m going to loan this person $2,000, and this person $4,000, and this person $10,000.” Then you create your own fund, and hopefully, you’re not getting more defaults than you are actual production out of that. But there are different ways to approach it. The point is, it’s high-interest loans that are short-term, that’s all it is.
Now I’ll move on to a rent-to-own model. This was kind of an interesting private placement to piggyback off what I said earlier with private placements. It can be mobile homes, self-storage, multifamily, etc, hospitality, hotel, office, or industrial. But this one that I did was kind of interesting. This group, their niche is they buy distressed assets, which are single-family homes, off the books of banks in inexpensive markets. So say, in Indiana or Ohio, for example; not coastal markets, not San Francisco.
So they are essentially buying a house –I’m making up these numbers again– for let’s say $40,000 in a market like that. They’re putting about $10,000 into the house to make it meet code and make it livable, and all these things. So their basis is about 50,000. By the way, they’ve done all this 100% cash, so there’s no loans, or debt, or mortgages. Then they’re acting as the bank for folks that otherwise couldn’t qualify for a mortgage through the big banks – through Wells Fargo, Bank of America, JP Morgan Chase, things like that. So maybe they have lower credit, or they don’t have quite the down payment…
What they’re doing is like a rent-to-own business model, which is really interesting, because when you do a lease-to-own or rent to own, you’re not only paying the rent, but you’re paying a portion of the principal, usually, towards being able to actually purchase this home. You’re forcing yourself to save for a down payment, essentially. And if you decide down the road you’re not going to execute on the deal, you’re not going to buy the house and you’re going to walk away from it – well, for the investors anyway, that’s a pretty high yield. You’re getting rent plus principal the whole time, so it’s a nice cash flow on a low basis home, with no debt. And if the tenant does decide, “Yeah, I do want to buy this house”, then this group is usually selling that same house for like $80,000, for example.
So there’s a nice equity upside to it as well. I’m sure other groups do stuff like that. But it’s just the idea that you can form a business of any type really, and make it a private placement for people to invest in. That’s one that I just thought was particularly interesting.
Theo Hicks: There’s a guy that I interviewed, he doesn’t rent to own, but t was something kind of similar. So basically, he would go and he’d find a big multifamily building, let’s say like a 200-unit multifamily building, and he’d rent a unit, and then he would get money from someone, and they’d buy the furniture for that unit. They’d cover the rent, the security deposit, and the first down payment (as a passive investor) and then they’d get the rent each month. The guy would charge a management fee and some other fee, or something. So it’s like a rent-to-rent model, or something. I don’t know what that is, because there’s no equity upside. I guess it’s more of a cash flow, but definitely passive. I invest with this guy and then I get to collect the monthly rent. But then obviously, there’s no sale or big equity upside. It’s just all 100% cash flow.
Travis Watts: Yep, exactly. That’s a great situation to think about. It’s a different model than what I just described, but it’s still a passive opportunity; it’s a different business model. There are endless amounts of this stuff out there.
Theo Hicks: There really is.
Travis Watts: You really see it when you start sinking into this… And you’ve got a cool role in that you get to interview so many people like this. You get to rapidly learn these different models like that. That’s very cool. Alright, so – distressed debt, I’m going to touch on. This is one that I actually lost money in, but it’s kind of an interesting concept… Similar to what I talked about before. This company was essentially going to banks, and what happens — let’s say a bank issues a credit card to someone; well, that’s uncollateralized most of the time. So they’re giving you a line of credit in hopes that you’re going to pay it, but if you don’t, there’s not a whole lot they can do. They can send you to collections, but there’s no collateral; they’re not coming after your house or what have you.
So that happens sometimes – someone gets a new credit card, they put 5k on it and they quit making the payment. Well, the bank doesn’t have the time or the resources, in most cases, to go chasing after these people, so they’ll sell that debt at a significant discount to a third party, like a collection agency, for example, and then they’ll try to collect on it through the person who owes the money, and try to work a deal with them… Say, “Look, you took out $5,000 and you quit making your payments.” Let’s say this group bought that for $2,000, just to use a simple example. They’d say, “Hey, could you maybe pay us 3,000 bucks then, and then we’ll call it good? Or instead of paying 500 a month for payment, could you do 350?” They’re going to try to work a scenario that’s kind of a win-win. And because they bought that debt at a lower basis, that’s a nice cash flow and potential equity upside. So there was a fund doing that. That’s another way, it’s a private placement offering.
Theo Hicks: Another person I interviewed – something similar but for houses. The same thing, they were doing a foreclosure. For this particular person, the house was always vacant, so they knew they were going to get the house… But I’ve interviewed people who have different approaches to it. They’ll buy the debt or buy the note, and then instead of foreclosing, they’ll kind of restructure the loan with them, so they make cash flow that way. Or they’ll just straight up get the house, then flip it, and sell it, and make money that way. But there’s people out there that will do this on a massive scale and then raise money from passive investors to buy these notes. Again, it’s kind of similar, but on the real estate side.
Travis Watts: Exactly. I’ve seen different business models with transaction fees where you’re getting that transaction fee in some kind of syndication model. To that point, similar, is ATM machines. I’m sure you’ve interviewed some folks that have mentioned ATM investing. It used to be, years ago, it was either a kind of a Wall Street thing, or it was a mom-and-pop operation. So it was either you or I, kind of like a vending machine business, we’d go buy new or used ATM machines, we would be responsible for finding a place to put that, maybe working with a local bar, diner, restaurant, or gas station, and then we would have to maintain it, restock it, and all these things. There’s a little more to it, I’m simplifying it. So we could either do it that way and that becomes kind of an active business, or kind of a Wall Street controlled type of thing.
Nowadays, they’ve taken tranches of that Wall Street model and made it available to accredited investors to participate in. There are a few operators in the space doing this that I know of. One in particular that’s pretty huge, and most people, if you’ve ever talked to someone that said “I do ATM investing”, they’ve probably done it through this group, but I don’t know.
So how it works is, again, it’s a fund, so it’s diversified. There are regions and markets and locations that are historically proven to perform at certain metrics. A couple thousand ATM machines in this fund, I’m a passive investor, I say, “Here’s my $100,000” or whatever; that actually buys ATMs physically, like actual new ATM machines, and then the operator goes and they place them in the existing location. So he’ll take out an old one that has been there for a long time, like five to seven years, it’s outdated, whatever, it needs maintenance – they pull it out, they put mine in there. And then I’m getting a cumulative return based on the performance of the portfolio.
In this case, it’s kind of interesting because the operator is quite involved. They’re very busy, it’s a very active business on that side of the coin. They’re constantly maintenancing, outfitting, putting new ones in, taking old ones out, restocking, all these things. So they’re actually taking the majority of those transaction fees. When you go to use an ATM machine and you pay three bucks to pull money out, they’re actually taking say $2 of that for their fee, and then the passives are getting $1. But when you add it all up it makes, to me anyway, financial sense to partner on something like that for the cash flow.
So that’s ATM investing in a nutshell. I guess I can cover at this point – the vending machine business is very similar. All the little snack machines when you go and get your oil changed, or wherever. That’s a business that can be active or passive as well. There’s buying a vending machine, making sure it’s stocked, and then getting ridiculous prices for stuff you don’t need. [laughs] That’s another kind of business model.
Alright, oil and gas royalties. I’ve only played in this space very minorly. Sometimes it’s a master-limited partnership… It’s kind of a high-risk/high-reward. Commodities bounce up and down, and you just look at the historic charts on oil, and it’s 120 a barrel, it’s 20 a barrel… It’s so volatile. But if I invest in oil and gas, there’s a) some great tax advantages to doing. That’s why most people invest, in sometimes dry hole production, stuff like that. What do they call it? Oh, gosh, I can’t think of the term. But anyway, you’re speculating on where oil and gas is going to be. Wildcats, I think. That’s the most risky form of this investing.
But you can also invest, again, in a pooled fund, private or public, of existing and currently producing oil wells. So you’re eliminating the risk that is there actually going to be any oil there? Well, you already know. There is oil, and it’s producing, and it’s cash-flowing right now. Of course, you’re going to have a lower return because of that certainty. But it’s a whole sector in itself. I mean, that could be an hour-long conversation. But basically, you have royalty, or interest, or whatever, in the actual production of oil and gas wells. That’s something that you can do as well.
Theo Hicks: I have a neighbor, that’s what he does. He works for a big fund that trades energy and then I think he’s setting up his own little fund as well. I’m not sure if it’s oil and gas or what type of energy it is, but he does the same thing, and they bring in big passive investors, use their money to create that stock, or however it works.
Travis Watts: Yeah, it’s interesting when you do — I know as Robert Kiyosaki has talked about, he does some oil and gas exploration investing and stuff like that. It’s on the tail end of what he does. He’s making money through his Corporation, the Rich Dad Company, and then through real estate, and then… It’s like the tail end. It’s like after he, you know, net cash flows and all this, and then he’s speculating a little bit. But the thing is, when you do dry hole stuff, when you’re speculating, you’re trying to get a producing well from complete scratch, most of the time – and again, I’m not a CPA or a tax advisor… Most of the time you can write off the majority of all those costs, from drilling and whatnot, so you get these huge tax write-offs. And if it does produce, even better. But even if it doesn’t and you’re in a high bracket, it’s almost like the government’s your partner there. They’re going to give you a 30% risk-adjusted tax incentive to do so.
And the last thing I’ll say – I worked in the oil industry for a number of years. It’s good when it’s good, and when it’s bad, it sucks. It’s a boom and bust industry.
Renting cars, or RVs, or boats… Speaking of Robert Kiyosaki, he’s the one that actually, years and years and years ago, I heard him talking about how — he’s from Hawaii, and he and his wife wanted a sailboat; almost like a mini yacht kind of thing. I don’t know if [unintelligible [00:25:56].23] But anyway, expensive, and a liability. Robert’s famous for talking about assets and liabilities. Well, he didn’t want a liability on his books, so what he did is he found a charter service, a boat or excursion or tour service, or what have you, that rents out boats and does these things.
So they bought the boat, and then they put it in a pool to be used for that particular company, and that company basically pays them rent on having the boat there that’s accessible to them. So he turned a liability into a cash flow-positive asset… Which I thought was really cool, because he owns the boat; he gets to use the boat anytime he wants for free, it’s his, but then he also makes cash flow off of it when he’s not in Hawaii, which is most of the time. I thought that was really cool.
Fast forward years down the road, this is what my wife and I do with one of our cars. We have a couple of places that we live, and at one of them, we have our car. We’re not there a whole lot using that car, so when we’re not there, we hooked it up to a platform that takes care of everything on our car, from car washes, refueling, the oil, whatever, and then they rent it out to other people while we’re not there, and then wget just passive cash flow. We’re not actively involved in the business, but then anytime we’re going to come to use it, we just go into this app and we just say, “Alright, we’re going to be here for two weeks, we want the car” and then it’s ours. It’s our car. It’s kind of a cool concept. Again, a car is a liability; you’re paying for parking, insurance, maintenance, and upkeep, so we found a way to convert that into an asset for us, which is pretty cool. You could do that with anything.
I just saw an ad the other day on Instagram, and it says, “Do you have an RV? Make 1,500 bucks a week renting out your RV.” That’s the same thing. Most people that have RVs, it sits there three quarters of the year doing nothing, and then they use it a little bit, and then over time, you probably use it even less. It depends. But why not turn that into some cash flow? A lot of people aren’t willing to go buy an RV, they don’t have a place to store an RV, they don’t know anything about RVs; they just want to rent one for the weekend. It makes a lot of sense.
Theo Hicks: Something very similar. It’s not necessarily exactly passive, but it kind of reminds me of that boat story, that RV story. A neighbor back where I grew up, they bought this big semi-truck, the one that pulls the big trailers. But it’s like the living area is massive. So whenever they travel all the time or they go on vacations, rather than flying to their location, they’ll just take a job, hook up a trailer, they’re driving there anyway, they’ll bring the trailer there, you get paid for that, going on their vacation, hook up a trailer, and bring it back. That’s kind of an interesting strategy.
Travis Watts: It’s a hot-shotting business. So if you have the right equipment, again, yeah; if you’re going to have a truck and trailer anyway, that’s half the equation. The rest is just sign up for some platform that you can go pick up jobs. Again, back to the oilfield days – man, some of those guys… I’m out there swinging hammers, working 14 hours a day, sweating my butt off, and here comes some hotshot showing up in his little hoodie with his truck and trailer making more money than I’m making, just because he picked up a [unintelligible [00:29:02].28] or something, and got paid a thousand bucks to bring it out to us. It was crazy. That’d be an active business, of course. But there are ways to make money off that, or turn a liability into an asset.
Alright, cool. This one’s fun. Theo, I know you’ll probably have a few things to add here. So house hacking – Theo and I both got started with house hacking in the real estate space. My story goes that 2009, two-bed/one-bath house; it was the first property that I ever purchased. The government was doing a first-time homebuyer credit at the time because of the recession… And all I knew was this particular house sold for 168,000 a couple of years back, and now it was on the market for 95k, and it didn’t have any major issues; it was quite frankly in good shape, and just needed some paint on the inside. That was my first purchase.
My mortgage, if I remember right, was about $650 a month. I had a spare bedroom in a college town, and I was raised by very frugal parents that taught me about garage sales, and Craigslist, and this kind of stuff… So I went out and I furnished this bedroom in the house, for that matter, so cheaply you wouldn’t believe it. I don’t even know, I spent like 1,500 bucks and furnished the whole house. It was insane.
But anyway, I ended up charging 600 a month for the spare bedroom, so I was essentially living for free. It was an incredible, mind-boggling moment in my life to think real estate is powerful, cash flow is powerful, I want to keep doing this; I want to do this on a much bigger scale. That was when the seeds got planted. That’s how I got started with it. Did you have anything you want to add to that?
Theo Hicks: Yeah. House hacking, just like any other thing – there are so many different ways to go about doing it. If you already live in a house, you can rent out a spare bedroom. I’ve heard people convert a shed – a big shed obviously – their garage into a unit, renting out their basement, you can do more of an Airbnb type of thing if you travel a lot… If you travel to say four or five different locations, you’ve got a place in each of those spots, you’re there for a month, while you’re not there, you Airbnb it. [unintelligible [00:31:01].13] have 12 houses, do it that way.
What I really like about the house-hacking though in particular is that it’s very repeatable. You can house-hack, say a duplex or a triplex or a quadplex, it might be a little bit more active that way, but depending on how you set the lease up, they could take care of everything and you just mostly collect rent and then pay for things as they come up. But then after a year you can move out, and then because of that low downpayment, you can rent out that entire place, or both units, three units, four units, you have a really, really high cash on cash return, and then just do it again; buy another house, house hack again. Slightly more active; it’s not going to be completely passive, like renting out your bedroom… But this is again, the Actively Passive Investing Show, so… It’s not the same as running a full-time business. I suppose you could put the right team in place…
I really like this house hacking strategy. Really, anyone who I ever talked to that talks about getting into investing in real estate, this is really one of the best ways, because it’s a really low down payment, you’re managing a property that you’re there, so you don’t have to travel around everywhere… And once you leave, you can rent it out and have a really high cash on cash return. But I love this strategy for really anyone who’s planning to get into active investing, but there are also ways to make it more and more passive.
Travis Watts: Yeah, I think a lot of these things that we’re talking about, Theo – it requires a decent amount of capital in order to achieve the kind of results that maybe you’re looking for, if you want to be solely 100% passive. So house hacking, the way I see it – there are two things. If your net worth is, let’s say under $100,000, this would be a great way to start. If you want to get started in real estate, it’s cash flow, it’s real estate, it’s home buying… There’s so much flexibility with single-family or small multifamily that you can do, different loans you can qualify for… It’s really a great way. I think that’s why you and I both started that way. It just seemed like the most logical step in the door, at least to me it did.
So that’s how I look at it, when you’re at that kind of level. And you could certainly do it beyond that, but yeah, maybe then at some point, you’re thinking maybe a guest house in the backyard, or maybe the basement with a separate entrance or something. Maybe you don’t want a roommate per se your whole life, but there are ways to make it work, to your point. Or a detached garage or something.
Alright, cool. I want to cover a few low-yield things, but certainly passive opportunities that some people are very into. Certificates of deposit from a bank, a CD, annuities, a common insurance kind of product for retirees mostly… Money markets, which are usually short-term Treasuries and things like that, and bonds, whether we’re talking US bonds or corporate bonds.
Right now, in today’s world, in 2021, these don’t yield very much, but they are passive. You could certainly walk down to your bank and say, “Here’s 100k, I want to buy a CD.” It’s pretty streamlined. So those are some options for you. I’ve done most of those – not all of those – at one point or another, with small amounts of money. Not annuities though.
And then here’s one – it’s kind of a stretch, but I want to throw it in here because it’s interesting. Years ago, like 2016 or 2015, I got a credit card that is straight-up 2% cashback, no matter what, unlimited all the time, on everything. I know it’s not passive income, and I know it’s not an investment, but every single thing I buy in my license then, 2% back.
So you end up getting these rewards that I redeem for cash, and it’s kind of nice. We all have to spend money, you know what I mean? So why not just get a little cash flow stream built off of it? I know a lot of the travel hackers and whatnot online – they do the airline rewards and they end up flying first class for free to Asia, or something. There are different things you can do, depending on what’s up your alley for you. But something to consider if you don’t have a good credit card or cashback kind of thing, that’s certainly an option.
And then I just want to hit real quick some alternative alternatives that I have not done, I don’t think, mostly… Let me take a look. Yeah, no, I haven’t done any of these. But they could be cash flow. There’s a lot of programs out there for dropshipping where you can put some time in upfront, build this e-commerce business, so to speak, and then make it sort of turnkey, to where you’re not actually storing inventory, you’re not actually having to do customer relations and returns, and stuff. You’re arbitraging; you’ve set up a system where you’re buying things for a cheap price, you’re selling them at a higher price, and you’ve made that automated to where you’re just getting cash flow off that business. So that’s certainly something that you can do.
Affiliate marketing – again, let’s say you’re a YouTuber and you’re using a microphone and you’re doing a review on it or whatnot, so you get all these views, and you say “Links in the description” – well, that’s an affiliate link most of the time. These folks are getting a kickback when someone clicks that link, places the order; they’ll get like five bucks or something. Sometimes more, it depends on the price point. So it’s not really passive, but one day it is passive, you know what I mean? You put in some time upfront, and then you just let it roll, and then you have 100 videos, and then you’re just collecting these commissions off all these things that sell, without you having to do any further work.
Car washes could be independently owned. I’ve also seen funds that own car washes. We all know about that, the self-serve thing, or the automated roll through. You can just own those things. They’re sometimes some cash flow kings, they’re pretty crazy.
We talked about vending machines. You can do advertising on your car; we’ve talking about that before the show, Theo. You can put these big banners down the side of your car and some companies will pay you, per month, per week, whatever, depending on how much you drive, what your car is, all these different factors… But certainly, it’s something to think about. I joke that you could get a tattoo across your forehead, or just get a tattoo in general, and some companies would pay you for that, because that’s long-term marketing. I don’t know that that would really be worth it, but to me…
Theo Hicks: Definitely passive.
Travis Watts: But certainly passive, right? That’s just kind of a joke. But there are all kinds of things… To me, to wrap all this up, the bottom line is you’re an active investor if you have an active participation in the business. Not just upfront, but ongoing. When you own single-family homes and you self-manage, that means you’re always looking for properties, you’re always working with relatives, you’re always showing up at the closings, you are always turning over units, you’re always calling your contractors… This is active participation. You are not a passive investor if you own single-family homes. And even if they’re turnkey and you have professional property management, if you’re still dealing in the business all the time, on an ongoing basis, having to make decisions, “Am I going to replace the roof? Am I going to patch it? Am I going to do a new air conditioning unit? What color am I going to paint this?”, that is active participation. That’s how I define active and passive. Passive is all the things that we just described, mostly though, like the private placement example where you’re investing in a private fund, or in a stock situation…
We spoke on the last episode about owning a stock like Apple. Well, I don’t work for Apple; I’m not a CEO of Apple, I’m not an engineer at Apple. I have no active participation in the business of Apple. So if I go and buy a share, I am a passive investor in Apple, or in that business. That’s a quick refresher on how to look at it.
That’s my list. There are probably more than 15 ideas, and I know we went a little bit long, but hopefully food for thought. Everybody listening, you can always reach out to us for more clarification on any of that. Hopefully, it all made sense. But that’s what I wanted to share with everyone, is some of that stuff I’ve played around with.
Theo Hicks: I really appreciate that list. The way I would think of this – again, we’re talking about passive investing, so maybe right now you’re focused a lot on one of these or a couple of these. But as time goes on, the goal of all this, at least for some people, might be to have this passive income replace their full-time job income, so they can become full-time passive investors. Maybe right now renting cars, RVs, and boats, and turning a liability into an asset, or a rent-to-own model, or some of these more complicated/complex models – it might not be something you’re interested in now because you don’t know much about it. But once you retire, you want to diversify, expand, spend your time passively investing even more, and now you’ve got a whole massive list of ideas of things to investigate. You can maybe go from one to two, or two to three, or do all 15+… It’s really up to you.
Ultimately, I think it makes sense to focus on what you know first, get really good at that, and then decide what to expand in next based off of this list went over, or where you’re at, what you’re interested in, things like that. That’s all I have to say. Anything else, Travis, before we sign off?
Travis Watts: I think just at the end of the day, one more thing – as a full-time cash flow investor, if you will, I’m just looking for a risk-adjusted return that makes logical sense to me in something that produces positive cash flow. That’s what I’m always looking for. There’s plenty of things that can produce cash flow, but you’re taking an awful lot of risk for it, so that’s not something I’m going to be involved with.
I’m always trying to learn as much as I can, ask around, network, and just try to figure out what makes the most sense for me. We’re all different, to your point. House-hacking could be right up your alley today, but for me at this stage in life, that isn’t a strategy that I’m actively doing, nor do I intend to really ever do again. So nothing against it; it was great when it was great, but I’ve moved on to some other things. So that’s it.
Theo Hicks: Perfect. Well, Travis, thank you for joining us and providing us with a very detailed list of 15 or so different passive investment opportunities. Best Ever listeners, as always, thank you for tuning in. If you have any questions for us or you have a topic you want to discuss, you can email that to me at firstname.lastname@example.org and we’ll cover it on the longer-form show Actively Passive Investing Show, or our 60-second segment on YouTube. Again, Travis, thanks for joining me. Best Ever listeners, have a Best Ever day and we’ll talk to you tomorrow.
Travis Watts: Thanks, Theo. Thanks, everybody.
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