How To Actually Earn Passive Income So You Can Quit Your 9-5

Here's how passive income actually works that most people on the internet are scared to tell you. The way it works is you're going to go out and make this much money and then you can only go out and spend this much of the money that you earned. Then you take this money that you didn't spend and you're going to use it to buy something that can pay you with this passive income. What are those things? Well, number one can be dividend paying stocks. Number two can be cash for producing real estate. Number three could potentially be a business. This is an order from the least effort and lowest returns to the most effort and higher returns. The whole concept of passive income also doesn't really make any sense because all sort of income is going to require some sort of work. It's just how much work on your end. Dividends are probably the closest things to true passive income because you can buy a few stocks with the click of a button and then they will start paying you with dividends every few months, every quarter, but it still requires you to maintain your portfolio. Real estate can be generally passive if you have a good property manager to manage your properties. But again, it's going to take you more work because now you have to go out and find the properties and investing in the business. This can get you the most cashflow, but it's also going to require the most work until you can hire a person to manage all of your operations to make it more passive for you. But even then, you got to make sure that your operations person is doing a good job. So when you're investing in dividends, you can expect somewhere between 2% to 7% or maybe 8% a year in dividends on your money. When you're investing in real estate, you can expect somewhere between 4% to 10% a year in cashflow, sometimes more, sometimes less on your money. And if you're investing in a business, you want to see somewhere between 10% and 25% a year cash on cash return on the money you're using to go out and buy a business. Now again, more work, more effort, less work, less potential returns. And just for full transparency, I don't like using the term passive income. I prefer cashflow, but it feels like everybody on the internet loves the topic of passive income, which is why I'm using it. And secondly, I don't like talking about business income in that same conversation because I don't think it fits very well. But again, there is so many people on the internet talking about how you can make all this passive income by building a business, which is a complete lie, which is why I want to talk about it. And I want to break down the ways that different types of cashflow works from dividends to real estate to businesses. That way you have a real understanding of how this type of cashflow income works, how you can make it kind of passive, and how much returns you can actually expect. And this type of cashflow or passive income is not there as a way for you to pay your bills because you're struggling to make money. It's a way for you to take your extra money, put that to work. That way your extra money can start earning you some extra money. So you can hopefully use that money to fund your lifestyle. It's not a way for you to now figure out how you can make ends meet. When you want to invest for this type of cashflow in the stock market, you are investing in a dividend. A dividend is a cash payment that a company gives you for doing nothing except owning the company. That means this company has so much extra cash, so much extra profit left over that they can just give it away to the shareholders. This means you get paid without having to sell your stocks. Now there's a couple ways you can go about doing this. You can go out and invest in an individual company, or you can invest into a fund. And for the average person, I would say it's better for you to go out and invest in a fund as opposed to an individual company because if you're investing in an individual company, you've got to keep up with the company. You've got to study the financial statements. You want to make sure that this company is not on the way to bankruptcy because if you do that, well, you lose all the money that you invested, which is not a good thing. When you invest in a fund, now you're getting exposure to a broad basket of dividend-paying companies. So if one company goes bankrupt, well, you're balanced out by the winners. I'll give you a few examples, but I got to give you a disclaimer that I am just a random guy on YouTube. I am not a financial advisor. Make sure you do your own due diligence. Understand that investing has risks. You are never guaranteed to make money when you invest. In fact, you will lose money at some point. So make sure you always do your own due diligence and never blindly trust a random guy on YouTube. That being said, here are a few examples of dividend-paying funds that you can consider investing in. Number one is NOBL, NOBLE. Number two is SPYD. Number three is SCHD. Number four is VYMI. I am personally invested in these two funds, SCHD and VYMI here, which is why those asterisks are there. So let me break this down. NOBL, NOBLE, is an ETF that gives the exposure to dividend-paying companies in the S&P 500, but more specifically, dividend aristocrats in the S&P 500. What does that mean? If you take a look at the 500 largest companies in the stock market, that's the S&P 500. Out of those companies in the S&P 500, some of them pay a dividend, but then this goes a little bit more niche. What this says is we take a look at the dividend-paying companies in the S&P 500, but then we only invest in the companies that have increased and paid out a dividend every year for the last 25 years. That way, based off of historical data, these companies are more likely to continually increase their dividends in the future, or at least that's what they hope. At the time we're recording this video, it's paying out a dividend yield of around 2% a year. SPYD is a little bit broader. SPYD is an ETF that gives the exposure to dividend-paying companies in the S&P 500. So again, you take a look at the 500 largest companies in the stock market, this invests in the companies that are paying dividends in the S&P 500 and is paying, at the time we're recording this video, a 4% yield. SCHD is even more broad. This is investing in high dividend-paying companies across the stock market. It doesn't have to be just in the S&P 500, but a broad basket of high dividend-paying equity stocks in the stock market at the time we're recording this video is paying 3.3% a year. And then we have VYMI, which is a little bit more broad. This is investing in international dividend-paying companies, high dividend-yielding companies that are not inside the United States, different levels of risk there. And at the time we're recording this video, it is paying out a yield of 4.3% a year. Now, the way that you succeed as a dividend investor is not to be a trader, it's to be investing for the long-term. That means you want to invest in a good asset and you want to hold on to it for many years, if not decades. If you want to see the best returns, it's not trying to hold on to it for six months because that's not how you make money as an investor. I am not a trader. Trading is gambling. We're talking about investing for the long-term, many years because the reality is we're going to see market crashes, we're going to see recessions that are part of our system. You want to use those as an opportunity to buy even more. And the way that you win as a passive investor is you just keep buying every time you get paid. Buy a little bit every week, every two weeks, every month, and you just stick with that for years and decades. And that's how you build real wealth through the strategy because history has showed us that that works. Now, if you want to stay up to date on what's happening in the markets, when it's happening, I have a free newsletter called Market Briefs where every day my team is breaking down what's happening in things like the economy, the stock market, the housing market, the crypto market, and the global economy into a fun, witty, and easy to read newsletter. It's completely free. It's read by more than a quarter million investors every morning. So if you have not joined Market Briefs yet, I got the link to how you can join down in the description below. This brings me to the second way that you can invest with this type of cash flow, which is from real estate. In the stock market, it is pretty passive because once you find the right funds that you want to invest in, you can set it and forget it. There are many brokerages out there that will allow you to just set up an automatic systemized system where your money is automatically invested every week, every two weeks, every month into your funds. And even when you get paid dividends, you can choose to have those dividends reinvested or deposited into a different bank account for you. When it comes to real estate, it's going to take a little bit more work. And the way it works is you're going to go out and find a property. You can look at single family homes, a property complex, office buildings, retail buildings, storage buildings. It does not really matter, but we're going to talk about single family homes to keep You can go out and buy a property like this in certain areas for $200,000. I know a lot of people are going to say, well, Jaspreet, where in the world can I find a property for $200,000? Go to Michigan. You'll find properties like this all day and night long that will show you the numbers that I'm about to show you. You find a property like this for $200,000, you're going to rent it out for let's say $2,000 a month, which is $24,000 a year in rental income. Now, the problem with that is not all of this is your profit because you've got to pay your expenses. What are your expenses? You've got to pay for property taxes, your insurance, your maintenance, your management fees. And if you have vacancy costs, that's coming out of your pocket. Now, I'm going to assume that you buy this property all cash to keep the numbers even simpler, but let's assume that you have $10,000 a year in expenses. Now, that means you have about $14,000 of profit in your bank account at the end of the year. Now, your question might be, is this a good return? Is this a bad return? And the answer is, it depends. Depends what's good for you. So the way that you would calculate this is you take this $14,000 and then you divide it by the $200,000 you invested because for the sake of this example, I'm assuming that you bought this property all cash. And what this means is you got a 7% cash on cash return on this property, almost like a This is the cashflow. Now, that's what the money looks like in this hypothetical example. But the question is, how passive is this really? And this is going to depend on how good your team is because I invest in real estate. And what I can tell you is real estate can be a big pain in the neck, or it could be very great if you have a good property manager. And I have worked with good property managers and I have worked with bad property managers. When you have a good property It is very relieving because now your time might be an hour a month or maybe a couple hours a month, depending on how many properties you own and how involved you want to be. Maybe a little bit more or less, depending on what you're doing. But maybe one or two hours a month should be enough because now what your job is, is just to review the financial reports, make sure that things are getting paid because you have all the reports there. Make sure that you're making money. You're not the one that's talking to the tenant. You're not the one that's fixing the toilets. You're not the one that's dealing with the city. You're not the one that's dealing with attorneys. You're not the one that's dealing with contractors. That's your property manager's job and they shouldn't be bugging you for little issues and they just need to write up a report for you at the end of the month. That way you can review it on your own free time just to make sure that things are working. So your job is to make sure that the property manager is working. That's how it works in an ideal world when you have a good property manager. When you don't have a good property manager, now it's stressful because now number one, they're not doing the job. Number two, that means you're probably not getting paid. And number three, that means you got to come in now and make sure that things start to get turned around. Maybe you got to fire the property manager, get a new property manager, talk to attorneys, talk to contractors, talk to city people. It can be a big mess. And so when you don't have a good team, it can be very not passive. But when you have a good team and we could manage a property or multiple properties, then it can be very passive for you. Which brings me to the topic of number three, which is investing in a business for cash flow or what some people want to call passive income. But let's really explain how this works. This is supposed to be a business. And the whole idea and the thing that people, many people get excited over is I have this pile of cash sitting in my bank account. Maybe I sold a business or I made a lot of money, whatever. I have this money sitting here and I want to put this money to work and I want to get the highest returns. And then you start to go onto these business websites and you might hear something like, buy this gas station that's making $400,000 of profit a year. And you can buy this for $2 million, which if you do the math is a 20% return, which beats the heck out of stocks. And it definitely beats real estate as well. Now, when you think about this, you get excited because, hey, you buy this and you're going to make $400,000 a year. But what you have to start to understand now is what does it take to actually run this business? Because many times for smaller businesses that are generally under $5 million, you won't see your salary included in this number as well, which means you might have to be required to now go work in this gas station every single day. And if you don't want to do it yourself, well, you've got to pay somebody else to do it. And even if you don't want to pay somebody else to do it, you should still factor in a salary cost for you so you know how much money this business is actually making. So now if you're going to go out and pay a couple of managers to go out and work in this gas station all day, well, that might eat up something like $100,000 or $120,000 worth of profits right there, which might bring you down to, I don't know, $280,000. And then you have to think, well, what happens if somebody gets sick and they don't work? Who are they going to report to? Well, then they're going to have to report to you. And if you don't want them to report to you, then you're going to have to hire an operations manager or a director now to run your gas station and to make sure that when things go wrong, that there's somebody else that they can fall back on, which is also going to eat up a bigger chunk of those profits. And now you start to see that your profits are being eaten up by hiring the right personnel. And so if you're looking for a way to be completely passive and an absent owner in an active business like this, well, either you're going to have to buy something a lot bigger that can run completely without you, or you're going to have to hire a lot more people to make this much more passive for you, which could also eat up your profits. And so if you want to buy a great, but you better expect to be involved in the business in some way, shape, or form, that way you can make sure that the business continues to stay competitive. That way, the business can continue to stay profitable. That way, the business can continue to grow. Without having a business owner, the CEO to lead the charge is very hard to have a manager to sit there and to care about your capital, to care about your investment, and to care about your business the way that you would. And so you got to remember, this is an investment of your capital. And if you want to preserve the value of your capital and to continue to grow, you need somebody to manage the ship. You need somebody to want to grow the business, to grow the profits, to grow the value of what it is that you're doing. And if you're not ready to do the work, then maybe you want to do something where you have somebody else managing it, kind of like the stock market, where now if you invest in Amazon, the CEO of Amazon is there to manage and lead the operations. And you don't got to worry about that. You just get your share of the profits when the stock price goes up, or when you get your dividends. Here, you are the CEO. And if you don't want to work as a CEO, well, then your profits might start to take a hit. Let's assume that you can invest $1,000 a month into SPYD. Now, let's take a look at what the numbers will look like. Over the course of your investing career, you invested $540,000 into SPYD. And now when it comes time for you to retire, you're making