Consider the example of a business owner whose desk had a useful life of seven years. How much the desk is worth at the end of seven years (its fair market value as determined by agreement or appraisal) is its residual value, also known as salvage value. To manage asset-value risk, companies that have numerous expensive fixed assets, such as machine tools, vehicles, or medical equipment, may purchase residual value insurance to guarantee the value of properly maintained assets at the end of their useful lives.
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However, the RI-based approach is most appropriate when a firm is not paying dividends or exhibits an unpredictable dividend pattern, and / or when it has negative free cash flow many years out, but is expected to generate positive cash flow at some point in the future. Further, value is recognized earlier under the RI approach, since a large part of the stock's intrinsic value is recognized immediately – current book value per share – and residual income valuations are thus less sensitive to terminal value.
One of the things I'm surprised your article doesn't mention is the tax advantages of this type of investment. The depreciation and rehab costs (purchasing distressed properties) can be huge deductions to ones income taxes, which none of the others have. Then, along with the appreciation of real estate, this passive income investment outperforms the notion of maxing out my 401k as well.
Mike, I don’t consider the income from FS to be passive, as I’m spending time commenting to you right now. But since 75% of my traffic comes from search, the most traffic I would probably lose is 25% for probably a year. And then my search word rankings would probably slowly fade given frequency of posting new content is one of the search algo variables.
Another benefit of residual income is that, if the income stream is large enough, one does not need the main focus of his life to be on making enough money to survive. Having a comfortable and continuous level of residual income opens up more opportunities to travel, look into other business opportunities, and even take the time to indulge in his hobbies.
Finally, I imagine the biggest debate with my ranking is Creating Your Own Product as the #1 passive income source. If most people have never created their own product, then it’s easy to give it a thumbs down. There won’t be much complaint about Private Equity Investing being in last place because most people are not accredited investors. But given I believe that plenty of people can create their own product if they try, pushback is inevitable because a lot of people simply don’t try!
When withdrawing money to live on, I don’t care how many stock shares I own or what the dividends are – I care about how much MONEY I’m able to safely withdraw from my total portfolio without running out before I die. A lot of academics have analyzed total market returns based on indices and done Monte Carlo simulations of portfolios with various asset allocations, and have come up with percentages that you can have reasonable statistical confidence of being safe.
You may think of a savings account as just that, savings. But it’s actually another form of income as the money in the account will draw interest. And while this interest may be small, it’s still better than $0. Eventually, you can invest this money whenever an opportunity presents itself in order to gain other income streams. Look into Tax Free Savings Accounts if you are going this route.
Among the various market multiples, residual income models are most closely related to the price to book value (P/B) ratio because the justified P/B is directly linked to expected future residual income. This can be seen by observing the single stage model. If ROE is greater than the required return on equity, the second term (the present value of residual income) will be positive, the market will be greater than book value, and the justified P/B ratio will be greater than one.
Blogging is still going to take work starting out. That path to $5,000 a month didn’t happen overnight but just like real estate development, it build up an asset that now creates constant cash flow whether I work or not. I get over 30,000 visitors a month from Google search rankings, rankings that will continue to send traffic even if I take a little time off.
The most underrated thing and the BEST part to me is; that hard earned traffic is given to you for FREE, people already know about Amazon, but people don't know about your website/blog/etc. There's easier ways to get more exposure with your product. You can rank your product on page 1 pretty easy and doing so will make your product viewed by hundreds of thousands of purchase ready customers. I started with little experience and I'm pulling it off, I'm sure you can do this too. If your interested I can show you how to start an Amazon business, and what I personally do to grow it. https://youtu.be/YVmbeyGObAk
I agree mostly with the real estate advice. I’m looking for ways to take advantage of the condo I own to get up the rent from ~$0.90/ft to the $1.2-1.5/ft that seems more like the range in the same area. I’d have to put in a bit of capital (probably 10k on the low end for just the basics up to 40k if I wanted to remodel the kitchen and 2 bathrooms up to par with the area), so the return is likely there if those upgrades warrant $1.30/ft (given the unit is larger than most 2br/2ba in the area).
The type of business you should start depends on your passion and existing skill set. If you love baking, for example, you could consider starting a home-based cake or brownie business. Love to sew? Spend your free time creating the perfect crafts, then turn around and sell them with your own Etsy store. Love dogs? Consider watching dogs out of your own home and marketing your services on a website like Rover.com.
Why did P2P lending get a liquidity ranking of 6? It is quite possibly the most illiquid investment option you listed. You said you rank liquidity by “difficulty level of withdrawing your money without a massive penalty”, and for Lending Club notes, it’s not only difficult and extremely time consuming to sell all of your notes in their super illiquid market, but you would have to sell your notes at large losses to hope to get others interested in buying your notes. On top of that, it is impossible to withdraw your money any other way other than just waiting for interest/principal to pay off every month until maturity in 3 to 5 years. You can’t just one day tell Lending Club “I want to quit, please give me my money back.” One can even argue that it is less difficult to sell a home (in order to “withdraw” the money invested) than to withdraw all of their money from a P2P loan portfolio because it is very possible to sell a home before 3 to 5 years.