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How To Start Making Passive Income


How to Start Making Passive IncomeI retired from my engineering career when I was 38. How is that possible? The answer is passive income. Well, it’s a bit more complicated than that. When I stop working full-time 7 years ago, we didn’t have enough passive income to pay the bill. My wife continued to work and I make some income from blogging. (Mrs. RB40 plans to retire in 2020.) Our net worth was 30x our expense, but it didn’t throw off much passive income. In theory, I could sell our investment to pay the bills. However, I don’t like that. I’d rather have passive income instead. It took many years, but our FI ratio finally surpasses 100%. This means we don’t have to work anymore. Our passive income is enough to cover all our expenses!

*FI ratio = passive income / expense

But how did I get started? Passive income takes a long time to build up. We saved and invested for 23 years to achieve financial freedom. Some people took less time and some people more. Here is how we did it.

Start Making Passive Income

passive income

1. Spend less than you make

Spend less than you make and save 50% of your income. Everyone has to start somewhere. If you have to start from $0 like me, then you need to work hard and make some money first. My wife and I are both frugal so we saved a good percentage of our paychecks right from the beginning. Most of the savings went to max out our 401k contributions, but we have a little extra left for our savings account too. The savings account generated some income from interest. It was very small, but this is the first passive income for almost everyone. You need to walk before you can run.

*You can access your tax-advantaged accounts (401k) without paying the 10% early withdrawal penalty by building a Roth IRA ladder. If you’re young, contribute as much as you can to your 401k and Roth IRA. Don’t worry about the withdrawal process until later.

2. Invest in the stock market

Once we have a sizeable amount in our savings account, we branched out to investing in the stock market. At first, I invested in mutual funds and growth stocks. But that’s not the right style for me anymore. Once I retired, I gradually moved our investment to dividend stocks. This works very well because it’s a less stressful way to invest. I could focus on buying quality companies and don’t have to worry about selling very often. The dividend is also a great source of passive income.

The key for us was to keep investing through the down cycles. When I was working, I had good income and was able to keep adding to our investment through the Financial Crisis. This gave our portfolio a huge boost and it’s paying off now. If you have a steady income, you need to keep investing through thick and thin. The market is very volatile now, but don’t be afraid. Keep investing and it will pay off later.

For new investors, I suggest investing in a low-cost index fund like VTSMX (Vanguard Total Market Index Fund.) Just keep adding to this fund every month while learning how to invest in individual stocks. Once you’re more comfortable, you can start investing in individual stocks. Once you’re near early retirement, then you can gradually convert your portfolio to dividend stocks as I did.

3. Rental property

We purchased a house in 2000 and lived there until 2007. When we moved, we rented the house instead of selling it. I think many landlords started out this way. The rental home worked out well for us so that gave us the incentive to acquire a 4-plex. These early properties gave us some rental income and we made some money from appreciation too.

Unfortunately, I can’t be a landlord anymore. My mom has dementia and I need to spend more time in Thailand to help out. When I’m there, I can’t manage our properties. (I haven’t been able to find a good property manager. They are way too expensive anyway.) That’s why we’re consolidating our properties this year. We moved into our duplex and put the rest up for sale. Now, we only have one rental unit left. Being a landlord is a great way to build wealth if you can handle it. However, there are alternative ways to invest in real estate.

4. Real Estate Crowdfunding

I can’t be an active landlord anymore, but I still believe in real estate. That’s why I’m investing in REIT and real estate crowdfunding. Currently, we have about $100,000 invested in REIT and $55,000 in RE crowdfunding. Our condo just sold so we have some cash to invest now. I plan to increase our investment with CrowdStreet and that income should replace our rental income. I think this is a great way to invest. CrowdStreet has commercial projects across the USA. You could invest in apartments, self-storage, strip malls, office buildings, and more. It’s too expensive to invest in real estate locally now. I intend to focus on America’s heartland, where real estate still has a lot of upsides.

*Sign up for free with CrowdStreet to browse their projects. It’s a great way to diversify your investment. The stock market is great, but I don’t think it will do well over the next few years. The global economy is slowing down and the stock market will be very volatile.

5. Side Hustle

Blogging is my main side hustle. Okay, this one is not quite passive. I spend 20-30 hours per week on Retire by 40. Blogging can be a lot of work, but it can lead to huge opportunities down the road. Many bloggers left their day job to pursue self-employment and they are doing quite well. Some elite bloggers are making a lot more income than they ever made working for a corporation.

I encourage everyone to start a blog. The great thing about blogging is that you don’t need to know how to do all the technical stuff. You don’t even need to be a great writer. I was way better at STEM subjects when I was in school and I never thought I could write like this. My early articles weren’t great, but I improved little by little. Like anything, the more you practice, the better you get. Seriously, if I can write a blog, anyone can.

Here is my tutorial on How to Start a Blog and Why You Should. This one isn’t passive income, but it’s a very good bridge. It took time to build passive income. The blogging income gave me extra time to get here.

Start making passive income

So you see, it’s not difficult to start your passive income rolling, but it can take a lot of time. We started small with just a few dollars in passive income. Now, our passive income is enough to cover our expense. That’s true financial freedom. It took us over 20 years, though. If you’re lucky, you’ll get there sooner. My main advice is to try different things and see what works for you. If you’re good at managing a rental property, then focus on that. Good luck!

Readers, do you have any plan to make passive income? You can see how I’m doing at my Passive Income page

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.
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{ 125 comments… add one }
  • Goat Finja August 18, 2019, 12:39 pm

    Interesting read. I am as well a big fan of Vanguard EFTs. I even set up my company’s 401-K plan with Vanguard. The costs to maintain my plan are minimal.

  • Buy, Hold Long August 17, 2019, 6:03 pm

    That’s a really comprehensive guide. Some great real life examples which is fantastic.

    Thank you so much for sharing.

  • Luis August 16, 2019, 11:54 am

    Question- I’ve started dividend investing, as well. But when is a good time to take profits off the table? 25% growth? 50% growth? 100% growth? I was wondering because SBUX was one of my dividend picks and it had run up 100% from where I got in. I didn’t think it had anywhere else to go, but sideways or down, so I got out and reinvested into Vanguard ETFs.

    I think at some point in holding dividend investments, it makes sense to take the gains and reinvest elsewhere. Just not sure where the line is for most people.

  • A Frugal Family's Journey August 16, 2019, 10:44 am

    Great article RB40! We currently do all but one, rental properties. Not a great excuse but we live in California and it is not easy to enter the rental market. Cost of living is pretty high here! But we do have plans to pick up a few in retirement, once our home is paid fully paid off.

    Thanks for sharing, I know many who have not yet started to building their passive income stream will find great value in this piece. Thanks for sharing!

    Best wishes and continued success on your personal journey! AFFJ

  • freddy smidlap August 16, 2019, 5:42 am

    i’m glad you finally got our from under that property that was stressing you out. you’ll find a good use for the money to recoup the income. i like the theory of going for some growth and shifting to dividend payers when you really need the steady income. i got a bunch of yield from preferred stock ETF’s where most people have bonds but probably could have waited a few years. the beauty of investing is that you’re allowed to change course if you want. it’s not written in stone you need to do the same thing for the rest of your life.

    • retirebyforty August 16, 2019, 6:59 am

      Exactly. When I was working, I didn’t want dividend income. It just means more taxes.

  • Financial Freedom Countdown August 15, 2019, 8:13 pm

    Joe, if I am reading this correctly the decrease in your expenses was greater than the loss in your rental income by selling the unit? So in this case would you say that in hindsight rental property based on the time and price you bought it was not a wealth builder?

  • Sport of Money August 15, 2019, 4:26 pm

    I work in finance and the job is highly dependent on bonus payout at year end. My company also does not provide a pension.

    That means I have to make sure I can have enough cash flow to support my lifestyle in the event it’s a bad year with little to no bonus payout. It also means I need to have cash flow to support myself when retirement hits.

    Therefore, generating passive income is a need for me. I am a big fan of rental properties. There are many benefits to real estate (from leverage to favorable tax treatments to ability to add/create value) and I believe it should be a cornerstone of anyone’s investment portfolio.

    • retirebyforty August 16, 2019, 6:47 am

      I’m a big fan of rentals too. I think everyone should try it and see if they can handle being a landlord. It’s a great way to build wealth.

  • Mr. Tako August 15, 2019, 8:57 am

    Yup, passive income is the way to go. In my case, I rely less on real estate and more on dividends from safe low-leverage investments.

    In our case this passive income amounts to around $60k per year, so it can definitely be done! 🙂

  • Jason Wong August 15, 2019, 8:25 am

    Hi Joe,

    Great blog. In your tax advantaged accounts, is the amount there generated from dividends generated from your stock holdings? If so, do you withdraw these monthly to cover your living expenses?

    Are you diligently following the 4% rule? The following article examines if 4% is viable.



    • retirebyforty August 15, 2019, 9:23 am

      Yes, the amount is generated from distributions. Our tax advantaged accounts are at Vanguard and everything gets reinvested for now. When we need it, we’ll build a Roth IRA ladder. This is a complicated process, but it’s the way most early retirees access their IRA.

      No, I use the 4% rule as a guideline. Generating enough passive income to cover your expense sustainably is more difficult. IMO.

      • Jason Wong August 15, 2019, 2:28 pm

        Congratulations on what you have achieved so far.

        Early retirement is what dreams are made of.

  • Pete Patel August 15, 2019, 7:59 am

    Just like Xrayvsn, I’ve been investing in real estate via syndication for the last 12 years.
    Which helped me and wife to retire 2 years ago. The benefits are…fairly steady income over the years and get to claim depreciation and most of the income is capital gains and no hassle with tenants. Also, via a self-directed IRA, you can invest in real estate too.

    • retirebyforty August 15, 2019, 9:18 am

      I really need to learn more about syndication. Is it mostly local deals or nationwide? It sounds like a great way to generate passive income.

      • Pete Patel August 15, 2019, 9:50 am

        Joe, it’s nationwide, however the group I invest with they have majority of their properties on east coast and they go west as TX and CO.
        If you need more information, please email me…Pete

  • Financial Fitness Fanatic August 15, 2019, 7:00 am

    Congratulations on reaching a 100% FI ratio. It makes total sense that you are selling your rental properties now: they’ve appreciated well, interest rates are extremely low which has kept real estate prices high, and they just don’t fit your lifestyle anymore. Great time to sell. But my question is, what are your plans for the big influx of cash that you’re getting from selling the properties? With the inverted yield curve suggesting an imminent recession and the stock market so volatile lately, are you still going to put it into dividend stocks right away? Or will you start with something like an on-line savings account (for the higher interest) and gradually invest the money in stocks over the next couple of years in order to take advantage of volatility and a likely bear market (which is what I would probably do in this uncertain economic environment)?

    • retirebyforty August 15, 2019, 7:33 am

      I’m very nervous about the stock market so it’s in a money market account right now. Eventually, I’ll put half with CrowdStreet and half in dividend stocks. It might take a year or so to invest.

      • Financial Fitness Fanatic August 15, 2019, 10:45 am

        Love it! That sounds like a very wise plan. Good to know you have that much trust in the CrowdStreet model — I will definitely look into that as a way to diversify.

  • [email protected] August 15, 2019, 6:38 am

    I agree with the real estate. I wouldn’t call it completely passive income, but it does provide some flexibility and not a lot of time. I have found that requiring tenants to pay by ACH (basically direct deposit) really helps cut down my time AND I don’t have to be there to collect rent. I bought my first property in 2004, and it rented for $450. The market rate for it today is $650. In 2007, I moved out of my house and rented it for $650 instead of selling it. It now rents for $950. If amounts seem low, its because I live in a small town rural area. Mortgage payments stay the same, but rents go up. I believe anyone wanting to retire early should have at least one rental property (unless they have multiple millions).

    Have you considered looking into real estate tax liens? I haven’t done this yet, but am considering starting a small amount of investment when I get to your point and ramping it up if I like it. For example, Arizona provides up to a 16% return, Texas a 25%, and Florida up to 18% return. The downside is your money is locked in with no interest until the tax is paid by the taxpayer. Every state is different so there can be some other issues as well, but I like the idea.

    • retirebyforty August 15, 2019, 7:37 am

      We’ve been very lucky so far. Most of our tenants are on time with rent. We had one tenant that paid late pretty often, but the check usually came through a few days later. The problem with our rental condo is that property tax and HOA fees kept going up. The city also kept passing new “fair access” rules. It doesn’t make sense to be a landlord anymore.
      I haven’t looked into tax liens much. I think it’s probably too much work for me.

  • Xrayvsn August 15, 2019, 3:29 am

    Passive income is the key to why I would even consider retiring much earlier than originally anticipated.

    Like you Joe I am more hesitant to sell assets as part of my SWR and instead trying to build up a reliable passive income stream instead. Of course this means a lot more assets are typically needed and is likely overkill (could have retired earlier if I was more willing to consume the assets rather than live off the passive income) but I think the end result of it will be a financial legacy I can hopefully pass along to my daughter.

    I personally use real estate as the main source of this passive income (via syndication now) but also do have yield from my assets in the market.

    • retirebyforty August 15, 2019, 6:22 am

      Passive income is much safer if you plan to retire early. We’ll be in retirement for 40+ years and I don’t quite trust the 4% SWR. Real estate syndication sounds good. I need to look more into that.

  • Lisa February 24, 2017, 2:49 am

    It was interesting for me to read about crowdfunding. And blogging sound as a good idea as well, of course if you have passion for writing. Many of my friends, however, make good money on renting. And I’ve been starting to think about it as well. Property investments can generate different levels of income.This article https://rentberry.com/blog/nyc-boroughs advises to invest in NY. Does anyone have some thoughts in this regard?

    • retirebyforty August 15, 2019, 6:24 am

      NY sounds risky to me. Can you really make any money from the rent? The property price must be astronomical now.

  • AffordEverything August 15, 2016, 10:38 pm

    I agree about making more then you spend, the reason why most people are not growing wealth is because they haven’t learned the relationship between assets they make you money and liabilities, that cause expenses. That combined with always spending at the high end of their allowances make it pretty hard to save money, which is a key factor in building passive income.

  • Arko98 July 21, 2016, 11:17 am

    I recently recved a $400000 payout, I’m 58 yrs old and desire a passive or semi-passive investment to provide $2000-$3000 monthly income… What might you suggest? P2P lending or a rental unit(s)….

    • AffordEverything August 15, 2016, 10:41 pm

      I recommend real estate the market is going to keep rising for a while and rental income is good as long as you properly screen tenants, i recommend doing this yourself though, no property manager will care as much as you do

      • retirebyforty August 15, 2019, 6:25 am

        I also recommend rentals. See if it makes sense in your market. If not, then probably split between stock and real estate (REIT & RE crowdfunding.)

  • Kari October 22, 2014, 4:50 am

    There are many business opportunities for generating passive income that I think so many people overlook. Yes, it takes a bit of hard work in the beginning but the ability to generate 1000’s of dollars a month from a business is very doable. While we are investing in real estate in addition to traditional mutual funds, etc., we see business income as being the far biggest source of passive income, and the most secure. We decided to become a strategic partner with a global life science company that is heavily investing research in innovative science, developing game changing products that will help people live well and young a lot longer. This industry is growing rapidly so we have decided to leverage that, given that there is almost no barrier to entry yet if you work at it for a few years, the income is well beyond anything we,ve ever dreamed! How many others have a passive income generating business?

    • retirebyforty August 15, 2019, 6:27 am

      That’s great! I think business income is a great way to grow your passive income. However, it will be a lot of work. Also, a lot of people are not very good at business. If you can start a business without having to invest your life saving, then go for it. It’s a great idea as long as you’re willing to work and take on some risk.

      • Dan Crawley August 16, 2019, 8:13 am

        Have you considered being a hard money lender with some of your funds from selling Real Estate or Roth funds? There are ways to be very safe & careful while lending hard money. I line up investments for a hard money lender (as well as Real Estate flippers) and he makes six figure income every year just from interest (15% returns on average). The flipping part is very dynamic and full of risk, but hard money if done right can be safe & lucrative.

  • Nathan June 25, 2014, 11:27 pm

    I keep hearing people making a passive income with investing. But I never hear about the fact of paying the 10% penalty for withdrawing the money out. So you need to be gaining more than 10% on your money or this is information only for people that are at the age of 59 1/2. Could you please explain a little more in detail.

    Thank you

    • retirebyforty June 26, 2014, 12:15 am

      The 10% penalty only applies to retirement accounts like the 401k and IRA. If you invest your money in a taxable account at a brokerage, then there is no 10% early withdrawal penalty. When we talk about passive income, we generally do not include the retirement accounts like the 401k. Does that make sense?

      • Daniel August 16, 2019, 5:10 am

        I’m still confused. Based on your passive income breakdown above, it looks like about half of your passive income (over 30k/year) is in tax advantaged accounts. Are you assuming that you and Mrs. RB40 will continue to generate 30k or so I’m active income so you don’t have to tap into your tax advantaged accounts? But you’re considering yourself meeting 100% of expenses with passive income because you *will* be as soon as you’re old enough to tap the 401ks/IRAs? Or is it a given that you’re going to have to do a Roth ladder as soon as mrs RB40 retires. I’m confused why FIRE bloggers always include their retirement accounts in their calculations for income generation when they can’t tap into a big chunk of that money yet.

        • Daniel August 16, 2019, 5:24 am

          Wait, I think it get it. Is the whole point that it doesn’t matter how much of your net worth is in taxable or tax deferred accounts because all you need is for your overall net worth to be stable or growing and enough in non retirement to get you through the bridge years when you can’t tap the 401k/IRA? In other words, are FIRE bloggers saying it doesn’t matter if I’m depleting my taxable account funds by spending more than the amount they increase each year because ultimately that slowly decreasing taxable account balance is being offset by a growing balance in your 401k?

          • retirebyforty August 16, 2019, 6:58 am

            This works too. But I think it’s better to build a Roth IRA ladder anyway.
            For us, if we only deplete the taxable account, we’ll be in a very low tax bracket.
            This is the chance to convert some IRA (or 401k) to Roth and minimize taxes.
            Basically, it’s best to withdraw a bit from all types of accounts and try to minimize taxes.

        • retirebyforty August 16, 2019, 6:53 am

          For us, it’s a multistep process.
          Mrs. RB40 will retire soon. Once she retires, we’ll evaluate our options again.
          As long as I still make enough money to pay our expense, I’ll put off withdrawal from our tax-advantaged accounts.
          Once I stop working completely, then we’ll build a Roth IRA ladder. It doesn’t make sense to start the Roth IRA ladder if you still have active income.

          • Daniel August 16, 2019, 8:31 pm

            That’s helpful. Thanks!

  • TD June 16, 2014, 11:10 am

    I have focused on generating passive income for the past several years. If you are willing to work at it, you can be successful. Here is what I have done.
    1) aggressively save more than you earn. prepare a budget and look for ways to reduce expenses. people fail because they don’t manage their expenses. what you save is much more important than what you make
    2) invest a portion of your $ in MLP’s (master limited partnerships) which spin off quarterly or monthly income. They also can be tax deferred and have high yields. Reinvest the dividends until you need the cashflow. I make thousands/month this way. Learn about this on seekingalpha.com which is a good resource for stocks
    3) consider investing in income producing real estate focused on crops. Newer vehicles have been developed where you purchase the land, and an operator manages the plantation. Crops can include timber, coconuts, row crops, coffee, etc. You will need min. of $50-100k for these types of investments, but the returns are in the double digits with zero correlation with the stock market. Land values should continue to go up over time as the population grows. More profitable than rentals. Pick your partner’s carefully.

    good luck

    • real estate investor March 11, 2015, 8:16 pm

      I disagree on the crops. I looked into this and the farmland funds i researched told me the start up investment was 250,000 dollars and the return was between 2% and 20% depending on many circumstances. Sorry, but i already get between 20% and 30% with my RE rentals cash on cash return. So the crops are not a better investment.

  • Sammy February 12, 2014, 4:03 pm

    You can save lot of money if you cut down on buying soda drinks at a restaurant, get water and save $1 to $2 every time you eat out. It adds up

  • Dilpreet Bhatia August 26, 2013, 3:06 am

    I think creating some intellectual property and selling it is the best way. It may be photos, music, videos, books, patents. I am also reading Rich Dad Poor Dad these days. Awesome book for finance dummies like me!!

  • TWade August 22, 2013, 3:14 am

    Passive income is a lot of work. I know a few people out there that make it sound so easy. Passive income does take a lot of time and effort and one thing to remember that passive income is not an overnight success.

  • James Kimani April 24, 2013, 4:58 pm

    Kudos Retirebyforty,

    Thanx for sharing such gems with readers. l am almost 40 but l hadn’t set a goal to retire by 40 earlier coz simply l didn’t know anything about the concept of passive income. But since l came across the concept some 8 or so years ago, it kinda swallowed all of me and l basically became obssessed. 6 years ago, l landed on these shores (from Africa) and foremost in ma mind was how l could amass a small fortune which could earn me some nice passive income and make ma life a lil bit ezier. Through sheer hard physical labor bordering on insanity-double jobs + OT, and playing the financial markets, l have been able to accumulate $100 000+ which is currently giving me a tidy amount of passive income (am the typical immigrant, warts and all – heavy/thick accent, professional qualifications from Africa but useless in the US) l am not writing this for show-off, but rather to inspire and give courage to those eager to try. l believe l have faced some of the toughest challenges a man can endure in life and am proud of what l have achieved. There is a reason the rich keep getting richer and retirebyforty has let you guys into a very big secret of the wealthy. This wisdom he shares here is gold to those who dare try. lts not ez, but ts certainly do-able. l am not yet done, my journey continues. Thanx a bunch Mr Retirebyforty!

  • kamen November 30, 2012, 10:04 pm

    hi your portfolio is so impressive.

    i m a foreigner and i want to buy a property to general rental income like you in california. however, it is a very high capital gain tax for a foreigner in california. Can you give me some advice?

    • retirebyforty December 3, 2012, 8:28 am

      Sorry, I don’t know much about capital gain tax for foreigner. How about REIT? It will be much easier than rental properties for you.

  • Bernard Z. November 25, 2012, 9:29 am

    Great tips, making money from your savings account is a great first step that almost anyone do. Like you said it wont be much at first but its a start. One of my passive incomes comes from candy machines and the income from it pays for my other businesses. Just have to play it smart and it will grow. Thanks for sharing this, I will also be sharing this info with my readers.

  • Parthibanb November 2, 2012, 11:26 pm

    Good points to consider. But do you have any suggestions to follow in a high inflation and high interest rates country to achieve steady passive income? Tnx

    • retirebyforty November 3, 2012, 8:16 am

      I’m sorry, I don’t know enough to give good advice there. If your government is stable, then long term bond is good in that situation. Rental properties are probably good too because you can raise the rent.

  • Joshua Lindsey July 1, 2012, 11:36 am

    Great post I have been thinking about starting rentals and love to build passive income. Thanks for the link to Financial Samurai as well I will check it out.

    • retirebyforty July 1, 2012, 10:50 pm

      Good luck! It takes a lot of time, but if you start now, you’ll be better off in the future.

  • Mike June 21, 2012, 8:16 pm

    I am planning to build a passive income stream solely to reduce my credit card debts from my first failed business. Then I’ll be working on finding ways to have other sources to be able to start building up savings and IRAs and then I’ll have one that I solely use towards doing the activities that I find meaningful.

    • retirebyforty June 26, 2012, 7:32 am

      Good luck! You probably should concentrate on paying off the credit card balance first. The interest rate is so high that it’s tough for passive income to overcome. Passive income usually take a while to get going.

      • Mike June 26, 2012, 8:02 am

        Yep. It’s not that bad (only $6000 and they have offered a decent payment schedule on it) so I’ll probably use my job at first to pay it down then use the passive income streams to pay down the rest of it.

  • DaveL June 21, 2012, 3:54 pm

    I have started the more basic step of spending less than I make and putting the rest into savings. I hope to increase this amount as my career progresses.

    I would love to get to the point where I can buy a duplex to rent out. A friend of mine in college, his dad has been doing this for awhile now and I think it has become addicting for him haha, but he loves it and it generates quite a bit of passive income now.

    A lot of great ideas to think about!

    • retirebyforty June 26, 2012, 7:26 am

      I’m encouraging my brothers to look into a duplex instead of a house too. I think it’s a great way to get started with real estate investing.

  • Drew June 17, 2012, 10:35 am

    I would also say continue to make small, possibly tiny, incremental increases in your regular contributions while you’re investing You’ll find them far easier to adjust to than big changes, and over time they will add up to a really significant extra contribution, hopefully leading to more passive income.

  • Kim May 15, 2012, 6:26 am

    My husband and I started a modest dividend fund for ourselves back in 2008 when the market crashed and were more conservative about how much capital we put into it than we wish we had in retrospect! Of course at the time it wasn’t clear how long it would take for the markets to go up again, whether the global financial system wasn’t going to collapse further. But if we’d known then what we know now… the old story!

    Re: rental properties, we’ve discovered we actually really dislike home ownership, after 14 years of giving it a try, so rental properties are definitely NOT a good choice for us! It’s quite important to know that about yourself. Trying to do something you really dislike isn’t the answer, so we will have to find another way.

    • retirebyforty May 16, 2012, 9:41 am

      I hear you about home ownership. It is a lot of work. I manage our rental home, but the renters are very good and doesn’t cause any problems. We hire a property manager for our 4 plex. It cost money, but that’s the only way we can do it.

  • Shilpan May 4, 2012, 4:02 pm

    With my hotel investment income( avg. $9500) and a small strip center income($1500), I have $11,000 in the passive income. It’s not completely passive as I spend close to 5 hours per month to monitor and manage these investments.

    • retirebyforty May 5, 2012, 10:13 pm

      That’s really impressive. Great job!

  • Jennifer from Credit Karma April 18, 2012, 3:56 pm

    Great post, RB40! I’m in my early 20’s and have a good amount of money saved up in my checking account but you’ve definitely inspired me to stop letting it sit in the bank and instead invest it to start generating some passive income.

    • retirebyforty April 18, 2012, 9:49 pm

      Thanks! You definitely need to invest the money instead of keeping it in the bank. Start off with something easy like the Vanguard index funds and you can diversify as you learn more.

  • Roger the Amateur Financier April 16, 2012, 7:26 pm

    Not too shabby; you’re already making more in passive income than I’m currently earning in active income. I’m definitely working to build my passive and side income, although it’s quite a long slog. Still, to be able to retire on time (or even early) with less worry about exhausting my savings would be a wonderful help to building a good life.

    • retirebyforty April 17, 2012, 9:51 am

      It is a long process to build passive income. You should check out Financial Samurai’s post on multiple streams. He is making great passive income.

  • [email protected] April 16, 2012, 3:57 pm

    We don’t make any passive income yet, but I am interested in beginning to develop passive income streams. I am also interested in P2P investing, but I want to get our debt paid off first.

    • retirebyforty April 17, 2012, 9:49 am

      Paying off high interest debt is the #1 priority. I’m sure you can do it!

  • My University Money April 15, 2012, 8:49 pm

    I’m hoping that building up passive income sources when I’m young will build self-propelled momentum over time. The more money I earn in passive income and re-invest, the quicker that snowball can begin rolling right? Great examples of ways for people to start.

    • retirebyforty April 15, 2012, 10:09 pm

      That’s right! I wish I started with rental properties even earlier. Well, we did rent our extra room out once in a while so I guess that counts.

  • 101 Centavos April 15, 2012, 6:24 pm

    Great stream of cash, RB40. I’ll be following your progress on P2P with interest.

  • Aloysa @My Broken Coin April 15, 2012, 4:39 pm

    What was your initial investment in P2p? I am thinking to look into it and see what it is all about. I know a little but not enough to make me comfortable. Yet. 🙂

    • retirebyforty April 15, 2012, 10:08 pm

      My initial investment was $1,000. It went well for 6 months so I’m increasing it. I think $1,000 is the minimal to be able to lend enough to be a little diverse.

  • Kurt @ Money Counselor April 15, 2012, 11:29 am

    My plans are a start-up personal finance blog biz, royalty trusts, high-dividend stocks, a short-term rental apartment, and select hi-yield bonds.

    I tried peer-to-peer lending through Prosper and experienced a negative return. However, I think my timing was exquisitely poor: I completed lending out the chunk of money I had set aside for Prosper in the spring of 2008. Then the economy went ka-boom! I’d like to try it again, but I’m a bit gun shy now.

    • retirebyforty April 15, 2012, 10:07 pm

      I heard about 2008 from a few P2P lenders. Hopefully we’ll have smooth sailing for a few years, but we still have to be prepared for a downturn like that too.
      Good luck with your plan!

  • Chuck April 15, 2012, 10:44 am


    Passive income is certainly key to an early retirement. You just won’t get there dutifully maxing out your 401k and ROTH IRA. For my wife and I we did not start until we were around 35-37. We won’t make 40, but 50 is achievable.

    For us it is rental properties that will get us there. Whatever it is, you must have a passion for it – then all the work that goes into it will not feel like work. I must warn you rentals are not as passive as some make them out to be.

    Good luck,

    • retirebyforty April 15, 2012, 10:05 pm

      I think maxing out 401k and Roth IRA as soon as you start working will get your to early retirement. I’m sure there are many 401k millionaire out there.
      I agree about the rentals. Something always come up every month…

  • SB @ One Cent At A Time April 15, 2012, 9:16 am

    Dividend stocks and prosper are my only two ways of passive income for now, apart from a few bucks from bank interest. you are doing good with $1400 in passive income.

  • Roshawn @ Watson Inc April 14, 2012, 5:37 pm

    Great post RB40! I am very excited about the rental income possibilities. Once we decide where we are going to settle long-term, we definitely intend to buy more. Currently, we mind our portfolio

    • retirebyforty April 15, 2012, 10:04 pm

      Some people doesn’t mind owning out of state properties, but I like to be local. It’s much easier for me. Hope you guys figure out where you want to live soon.

  • [email protected] April 14, 2012, 2:18 pm

    Wow $1400 a month is a really good start! I’m thinking for a lot of people starting some sort of business that’s passive in nature could be a way to go too. With rental property (which is never completely passive!), equities and lending you have to start with a fairly large nest egg, but with a business you can start with very little capital, grow the business, then invest the profits in other investments. That can also create a mutliplier affect with income sources. That’ll be a solid retirement plan!

    • retirebyforty April 15, 2012, 10:03 pm

      I like starting a business too, but I think that’s not really passive income. I guess once you can hire people to run the business and still have positive cash flow, then it would be a great passive income source.

  • The First Million is the Hardest April 14, 2012, 2:11 pm

    Having a few large passive income streams certainly is the “dream”. Right now I’m working on building a dividend portfolio and hopefully picking up a rental property or two over the next 5 years or so.

    • retirebyforty April 15, 2012, 10:01 pm

      Good luck! It took me a very long time to build my dividend portfolio, but I’m sure you can do it.

  • BusyExecutiveMoneyBlog April 13, 2012, 7:55 pm

    RB40, well written and well done. Your income streams are impressive.

  • Michelle April 13, 2012, 7:37 pm

    Money for nothin! Woot! Who doesn’t love that? We’ve got some passive income ideas up our sleeves and I can’t wait til it starts rolling in and we get to see the fruits of our labor.

    • retirebyforty April 14, 2012, 11:22 am

      Good luck! It takes a long time.

  • Invest It Wisely April 13, 2012, 3:55 pm

    On a more philosophical level, there is really no such thing as “passive” income. Income is just a function of deployed capital, and capital only comes from deferred savings. You can only build up those savings by saving income during your working years or starting a business and making money that way.

    When looked at that way, passive income is really sequestered wealth, and it certainly takes some activity to get to that point. 😉

  • Jeff @ Sustainable Life Blog April 13, 2012, 1:51 pm

    Thanks for the breakdown joe – I think some people just thought you ‘fell into’ 1400/mo passive income, when you didnt. Glad to share, and once I pay off my debt I’d like to get something like that started.

    • retirebyforty April 13, 2012, 3:30 pm

      I should have made it clear that I don’t have a trust fund. 🙂
      I started at 0 after college and the $1,400 took 15 years to build up. Luckily I didn’t have student loan. I’m sure you will get it rolling pretty quickly especially with a hand from your soon to be wife.

      • real estate investor March 8, 2015, 12:18 pm

        I’ve gotten to 1450 a month passive income after expenses in two short years. Did it through real estate rentals. Yes, i still have dividend paying stocks and those returns are not incorporated with the numbers above. Those above are RE only. I did P2P lending with lending club but am now liquidating my positions as loans are paid in full. Return has dwindled from 8% to 5% and a few too many defaults for my liking plus they are not secured. I’m still looking for new streams of passive cashflow.

  • Invest It Wisely April 13, 2012, 1:47 pm

    You’re doing really well on the passive income front, Joe! Keep going…

    • retirebyforty April 13, 2012, 3:27 pm

      Thanks Kevin. It will be much more difficult to increase after I quit my job, but who knows what will happen.

  • Forest Parks April 13, 2012, 1:45 pm

    $1400 a month is impressive! I’m quite interested in p2p lending as feel it’s fairer than big bank lending but I don’t yet have the spare income to give it a shot.

    • retirebyforty April 13, 2012, 3:27 pm

      I started P2P lending last year. $1,000 is not a bad start and you can keep adding to it.

  • Darrell @ Debt and Buried April 13, 2012, 1:30 pm

    I am a huge fan of Prosper and P2P lending in general. I’ve made over 60 loans and even playing it safe I’ve managed about a 8% annual yield. Better yet, it makes me happy to think about costing the credit card companies money when people can refinance at a lower rate and pay off their bills sooner.

    • retirebyforty April 13, 2012, 3:26 pm

      How long have you been lending? Did you lend during the recession? I want to know if your yield took a big hit.
      I think P2P is good during the good times, but will probably more risky during any economic downturn.
      I think it’s a win win for lender and borrowers too.

      • kevin December 12, 2012, 4:50 pm

        Yes I was lending on p2p sites before and after the recent recession. I was investing a little over 30k at the peak of my portfolio when it started going down hill. Prior to the recession my return was averaging around 10-15%. When things got bad around 30-40% of the loans defaulted, went into collections, or no payments over 4 months from what i remember. Yet at the end i came out lucky without any loss but a slight gain of around 3%. This is from investing in mostly AA-B credit scores. Id recommend you guys understand the risks involved.

        • Goat Finja August 24, 2019, 12:56 pm

          What are better P2P programs worth exploring these days?

          • retirebyforty August 24, 2019, 7:16 pm

            I’d go with real estate crowdfunding.
            CrowdStreet and PeerStreet are good.
            If you’re not an accredited investor, then I would skip P2P. Stick with stocks and REITs until you have more experience.

      • Peter August 17, 2013, 9:01 pm

        I’m a big believer of P2P lending and have been invested in Prosper over 6 years now with over 1015 active notes. Last October 2012 my ROI was 14.94% now yielding 11.08% through July 2013. It’s still above 10% but I’ve seen more defaults last 12 months than I did the previous 24 months. I feel more people are borrowing money then they should and/or losing jobs or seeing less of job income. It’s getting harder to invest in better loans as Prosper has open up the site to institutional investors.

        • retirebyforty August 18, 2013, 2:31 pm

          I feel like there are less loans too. Maybe the good ones are snapped up very quickly by the institutional investors…

  • Christa April 13, 2012, 1:07 pm

    Great info for those starting out (like me). My passive income is relatively low at this point, but as I continue to invest, it should increase.

    • retirebyforty April 13, 2012, 3:25 pm

      Keep working at it and you’ll get there! It’s a long game.

  • krantcents April 13, 2012, 12:36 pm

    I think you want a variety of passive income so it keeps up with inflation. Stay tuned, next week I introduce a different investment strategy.

    • retirebyforty April 13, 2012, 3:22 pm

      I’ll look forward to that.

    • David @ VapeHabitat July 28, 2018, 12:16 pm

      Blogging is my favorite option! That’s what I am doing for 6 months already. Love it as hell!

  • The Happy Homeowner April 13, 2012, 10:32 am

    I’m also currently saving for my first investment property. My plan is to purchase it within the next 2 years, then continue to acquire properties after that!

    • retirebyforty April 15, 2012, 10:00 pm

      Sounds like a plan!

  • Financial Samurai April 13, 2012, 10:13 am

    Good to see that P2P you won from #YakChat is starting you off on a new income stream! If only P2P was guaranteed at at least 8%.. I would dump ALL my money there!

    • retirebyforty April 13, 2012, 10:39 am

      Thanks for the reminder. I forgot the hash tag and updated the post. Yeah, I would only invest what you can afford to lose. If we have another recession, I’m sure the default rate would go through the roof.

    • investlike1percent May 28, 2012, 1:31 am


      why dont you do hard money loans at 50% FMV to real estate. they are available all day long yielding >8%

  • Miss T @ Prairie Eco-Thrifter April 13, 2012, 8:23 am

    I would really like to get a rental property. Real estate investing really appeals to me and I have seen a lot of people make it a success. We just need to save up a bit more first. Hopefully in the next few years we can make this a reality.

    • retirebyforty April 13, 2012, 9:51 am

      Keep saving and investing in the stock market and be ready to take the opportunity when it arise. I hear the housing situation in CA is similar to the US bubble 5 years ago. Good luck!

  • WorkSaveLive April 13, 2012, 3:58 am

    The only other one I’ve considered is starting a business and eventually having people that can manage it for you. It’s pretty nice to be the owner of a company and not have to work very hard on it.

    Other than that my primary source will be from rental properties.

    Thanks for sharing – $1400 is a pretty awesome passive income stream!

  • Terry Pratt April 13, 2012, 3:29 am

    No, I am a rent slave who earns a poverty-level income and student loan payments get in the way of spending less than I earn.

    So I am providing passive income to my landlord but none for myself..

    • retirebyforty April 13, 2012, 9:47 am

      I’m sorry to hear that, but don’t give up. You will be making more money soon and I’m sure you will be able to pay off that student loan before you know it. Keep your eyes open for a better job opportunity. Good luck!

  • After paying off our debts, we started with our retirement and emergency savings. Investment will follow next. You listed good suggestions for us. Thank you!

    • retirebyforty April 13, 2012, 9:46 am

      You got the priority straight. Good luck!

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