Hello, in this post, “Passive Income the Naked Truth”, I want to explain to you, in a simple way, what are the so-called PASSIVE INCOME, the benefits of COMPOUND INTEREST and the different TYPES OF PASSIVE INCOME.
I will also talk about which ones I think are really useful for almost all people and not those wonderful tales transmitted by many experts, such as, for example, those who talk about buying houses without money through mortgages, and then renting them to pay back the mortgage with the rent and also earn a supposed passive income, repeating the operation as many times as the imagination can reach. Or those who sell that with an affiliation website you will earn automatically and without doing anything thousands of euros per month in commissions paid for each purchase made through your website. Or those who have the keys with their infallible method, to make a living from trading with 2 hours a day.
Let’s start by explaining three simple and related concepts: PASSIVE INCOME, COMPOSED INTEREST and FINANCIAL FREEDOM.
PASSIVE INCOME
Among the PASSIVE INCOME we know for example property rentals, stock dividends, royalties for intellectual property (books, courses, music, patents), income from advertising on blogs or Social Networks and affiliate income from product or service recommendations, among others.
COMPOUND INTEREST
Regarding COMPOUND INTEREST the concept is very simple, but wonderful once you understand it.
If you invest, for example, 50,000 eur for 30 years in a savings account that would produce 5% annual interest at the end of 30 years you would have a total of 85,000 euros. But if you invest using compound interest, the first year you would get interest worth 2,500 eur. Therefore, the second year you would not invest 50,000 eur but 52,500 eur, and that 5% would be applied in the second year on those 52,500 eur not on the 50,000 eur.
This would mean that after 30 years of investment you would obtain a total amount of 432,149 eur compared to the 85,000 eur obtained without using compound interest. It looks like magic, but it is simple mathematics. Therefore the first lesson in any investment that you should engrave in your brain is to invest using compound interest in your investments. The interest you earn should always be reinvested to take advantage of its multiplying effect on your future earnings.
Learn more about compound interest on our post: What is the Compound Interest?
FINANCIAL FREEDOM
FINANCIAL FREEDOM is defined as the ability to have enough passive income to cover your expenses and achieve your goals without the need to actively work. It is the ability to live the life you want without constant financial worries. In short, the power to decide what to do, how to do it, with whom to do it, when to do it.
Throughout this post I will explain how I have managed to achieve this financial freedom at the age of 45, and how for the last few years I live where I want, I am with who I want, I work when I want and because I enjoy it, I have enough recurring income to lead a comfortable and stress-free life (without great luxuries) and I can devote all the time I want to my family and friends.
Besides the fact that my life is practically solved, I think I will be able to leave everything organized so that my children’s life is also covered or at least they can have a good cushion to help them choose to study or work where they want, without the stress that comes from doing something out of necessity or obligation.
Let’s be clear from the beginning, financial freedom is not the same for everyone. What for me may be financial freedom by earning 7.000 eur net per month, another person will say that if he earns 7.000 eur passively, having a job that offers him another 3.000 eur more, it will not compensate him to earn 10.000 eur per month and thus live better, but without having obtained that financial freedom.
Other people will not achieve it even if they have 20 million in the bank, either because they do not want to or because they do not know how. Therefore, when talking about Financial Freedom, each person must think and design what would be the age and the amount with which he/she could be considered financially free and then decide the kind of life he/she wants next.
MY PATH TO FINANCIAL INDEPENDENCE
Let’s start with a little history, MY STORY, and how I have come to achieve the life I wanted doing what I want, when I want, how I want and where I want. I have a degree in Economics and a Master in International Business Management.
During the MBA one of the objectives was to learn to create companies and simulate creating a business from 0, very interesting and although the teachers encouraged entrepreneurship, I think that 99% of students in the end what we expected was to find our first job and work in a large company.
I was the first of my class and before finishing the course, I already had a job, an English multinational company hired me, the truth is that that first job that you accept at the moment out of necessity and urgency conditions you, and if it is as an accountant you will probably be an accountant all your life, if you start in consulting you will be a consultant all your life etc.
Therefore, I think it is important to think a lot about that first choice and looking back I would even recommend young people to dare to reject a first job if they think it is far away from what they would like their professional career to be. Although the truth is usually, not knowing what the working world is like, you accept the first offer and start working.
My first jobs allowed me to earn a good salary, travel and have international experiences working in many countries. The environment with young people, with similar concerns, made you consider yourself lucky, despite working 12 hours a day and constantly changing city or country. Those salaries that increased every year allowed you to save and in parallel I was investing in one of my favorite “hobbies”:
REAL ESTATE INVESTMENT
I started to buy cheap apartments in poor neighborhoods, refurbished them and sold them with a capital gain. I loved buying an old house that had not been renovated for more than 30 years, throwing it away and converting it into a modern house, and the profits were interesting.
It was curious, because although I dedicated no more than 5% of my time to it, it came to a point that it gave me more money than my 12 hours a day at the “official” job. But the fear of leaving a secure salary, where you get paid month by month, makes it difficult to focus on what you like the most, so I was combining the two things.
Besides, buying apartments in cash required having money in the bank to take advantage of opportunities and not waste time negotiating with the bank. I saw an apartment and in 2-3 days I was already signing the deeds and starting the renovation. The objective was to have the renovation finished in one month so that in 2-3 months I could sell the property and buy another one.
It can be said that this is where I started my first passive income business and for years I continued this way, my official job and my “hobby” in parallel. I can not deny that the results were very positive, as there was a large supply of old housing and a lot of demand for updated housing and not so many players doing what young people call today as “flipping”, as if the wheel had been invented to give it that name.
With the real estate crisis of 2008, reality brought down the maxim that we all repeated, “the price of apartments will never go down”, and so when I had all my savings invested in 4 properties bought and renovated to sell, in summer 2007 it began to slow down and in 2008 the market fell as few crises I have seen (and I also lived the crisis of the 90s but not in the same proportion).
The time for sale was extended to 6-8 months of the usual 2-3, you lowered the price and nothing, in the end after a year of waiting, I sold one of them losing money and the others I put them for rent, so there I began to know another source of passive income, rentals.
You will also find hundreds of videos where they tell you how interesting it is as a source of passive income rentals, you get a tenant and ale every month 600-800 eur rent without doing anything.
In short, throughout my life I have bought, renovated and sold more than 35 homes and in one of them, which was supposed to be my usual home, I was also the promoter of the same to raise the house of my dreams from design to finish its construction and decoration.
A reflection, not advice, because everyone approaches life in different ways. If you live on a salary it will be more complicated to create wealth, to earn real money. Salaries are designed to provide you with a means to live, good salaries allow you to save and normal and low salaries allow you to survive. In exchange, the company will squeeze the maximum of your time, of your life and will demand that you compete, fight and sacrifice your life to reach your achievements, a promotion, an annual bonus for sales, some objectives to avoid dismissal, a greater social recognition but be clear, when you are not able to offer the maximum or sometimes even by criteria not merely economic but of business strategy, they will dispense with you without hesitation, the old story that you retired where you started to work ceased to exist.
And in Spain above all, in other countries not so radical, there is a problem when you reach 45-50 years of age. For example, in my case it was like that, since in the consulting sector you are already considered very old compared to the average 25-35 year old, so you are fired and that’s it.
The company has no mercy or memory. If you were many years in the same company, maybe to avoid a high compensation, they keep you in your position. As a freelance consultant, when you are 45 years old, the company no longer counts on you and if you are lucky you should try to make the leap in one of your clients in which you worked, but it is not easy for them to hire a “young man” with gray hair. I have many colleagues between the ages of 45-50 who have gone unemployed and are now facing the harsh reality that the professional market no longer hires people of that age despite excellent resumes. Another good reason to start building a portfolio during the “productive” years that will allow you to make a living if the job market pushes you out.
These years of selling my skills to the highest bidder made me have savings to start creating little by little my investment portfolio, almost 100% focused on real estate as one of the best forms of investment.
In addition, I decided to leave the world of being a salaried employee to have my own company and I saw how incredibly thankless it is to be an entrepreneur, with the demands of quarterly VAT payments, payment of salaries on the 28th without fail, customers who pay 120 and 200 days even though the law indicated shorter deadlines, even debts with public agencies as major debtors and bad payers, when then you are required to pay a simple tax with a surcharge of 25% if you delay more than a month to pay them.
As a salaried employee you go on vacation and enjoy, on Friday the stress ends until Monday. As an entrepreneur there is no vacation (payments and expenses do not vacation and continue to be produced) and the stress lasts 24/7 for 365 days a year. In addition, 3 out of 5 businesses die before 5 years, so it is not an easy thing to start, but when you keep the business, it will be the source of income of your life, at levels of income that almost never will offer you a salary, and above all you will win to keep your personality to make decisions and not have to bow your head to incompetent, insecure or capricious bosses, you will do it to demanding customers but then you can decide if you want to put up with them or not.
Therefore, I think it is interesting to start with a fixed salary in a company where you can learn without risking your scarce resources, set a fixed savings goal as if it were a mortgage payment and in parallel start with business ideas that you like and where you enjoy to see if the theory becomes reality and that initially residual source of income could become your source of income for life. I at least started my saving skills this way, working for others, saving and starting to invest in real estate.
Starting a business in parallel to keeping your salaried job takes a lot of stress away, knowing that you have the cushion of a steady paycheck versus the stress of gambling it all away for months without any income and not knowing if you will finally have to throw in the towel after months of trying. But as I said, everyone has their own level of risk aversion, their family financial cushion, their personal situation, etc. It is not the same to start a business with parents who will support you if you fail, or to start a business as a single person than with children with high monthly fixed expenses.
But let’s analyze the different forms of passive income that are said to exist and that I have tried over the years. Also at the end of this article I will give you my personal recommendation on what I think is the best way to generate passive income and obtain financial freedom.
REAL ESTATE -BUYING AND RENTING-
Let’s look at buying and selling real estate and rentals as one of the most recognized ways to earn passive income.
BUYING PROPERTIES
Refurbishing and renting in Spain, which is the market I know best, but I’m sure it will be very similar in other parts of the world, requires initially having quite a lot of cash (in the old days much less than today).
I love the gurus that are on social networks talking about starting in this sector with other people’s money, that of the banks, and I would love to see one of those influencers go to a bank to apply for a mortgage on an apartment to be reformed that is not even for a permanent residence (so the bank will give you a maximum of 60% of the appraisal price, so you must have the remaining 40%, plus taxes, mortgage, notary and registration fees, plus reform costs, 20. 20,000 eur if you do a facelift and 40,000 eur if you do a complete reform, plus expenses of community of neighbors, local taxes, fixed terms of electricity and gas etc..
We are not talking about the municipal capital gains tax, which is the tax that the local councils charge when you sell your property at a profit (in my time when I bought and sold before the year I paid 0% tax, but of course, the councils saw that it was more convenient to charge even if you had only been the owner for 5 days as has happened to me between the purchase and sale of a house).
In addition, the costs of repairs, which clearly are the ones that make you can make a profit when you buy an old apartment for 100.000 eur, spend 40.000 eur and sell it for 180.000 eur to be all brand new, for the Spanish Tax Agency is not deductible (only if it is considered improvement not rehabilitation, it would take a separate topic to explain in detail this but to understand better if you change the windows can be deducted to improve the energy efficiency of housing, but put the new floor, new kitchen, cabinets, paint, etc. etc. all that does not deduct a euro as it is considered renovation not rehabilitation and the worst thing is not that it does not deduct is that for the Tax Agency that investment does not exist).
That is to say, for the Tax Agency you have bought for 100.000 eur and sold for 180.000 eur so you have obtained a capital gain of 80.000 eur and on that… to pay taxes!!!.
So, although it was my main source of wealth and made my investment capital available, today I do not consider it as beneficial. Consider one thing, you take a risk when you buy an apartment that you think you can sell with a profit, you invest a great capital in the apartment and in the renovation, but the net profits after taxes and other expenses are not much higher than the 5% that the real estate company that sold your apartment takes without taking any risk and without having to be aware for 2 months of problems with the renovation company and arguments with the neighbors about the works. To get a 10-15% profit you have had to invest a very high amount and that financially is a big risk.
What these famous influencers do not say, because they have not been in the sector since 1989 when I bought my first apartment, is that already in the 90’s there was a lot of buying and selling and more speculation.
Developers put up a sign for upcoming construction and 80% of the apartments had already been sold. The game was fantastic. You would buy an off-plan apartment for 100,000 eur and in 6 months you would sell it for 130,000 eur and the buyer would sell it for 160,000 eur when the building was finished.
Without a deed or anything else, only a private contract with the developer, and contributing perhaps only 20% of the amount of the apartment, you obtained a 100% profit on the money contributed. Moreover, for many, even in the pass you did not appear for the purposes of the Tax Agency, since in the contract the price of 100,000 eur still appeared and the other 30,000 eur went in “cash”, and then in the second sale 60,000 eur went in “cash”.
This also happened during the mid 90’s, until the bubble burst and there was a major real estate crisis, but as everything is soon forgotten, from 1997 everything started to grow again until it burst in 2007-2008 where another big crisis broke out.
I have known divorces, alcohol and drug problems and even suicides by hard-working people who were doing well in their profession but had no financial culture, they believed the story of “the floors never go down” and bought 5 villas of 200,000 eur, giving only a first payment of 20,000 eur per villa and payments of 1,000 eur per month with the intention of selling each villa for 240,000 eur in 6 months. When the issue exploded they found that they could not sell the houses even at the price they bought them for, they owed 1 million euros and they had put their house, their company and their family at stake.
Rule number one of investment, never put all your eggs in the same basket and never invest all your capital in the same game, even if it seems super safe and reliable and it makes you angry not to win the maximum possible money that you are winning if you play more. The more you bet the more you will lose if the game goes wrong.
Many experts and millionaires talk about how it is “poor” to buy with your savings and that you should always use other people’s money. There may be a point of reason, if my savings yield me 10% interest, it will always be better not to touch them and ask for money from someone who will lend me the money at 5%. But be careful with these maxims. In those buoyant years, many bank managers told me that I was stupid, that they had the power of signature to give me immediately 500,000 eur so that I could buy some land, build 4-5 small houses and earn money quickly.
Maybe more out of “poor” education than as an economist, I have always thought that when I have 4 euros in savings I can spend 3 but never 6. Those same super colleague directors were the ones who chased their now ex_friends, to whom they lent money to pay back the money they borrowed when the bubble burst.
I didn’t get much richer than I could have, but when the crisis broke out, it was worse for me, like everyone else, but I was able to sleep peacefully and never owe a euro to anyone.
RENTING PROPERTIES
Let’s talk now about RENTING, another famous means of passive income. It is considered that renting usually provides in cities with high demand, around 6-7% return but it is another big lie offered by those who sell courses. In small cities this return is usually in the 4-5%, but it is necessary to consider several factors, first that the tenant is wonderful and does not give problems.
The second is that he/she pays without problems, which is the big issue that can be solved with non-payment insurances that protect the rent but that add up and continue subtracting profitability. Thirdly, there is the legal insecurity, which has existed for years and after the COVID issue even more so.
For the state it is much easier to leave the problem in the hands of individuals than to assume the problem themselves, so if the family declares itself vulnerable they will not be thrown out even in 2 years, the legal risk today is a big problem to enter the rental business.
Also consider another point, a rent of 600 eur per month with a deposit of the same amount does not cover you if for example, as happened to me with my last tenants, they made me damages worth 3,000 eur (I had to change floors, baseboards, jambs, doors and paint the whole house). In total it cost me half a year’s rent which of course you pay for as the tenants leave the apartment and you have to chase them when you don’t even know where they are leaving to send them a legal claim or get ready for two years of legal claims with expenses for the legal team.
Another tenant brought in two puppies and left stains on the floor that would not come off and we are talking about more than 100m2 of porcelain floor. Another one left a stain on the Silestone countertop that was worth 8,000 eur complete and had to pay 3,000 eur for the section that was repaired but was no longer exactly the same as the rest of the kitchen.
This is not told to you by the gurus on Youtube. In addition, of course, the Tax Agency arrives and takes its share of that 6% return expected from a good rental. The net profitability is more towards 4%…. narrowly beating inflation.
TOURISTIC RENTALS
In the rental world we also have the famous TOURIST RENTAL apartments. I have had 3 next to the beach and I can say that I obtained great profitability, more than 10% net. The location next to the beach and in a tourist area with good weather all year round meant that I had almost 94% occupancy all year round. But the numbers don’t tell the whole story either.
Initially I managed the rentals via platforms like Booking, Airbnb, etc., the competition is so high that I had to be every 3-4 days monitoring prices and adapting them to be well positioned. It is something very clear, users order hotels or apartments by price from lowest to highest, sometimes just because the one before yours is 3 eur cheaper will make them rent that apartment instead of yours.
Then comes the reception of the clients (those who want to get in early, those who arrive 4 hours later than agreed, those whose plane lands at 1 am and finally arrive at 2:30 am, those who call you on a Saturday at 12: 00 at night saying that they have locked themselves in the balcony on the outside and that the door has the key on the inside so you cannot open it with your key and they refuse to pay a locksmith because they say it is a defect of your accommodation, those who call you at 3 o’clock in the morning because the door does not open and they were so drunk that they went to the wrong floor, those who left you the room destroyed by wiping the mascara of makeup with new sheets and a thousand stories that can be read in the forums of owners of these platforms, they are very entertaining).
Therefore, this business is profitable, especially if you do all the management, but Passive Income has very little. It takes a considerable time (also, like all the restoration, very thankless, when others vacation, is when you work the most and while you go to the apartment to change sheets and clean bathrooms, you see tourists enjoying sangria and paella on the terraces).
So you try to evolve to improve your quality of life and you go from receiving clients and cleaning to handing over the management to a third party in order to gain the dreamed freedom that the world of passive income talks about. Why not hand over 2-3% of the profits and have the apartment managed by a third party?
I hired three companies of supposed professionals and three of them I abandoned when I saw that they had very little professionalism, your apartment for them is just one more and they do not know what should be the right price to sell it at maximum performance, they usually put it at very high prices so that the occupancy dropped a lot. In addition to the 15% of the reservation price to be added to the 15% of Booking/Airbnb. The numbers were already moving away from the dreamed 10%, more towards the real 7%. The 94% occupancy rate that I achieved was also reduced to the 70-75% that the “experts” achieved.
In the end you decided to manage the calendars and reservations yourself to find the maximum occupancy and profitability possible and a person to give keys and do the cleaning for less than what the professionals charge. They are usually individuals with high turnover, so if you do not live in the city, it meant that every so often you had to find another trusted person to whom you could give your home with a simple interview and without much possibility of verifying its subsequent effectiveness except when it was late and you saw bad customer reviews (one of these people, knowing the calendar, rented the homes on their own on days without reservations and took the money).
Of course, we also had a squatter who, after seeing that justice offered us a couple of years to kick him out, we went in and when he came out, we changed the lock and told him that either he signed his departure without any complaint or his things were going to a dumpster. Illegal probably but justice doesn’t offer you many more options when it’s the first one to relax and watch the years go by. The weeks without sleep and the 2000 kms trip across half of Europe I don’t count here.
Summarizing, the real estate market is interesting when you start to have capital, although the maintenance and management costs and of course the final taxes, makes that the real net yields are not as favorable as they are sold out there. We can speak that they are passive income, but as I have told you they are not 100% passive income either, since first they require regular work and demand your physical presence for their management, which means that they cannot be considered 100% passive income.
AUCTIONS
Another example in the real estate world that I have tried, the world of REAL ESTATE AUCTIONS. For my experience in this sector I bought a course from a famous youtuber who first informed, and then already started selling courses (and possibly earned more with it than with the auctions). He promised that he would only sell the course for a limited time to a maximum of users, but as time forgets everything, and he must have discovered the manna of continuing to make money from a job already done, because he continued to sell the course massively over time.
The logic is simple, as the current real estate market is already too complicated to buy-refurbish and sell, so I buy 30% below the market price in order to get the expected benefits.
But when you pay and do the course, which is good, nobody has told you the reality, or at least not all the reality, and that is what bothers me the most, those little half lies that they always forget to tell and that mark the all or nothing, but as they need massive sales they sell it to everyone even knowing that for the vast majority it will not help them at all.
If you have “normal” savings, you have access to apartments in auctions of 100,000-200,000 eur for which there is such a wild competition, that in the end the auction prices go up and up and end up buying 10% below market price or even at market price, plus 2 years of legal proceedings with the money blocked, expenses in lawyers and solicitors, calls to the officers of justice, problems and more problems.
On the other hand, the one who has large capital and buys a house of 1 million euros for 600,000 does make a great profit, but in that league only a few play, in that area there is much less competition, higher margins and therefore interesting real benefits. Therefore, of more than 70 professional users I know who bought the course, in more than 2 years none had managed to buy a house at auction, would we all be useless?
Can we say that the course is a scam? No, not 100%, but the reality is that the sale of the courses is the business, the deception is in not warning normal users that either you have significant financial resources or it will be very very difficult to make a profit in this sector. But they always forget to comment on this simple message.
And this is the big issue that can be seen on Youtube or other SOCIAL NETWORKS. The big business of passive income is to prepare a course of whatever and sell it on the networks. After the effort of doing it and investing in its promotion then each sale is a net income.
The difficulty is that there are thousands of similar courses and getting a quality product is not easy. Therefore, it is not a simple product to manage nor is it very passive income, since you have to be constantly making yourself popular in networks to not fall into oblivion, and when talking in networks we talk about juggling madly between your website, blogs, Youtube, Tiktok, Pinterest, Instagram, shorts, Google Adsense and the thousands of hours you can spend managing and selling your products. Nor is it for me or for the vast majority who do not know where to invest or how to manage so many promotion options in a reasonable way and if you use an expert to manage it, invest and invest without knowing if you will have profits someday.
Other passive sources that are very popular are:
DIGITAL SERVICES
Social Networks such as Youtube, is as full of this type of videos as with cryptocurrencies or selling on Amazon. There is the business, for example, of creating web pages offering information about products: the 10 best of this or another and attaching product affiliation links, blogs with advertising links, etc.
At COVID time, being cooped up at home and having time, I decided to try it and created a website about the infant world, I created a website with lots of valuable information, tips, associated videos on Youtube to help choose between the best bottles, cribs, pacifiers, etc., I invested in creating links to other blogs, paid advertising on Facebook, Google Adsense, I used Instagram, Pinterest and everything that for example the Gurus of the Webs show you that it is very easy to do. What’s more, he teaches you in-situ, he starts to create a page from scratch on any topic and wham, you see that in a few days it is positioned number 1 in Google and billing.
Well, I must be very stupid, because after more than 1 year my sales were ridiculous, until you realize that there are, not thousands but millions, of pages similar to yours around the world and that reaching the user is almost impossible in a natural way and that either you invest money or you don’t appear. It’s like being on page 5 of Amazon with a great product …. nobody ever reaches you.
The case of these gurus is clear, if I have 2 million followers I create a page selling cell phone cases and in a week I bill 50.000 eur. The reality that they do not clarify, is that when you already have 2 million followers, whatever you do works immediately because you have the most difficult thing, since your followers enter and immediately give authority to your website.
What they don’t tell you is how to go from 0 followers and 0 authority, to doing something that makes you money. And meanwhile, they have taken the money of another 20,000 users who have bought their course….that is where the source of income is, not in sales through the web but in sales of courses on how to make money creating websites.
In addition, this business is not very passive either, since you have to be constantly trying not to fall into the oblivion of the other thousand sells courses, and promote on blogs, websites, social networks, most of the time paying and paying to appear in top positions and continue to promote sales of your courses or books.
CRYPTOCURRENCIES
Another king of passive income, the CRYPTOCURRENCIES. As an economist I can understand why a stock goes up or down, why the price of housing goes up or down, or how a mutual fund or ETF works, but don’t ask me to explain how cryptocurrencies work.
I can only say that I don’t know why they go up and I don’t know why they go down either (except for the maxim that there is little supply in some and lots of demand and the rebelliousness of young people in overthrowing the current monetary system governed by central banks versus a purely market controlled currency system). Only a confidence that they will grow to the infinity of their fans makes people keep investing in something that nobody understands, and neither will they understand when one day they enter their wallet and see that their money is gone and without knowing where the air that took them away came from.
I have tried them, of course, and when I invested I did not know why or how. I have tried buying and leaving them there sleeping and also acting as a dealer and buying and selling intraday and even buying and selling on the spot. The latter was even fun but I don’t think it’s a smooth or long lasting source of passive income.
There are dealers who do the same from home, but in my years of consulting one of my most interesting projects was to design the integration of various Treasury rooms of a large bank resulting from the merger of several entities and create one of the best and most modern rooms of the moment, and if there is something I learned from the brokers and dealers is that they use analysis tools that will never have a user at home and above all and most importantly …. they have a speed of execution in their computer systems of nanoseconds, which can never be overcome from a simple home computer, so your sell order will always be behind the big traders who will scratch the cents that make profitable operations. It’s like trying to beat a bot in a bidding game by doing enter on your keyboard, a 4 million euro server versus a 2.000 eur home computer, there is no color.
Then there are those who show their money earned in bitcoins, we will have to see when they sell it and subtract the commissions of the platform of the day, the currency exchange, the bank commission and now the government control (it will no longer be enough to go to Andorra or Portugal) how much is the profitability of the investment. As there is no reason to go up or down, the big whales can easily move the market as they please. If big fortunes sell their millions of bitcoins, there will immediately be massive sales of thousands of people who will think that the next cryptocurrency winter is coming, once the prices go down the big fortunes buy again with prices 30% cheaper and they have already made a good profit. This way I would not like to gamble my retirement pension, hoping that one morning I wake up and 70% of my income has disappeared without knowing how or why.
For now, the believers continue with the investment with the dream that one day they will liquidate their manna and retire. I think the possibility exists, but as much as flipping a coin and gambling your future on heads versus tails.
It goes without saying that if you lose your keys or your wallet (moving, forgetfulness, home accidents, or even unforeseeable fatal accidents leaving your family unaware that there are thousands of euros in a small pendrive). But as with faith there is no discussion, believers will continue to believe and the rest of us must respect their beliefs as much as possible.
If you would like to know more about this subject you can read our post: Generating Passive Income with Digital Currencies.
AFFILIATES WEBS
We also talk about passive income to the AFFILIATE WEB, you recommend on blogs, websites and social networks products of others and get a commission after its sale.
Course sellers sell it to you as something easy and safe. In Fiverr they make websites with 10.000 products for 30 eur and they assure you that you will make 200K a month, they already have pages with millions of products prepared according to what you ask for: sports, home products, etc. and in a minute they send you a website with thousands of products that nobody will click on, since there are 5 million similar pages and either you invest thousands of euros in promoting your website or you will take months and months investing money without having the certainty that in the future you will have a recurring income.
And the question is simple, if for 30 eur they create websites that generate 200.000 eur per month, why don’t they invest in 100 websites and start earning 20 million euros per month, they only need to have 3.000 euros.
FINANCIAL PRODUCTS
One of the most traditional, known and real options for passive income are the purchase and sale of STOCKS, BONDS, ETFs, FUNDS etc. .
It is true that in the long term the Stock Market, the Stock Exchange, always or almost always to be more precise, ends up giving benefits, for a few years you can lose, but if you keep your nerves, the economic cycles make it finally go up, and at the end of your life you hope that the up cycles have been greater than the down cycles.
But in the end let’s not kid ourselves, the cryptocurrency market seems like a thing for young people and geeks and the stock market seems like a thing for serious people in ties and suits working in a bank or treasury room.
It is certainly a more scientific science, if a company is doing well it is normal that their shares go up, so you can follow the pages of economics to know where you should invest, or follow the advice of your banker “friend”, which in the end is usually influenced by the lines of investment that marks your entity or interests according to where to get more profit.
But it also has a pretty crazy level of volatility and I have seen companies earn 10% more than last year in profits for their shareholders, and the shares sink because the estimates were that the growth was going to be 20% and when the expectations are not met your shares fall, which is incomprehensible to you if in the end the company made money.
Investing in ETF’s that invest, for example, in the largest companies in the world is usually a safe and profitable way to invest and get a more or less attractive interest rate on your savings.
But in the end, when you sell, there are commissions from the company that manages the securities, bank commissions and finally the Tax Agency that demands its share. In the end, your net income, besides being uncertain, will not leave you a high profitability unless you have also assumed very high risks especially dedicated to high rollers with an iron heart.
One of the few times I invested in banking products of this type through the Private Banking of my bank (special rooms, coffee at every meeting, young, smiling and friendly guys, with suits, shiny shoes and Hermés ties). They offered me an interesting product: the bank only charges you when you earn, so we show you our commitment to look for the best for you, if we don’t make you earn money we work for free….tentador and convincing, isn’t it. It didn’t take me two months to see the reality. I invested let’s say 100 eur and a month later my shares were worth 80, the following month they went up to 90 and I found that they had charged me interest, when I asked why if I was still losing 10 compared to the 100 invested, they told me that they charge when they made me earn, as I earned from 80 to 90, well then, to charge commissions on the 10 eur earned. That’s the way it is in the banking world, the house never loses.
AMAZON FBA
And to finish with the fantastic means of passive income we find the world of AMAZON FBA. Possibly and together with the cryptocurrencies of which you will find the largest number of courses and gurus offering the wonder of this passive income that will make you earn thousands of euros / dollars in a very simple way.
And how? Well very easy, I go to Alibaba and buy a product in China for 5 euros, I go to Amazon and see that it sells for 20 and that’s the deal. I buy about 200 units, I send it to Amazon warehouses that takes care of all the logistics when selling my product.
The most exaggerated gurus will paint you the numbers to the beast, 20 eur for 200 units you will have earned in 1-2 months it takes to organize everything about 4,000 eur with an investment of 5 eur for 200 units, ie 1000 eur. They often forget to explain all the expenses that must be made before and during this process (software, management fees, storage, registration companies, brands, advertising, image design, etc.) that makes the final margins between what you bill and what you earn net at the end of the process, is not so wonderful and that without excluding the many hours it takes to perform all the steps. They sell you that with a couple of hours a week you can manage the business but there is very little passive income and the dedication required is very, very high.
Of course, youtubers who will teach you that they have a turnover of 20 million euros leave their lives and work hours and hours to create videos every week, create sales funnels, analyze neuromarketing techniques to motivate the purchase, free webinars and even free mini courses, where they selflessly explain the business step by step, but in the end they only try to sell you the course.
And the million dollar question is, if you invoice 20-30 million and manage 70-100 products, with the work involved, why do you invest so many hours and effort in preparing a course and promote its sale? The easy answer is usually that after having financial peace of mind they feel a moral obligation to help others.
I’m sorry but already having a few years on me, my confidence about the moral of people and more when talking about money and more when as with other courses such as affiliate websites, auction courses, real estate sales courses and others always keep some information that is what would make 80% of their future buyers of courses not to buy them.
If you really care about people tell the young kids that no way they can start selling on Amazon with 3,000 eur and that in 2 months they will be making money. Tell them the truth, that to start on Amazon you should enter with products above 20-30 eur (selling 2 euro keychains with a net profit of 20 cents you have to buy 5,000 units or you compete with large manufacturers that can lower the price when they want and leave you without margin or you will sell in negative).
That you will have to pay Amazon 40 eur a month just to use their platform and in addition they will charge you for storage, transport, management etc like 20% of your selling price, that you will have to pay taxes, that you will have to pay for shipping, that you will have to pay for Hellium10 or Juglescoutt software, another 80 a month, to manage the analysis, that you will have to pay for registering your brand, for designing the packaging, the listing images and content A+ and above all the advertising campaigns on Amazon, that you will have to pay for other software to know how your sales are going since amazon’s software does not show you much information.
The idea is clear, you are not going to sell anything until you have positive reviews and that is achieved by appearing on the first pages (nobody searches on page 4 of Amazon), for that you and 4. 000 sellers of your product pay to appear when searching for a keyword, dance shoe, and if others pay 1 euro to appear when a user writes that word, you must pay 1.10 eur and be aware that tomorrow another seller does not pay 1.20 so you must be all the time attentive to a lot of keywords and the amounts of bids.
For Amazon, competition is wonderful, but you will be fighting against hundreds of sellers with large amounts of money to bid on your keywords or with thousands of reviews prior to the launch of your product.
They will also tell you that to be successful you must perfect your product, but they do not tell you that dealing with a Chinese manufacturer that sells its product to millions of people and is not interested in making adaptations to a $12 product, or if you find the one that interests you will be negotiating with him, I am not exaggerating, up to 5 months between you ask for X they say yes and then they show you something else different, they send you a sample by plane, you pay, you see that it does not meet and you have to negotiate again and then a month until they manufacture it and another month of transport etc..
The real times are not as painted from the time you choose a product until you launch your product on Amazon. Also point out that there are professionals who will charge you for doing the product search and selection, others to create professional images, others to design your logo, others to design your packaging, others to create the A+ content, others to manage transport and customs procedures, others to manage advertising campaigns, others to solve problems with Amazon.
Because yes, Amazon is wonderful for the buyer, you call and they return the product or the money without any problem, normal is not their money is your product that will be damaged or they will return it used or broken because they did not like it, or they can close your account with thousands of euros in products because someone, a competitor angry about losing market share, say something bad about you or buy your products and start giving you bad reviews or a pirate hijacks your account.
Amazon’s customer service is terrible and every morning you can run into problems that no one will explain how to fix and will require hours and hours to fix. But course sellers who manage 50 products will always find free hours to help you out of pure altruism, of course.
So please be honest, it can be a great business to sell on Amazon but first it requires you to have significant upfront money and more capital to reinvest (the first few months you will almost certainly sell at a loss to get positioning but you will have to place more orders to meet demand) and lots and lots of work or more money for others to do it for you.
Therefore, do not deceive young people with a few euros to buy courses with the idea that it is a business to start with 2000 eur. I think that with less than 8,000-10,000 eur they should not even consider it and others to continue buying more product as sales go, but of course if they say so you lose many buyers of courses with little income but with great enthusiasm to succeed.
As the one that sells auction courses and does not say that you forget to buy 80,000 eur apartments at auctions, or the one that sells to create Websites saying that you only have to pay 5 euro/month of webhosting and domain, not to mention the thousands of euros in promotion and hundreds of hours of dedication.
Neither say that with 2 hours a week you can manage these businesses. From searching for products, dealing with the Chinese manufacturer, designing images, logo, transport, advertising campaigns, managing returns and problems and sales evolution, it can be said that it is anything but a passive income. You may have income, but let’s tell the truth, you will spend your 8 hours a day if not more.
You can read a detailed post about my experience on Amazon FBA here.
P2P CROWDFUNDING LENDING
And finally we come to the last source of passive income, known as P2P investment or CROWDFUNDING / CROWDLENDING, and yes this is at present and after having tried many other means of investment, more or less passive, the one that at present and for about 5 years to what I dedicate myself body and soul.
I am going to indicate why I believe that without being perfect, nothing is perfect, I consider that it is currently one of the best and only real sources of passive income where to obtain a good profitability.
For those who have never heard of this form of investment, it is very simple to explain and understand. I will try to explain it in the simplest possible language.
Traditionally a company in order to grow (to buy a warehouse, machinery, merchandise, etc.) or an individual who wants to buy a car, house, etc. would go to a financial entity that would lend him the money at an interest rate X during a series of years with an annual interest rate.
This loan-credit model is well known to everyone and almost all of us have used it at some time. Apart from the banking institutions, there were also lenders who, with worse conditions for the borrower, assumed risks that many banks did not want to assume (normally the bank is maintained by thousands of people and the lender sometimes by a single person or small group of investors, so it is logical that by accepting rejected by the banks and by assuming higher risks, they would be forced to pay higher interest rates).
The use of technology and crowdfunding/crowdlending, or fundraising/loans, has revolutionized this market. For those who need a loan to start a business, grow the company or solve a specific cash need, it allows them to have access to an alternative source of financing to banks that sometimes are not willing or tighten their risk criteria for granting loans.
Let us not think that money is not lent by the banks for being a bad payer or irresponsible, sometimes banks are simply not interested in giving more credit or they do it with totally usurious conditions (what if guarantees, personal and family guarantees, additional insurance, contracting various banking products, etc.). This is how Loan Originator Companies emerge and start lending to thousands of individuals and companies.
These loans must also be secured by collateral such as the property title of the person to whom the loan is granted or other personal guarantees. In case of non-payments or delays, as in banking, there are penalties or even judicial executions to recover the borrowed funds plus interest for late payment.
The mortgage that the bank leaves you, where does the bank get the money from, from thousands of savers with their funds deposited in the bank. And this is how these Loan Originator Companies do it, looking for thousands of small savers-investors who want to invest in these loans. In order to make this operational, the Technological Platforms arise, where a loan of 3,000 eur is divided between an individual to buy a car and 100 private investors who invest 30 eur each. This loan is established for a determined period of time, let’s say 1 year at an interest rate of 12% per annum payable monthly. Therefore, each investor who put in 30 eur will receive 1% interest every month for 12 months. It is simple. And I say monthly interest, because many of these platforms pay you monthly interest, you do not have to wait for the annual amortization of the loan. This way you can immediately pass this interest to another investment that will continue to produce new interest that you can reinvest again, make compound interest work.
There are many Crowdfunding/Crowdlending Platforms in the market. The most evolved market is in Europe, with the highest rates, but there are also this type of companies in the USA and other continents.
I personally invest 90% in Europe and 10% in the USA, but there are some in South America, Oceania etc… Some European platforms for example allow only Europeans to invest, and others in the USA require you to be an American or legal resident to invest, but there are exceptions. I invest in more than 50 different platforms, although after trying them for years you finally know the 10 where you don’t want to invest anymore, the 20 where you invest to diversify and the 20 where you feel more comfortable and where they offered you the best results.
You can look for many of these platforms on the Net and I comment some of them on my Youtube channel.
So you can find Mintos, Getincome, Bondster, Esketit, Profitus, Capitalia, HeavyFinance, Hive5, Viainvest and many others. Or click to find 23 of the best P2P Platforms.
Some are specialized in specific sectors such as real estate and will offer you for example to invest in a loan to a real estate developer, or even to own a small percentage of a house among many investors or the same to buy a house to dedicate it to tourist rental and obtain a profitability obtained from the rents and another profitability when selling the property in the future.
Others are focused on the agricultural sector, offering loans to farmers for their new harvest, machinery, expansion of land or facilities on the farm, etc..
Others are more oriented to invest in start-ups of new businesses, from a coffee shop to a new brand of organic creams.
There are platforms that invest in solidarity projects to support disadvantaged communities.
There is even a platform that buys portfolios of bad loans at a very low price, say 10% of their value and then litigate and recover a percentage of profit of say 40% of the original value of the loans (let’s say it would be like buying auctioned apartments, cheap but with greater difficulties in exchange for high profitability).
Others offer to invest in Bonds, Securities, ETF’s, and many others.
Where to invest will depend on the investor’s appetite for one sector or another, some like to invest more in real estate, others more in agriculture.
There are investments for a few days, others for 6 months, others for 1 year and even for 5 years. There is also the assumption of risks, the more doubtful loans offer more interest and the safer ones less.
There are loans guaranteed by the property itself, or with European funds or subsidies that make them safer than others only guaranteed for example by the salary of the person who buys a vehicle.
WHY P2P CROWDFUNDING INVESTMENT?
And why these investments seem to me to be among the best as a means of passive income. After testing them and betting my own money and that of my clients for more than 5 years I can indicate several:
- The investment can be from 10 euros in many loans, other 50 or 100 eur but I love the fact that I prefer to take a risk leaving 10 eur to 100 friends than 1,000 eur to a single friend. I can estimate that of the 100 friends some will fail me and I will have lost a very small part of my investment which will be more than covered by the 10% interest that those who did pay will give me.
The investment idea is great, to avoid the risks I diversify among many investment platforms that in turn invest in a multitude of Originator Companies and in turn I invest small amounts among a multitude of loans. It is a great formula to reduce the risk of possible disasters, not like investing 200,000 eur in a house that one day there is a fire and goodbye to the 200,000 eur, or invest 30,000 in an investment fund that can go very wrong, or buy 5,000 euros in shares of a company with negative results. Getting to fragment investments in amounts as small as 5 euros in say 8,000 different loans, is one of the best risk reduction methods I know.
2. Investment terms, I love to invest in terms of 1 month, 6 months or 1 year. There are several reasons for this, life nowadays is very fast paced and I don’t like to have my money tied up for a long time, I like to know that I can recover part of my investment for unforeseen events quickly. If I don’t need it, I keep reinvesting the money another month and another month and so on until I want to.
But remember when I was telling you about the wonders of compound interest. Every time I invest 100 eur and receive say 100.83 eur at the end of the first month at 10% annual interest, I am reinvesting 100.83 the second month which in turn will produce more money which will be reinvested in turn in the third month and so we let compound interest work its magic.
In addition, most of these investment platforms do not charge to invest or withdraw money and allow you to automate your investments so that the money earned continues to be reinvested according to the criteria you set, so here really is a passive income that makes your business grow and grow.
It is one of the few Passive Income that grant Financial Freedom because once invested you do not have the need to be aware of doing anything else (although like any investment is always recommended to keep an eye, read information about the market, health and financial situation of the Investment Platform, because like everything in life changes a platform that for some years works very well may at a given time by market circumstances (war Ukraine for example), or mismanagement of those responsible, begin to give liquidity problems and may be interested to withdraw or reduce positions until everything relaxes). The good thing about short investment terms is that at any sign of fatigue of the company, you can quickly start to cancel your investments and recover the money quickly, you do not have to wait 1 year for a window of partial or total disinvestment or penalty fees to recover your money quickly or have to sit and wait to see if the company recovers from its bad situation.
3. Many of the platforms also offer another layer of security called Buyback, which is a Buyback Obligation. It usually consists of a commitment in which the Loan Originator offers the investor to repurchase the loan if 60-90 days after the payment date the debtor has not complied with its payment commitments. In other words, if there are problems, they will return the money and their legal teams will pursue the debtor to try to collect.
4. They also offer some Secondary Markets that help to offer greater liquidity to the market. Let’s say you have a lot of one-year loans and you have an unforeseen event that makes you need the money. This secondary market serves as a quick escape valve, so that you can sell your investments early and have another investor buy them back from you. Normally, it should be at the same value or less than you bought it, although sometimes it is also used to sell with some overprice and thus get even more profit, of course if someone is interested in paying for it. Normally, it should be at the same value or less than you bought it, although sometimes it is also used to sell with some overprice and thus get even more profit, of course if someone is interested in paying for it. The normal thing is that if you want your money fast, you give up some of your earnings, for example, do not pretend to earn 10% but 8% in exchange for recovering your money quickly.
5. These platforms invest in a multitude of countries, which for some may give them some initial fear because they do not fully understand how the real economy works. Already more than 20 years ago when we designed the new Treasury Room of a major bank, the systems worked as follows. Mr. Lucas’ savings in his checking account in his town of 1. In addition to being used to give other loans or credits, large sums are transferred to the Treasury Rooms of the large entities that during stock exchange hours, in Europe from 9:00 to 17:00 hours moved through the European stock exchanges, from 15:00 hours the US stock exchanges opened and much of the money “flew” there and when the American stock exchange closed, the money “flew” to the Asian markets to return to Europe the next morning. And unbeknownst to him poor Lucas’ retirement pension had been producing interest by circling the globe in 3 markets in 24 hours.
That’s why it should be no big deal to invest in land in Lithuania, a building in Budapest, a car loan in Berlin or a house renovation in Florida.
Moreover, financially it is the most advisable to avoid country risks that to a greater or lesser extent still exist and when you travel and see that in Spain a current account offers a 2% return and crossing the border in France a 4%, why not take advantage? that today transfers are free or very cheap and your money does not have to be only in banks or investments in your country is a barrier to be eliminated in this globalized world. In addition, you have to diversify not only in investments in different products and sectors but also in different financial institutions and countries to protect your savings also from currency devaluations, advantages in higher interest rates in emerging countries etc., having bank accounts open in different countries of the world no longer has to be exclusive to multinationals.
Therefore, an investment that you can make with very little capital, which allows a young person to start putting their first 10 eur every week or month or the investor who wants to invest 500,000 eur can participate with the same rules and benefits.
Where you can invest your money every 30 or 90 days reinvesting it automatically.
Where you can choose whether you like to invest in real estate or in Bonds or in the agricultural sector or even better where you can invest a very small amount in a multitude of Platforms extraordinarily diversifying the risk of losses makes it in my opinion a Passive Income and a Financial Freedom as close to its purest definition of allowing you to get the most out of your savings without dedication and in a safe and continuous way over time.
You can learn more about P2P Crowdfunding loans on our Beginner´s Guide or ask for our services to design and manage crowdfunding investment portfolios.
CONCLUSION for PASSIVE INCOME THE NAKED TRUTH
Personally, my times of having 200.000 eur blocked in a property that could take time to be sold, or that a squatter would come in or that an absent-minded neighbor would set fire to his kitchen and the building would be destroyed, are over.
Investing in rentals does not seem so profitable to me, plus the problems and dedication involved, especially if it is a tourist apartment.
The bank financial products, after commissions of the managing entities and subsequent taxes do not offer me much more confidence either.
Affiliation websites, blogs, digital services seem to me very complicated to be profitable because of the great competition, and a lot of work and money it takes to be “popular” (just think of the millions that a brand like Coca-Cola or Nike spend on advertising a year despite being leaders, to be very clear that my website selling t-shirts will be difficult to be known if I do not continuously risk a lot of money and spend a lot of time to have a highly optimized SEO that constantly changes according to changes in search engines and platforms like Instagram, Youtube etc.). As in sports, there are millions of kids playing soccer or tennis, but only a tiny part of them succeed, and analyzing why is very complex.
Being able to invest small amounts, and obtain many small amounts of profit every day from a multitude of small investments in a multitude of small loans in a multitude of platforms that invest in a multitude of sectors in a multitude of countries makes that, although in any investment you should always be warned of the risks…., in this type of investment it can be said that it is so blurred that although various loans will fail In my case (and they will fail, it is impossible for everyone to pay, it would be too perfect a world), the profits of the paid ones far outweigh the losses of the unrecoverable ones.
Thus in 5 years in my case (you know the disclaimer: past profits do not guarantee future profits), I have obtained a return for me and my clients of more than 11.5% net. We can think that 10% is a very certain objective of being able to be insured by assuming medium-risk investments.
And the truth is that at the beginning, I entered every day to see how I had earned 250 eur every day, whether it was Monday or Saturday, and I saw the income, not future or foreseeable, but real in my account that I could withdraw or reinvest. Now, having everything automated, I only enter sporadically at the end of the month to write down my earnings in my excel and above all because of the commitment of my clients I regularly follow the companies where I invest to detect if they are still working properly or show any sign of weakness (shortage of loans, delay in repaying loans or delays in making effective the repurchase obligation). In those cases I make quick adjustments to move money between platforms and inform my clients to do the same. Where I have been investing for 5 years is where I advise my clients to invest, and as most of the time my portfolio is much larger than theirs, they can be assured that I am not interested in taking unnecessary risks when I personally would lose the most.
As a final thought I would like to comment that there are no absolute truths as I said at the beginning, what for one is an ideal life for another will not be, and the same happens with passive investments.
If you are a technology lover, what may attract you the most will be to develop computer applications to sell and I will not be the one to say that it is a bad idea, those who like financial investments go ahead with trading, those who have a lot of capital should certainly enter the real estate sector. And above all, passive passive in this world there is only death, the world goes too fast to think that you can invest and you forget and receive income every month.
What I am telling you today is that I think Crowdfunding/Crowdlending is a fantastic investment, maybe in 5 years time all or most of the companies will have gone bankrupt. We can all remember great companies that today disappeared and new ones that emerged very quickly and that in a few years may be a memory for their users.
Therefore, I speak from experience not from rhetoric, I have told you about my investment experience over the last 30 years and investments that I made then I would not make today and investments in Crowdfunding, where I have been 5 years with very good results, maybe in 3 years will be a memory.
But I think that for the vast majority of people with a few savings who want to get an interesting return, forget the Youtube titles of win 1 million with 1. 000 eur with my big secret, without having to spend a lot of time and that takes advantage of compound interest and offers high liquidity and a good interest rate that beats inflation and allows you to save for the future and come a day to enjoy Financial Freedom, I am certainly convinced that investment in P2P Crowdfunding/Crowdlending is the most interesting option that exists today.
For more information or advice, from carliaconsulting@hotmail.com I will be happy to help you. I offer a simple service of design of the best portfolio for your investment according to your needs and requirements in a single session of knowledge and design and other more elaborate with an accompaniment over time of 3 or 6 months, advising on how to go looking for the maximum possible return on investment as well as being attentive to the evolution of existing platforms and new opportunities that arise. After 6 months you should feel so comfortable traveling on your own that you won’t need more help than from time to time to be attentive to my emails about any news of interest in this sector.
I know it’s been quite lengthy, and I tend to talk a lot. But with so many lies, half-truths, various products, endless videos, and countless gurus out there, I thought it would be helpful to gather all the essential information in one place.
Instead of going crazy watching a thousand videos that confuse, disorient, and worse, deceive you into repeatedly trying to achieve the passive income and financial freedom that so many dream of, I hope I’ve managed to provide some clarity, at least to some extent. We are all different, and there are no exact definitions of how to manage our financial freedom.
I look forward to your comments, and hopefully, we can work together if you decide that I can help you with my knowledge of passive investments. Best regards, and if you made it to the end—which isn’t easy—thank you very much!
