Cash Flow: How Passive Are Your Investments?

by FI Fighter on March 27, 2014

in Thoughts


In order to reach early financial independence, you will either need a ton of cash, or enough passive income coming in each month to cover your expenses. If you weren’t fortunate enough to start your own thriving business, or join a start up company pre-IPO, chances are pretty good that you’ve also decided to pursue the passive income route.

There are many investment vehicles out there that you can use to help generate passive income. However, no two types will perform the same; some will be more passive than others.

Since I’ve been investing long enough to have exposure to many different kinds of investments, I thought it might be useful to classify them, in regards to passivity.

Passivity Rating:

1/10 (80 hours per month)
2/10 (60 hours per month)
3/10 (40 hours per month)
4/10 (20 hours per month)
5/10 (10 hours per month)
6/10 (5 hours per month)
7/10 (2.5 hours per month)
8/10 (1 hours per month)
9/10 (0.5 hours per month)
10/10 (less than 0.5 hours per month)

Savings Account and CDs

The simplest form of passive investing is through the use of a conventional savings account or CD. My own personal savings account returns a paltry 0.05% interest. I’ve collected less than $1.00 year to date. CDs aren’t much better, and rates today start at about 1.0%. If your goal is to reach early financial independence, you will need to find a better investment alternative that returns a higher yield. Otherwise, you’ll probably never get there moving at a snail’s pace…

My Passivity Rating: 10/10

My own experience: I keep an emergency fund in a standard savings account. Nothing special going on here. I might check up on the account once every few months or so, spending less than five minutes each time. Also, I don’t even bother looking at the “passive income” it generates. When it comes to early FI, my savings account doesn’t factor into the mix at all. I don’t currently have a CD account active.

Index Fund Investing

Many investors like to invest in index funds because they want to be as hands off as possible. As many have also learned in the world of stock investing, sometimes it pays (literally) to be an average performer. You can simply track an index as well known as the S&P 500, and by investing in low expense ratio index funds, you’ll still generate returns that’ll beat 9/10 actively managed funds out there.

Pretty sweet! When it comes to index funds, there’s almost no other form of investment that’s more passive, and can still generate such high returns. Index funds easily put the returns offered by conventional checking accounts and CDs to shame.

What’s the catch? Although index funds are wonderfully simple and passive, the income they generate can still leave a lot to be desired. For anyone on the journey to early financial independence, we already know that passive income is the name of the game. Thus, using the index fund approach may take someone awhile longer than if they were to use another alternative.

My Passivity Rating: 9/10

My own experience: For myself, I invest in index funds for my 401k and Roth IRA, but I don’t depend on them for funding my early FI income stream. I am planning on leaving these accounts alone until I am able to access them without penalty at 59 1/2. Yes, there are ways to get the money out early without having to pay penalties, but I don’t foresee the need to have to do so. As long as the early FI income streams are performing, I’ll simply keep the retirement accounts in place as a backup, or safety net. I spend about 30 minutes each month looking through the accounts and going over the transactions (dividend re-investments).

Dividend Growth Investing

While most major indexes won’t yield anything greater than say 2%, an investor can utilize a strategy known as dividend growth investing (DGI) to custom-build their own portfolio to enhance the yield. It isn’t uncommon for a dividend growth investor to start building their portfolio with an initial yield between 3% and 4%. Due to the nature of dividend growth, the yield on cost (YOC) gained over the years (due to consistent dividend raises) will only serve to enhance the total return of the portfolio. In other words, dividend growth investing is a powerful investment vehicle that can be used by an investor to help accelerate the cash flow generated by their portfolio. If done right, the numbers of years needed to reach early FI can be rapidly shaved off, when compared to most other investment vehicles. In fact, a lot of fellow bloggers and readers are using exactly the dividend growth investing route to get to early FI.

My Passivity Rating: 4/10

My own experience: Again, there’s a catch. Dividend growth investing can return a higher yield than index funds, but it can also be far less passive. Since you are in full control, there is no one else but yourself to help you manage the funds in your portfolio. This isn’t necessarily a bad thing, as you have the freedom to handcraft the exact portfolio you desire. You get to set how many stocks you want to own and what your asset allocation is across different sectors/industries.

Although you probably won’t need to tune in to every earnings report for each company you own, you’ll probably still want to monitor performance on a semi-regular basis. Even if you do invest in stable, large-cap blue chips, it isn’t unheard of for even premiere companies to announce dividend cuts (e.g. General Electric (GE) in 2009).

The biggest fear a dividend investor has is if the underlying stock they own either freezes, or cuts the dividend. I faced this very problem myself not too long ago when Exelon Corporation (EXC) announced a massive dividend cut of 41%.

Note: There is definitely an easier way to make dividend growth investing more passive — invest in only the “best-of-the-best” blue chip dividend aristocrats (PG, KO, MCD, PEP, JNJ, etc.). If you were to do that, the Passivity Rating could easily jump back up to 8/10 or even 9/10. The Passivity Rating of 4/10 only describes my own personal experience building a custom dividend portfolio.

Before liquidating my dividend portfolio to fund the purchase of Rental Property #2, I owned a portfolio comprised of 24 different companies. I probably spent about 20 hours/month (4/10 Passivity Rating) buying, selling, and monitoring my positions. I allocated even more time towards research (e.g. reading Seeking Alpha articles), but that was more for fun rather than out of necessity. If I were to include the research time spent, the total time spent each month would jump to 40 hours (3/10 Passivity Rating).

Portfolio Early 2013:


More work than an index fund…

Turnkey/PM Real Estate Investing

I own three out-of-state turnkey properties that are managed by a local property management (PM) company. When buying a turnkey investment, the seller will always advertise the purchase as being as “hands off as possible”. Part of the allure for purchasing turnkey is that the income your investment generates is supposed to be completely 100% passive. The other (primary) reason for buying turnkey is for the higher cash flow return; if you select the right market, it isn’t unheard of to find cash-on-cash returns yielding over 10%. With rental properties, nothing is ever guaranteed though, so there will always be risks involved. However, if things work out as planned, you’ll probably end up reaching early FI sooner than anticipated.

My Passivity Rating: 5/10

My own experience: It hasn’t been a full year yet, but I’m finding the turnkey sales pitch to be surprisingly more accurate than not. I honestly didn’t know what to expect when I first started, but I’m learning first hand that the PM really does handle all the day-to-day operations. From tenant screening, to maintenance repair items, to rent collection from the tenants, the PM handles it all.  In fact, sometimes I think they keep me too much out of the loop, so I always have to remember to send weekly e-mails asking for status updates. I do my best not to micro-manage (nobody likes that), but you do owe it to yourself to ask a lot of questions. It’s the only way you’ll learn how the process really works… and if you want more control (voice) over certain decisions (e.g. tenant approval process), you’ll have to let the PM know. Otherwise, they’ll just assume the responsibility and do everything themselves…

Granted, my low stress/headache experience might only be this way for now because I’m only on Year 1. As I’ve been warned many times before, you won’t really know for certain how things will be until you get to Year 2 or Year 3. That’s when you have to observe more closely, and watch to see if the wheels start to fall off!

But so far, so good. Right now, I’m probably spending about 10 hours/month total for all three properties. Most of my time is spent writing e-mails or going over owner statements, maintenance requests. And going to the bank to deposit rent checks (not all turnkey companies provide direct deposit/ACH service).

Here’s what a typical owner statement looks like (Chicago; March 2014):


Kick back, do nothing, and collect rent checks! (well, almost)

Self-Managed Real Estate Investing

In addition to three turnkey properties, I also own and self-manage two local Bay Area properties. I won the first property in 2012 and the second one in early 2013. Even before I got started with landlording, I had this strong impression that there would be a lot of work involved. Since housing prices were so affordable when I bought, I figured the long-term rewards would be worth the effort. It hasn’t even been two years and my decision to buy is already looking like it was the right one to make. Housing prices have continued to surge, and the appreciation so far has been spectacular. These two rental properties are the best investment decisions I’ve ever made in my life, so far.

My Passivity Rating: 6/10

My own experience: My two self-managed rentals have been a tremendous experience so far. The Passivity Rating of 6/10 is not a typo. I’m certain this won’t always be the case, and it seldom is for actively managed investment properties, but I’ve been so fortunate to land some amazing (and self-sufficient) tenants. I believe part of that has to do with buying in the right neighborhoods and selecting high caliber tenants (high income professionals). Most of the work I spend on these properties is for periodic inspections, and phone calls/texts with the tenants.

So, although the cash flow numbers aren’t the greatest, there are definitely other benefits for paying more for quality. Right now, my real estate portfolio has a blend or properties — some that cater to low income and others that are more suited for high income individuals. Based off of my own local experience, I believe that my future purchases will again steer more towards higher quality tenants. There is a place in the portfolio for high cash flow properties, but I believe that the core foundation should be built on quality.


I’m trying to get to early financial independence as soon as possible. In the process, I have used many different investment vehicles, and I’m learning through experience which ones are most suitable for my own journey. However, lost in any cash flow, or yield analysis is the Passivity Rating of each investment. The above report was generated based off of my own individual experience, but I’m sure it will vary for each individual investor.

Note: I did not include any peer-to-peer (p2p) reports, as I have no experience using Lending Club, Prosper, or any other p2p networks. I am sure those are great investment alternatives, though, as I have heard great feedback from other investors. Again, there are many vehicles you can use to help take you to early FI…


What investments are you currently utilizing on your own journey to FI? What do you find most passive? Did things turn out the way you expected them to?

{ 31 comments… read them below or add one }

1 Roadmap2RetireNo Gravatar March 27, 2014 at 10:08 am

I like the idea of a passivity rating. If I take it a step further, I would add a risk/reward factor associated with each.


2 FI FighterNo Gravatar March 27, 2014 at 10:05 pm


That’s a good suggestion and something I should have considered in this article. A checking account is completely passive, but I’m guessing the reward factor isn’t anywhere near enough to entice someone to keep investing in one. 😉

Take care!


3 Done by FortyNo Gravatar March 27, 2014 at 10:13 am

Very interesting that your self-managed properties score better than your turnkey properties. I’ll have to think on that.


4 FI FighterNo Gravatar March 27, 2014 at 10:06 pm

Done by Forty,

Yeah, I’m sure it’s just an aberration and something that wouldn’t hold long-term. I’ve just been lucky so far…

But I think it does clearly show the benefits that can be had when you invest in quality rentals that attract quality tenants.

Take care!


5 J. MoneyNo Gravatar March 27, 2014 at 10:47 am

I love that passive ranking too. I didn’t see blogging on there?? (JOKE!!! Blogging is the opposite of passive even though EVERYONE likes to believe it is! :))


6 FI FighterNo Gravatar March 27, 2014 at 10:09 pm


Shoot, I forgot about blogging! What could be more passive than that?!?

Wait, are you telling me it takes more than 5 minutes to whip out an article???

In all seriousness, blogging would be one of the last things I would ever qualify as being passive. On the scale, I would score it 2/10… probably 1/10 if I didn’t have a full time job consuming most of my time.

It’s hard work as I’m sure you’re well, well aware of 😉

Take care!


7 writing2realityNo Gravatar March 29, 2014 at 10:18 am

This is so true for blogging related activities. At some point it needs to be determined if you’re blogging as a hobby or desire to make it a business.

I think important to note is that there are ways to turn just about every investment out there into a more passive version. Generally this means sacrificing some level of returns, but the options are there.


8 JC @ Passive-Income-PursuitNo Gravatar March 27, 2014 at 10:53 am

Just a gut feeling is that the self-managed properties’ passivity rating is highly dependent on the property type and tenants that would be there. It’s kind of like investing in only the best of the best DG companies where the passivity rating goes higher because of the high quality nature. If you self-manage middle to low income properties then the passivity is going to go way down. I really like the idea of passivity though because chances are none of us reaching for FI want to be completely consumed by managing our passive income sources so getting the right mix of passive income sources to really allow you to enjoy that passive income by not worrying about it.


9 FI FighterNo Gravatar March 27, 2014 at 10:12 pm


Yes, I definitely feel the higher rating is due to the fact that the properties/tenants are of high caliber. That, and I just got lucky…

In the article, I did mention that a portfolio consisting of only the best DG companies would probably also score very high, around 8/10 or 9/10.

If you want more passive, it’s a good idea to buy quality. Of course that’s always easier said than done since quality usually doesn’t come cheap.

Good point. Once I get to early FI, I will need all my investments to be as passive as possible. This probably means 5/10 or higher on the scale.

Take care!


10 Dave @ The New York BudgetNo Gravatar March 27, 2014 at 1:43 pm

Great rankings!

Could be a good strategy to transition from the lower rankings to the higher rankings as you get older (and have generated more wealth and no longer want to be as active in your wealth building strategy).


11 FI FighterNo Gravatar March 27, 2014 at 10:14 pm


Yup, that’s definitely a good idea. Long term, if I stick with rentals I’ll either need to go fully turnkey, or need a quality PM in place for each rental. That’s the only way I’d be able to run things with me being thousands of miles away on an island somewhere enjoying the sun… 🙂

Take care!


12 JasonNo Gravatar March 27, 2014 at 2:48 pm

Hi there FI Figher,

I really like the passivity rating too, but the one thing I’ve found with DIY landlording is that, even for the best properties, the passivity decreases as you get more. With a full-time job, I’d say 3 properties is the most someone should expect to keep under control. Any more and small tasks tend to slip off the plate.

This is why I’m moving to using property management companies – they allow you to scale to tens (or even, dare I say, hundreds!) of doors.


13 FI FighterNo Gravatar March 27, 2014 at 10:17 pm


I absolutely agree — I think even two rentals is probably plenty for anyone working a full time + stressful job. I’ve only been able to manage so far b/c I have very low maintenance tenants in place.

I’m with you and will eventually migrate everything to a qualified PM. Long-term, I don’t want to manage anything myself.

100 doors! That would be an awesome dream for later… Let’s get to 10 first 🙂

All the best!


14 TJNo Gravatar March 27, 2014 at 3:19 pm

I own one self-managed rental property, and except for the month where I bought it a year ago, the passivity rating is more like 9/10 or 10/10. Most months I spend 2 mins checking whether the rent has gone into my bank account. But the thing about rental properties is of course that it could easily change if something breaks etc.


15 FI FighterNo Gravatar March 27, 2014 at 10:18 pm


Congrats, sounds like you made a great investment and also lucked out on getting some great tenants. I’ll take a 9/10 or 10/10 on a rental property any day of the week.

Yeah, unfortunately, rentals are always unpredictable and things can change on a dime.

Best of luck!


16 No Nonsense LandlordNo Gravatar March 27, 2014 at 3:21 pm

With my 24 renters, I find I put in 5 to 10 hours a month, max. If I do some additional maintenance, either to improve or upgrade the building, it is more. I view that as not a requirement of the rental, but as working for my own company. I could write a check to myself (and pay FICA, and all of the other taxes and insurance), or I just donate the work.

No much different that when you change your own oil, or wash your own car. I have seen one of the ‘big box’ property management firms say that they will allocate 4 hours per YEAR, other than 2 annual inspections. So, figure 20 minutes per month per property.

You have to do something with your time, why not make or save money on every minute you can.

At some point, I may hire someone to do the work, but for now, it’s a good gig.

I have put a Spring 2016 as a FIRE date, even though I could do it now. I want to live as good, or better, after FIRE.


17 FI FighterNo Gravatar March 27, 2014 at 10:19 pm


Wow, that’s pretty impressive considering you own so many units. I would have guessed that you would need to spend more time managing them each month.

Best of luck on getting to your FIRE date in 2016. Sounds like you are ready even now, which is awesome. You have a lot to look forward to! 🙂



18 EvanNo Gravatar March 28, 2014 at 8:32 am

If i had to guess the return on a bunch of 10s isn’t going to be too good. I think my goal would be to have one or two 10s, and then work my way down to 4s


19 FI FighterNo Gravatar April 1, 2014 at 7:59 pm


Yeah, usually the more passive the investment, the lower the returns. It’s all about finding that right balance between risk, reward, and passivity.

All the best!


20 Jon @ Money Smart GuidesNo Gravatar March 31, 2014 at 1:53 pm

My tenants are pretty hands off too, so I would agree with a rating of 6/10. Of course, there are exceptions, but over the 2 years I’ve been renting to this tenant, I’ve been called 2 times for small issues.


21 FI FighterNo Gravatar April 1, 2014 at 8:00 pm


That’s awesome, I’m glad to hear your tenants are pretty low key. Mine have also been great and I hope they stick around forever 🙂



22 Free To PursueNo Gravatar April 1, 2014 at 5:34 am

The passivity index is BRILLIANT!

Too few people think about the work/reward when it comes to investing, focusing solely on the risk/reward instead.

The time spent is an opportunity cost of the investment type selected. That time could be spent with friends and family, working on other activities of interest, etc.

There are many reasons/drivers for FI, but I doubt that the intention is to switch one 40-60hr work week for another! Self-imposed obligations can feel like bosses too!


23 FI FighterNo Gravatar April 1, 2014 at 8:05 pm

Free to Pursue,

Yes, definitely the amount of work involved is something worth considering. For anyone trying to get to FI, you must think about how you want to live your day to day. Do you want to be managing all of your investments on a day to day? Or would you prefer to be as hands off as possible?

I actually want to be on an island a few thousands of miles away (at least for awhile), so I need passive investments. Even though I self-manage a few properties now, I would outsource that work and accept a smaller return when the time comes.

Great point, I definitely don’t want to trade one 40 hr/week job for another! 🙂



24 Quinn @ Wealth Out WestNo Gravatar April 1, 2014 at 7:30 am

Apologies if you’ve shared this in other posts (I’m a new reader!), but where in the Bay Area are your self managed rental properties? I love the idea of investing in real estate, but all of the rent control and tenants rights laws in San Francisco make me very very nervous. I imagine your properties are on the Peninsula or in the South/East Bay?


25 FI FighterNo Gravatar April 1, 2014 at 8:05 pm


The local properties are in the South Bay Area. Yeah, I’ve heard horror stories about SF rent control!



26 CptMrPantsNo Gravatar April 1, 2014 at 8:22 am

Tangent: How’d you end up with a picture of a St. Louis parking garage & the Eagleton Federal Court Building for this post?


27 FI FighterNo Gravatar April 1, 2014 at 8:06 pm


I was in St. Louis not too long ago. I photograph a great majority of the pics I use on this site… No rhyme or reason why I picked that one in particular 😉



28 CptMrPantsNo Gravatar April 8, 2014 at 9:10 am

Another STL photo on today’s post. Represent.

Pretty decent rental property returns here- you might try sticking your toe in here on your next property.


29 FI FighterNo Gravatar April 8, 2014 at 9:25 am

LOL! You know your city very well…

I’ll keep throwing in some pics of St. Louis every now and then… let’s see if you can catch them all! 😉

Yes, your city is a great place to invest in rental properties!



30 Joe SNo Gravatar April 1, 2014 at 9:04 am

FI, good stuff as usual, I have experienced better results with my stock market investing as opposed to me real estate and am considering letting my property go on sale (after renovations) and simplifying my life and concentrating on my stock market investing. I work full-time and just consider real estate too time consuming for me.




31 FI FighterNo Gravatar April 1, 2014 at 8:08 pm


That’s totally understandable, and real estate is a pretty hands on investment, especially if you’re self managing. I’ve had good luck and been fortunate to land some quality tenants, but I’ve also heard a ton of horror stories…

Best of luck on selling the property.

Take care!


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