This article is about two things that are closely related. Generating wealth through:
- passive and residual income, and
- through small business ownership.
One of the things I’ve written extensively about over the last few years is the idea of creating wealth by building multiple streams of passive sustainable income.
Next, and germane to this article is that I just negotiated, agreed to, and will soon complete the purchase of a going concern small business, I’m going to dive into how I view the sources of passive and residual income streams within my portfolio and then discuss the business I bought and my investment thesis around creating a platform ventures portfolio.
Before I get into my business purchase, including the what and why, I wanted to review some of the assets I hold inside my portfolio and how I measure and view these returns.
A Review of Passive Income Sources Including Real Estate, Dividends, Royalties, and Business Ownership
Residual Income in Real Estate
Buying an income-producing real estate property – like an apartment building, for example – is an excellent source of residual income. Not only will you recognize gains from the increased value in the building itself, but the building will also be a source of monthly inflation-protected income.
Notice I used the word “residual income” instead of passive. Although the income might be somewhat passive, it does require management, and there are expenses associated with real estate ownership, so, the residual is the amount of profit at the end of the month/year.
Passive Income Dividend Investing
Dividend stocks are an example of passive income and simple passive cashflow. I say “simple passive cashflow” because unlike apartment buildings, the dividend income you receive from owning a stock is truly passive, whereas owning a building requires more active management.
Enbridge, for instance, is a large, multinational corporation that’s been around for decades and pays an 8.1% dividend. A $10,000 investment in Enbridge will provide $810 in tax-preferred income per year.
Passive Income from Royalties
Royalties from movie or music sources is another example of passive income.
In an article I wrote a few months ago, I mentioned that I was looking at investing in music royalties; in fact, I bought and closed on my first royalty sale a couple of weeks after. The royalties include songs from Rihanna, Kanye West, and a couple of other artists. The sale closed in July, and I received my first royalty check a few days ago.
The above three are examples of assets that do have some inherent risk; however, they produce consistent streams of income, month after month.
In this super low-interest-rate environment, it’s very difficult to find anything that provides a meaningful yield without taking any risk – after all, the current 5-year risk-free government rate is just slightly above 0%.
Guaranteed Passive Income
You could of course park your money in a GIC, T-Bill, or high-interest savings account and earn somewhere between 0.5% and 1.5% on your money, but at that rate, it’s very difficult to compound your wealth in a meaningful way.
The current low-interest-rate world is especially difficult for the retiree who is living off their investments and needs to earn a yield of 5 to 7% in order to maintain and fund their retirement. So most retirees are faced with a choice – accept the low-interest rate, low volatility, and low risk associated with a government-guaranteed investment, or stretch for yield and accept the inherent risk.
Guaranteed passive income, like a GIC or a HISA (high-interest savings account) might be guaranteed, and passive, but, the returns are abysmal.
Preferred Shares:
One of my investments that have been disappointingly and particularly volatile over the last year has been preferred shares, and although most of the preferred shares have recovered from their spring lows, I did watch as the preferred share market dropped by close to 30% in March.
The perpetual preferred share market (not fixed reset) shouldn’t be that volatile, but, it was in March 2020, and that was a perfect time for the opportunistic buyer to enter the market to take advantage of the dislocation.
As an example, a Royal Bank perpetual preferred share, which was earning a roughly 5% yield in early February, was trading at yields close to 8% at the March lows. Those types of returns are amazing, and anyone who picked up these preference shares in March is now sitting on a 30% capital gain, and a guaranteed 5% dividend – provided RBC doesn’t go out of business or discontinue their dividends.
Building Wealth and Passive and Residual Income Through Business Ownership
I’m on a constant hunt for business opportunities where I can earn long-term capital gains, ideally somewhere in the area of 10% IRR (or greater), and/or passive income streams that might not produce the same level of capital gains, but can produce a guaranteed yearly income stream. Preferred shares, real estate, royalties, and business income are examples.
Not only am I a passive income investor, but I am an active investor, as well.
Active business investing comes in two forms:
- Investing in a fund that invests in businesses, either through private equity, venture capital, or angel investing; and
- Investing in a business where I have some form of control, either by directly operating the business, or by being instrumental in some way in the success and outcome of the business itself.
Let me provide you with some examples of both:
Investing in An Angel and Private Equity Fund
I’ve set aside a certain amount of risk capital that I am prepared to “put to work,” and stretch on the risk opportunity spectrum. For example, I recently invested as a limited partner in an angel fund that has had some excellent early success. In fact, I interviewed the managing partner of the Ripple Ventures fund, Matt Cohen, on a recent podcast. You can listen here, where Matt talks about aiming for a 3 to 5 times return on investment.
I am also considering investing in a private equity fund, and am interviewing a couple of different fund managers to assess whether their investment thesis, past success, and management style are consistent with my goals.
Investing in a Private Business Where I Have Control Over the Outcome
I am an entrepreneur at heart. I’ve been an entrepreneur since I was a young teenager, and other than two three-month stints when I was 19, and 21, I haven’t ever had a job. Frankly, I’m probably not employable.
I enjoy investing. I also enjoy running a business and being an entrepreneur.
And therein lies my personal dilemma.
I wrote about my internal conflict a few weeks ago where I almost bought a business. I was hours away from signing the paperwork but caught myself just in time and fortunately, I didn’t sign. The business would have been way too hands-on for me, and although the business idea was sound, I just wasn’t comfortable with how much of my time it would take.
Having said the above, and although I didn’t buy that small business, I continued to look for a small business that would be in alignment with my return expectations, and more importantly, in line with both my time and personal commitments.
I’m looking for an opportunity that I can run somewhat passively, where I can put a team in place, obtain excellent capital gain and passive income returns, and not have it consume my time beyond 10 to 15 hours per week. I wrote about that here: How to Make a 600% Return on a Business Investment Inside 24-Months, and Compare Returns using IRR
What I decided to start is a platform ventures based business that buys online communities including blogs, forums, and review sites in the business, finance, lifestyle, and pets markets.
I own three blogs at the moment, and I just bought my fourth. I expect to “officially” take possession of that blog in the next week or two, and when I do, I will share the information with you.
My goal, in the as-yet-to-be-named venture, is to own twenty or so blogs in the next two years and to have a team in place that can manage the writing, SEO, advertising, and day-to-day management. I expect to have my first two hires in the next month.
As an example of one of the blogs I just bought (I will share more details in a few weeks once the deal is completed), is a small blog with profits of approximately $3,000 per month. I paid $72,500 for the blog itself.
I expect that through some effort, we can get the profits to $4,000 per month inside three months.
I’m in the process of hiring two individuals: 1. a virtual assistant/writer for a full-time position to help run the business, and 2. a full-time graphic designer with skills in HTML/CSS, affiliate marketing, and landing page optimization/CRO.
Once the team is in place, I plan to buy more blogs, and continue to expand the team of writers, SEO experts, designers, and so on as required.
As long as the business continues to grow, I will continue to buy, and start, more blogs and forums.
My role throughout will be strategic, and not tactical. I enjoy writing for this blog, thekickassentrepreneur.com, and will continue to do so because I find writing to be cathartic, and it helps me formulate my thoughts. Beyond that, I will look for new ideas, help build the business, and continue to manage my other investments.
There is clearly some inherent risk involved with building and/or buying a business, but if you’re looking to create wealth, have an interest and capacity for entrepreneurship, enjoy the challenge, and understand how to manage and mitigate risk (all of which I am still learning by the way), then buying or starting a business could be the way to go.
And bringing this back full circle to how I started this article, I am looking to build streams of passive income. Operating a business is one way. It certainly has its challenges, but can also bring big rewards if done properly.
If you enjoyed this article, you might also enjoy: How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club
And this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.
You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation. You can subscribe here.
Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.
