Creating an Ideal Portfolio to Live Off Your Investments

Today I had someone ask me what I would do if I had inherited $800,000 and could invest it in anything but cryptocurrencies to try to make over $60,000 a year in income. Of course, I protested that cryptocurrencies were obviously the best investment right now! But after carefully consideration I started to put together a plan in my mind. If I had $800,000 right now, first of all I would never be an employee again in my life. My new full time job would be to invest that money wisely, and learn everything I could, and meet all the right people I'd need to meet to make sure my investments did well. Then once the money was invested and became low maintenance I'd turn my focus to creating a system to monitor those investments once a month and rebalance them as needed, while continually scanning the markets for warning signs, or new opportunities.

So what would I invest in? First of all, retirement accounts were ruled out because the investments weren't for some later time, but the income would be used year to year. One of the first choices is real estate. Real estate has the most favorable tax laws to build and preserve wealth when you take full advantage of LLCs and the allowable tax deductions. I wouldn't put all of my money into real estate though. Since my goal is to make $60,000 a year, I would look for a property that could make at least half of that in Net Operation Income. I happen to live in Northeast Ohio where you can buy a multi-family property that has 6 to 8 units for around $300,000 and will produce an NOI of over $30,000 a year. For lack of active listings right now and time to find them, you could also buy 2 properties that were 3 or 4 units to make the same goal of $30,000 a year. Here is an active listing of a 3 unit that earns over $15,000 a year with a purchase price of $112,000.

https://www.redfin.com/OH/Barberton/92-W-State-St-44203/home/75526723

This is pretty representative of the types of investment properties that can be found in northeast Ohio. Of course I wouldn't pay for the property all in cash up front. Half of the tax advantages and leverage of buying real estate comes from using Other People's Money. This will cut into your cashflow. Instead of $15,000 a year, it may only be $7,000 a year of profit, BUT this money will be TAX FREE. You get all the price appreciation of the property, and all the tax benefits and deductions, but someone else is paying your loan. Plus you'd only need to put about $30,000 of your $800,000 into this particular property. Let's say you only put about $100,000 of your money into real estate which could be 3 properties, 2 properties, or even just one depending on what is on the market at the time. Now you are making $20,000 a year from your real estate investments. With 1/8th of your total money to invest you could already be making more than 33% of your target goal. Real estate has many other advantages for leverage such as home equity lines of credit, cash-out refinancing, and 1031 exchanges. These options for leverage give you ways to increase your monthly cashflow without increasing your tax bill.

So we still have $700,000 to invest to try to make $40,000 a year. Ideally the investments will pay out at least once a month or once a quarter. What will we look at next? I personally am a fan of peer-to-peer lending. One issue with peer-to-peer lending is that some platforms only offer unsecured loans. If the borrower fails to pay back the loan, then the lender has no collateral to sell in order to recover their lost funds. This is why I prefer peer-to-peer lending sites that use collateral to secure the loan. In particular, many sites now use real estate to back the loans. The lender can foreclose on the property if the borrower does not pay back the loan. As a case study lets use the website www.peerstreet.com . They offer investors 6% to 12% returns on loans backed by real estate with a term of 1 year. You can invest as little at $1,000 in each loan, and then space out your investments so you are getting money back each month. As the lender, Peer Street can foreclose on the borrowers to recover your funds (although fees may be involved in this). Another options for crowdfunding real estate investments is Fundrise. One of their investments as a sample pays out an 8% yearly dividend. https://fundrise.com/reits/heartland-ereit/view
Fundrise also lets you gain a part of the appreciation in the value of the properties themselves plus the dividend being paid out. Then there are traditional REITs you can invest in. For example, Gladstone REIT pays out a monthly dividend which is currently 7.2% yearly. They lease commercial real estate to businesses and pass on their profits to investors.
http://ir.gladstonecommercial.com/dividends.cfm

Let's say we put $80,000 into some combination of real estate lending, crowdfunding, and REITS, and these return at least 6% a year in monthly or quarterly payouts. That would be $4,800 in income a year. So now we are making $24,800 a year, and still have $620,000 to invest. What other opportunities can we find for earning passive income?

One thing that we can count on in the future is that people will keep using energy. Utility companies will be around in some form making power, although the source of the power may be shifting to more renewable energy. Utility companies often pay attractive dividends to investors. One type of investment is in oil & gas pipeline companies called Master Limited Partnerships or MLPs. As a case study we'll look at Alerian MLP ETF (AMLP). It pays a quarterly dividend of 7.4% annualized. But since their is a 1.4% yearly fee for holding this fund we'll say the dividend is really about 6%. Master Limited Partnerships own the pipelines which charge transmission fees for oil and gas producing companies to get what they produce to customers. As long as people are burning oil and gas for heat and energy, and the wells are producing more, MLPs will keep paying out dividends.
http://www.alpsfunds.com/distributions/AMLP

Let's throw $40,000 at this. We'll still have plenty of money left and I still have plenty of ideas! This would get us $2,400 a year for a total of $27,200 a year now, and we still have $580,000 left to invest.

Another great dividend sector right now is online lenders and preferred securities companies. In this group we'll put companies like Nuveen Preferred Securities (JPS), Two Harbors Investment (TWO), and Annaly Capital Management (NLY). Nuveen is currently paying a monthly dividend with a 7.15% yearly yield, while TWO & NLY both pay a quarterly dividend with a 10% yearly yield. If we put $60,000 into each of these companies for a total of $180,000, that would create $16,290 of yearly cashflow. This brings our total yearly cashflow to $43,490, and we still have $400,000 left to invest.

Another similar type of investment is mortgage REITs. One fund doing this is VanEck Vectors Mortgage REIT Income ETF (MORT) which pays a quarterly dividend. A mortgage REIT pays out the returns from mortgages back to investors. The current yield is 9.39% and it has yearly fees of 0.57%. This rounds out to a return of roughly 8.8% a year. If we put $50,000 into this fund it would pay out $4,400 a year. Our total is now $47,890 with $350,000 more to invest.

Another investment I like is in owning part of the stock exchanges. It is better to own the casino than to try to beat a game where the odds are against you. In many ways, that is how the current stock market is. You are playing against high frequency trading robots that can see your order before they hit the market and buy or sell before you do. Virtu Financial is the company that owns the high frequency trading robots and 'makes' the markets. Whens they filed to be a public company in 2014 it was revealed that their trading robots made a profit in 1,277 out of 1,278 trading days. Making markets (read: rigging markets) must be a good business! Virtu Financial trades under the stock symbol VIRT and pays a 6% yearly dividend in quarterly distributions. Let's buy $40,000 of this stock since rigging markets will stay in style for many years to come. This will create $2,400 in yearly income. Our total is now $50,290 in yearly income with $310,000 left to invest.

Now that more than 60% of our total portfolio is in stocks and real estate, it is time to look at bonds. In particular, municipal bonds that are tax-exempt and corporate bonds that will pay a higher yield than treasury bonds. You can buy municipal bonds from a normal brokerage account with companies like eTrade or TD Ameritrade. In Ohio, there are municipal bonds offered for the construction of projects like public hospitals or universities. Long term bonds like this can yield 3.5% that is tax-exempt. $60,000 invested in munis will earn you $2,100 a year and when the bond expires you get the initial investment back. Now we have $250,000 left and are earning $52,390 a year.

Corporate bonds can be a very risky investment if the company goes bankrupt before the bond will expire. You need to choose strong companies with a business model that will survive into the future. Bonds for Sears Roebuck are yielding 16% to 18% right now, but the company is in serious trouble and will likely be bankrupt before 2027 and 2028 when those bonds expire. But to simplify things you can buy an ETF that holds hundreds of different corporate bonds like iShares iBoxx High Yield Corporate Bond ETF (HYG). The yield on this fund is 5% and it has a 0.5% annual fee. With $50,000 invested in this fund it will pay out monthly distributions for $2,250 a year. The income total is now $54,640 with $200,000 left to invest. Our $60,000 goal is getting closer.

Looking more at corporate bonds that are more than 20 years to expiry there are still some attractive options with yields over 5%. Corporate bonds are listed by something called a CUSIP symbol which is 9 digits. Some examples of strong companies with decent yielding bonds are Kinder Morgan (494550BF2), Hewlett Packard (428236BR3), & Time Warner (88732JAY4). $50,000 could be invested in these bonds yielding 5% to earn $2,500 a year paid out semi-annually. The total income is now $57,140 with $150,000 left to invest.

To round out our bond holdings we'll use TLT which is an ETF that holds US Treasury bonds with more than 20 years to expiration. It yields roughly 2.4% after fees. We'll allocate $125,000 to this ETF which will pay out $3,000 a year in monthly distributions. Now we are over our $60,000 income goal making $60,140 a year, but still have $25,000 left to invest!

Now I know I said were weren't supposed to be looking at cryptocurrency investments but we've already secured the income we need with the capital available so why not try to boost our earnings with some riskier investments? My two favorite investments right now that are producing daily income are Hashflare bitcoin cloud mining contracts and BitConnect lending. For checking the profitability of cloud mining I use the website CryptoCompare. It gets updated regularly and has profitability calculators that work fairly well.

https://www.cryptocompare.com/mining/#/contracts

Right now the lifetime Bitcoin contracts at Hashflare have the cheapest price per TH/s. These contracts will continue to pay out until they are unprofitable for 21 consecutive days at which time the contract will terminate. If at any time the mining operations are not profitable, the payouts will stop for that period, but as soon as it becomes profitable again they will turn back on (so long as 21 days in a row have not passed). Right now 1 TH/s of bitcoin mining power pays out 94 cents before fees. The contract costs $120 from Hashflare. The daily fee that Hashflare takes is 35 cents giving you a profit of 59 cents a day. This comes out to a breakeven on the investment of 202 days. All earnings after that are profit. Profits will begin to decay as the network difficulty increases because more miners, or more powerful mining hardware join the network, and the total hashrate of the network increases. A network difficulty chart I use is from Coinwarz.com
https://www.coinwarz.com/difficulty-charts/bitcoin-difficulty-chart

You can see in this chart found at the link above that 4 months ago the Bitcoin network difficulty was 499 billion, and now it is 860 billion. An increase of about 72%. But on April 8th the price of 1 bitcoin was around $1,200, and now it is $3,200 at the time of this writing. An increase of 266%. So long as the price of bitcoin rises to match the increase in network difficulty then the mining contract can continue indefinitely, but if for some reason the price of bitcoin crashes while the network difficulty continues to increase then the contract could terminate before you earn all of your initial investment back. It is basically a leveraged investment that the price of bitcoin will rise.

Let's put $15,000 into mining contracts and say that it pays out 50 cents a day per TH/s. That would be $62.50 a day in earnings and $22,812.50 in a year. Not bad! But as discussed above there are certain assumptions about the price of Bitcoin and the network difficulty that may not hold true for a year from now. It is very likely that the payouts will be less than $22,000 total a year from now, but they could continue for much more than a year.

Another cryptocurrency investment that has my attention right now is BitConnect lending. I started doing lending with $1,150 on July 2nd and have increased it to $3,190 invested as of today. So far in about 35 days I've earned $563. That is a pretty good return for so short of a time. The current 30 day average return for each day is 1.11%. That means you are earning 1.11% each day for the money you lend to their trading robot. It seems more reasonable to use 0.75% as a longer term average which is still a ridiculous return. Let's use the last $10,000 and scrape together $10 to do a $10,010 loan on BitConnect since you earn a guaranteed 0.25% interest a day for doing a loan equal or greater than $10,010. The loan period lasts 120 days and then you get your initial investment back. Let's say that you earn 1% on this investment on average each day (0.25% guaranteed plus 0.75%). That would be a return of $100.10 a day and $12,012 after 4 months when you get your $10,010 back. You could then do this 2 more times in a year. So from an initial $10,010 you can earn $36,036 in a year without reinvesting anything because you are using the payouts for day to day expenses.

So we used $775,000 to earn $60,140 a year, and then with the $25,000 left over we were able to earn $58,848 a year. To me it is very clear that cryptocurrencies are the best investment around right now!

If you are interested in using Hashflare, my referral code is https://hashflare.io/r/65498E42

If you are interested in trying BitConnect, my referral code is https://bitconnect.co/?ref=kylesalisbury

Please post your comments below on any investments that may earn better daily or monthly income than the ones I've mentioned. I'd love to learn about new opportunities for investing. The goal is to avoid trading and focus on investments that you can hold while continuing to receive payouts.