A Risk Score of 10 means no risk. A Return Score of 1 means the returns are horrible compared to the risk-free rate. A Feasibility score of 10 means everybody can do it. A Liquidity Score of 1 means it’s very difficult to withdraw your money without a massive penalty. An Activity Score of 10 means you can kick back and do nothing to earn income. To make the ranking as realistic as possible, every score is relative to each other. Furthermore, the return criteria is based off trying to generate $10,000 a year in passive income.
One aspect you might want to add to your scoring is “inflation protection”. At one end, bonds and CDs generally pay a fixed nominal coupon that doesn’t rise with inflation. Stock dividends and Real estate rents (and underlying property value) tend to. Not reallly sure how P2P lending ranks- though I suppose the timeframes are fairly short (1 year or less?) and therefore the interest you receive takes into account the current risk free rate + a premium for your risk. Now that I think about it, P2P lending probably deserves a lower score in the activity column than bonds too (since you probably need to make new loans more often).
Hey Mike! Love this article. Recently, I paid off my student loans and am crazy focused on creating multiple passive income streams. Currently, all my passive income comes from real estate and because of your great articles on the subject I called to check out refinance options! I had no clue about CD laddering, dividend investing or P2P lending until two weeks ago when I started doing my research on where to put my hard earned money. I had been just saving it but when I looked at the terrible 0.01% return I said forget it! 2 % for me is a great way to start. It is better than what I have been getting outside of my real estate. Also, creating products is a must! I’m working on this type of royalty too. I find it so exciting to learn how to use your money to make money. Thanks and I will be sure to link to you when I start my blog!
5. Subscription Models: Subscription models/Customer Hubs/Member Areas – These are businesses like Netflix, Costco, Sam’s Club. The subscription model has become almost its own category. But it has considerable cost and you must continuously create and cultivate content and value. The income is residual and combines loyalty and education with community.
ie first you need to haul ass and do something crazy, eg write a quality 20,000 word ebook (insanely not passive hahahah), but then you get to sit back and enjoy seeing PayPal sale messages pop up on your iPhone each morning as sale after sale after sale is made…on an ongoing basis and without any additional work. That’s some seriously Pina Colada flavored passive goodness!
Residual income models of equity value have become widely recognized tools in both investment practice and research. Conceptually, residual income is net income less a charge (deduction) for common shareholders’ opportunity cost in generating net income. It is the residual or remaining income after considering the costs of all of a company’s capital. The appeal of residual income models stems from a shortcoming of traditional accounting. Specifically, although a company’s income statement includes a charge for the cost of debt capital in the form of interest expense, it does not include a charge for the cost of equity capital. A company can have positive net income but may still not be adding value for shareholders if it does not earn more than its cost of equity capital. Residual income models explicitly recognize the costs of all the capital used in generating income.
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Residual income is calculated as net income less a charge for the cost of capital. The charge is known as the equity charge and is calculated as the value of equity capital multiplied by the cost of equity or the required rate of return on equity. Given the opportunity cost of equity, a company can have positive net income but negative residual income.