3 Passive Income Assets The Rich Are Buying Right Now (While You’re Working)

The video outlines three primary ways to generate passive income, contrasting the approach of the majority who work for a salary with the wealthy who acquire assets that pay them continuously. These methods require sacrifice and capital but offer the potential to replace active income.

The first asset discussed is physical real estate, which, while demanding the most in terms of money and time, offers significant cash flow potential. This can be achieved by renting out properties, with options ranging from buying a standalone house to a multi-unit dwelling where the owner occupies one unit and rents out the others, effectively subsidizing their mortgage.

The second and third assets are stocks and lending money to the government, respectively. Stocks can generate income through dividends, with options including individual companies, exchange-traded funds (ETFs), and international investments, each carrying different risk profiles. Lending money to the U.S. government, through treasuries or treasury ETFs, is presented as a lower-risk option for generating steady income, though it's not a primary wealth-building strategy. The key to success across all these methods is consistent investment and a long-term perspective.

The Wealthy's Approach: Assets vs. Salaries [0:00]

• The majority of people work hard for a salary, while the wealthy work hard to buy assets that pay them 24/7.
• When you stop working at a salary, your income stops; when you stop working with assets, you continue to get paid.
• The income from assets can replace income from a job, reducing reliance on a 9-to-5.
• Building these assets is not easy, requiring money and sacrifice, but it is possible.

This is the game that they never taught us in school.

Physical Real Estate as an Asset [0:42]

• Physical real estate is the first passive income-producing asset, requiring the most money, time, and effort, but it is a personal favorite.
• Example: A $180,000 house can be bought and rented out for $1,900 a month, totaling $22,800 in annual revenue.
• Expenses include property taxes, insurance, maintenance, management fees, and vacancy costs.
• If 50% of revenue goes to expenses, the profit could be around $11,400 annually.
• Alternative Strategy (House Hacking): For those without $200,000, a multi-unit primary residence (duplex, triplex, or 4-unit building) can be used.
• Example: A $600,000, 4-unit building. You live in one unit and rent out the other three for $1,300 each per month, generating $46,800 in rent annually.
• After expenses (property taxes, insurance, maintenance, management, vacancy), you might have $23,400 left before mortgage.
• With a 20% down payment ($120,000) and a mortgage of $480,000 at 6.5% for 30 years ($3,000/month or $36,000/year), your out-of-pocket cost to live in the property is around $1,000 a month.
• After living in the property for at least a year (as required by most mortgage contracts), you can move out and rent out your unit for $1,300, making a profit of $300 a month.
• This strategy allows for building a real estate portfolio by using your primary residence as a tool.
• Over time, rents can increase, further boosting income.

This is where things get interesting because when you buy this primary residence, you have to live there. But the question is, how long?

Stocks as an Asset [6:03]

• Stocks are the second asset wealthy people acquire for passive cash flow.
• Companies make profits and can reinvest, save, or pay shareholders dividends.
• Example: Owning a share of McDonald's makes you an owner. McDonald's profits can be reinvested or distributed as dividends to shareholders.
• A dividend is a cash payment from a company for owning its stock, typically paid quarterly.
• The amount of dividend received depends on the number of shares owned.
• Generating Cash Flow in Stocks:
  • Individual Stocks: Investing in specific companies.
    • Example: Verizon (around 6.2% dividend yield), Chevron (around 4.3%), and Merck (around 3.8%). Investing $100 in Verizon could yield $6.20 annually.
    • The strategy involves consistently investing and reinvesting dividends to acquire more shares, increasing income over time.
    • A mistake is choosing stocks based solely on the dividend number; a good asset should also increase in value and grow its profits, leading to dividend growth.
    • Example: Verizon's stock value decreased by 25% over 5 years, despite a strong dividend. Investing in individual companies carries high risk and potential reward; companies can go bankrupt.
  • ETFs (Exchange-Traded Funds): A basket of stocks offering diversification and lower risk.
    • Example: NCL (NOBL) invests in S&P 500 companies that have increased dividends for at least 25 years (dividend aristocrats), paying around a 2% annual dividend.
    • VYM (Vanguard High Dividend Yield ETF) invests in a broad basket of high dividend-paying stocks in the U.S.; the speaker is personally invested in VYM and it pays around a 2.6% annual dividend.
    • MORT (a REIT) focuses on mortgage-related real estate investment trusts and pays a high 12% dividend, but carries more volatility and risk.
  • International Investments: Investing in companies in other countries.
    • Example: VBYMI (Vanguard International High Dividend Yield ETF) focuses on international stocks with higher than average dividend yields, often in emerging markets. It pays over 4% annually.
    • LVHI focuses on developed countries outside the U.S. for more stable income, paying around 3.6% annually.
• The key is to "Always Be Buying" (ABB) consistently to accumulate shares and grow income streams.

The idea with dividend investing is to keep investing your money consistently. That way, you can work to acquire more shares of this thing that keeps paying you dividends.

Lending Money to the Government [16:14]

• The third way to generate passive cash flow is by lending money, specifically to the U.S. government through treasuries.
• The U.S. government funds its spending, including infrastructure and healthcare, through debt, borrowing from individuals.
• Treasuries: Loans to the U.S. government, considered the safest form of investment ("risk-free").
• The government can always repay debt by raising taxes or, in complex scenarios, working with the Federal Reserve to print money.
• Printing money can lead to inflation, devaluing the repayment.
• Treasuries generate a steady stream of income to combat inflation with relatively low risk.
• Warren Buffett holds billions in treasuries as a safe place to park money and earn interest.
• Ways to invest in treasuries:
  • TreasuryDirect.gov: Directly lending money to the government, with interest rates varying based on the investment term.
  • Short-Term Treasury ETFs: E.g., SGOV. These trade on the stock market and provide monthly interest payments.
    • SGOV is a short-term treasury ETF, meaning its price is stable, and it generates monthly interest payments.
    • The interest is generally not subject to state or local taxes, which is beneficial for those in high-tax states.
• Risks:
  • Interest rates depend on Federal Reserve Bank policy; if rates fall, the yield from these investments will also fall.
  • Not FDIC insured, unlike bank accounts. If the government defaults, the money might not be recovered.
• This is not a primary wealth-building strategy but a way to generate interest with low friction, serving as an alternative to high-yield savings accounts.

It is a loan to the United States government. This is called a treasury. And every economics textbook will tell you that a treasury is the safest form of investment.

The Path to Passive Income [20:50]

• To generate cash flow that replaces active income, you need to invest extra money consistently over time.
• A "decade of sacrifice" (10 years of consistent investing) can lead to a unrecognizable transformation with a new income stream.
• This income can be used to live off of, supplement your lifestyle, or buy more income-producing assets.
• The process is relatively passive as you don't have to work in the asset itself, though oversight is still required.
• The video covered real estate, stocks (individual, ETFs, international), and lending to the government (treasuries, treasury ETFs).
• Consistency, sacrifice, and a long-term aggressive approach are key.

And if you stay aggressive with this, in 10 years, I call it a decade of sacrifice, you will not be able to recognize yourself because you'll have a whole new stream of income.

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