The Best Passive Income Streams in Kenya: Ranking 1-10
Below are the eight best passive income investments to consider. Each passive income stream is ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criterion has a score between 1-10. The higher the score, the better.
A Risk score of 10 means no risk. A Risk Score of 1 means
there is extreme risk.
A Return score of 1 means the returns are horrible compared
to the risk-free rate. A Return Score of 10 means you have the highest
potential of getting the highest return relative to all other investments.
A Feasibility score of 10 means everybody can do it. A
Feasibility score of 1 means that there are high requirements to be able to
invest in such an asset.
A Liquidity score of 1 means the investment is very
difficult to withdraw your money or sell without a penalty or a long period of
time. A Liquidity score of 10 means you can access your funds instantly without
penalty.
An Activity score of 10 means you can kick back and do
nothing to earn income. An Activity score of 1 means you've got to manage your
investment all day long like working a day job.
A Tax score of 1 means the investment is taxed at the
highest possible rate and there's nothing you can do about it. A Tax score of
10 means the investment is generating the lowest tax liability possible or you
can do things to lower the tax liability.
To make the ranking as realistic as possible, every score is
relative to each other. Further, the return criteria are based on trying to
generate $10,000 a year in passive income.
Best Passive Income Investment Chart
Let's look at my overall Best Passive Income Investments
ranking chart. It has recently been updated to account for the ever-changing
economic environment. Interest rates will likely stay low for a while, which
makes generating meaningful passive income harder.
Compared to the previous best passive income investments
chart, Fixed Income / Bonds moved down from 3rd best to 5th best. While
Physical Real Estate moved up from 5th best to 3rd best partly due to higher
net rental yields and lower prices. Inflation is elevated in 2023, but is
finally coming down.
Dividend (stock) investing is still the ranked the best
passive income investment. However, it may not be the best for you given its
higher volatility and lower relative yields.
Private real estate funds, on the other hand, is much
less volatile and provides even higher yields. During bear markets, private
real estate funds like those from Fundrise tend to outperform.
We're past the bottom of the latest real estate downturn and
I expect real estate prices to move higher in 2024 and beyond. Mortgage rates
are declining and there is tremendous pent-up demand for real estate, which is
in undersupply by 5+ million homes in Kenya.
Best Passive Investment Rank #8: Hard Money Lending /
Peer-to-Peer Lending (P2P)
Lending money directly to friends, family, and strangers for
passive is tough to do. Friendships and relationships are often ruined because
of money. Therefore, I don’t recommend doing it unless the person you care
about is desperate. In such a situation, it would be best to provide an
interest-free loan or a gift.
The biggest problem with P2P lending is people not paying
investors back e.g. borrowers default on their loans. There's something that
just doesn't sit right when people break their contract obligations.
Over time, the P2P industry has seen its returns shrink due
to higher competition and more regulation. As a result, I believe making money
through P2P investing is one of the worst ways to generate
passive income today.
Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity:
7, Taxes: 5. Total Score: 30
Best Passive Investment Rank #7: Private Equity Or Debt
Investing
Private equity and venture capital investing
can be a tremendous source of capital appreciation with the right investments.
If you find the next Google, the returns will blow every single other passive
income investment out of the water. But of course, finding the next Google is a
tough task since most private companies fail. Further, the best investment
opportunities always go to the most connected investors.
The most liquid types of private equity investments are
those investing in equity or credit hedge funds, real estate funds, and private
company funds. Private debt investments include venture capital and real estate
funds as well. There are usually 3-10-year lockup periods, so the Liquidity
score is low. These funds should at least provide for some semi-regular passive
income distributions.
The least liquid type of private investment is when you
invest directly into a private company. You could be locked up forever and
receive zero dividends or distributions. I don't recommend individual investors
make angel investments. You'll get the worst deals and you'll have the
least amount of edge.
Access to private investments are usually restricted to
accredited investors ($250K income per individual or $1 million net worth
excluding primary residence), which is why the Feasibility Score is only a 2.
But the Activity Score is a 10, because you can't do
anything even if you wanted to. You're investing for the long term without the
daily noise, which is why I enjoy investing in private funds, even though
fees are higher. The Risk and Return score greatly depends on your investing
acumen and access.
Investing In Artificial Intelligence
One of the most interesting funds I'm allocating new capital
toward in 2024 and beyond is the Fundrise Innovation Fund. The
Innovation fund invests in:
- Artificial
Intelligence & Machine Learning
- Modern
Data Infrastructure
- Development
Operations (DevOps)
- Financial
Technology (FinTech)
- Real
Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial
intelligence, which I'm extremely bullish about. The investment minimum is also
only $10, as Fundrise has democratized access to venture capital as well. Most
venture capital funds have a $200,000+ minimum.
The issue with venture capital investing is earning passive
income. You likely won't earn any passive income or distributions for 5-10
years given the fund is investing in highly illiquid private companies.
Gaining $10,000 a year in private equity investing is
difficult to quantify unless you are investing in a real estate or fixed income
fund. Such funds generally target 8-15% annual returns, which equates to a need
for $83,000 – $125,000 in capital.
Risk: 6, Return: 8, Feasibility: 3, Liquidity: 3, Activity:
10, Taxes: 6. Total Score: 36
Best Passive Investment Rank #6: Certificate of Deposit
(CD) / Money Market Funds
Thanks to higher interest rates, CDs and money market funds
are now paying higher rates. Anybody can go to their local bank and open up a
CD of their desired duration. Furthermore, CD and money market accounts are
FDIC insured for up to $250,000 per individual and $500,000 per joint account.
Today you can typically get a money market account paying
~5%. Another great option to take advantage of is CIT Bank's Platinum
Savings account offering 5.05% for balances of $5k+. Pretty incredible
thanks to so many Fed rate hikes. Take advantage!
It still takes a tremendous amount of capital to generate
any meaningful amount of passive income with savings now. To generate $10,000 a
year in passive income at 5% requires $200,000 in capital. But at least you
know your money is safe, which is great during bear markets.
In a high interest rate environment, it's easier
to generate more passive income. As a result, it's also easier to achieve
financial independence too. With risk-free income at 5%+ and core CPI below
3.5%, we're currently in an excellent environment for savers.
Conversely, in a low interest rate environment, it's prudent
to lower your safe withdrawal rate in retirement and/or build
a bigger net worth before you retire. It takes a tremendous amount more in
capital to generate the same amount of risk-adjusted income today.
Risk: 10 (no risk), Return: 1 (the worst return),
Feasibility: 10 (anybody can open up a savings account). Liquidity: 6 (savings
are easily accessible, but not CDs without a penalty). Activity: 10 (you don't
have to do anything to earn passive income. Taxes: 5 (interest income is taxed
as normal income). Total Score: 42
Best Passive Investment Rank #5: Fixed Income (Bonds)
Bond yields are attractive, for now. After 35+ years of
inflation and interest rates going down, bonds had one of the worst years in
history in 2022, but rebounded in 2023.
The 10-year yield was at only 0.51% in August 2020. But now,
the 10-year bond yield is at ~4.1%. I would take advantage of this temporary
spike in bond yields and buy Treasury bonds with 3-month,
6-month, 9-month, and 1-year durations. If and when inflation roles over,
you'll be glad you own Treasury bonds with 5%+ rates.
Long term, I believe interest rates will stay low for a long
time. Just look at Japanese interest rates, which are negative (inflation is higher
than the nominal interest rate).
Bonds usually provide a good defensive allocation to an
investment portfolio, especially during times of uncertainty. If you hold a
government bond until maturity, you will get all your coupon payments and
principal back.
But just like stocks, there are plenty of different
types of bond investments to choose from. Further, the aggregate bond
market was down about 14% in 2022, the worst year ever. Hence, even bonds are
not always safe havens.
Anybody can buy a bond ETF such as IEF (7-10 Year Treasury),
MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total
Return Fund). You can also buy individual corporate or municipal bonds. Just
know that with bond funds, there is no maturity date. Hence, you will
experience higher principal risk if you need to sell.
Municipal bonds are especially enticing for higher-income
earners who face a high marginal tax rate. You can also directly buy Treasury
bonds through your online brokerage platform.
Main Concern With Bonds and Bond Funds In Particular
The main concern for bond funds is that their values go down
when the Federal Reserve hikes interest rates. That said, so long as you
hold individual bonds to maturity, you should get your initial
principal back along with all the coupon payments if you are buying a highly
rated bond e.g. AA.
Bonds are usually investment to help decrease volatility in
your portfolio. But if you own individual bonds and have to sell before
maturity, you could lose a lot of money if interest rates rise during the
holding period.
Risk: 6, Return: 2, Feasibility: 10, Liquidity: 7. Activity:
10. Taxes: 8. Total Score: 43
Best Passive Income Rank #4: Creating Your Own Products
If you’re a creative person, you might be able to produce a
product that’s able to generate a steady flow of passive income for years to
come. At the extreme, Michael Jackson makes more dead than alive. This is due
to the royalties his estate makes from all the songs he produced in his career.
Since Michael's death, his estate has made over $2.5 billion according to
Forbes.
Of course, it’s unlikely any one of us will replicate the
genius of Michael Jackson. But you could produce your own eBook, traditional
book, e-course, award-winning photo, or song to create your own slice of
passive income.
Example Of A Product
In 2012, I wrote a 120-page eBook about severance
package negotiations. Today, the book is in its 6th edition for 2023 and is
240-pages long. It regularly sells about ~50 copies a month at $87 – $97 each
without much ongoing maintenance.
Another way to think about how profitable creating a product
can be is to look at the amount of capital it would take to generate the same
about of earnings. For example, to replicate the ~$40,000 a year in passive
income I can get from the book, I would need to invest $1,000,000 in an asset
that generates a 4% yield. To earn $10,000 a year in passive income would
therefore need roughly $250,000 in capital.
Who would have thought a book about engineering your layoff
could regularly generate so much revenue? We’re so busy with our jobs that our
childhood creativity sadly vanishes over time. Now that millions of jobs are at
risk, the book has become a better seller.
Another Example: Royalty Payments
I published an instant Wall Street Journal bestseller, Buy
This, Not That: Spend Your Way To Wealth And Freedom. The book took two
years to write and has been reviewed and revised 15 times by three professional
editors. I figured why not write a great personal finance book during the
pandemic.
Once the book sells enough copies to cover my book advance,
I will make a 13% royalty based off each hardcover sale. I believe the book
will provide at least 100X more value than the cost of the book. You can pick
up a copy on Amazon, where it currently has the best sale.
Leverage the internet to create, connect, and sell. The
startup costs are low and it's easier than ever to launch your own site. The
only main risks are lost time and a wounded ego.
Here's my step-by-step guide on how to
start your own profitable site in under 30 minutes. You want to build an online
business that can't get shut down.
Below is a real income statement of a personal finance
blogger who started his website on the side while working.
If you are a constant daydreamer, creating your own product
is one of the best ways to go. The margins can be extremely high once your
product is produced. The only thing you need to do is regularly update the
product over time. If you have a great product, the upside is enormous.
Risk: 8, Return: 8, Feasibility: 8, Liquidity: 6, Activity: 7,
Taxes: 7. Total Score: 44
Best Passive Investment Rank #3: Physical Real Estate
Real estate is my favorite asset class to build
wealth for the average person because it's easy to understand,
provides shelter, is a tangible asset, doesn't lose instant value like stocks
overnight, and generates income. When I was in my 20s and 30s, I thought owning
rental properties was the best passive income investment.
The only bad thing about owning physical real estate is that
it ranks poorly on the Activity variable due to tenants and
maintenance issues. You can get lucky with great tenants who are
self-sufficient and never bother you. Or you can be stuck with tenants who
never pay on time and throw house-damaging parties.
Maintenance issues can be an ongoing headache without
proper preventative maintenance. For example, your roof could leak during the
next Bomb Cyclone. Or your water heater could burst and flood your basement.
Both have happened to me before! As a result, the older and wealthier you get,
the less you'll want to own too many physical rental properties.
Owning your primary residence means you are
neutral the real estate market. Renting means you are short the real estate
market. Only after buying two or more properties are you actually long real
estate. This is why everybody should own their primary residence as soon as
they know they want to stay put for 5-10 years. Inflation is too powerful a
force to combat.
In order to generate $10,000 in Net Operating Profit After
Tax (NOPAT) through a rental property, you must own a $50,000 property with an
unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental
yield, or a more realistic $200,000 property with a 5% net rental yield.
Generating High Rental Income Is Tough On The Coasts
In expensive cities like San Francisco and New York City,
net rental yields (cap rates) can fall as low as 2.5%. This is a sign that
there is a lot of liquidity buying property mainly for appreciation. Income
generation is second. This is a riskier proposition than buying property based
on rental income.
In inexpensive cities, such as those in the Midwest and
South, net rental yields can easily be in the range of 7%+, although
appreciation may be slower.
I'm bullish on the heartland of Kenya real estate and have been actively buying multifamily real estate there through real estate crowdfunding and specialty REITs, which we will discuss more below. Owning rental property in an elevated inflation environment is an optimal choice. Renting is not.
Real Estate Has Great Tax Benefits
The tax benefits of owning physical real estate are very
attractive. The first $250,000 in gains is tax-free per individual. If you're
married and own the property together, then you can receive $500,000 in
tax-free gains upon sale.
Then there's the ability to exchange a property you own for
another property via a 1031 Exchange so you don't have to pay
any capital gains taxes.
If you own rental property, you can take non-cash amortization
expenses to reduce any rental income taxes. Owning property over the long term
is one of the most proven ways to build wealth and generate passive income for
the average Kenyan.
The value of rental income goes up when interest rates fade.
Therefore, I think buying rental properties over the next 12
months is good as interest rates and property prices decline.
Risk: 8, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6,
Taxes: 10. Total Score: 45
Best Passive Investment Rank #2: Real Estate
Crowdfunding, REITs, Real Estate ETFs
Owning physical real estate has been my key source for
achieving financial freedom. My rental properties generate about $120,000 after
expenses a year, or roughly a third of my overall passive income streams.
However, now that I'm older and have two young children, I really want to
minimize the time I deal with maintenance issues and tenants.
Therefore, I've been investing more of my capital in real
estate crowdfunding, REITs, and real estate ETFs. Real estate crowdfunding
enables individuals to buy a percentage of a commercial real estate project
that was once only available to ultra-high net worth individuals or
institutional investors.
Owning individual physical real estate is great, but it's
like going all-in on one asset in a particular location with leverage. If the
market goes down, your concentrated investment could lose big time if you are
forced to sell. Many did during the last financial crisis.
My favorite real estate investing platform is Fundrise.
Fundrise manages over $3.3 billion in assets and has 550,000+ clients. Fundrise
mainly invests in single-family and multi-family investment properties in the
Sunbelt, where valuations are lower and net rental yields are higher.
Work from home and migration to lower-cost areas of the
country is here to stay. As a result, I believe Fundrise is investing in the
real estate sweet spot for the next several decades.
Unlike other passive investments on the list, with real estate crowdfunding you at least have a physical asset as collateral. Further, the income and returns are 100% passive, unlike the semi-passive income generated from being a landlord.
100% Passive Real Estate Income Is So Nice
For those of you who dislike dealing with tenants and
maintenance issues, investing in real estate crowdfunding is wonderful.
In mid-2017, I sold my San Francisco rental property for
30X annual gross rent. I reinvested $500,000 of the proceeds in a real estate
crowdfunding portfolio. The goal was to take advantage of lower valuations
across the country with much higher net rental yields. Not having to deal with
maintenance issues and tenant problems has been wonderful.
Coastal city real estate has become too expensive. I expect
people and capital to naturally flow towards lower-cost areas of the country,
especially post-pandemic. The future of work is remote. Take advantage of a
multi-decade demographic shift inland.
Further, the performance of Fundrise's funds has
been relatively steady during stock market downturns. Therefore, if there is
another crash, Fundrise funds should outperform. Real estate is defensive
because it becomes more affordable as mortgage rates decline. Investors want
real assets that provide shelter and income.
Below are the latest returns from Fundrise compared to public REITs and the S&P 500. Notice the significant outperformance in 2018 and 2022, when bear markets occur. I enjoy investing in private real estate given there is less volatility and potentially outperformance during tough times.
To be able to invest in real estate, but 100% passively is a
great combination. You can invest in publicly-traded REITs as well for real
estate exposure. However, as we saw in the violent March 2020 stock market
downturn, REITs performed even worse.
Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity:
10, Taxes: 7. Total Score: 47
The Best Passive Investment Rank #1: Dividend Investing
The best passive income investment is dividend-paying
stocks. Dividend and value stocks are making a comeback after underperforming
growth stocks during the pandemic.
The “Dividend Aristocrats” are a list of blue-chip companies
in the S&P 500 that have demonstrated a consistent increase in dividend
payouts over the years. Names such as McDonald's, P&G, Sherwin-Williams,
Caterpillar, Chevron, Coca-Cola, and Sysco Corpare considered some of the best
blue-chip dividend stocks. But there are some dogs like AT&T.
Let’s say a company earns $1 a share and pays out 75 cents
in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the
next year the company earns $2 a share and pays out $1 in the form of
dividends. Although the dividend payout ratio declines to 50%, due to the
company wanting to spend more CAPEX on expansion, at least the absolute
dividend amount increases.
Dividend stocks tend to be more mature companies that are
past their high growth stage. As a result, they are relatively less volatile
from a stock context. Utilities, telecoms, and financial sectors tend to make
up the majority of dividend-paying companies. In 2022, the S&P 500 dividend
yield is about 1.8%.
Tech, Internet, and biotech, on the other hand, tend not to
pay any dividends. They are growth stocks that reinvest most
of their retained earnings back into their company for further growth. But
growth stocks can easily lose investors tremendous value over a short period of
time.
Pay Attention To Dividend Yields
To achieve $10,000 in annual passive income with a ~1.8%
S&P 500 dividend yield would require $555,000. Instead, you could invest
only $154,000 into AT&T stock given its 8% estimated dividend yield. But
the problem is that AT&T has been a terrible performer, which has caused
shareholders a tremendous loss in principal value.
It all depends on your risk tolerance. I give dividend
investing a 5 on Return because dividend interest rates are relatively low.
Further, the volatility is now relatively high.
One of the easiest ways to get exposure to dividend stocks
is to buy ETFs like DVY, VYM, and NOBL or index funds. Alternatively, you can
DIY and use Empower's free financial tools to manage your
wealth. The key is to invest consistently over time.
In the long run, it is very hard to outperform any index.
Therefore, the key is to pay the lowest fees possible while being mostly
invested in index funds. Dividend index investing is great because it is
passive and liquid.
However, given dividend rates are low compared to real
estate and volatility is high in stocks after a 12+-year bull market, the
Return score is lower than in the past. You need a lot more capital to generate
passive income with dividend-paying stocks and index funds.
Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity:
10, Taxes: 8. Total Score: 48
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