Imagine waking up in the morning, not to a buzzing alarm at an ungodly hour, but calmly and naturally to your circadian rhythm.
Then imagine instead of gulping down your breakfast and jumping onto the heaving, sweaty commuter train, you drink your coffee at leisure and take a gentle stroll in the park. Next, rather than working for 10 to 12 hours with colleagues you may or may not like, you take your children to the nursery and watch them play.
To many, this might sound unattainable. But there is today a growing minority of lucky folk who live this lifestyle. Why? It's essentially because they’ve reached financial independence. This means they no longer have to work and earn a salary to support their lifestyles. Instead, they have passive income streams that are sufficient enough to meet all their daily financial obligations and enable them to enjoy a life of peace and serenity.
What is passive income?
Income is cash (or cash equivalent) that you receive on a regular and recurring basis. It can normally be divided into 2 distinct categories: active and passive.
Active income requires an active effort to ensure its continuity. This means it can only be generated if you work on it. It is usually in the form of salary but can also include self-employment revenue or active business revenue.
Passive income is the opposite. It is generated with little to low effort. It means that the cash will reach your bank account whether your alarm goes off at 5 AM or not at all. Examples include interest, dividends, and rental income. Most of these examples are distributed monthly or quarterly. If the sum of your passive income exceeds your monthly expenditure then hooray! You’ve reached financial independence.
I like using the lawnmower analogy when comparing active and passive income. Imagine that you need to mow your garden lawn. Normally people just buy a manual or petrol mower, wait for the grass to grow, cut it and repeat the process over and over. It’s an active process that requires effort. No work means a snake-infested bush in your back garden. This is a form of active income.
However one day, a genius decided to put in the time, ingenuity and money to create a programmable robotic lawnmower. Suddenly instead of the constant sweat and toil, he had front-loaded all effort and expenditure. Now all he needs to do is to sit back, relax and let the robot do all the hard work. This is passive income.
An overview of the top 5 passive income streams
The quality of a passive income stream is driven by 5 key factors:
- Ease of establishment - How easy or difficult it is to establish the income stream, both in terms of time and capital investment
- Yield - This is the amount of income as a percentage of the initial capital/time/input
- Reliability - Whether the asset generates consistent levels of income or not
- Maintenance requirements - The level of ongoing effort required to keep the income level consistent
- Liquidity - How quickly the underlying asset can be sold without a significant drop in value
With these in mind, we will examine the five most popular passive income assets in Switzerland.
Property (direct)
Overview: Rent collection through ownership of real estate.
Example: Direct ownership of an apartment in Central Zurich
Ease of establishment: CHF 100,000 minimum
Income level: 2-4% yield of the invested capital. Higher if leveraged.
Frequency: Monthly
Reliability: High
Risk to capital: Medium
Maintenance: High
Liquidity: Medium
Leverage: Up to 60% of the LTV
Property (indirect)
Overview: Rent collection on leased properties. Ownership achieved through shareholding in a Special Purpose Vehicle (SPV)
Example: Le Bijou Owners’ Club
Ease of establishment: CHF 50,000 minimum
Income level: 7-14% yield of the invested capital.
Frequency: Annually
Reliability: High
Risk to capital: Medium
Maintenance: Low
Liquidity: Medium
Leverage: Up to 60% of the LTV
Equity
Overview: Dividend (corporate profit paid to shareholders) collection through purchase the equity of profitable public companies.
Example: UBS Swiss High Dividend Fund CH0127276381
Ease of establishment: CHF 1,000 minimum
Income level: 1.3-3% of the invested capital
Frequency: Quarterly/Biannually
Reliability: Medium
Risk to capital: High
Maintenance: Low
Liquidity: High
Leverage: Margin loans can be used although it is extremely risky
Fixed income
Overview: Interest/coupon payment through ownership of fixed-income assets (e.g. bonds, high-interest saving accounts).
Example: Le Bijou Bonds
Ease of establishment: CHF 1,000 minimum
Income level: 3-5% of the invested capital
Frequency: Quarterly, or Monthly (rare)
Reliability: Medium-high
Risk to capital: Medium
Maintenance: Low
Liquidity: Low
Leverage: None
Crowdfunding
Overview: Participate in peer-to-peer lending to private individuals or smaller companies and earn interest payments on the loans.
Example: Crowdhouse
Ease of establishment: CHF 1,000 minimum
Income level: 5-6% of the invested capital
Frequency: Monthly
Reliability: Medium-low
Risk to capital: High
Maintenance: Low
Liquidity: Low
Leverage: None
Business ownership
Overview: Partial/outright ownership of stable and profitable private businesses and derive dividend income from its operations.
Example: Corporate Finance In Europe
Ease of establishment: CHF 100,000 minimum or a lot of sweat and toil
Income level: Zero to 100%+ depending on business performance
Frequency: Annually
Reliability: Depends on business performance
Risk to capital: Medium-high
Maintenance: High
Liquidity: Low
Leverage: Leveraged loans with strict covenants can be used although it can be risky
As you can see from the comparison above, properties and fixed-income score highly on income level and reliability, with fairly frequent payouts. And our research indicates that many investors would prefer bonds that yield monthly fixed rent. They are even happy to forego high returns offered by the equity in exchange for income stability and reliability.
Are blockchain startups and cryptocurrency passive income opportunities?
This is a question we are getting all the time but right now and for the near future they are definitely not reliable passive income opportunities.
Blockchain is simply a method of recording and encrypting data entries securely. Cryptocurrency, on the other hand, is a form of digital currency that is used as a form of value exchange, powered by the principles of blockchain. As a result, neither can yield a fixed income stream for investors; so for the moment they certainly aren’t passive income opportunities.
However, there have been plenty of individuals who have profited from cryptocurrency speculations and who then converted the profits into the assets outlined above and subsequently acquired stable passive income streams.
All streams lead to the vast Ocean
It has been said that the average millionaire has at least 7 independent income streams. But they cannot be working 7 jobs simultaneously as otherwise, they wouldn’t be millionaires, so usually most or all of these streams are of passive or semi-passive nature. Ultimately, passive income is the only sure way to achieve long-term wealth and live a life of tranquillity.
Excited? Time to start generating passive income!
