Passive income stream which covers your mortgage

April 12, 2009 4:23 AM

What would you do if you had a passive income stream which covered your mortgage?

I would like people to consider the following situation and give us their opinions on what they would do. We would like to hear how MeFi's out there would respond to having a similar financial position to the one I am going to describe below. This is one that my husband and I are currently entering and although we have our own ideas on how we would like to proceed, we were wondering how different people would approach the same circumstance.

My husband has developed a passive income stream which has consistently brought in enough money to cover our mortgage (approximately $2200 per month). We both work and prior to this passive income stream we still had enough money to cover all of our monthly expenses and save. We have an idea of how we would like our life to pan out, but we are really interested to know how other people might behave given our situation.

Would people turbo charge their pensions, pay off their mortgage faster, rent out their house while they move to different countries and work while they travel, have a child and one spouse no longer works, go part time and earn enough to cover the remaining bills?

I would like to clarify that this question does not concern the long term viability of the passive income stream. I will be happy to clarify my question further but please remember this is more about what you would do with your life given this income stream.

posted by lilyflower to work & money (29 answers total)

It's interesting how you're viewing this extra money -- sort of as if it were "free" in a sense. Nothing wrong with that! I like how you're seeing it as an opportunity. My husband and I also have a "passive income stream" as a result of his retirement from the military. For us, too, it's enough to cover the mortgage every month. We just look at it as part of our regular income. Still, since we do have more money than we would otherwise, we've used it to invest the maximum allowable every year in our 401ks (sigh...and have lost some of it that way), stay out of debt (other than mortgage), travel more than many of the people we know, buy more toys, and so on. All things you're considering. One thing we did -- that we have really not regretted -- is taking out a 15 year mortgage when we bought our last house, instead of the more usual 30 year one. We've save a bunch of money on interest and our house will be paid for in 3 years. That's a VERY nice feeling!
posted by rhartong at 4:35 AM on April 12, 2009

Well independently of this source of income, I'd seriously recommend refinancing if you haven't done it already. Interest rates are about as low as they can get, so that $2200 mortgage payment could theoretically be significantly lower, depending on what you were paying when the loan initiated.

The absolute first thing I'd do is build up a cash buffer, the so-called f*ck-you money. I'm not talking about enough to retire on, I'm talking enough so that if I lost all sources of income tomorrow, I'd be okay for 6-9 months. So something like $20-25k. This would not really be invested. Probably one of those high-interest online savings accounts. This is about as close to cash as you can get without sticking it under the mattress, and the interest will be enough to at least deal with inflation. But this is money with which I want to take zero risks. Something like this would enable you to weather most of the financial setbacks life tends to throw at you without too much difficulty. I'd recommend doing that, if you haven't done it already.

The second thing would be to pay off my credit cards. Fortunately, I don't have any credit card debt at the moment, but if I did, that would be the second thing to go. Yes, not paying this off first would cost me a bit in the long run, but not having the kind of buffer described immediately above can cost you far more than finance charges. Interest sucks, but insolvency is worse. But there isn't any legal investment you're likely to find that will pay in the 17-27% usurious rates that credit cards charge, so that goes second.

The third thing would start tackling my student loans. They're big. As in they'd knock out most of that $2200/month. This is going to be the single defining feature of my financial life for the next ten years, and it'd be really nice to have some room to breathe. A source of income like that would enable me to be debt-free in less than half of the time that it's going to take me under the circumstances. So the first thing I would prioritize is getting myself debt-free. If you have credit card debt, make it go away.

But I wouldn't put all of the money there. Some of my loans are at 6.8%, and I'd put all of the money there until that portion--about half of my indebtedness--was gone. But most of the rest is somewhere between 2.0-3.75%. This is pretty ridiculous for a loan. I plan on paying that off as slowly as possible, because even at today's interest rates, it's not terribly difficult to find something that will pay at least 4%. So with the rest of the money, I'd save for a downpayment on a house. You already seem to have one of those, so the equivalent there would probably be dumping money into your mortgage.

Once that's gone, you're pretty much in the clear and can start treating it as regular income. Pick a savings rate you're comfortable with, probably between 5-10%, and sock that much of your total income away every month. You can use the rest to raise your standard of living in the way that seems most pleasant. Note that depending on your circumstances this point might be a decade away, but that's alright.

Now I'm currently single, no children, no house, so that definitely affects my thoughts here. If I had a wife and kids, things might be a little different. But not that much. First, make sure you're solvent. Second, get out of your expensive debt. Third, if you can, find an investment vehicle that pays more than your cheap debt, and if you can't just get rid of the cheap debt. After that, treat it as regular income and save/spend it as you would other money.
posted by valkyryn at 4:58 AM on April 12, 2009

I don't think you have provided enough information to allow us to give you meaningful advice. what is your age? what kind of jobs are we talking about? income and debts? location? give us a statement like the one mint.com would aggregate for you (it's a great website btw) and you'll make it much easier to make recommendations.

personally, I'd look at all your debts first. which debt is costing you the most and which is cheapest? any high-interest credit cards you could afford to pay off? how is your financial cushion? use your discretionary income to cut down unnecessary costs first and build a six-month cushion secondly. (as in: six months without a single dollar coming through the door, all expenses and mortgage covered.) I'd also look at health insurance plans. the older you get the more frail you become and many insurance plans, even nice PPO plans, top out at some point. what happens if someone has a stroke and spends a month in a hospital and rehabilitation facility? will your policy cover the first million and then you're on your own? you now have the luxury of considering life-changing events most are not prepared for.

what I'm saying is cover your basics and the worst-case scenarios. you will sleep very sound knowing that no matter what happens to you things will be fine in the end. that is real luxury to me.

I'd be happy to make more specific recommendations once I know more about your situation but I'd understand if you were reluctant to disclose all that in a public forum.
posted by krautland at 4:59 AM on April 12, 2009

Hi all - I'm the husband, thought I'd jump in to clarify what we're asking.

@krautland - we're not looking for meaningful advice. Our finances are very well taken care of; we have no personal debt, no student loans, no car payments, no credit card debt, we're in the UK so have no expensive medical bills due to the NHS.

@valkryn - we'll be refinancing our home in the next few months when we reach the end of our current fixed deal, and will then have even more "spare" income. We've already got a buffer that would pay for 6 months of our expenses.

We do not intend to raise our standard of living to absorb the extra money since we already live very comfortably within our budget. There are no day-to-day extras that we want for.

We are both around 30, have no children (and no intention of having children - please don't discuss this aspect!) and were wondering what you would do given the same financial and geographic freedoms?

We had been intending to live as rhartong is - a life similar to our peers but perhaps slightly more comfortably, and with the mortgage paid off sooner. We're interested in what other ideas people have.

As krautland says, we "now have the luxury of considering life-changing events most are not prepared for". It is examples of these events that we're really interested in!
posted by BOfH at 5:31 AM on April 12, 2009

Just to confirm BOfH is my hubby!
posted by lilyflower at 5:33 AM on April 12, 2009

With housing expense out of the way, I'd try for some version of self-sufficiency. Growing my own food, reducing the energy use of the house. Sort of a high-end version of The Good Life.

But that's just my personal predilection.
posted by werkzeuger at 5:50 AM on April 12, 2009 [1 favorite]

Are you living the life you want to live? Meaning, do you want to work full-time, in your current job? Maybe you would prefer a less lucrative but more social activist job? Maybe you want to be a carnie or sell handmade jewellery on the festival circuit. I am not wealthy (FAR from it) but I live my life as though I am. I work at a job I love that is helping people, I chose to do things that will make me and the people around me happy, and I blow off my job on days when my family needs me more for my physical presence than my paycheque. If I won a million dollars tomorrow there is not a thing in my life I would change.
posted by saucysault at 6:12 AM on April 12, 2009 [1 favorite]

Travel.
It's a no brainer. Rent out the house if you like, for some extra income.
You're still young enough to have the energy (and courage) to go to some pretty exotic and off the beaten path places.
IMHO, there is no better life experience than getting out in the world and experiencing how other people live. It's something that will shape you for the rest of your lives, and that you may not have the opportunity to do later on, for whatever reason.
Go. Take a year, travel, work abroad, do volunteer work, whatever.
You can always come back to your house and security, and save for your pensions and do all that responsible grown up stuff later.
The best thing about passive income is that it enables you up to live life more fully, rather than have a nose to the grindstone existence. This is an opportunity that a lot of people will never have, and I can guarantee that if you do it, you will never regret it.
posted by newpotato at 6:22 AM on April 12, 2009 [2 favorites]

If, as you say, your basics are taken care of--do go ahead with that refi--and children seemingly out of the picture, I'd aim for two things.

The first would be generosity. Obviously you aren't the next Bill & Melinda Gates Foundation. But that's not really what I'm talking about. Nor am I really talking about giving to such organizations. That kind of giving, while important, is pretty impersonal. I'm talking about looking around you to see if there are people you know who need help. For example, though you apparently don't have kids, it's pretty safe to assume that some of your siblings or friends do. Education can be very expensive these days, potentially even in places like the UK. Why not help out? Or if they can't afford to take a family vacation, maybe you could make that happen. Just the sorts of things that all of us enjoyed or wish we could have when we were kids.

Included in generosity would be hospitality. Let others enjoy the benefits of your financial security. I'm not talking about being flashy or ostentatious with your wealth. I'm talking about living comfortably and having others share in that comfort. So make your home the place where everyone gathers. Invite people over, regularly. Even people you don't know very well. I think you'll find, as most people do, not only that it's pretty rewarding on a personal level, but that this kind of open-handedness is pretty awesome in terms of networking and connecting with people.

Basically, what I'm talking about here is moving from making sure that you are okay to making sure that your family and friends (in that order) are too. Obviously you can't subsidize their lives to any meaningful extent, but you can maybe make things that much easier. Using your money is generally a lot better for you than just having it, and using it on others rather than yourselves is pretty hard to beat, assuming you can afford it.

This actually has a bit of a concrete aspect to it, unpleasant though it may be to think about. At some point, you're going to die. Hopefully that isn't for decades, but eventually it happens to all of us. When that happens, your estate is going to go someone. I think it would be a lot more gratifying to know that it's going to someone you've invested in your whole life rather than the state or distant, unknown relatives. For most people, that means their children, but in your case, you might consider developing a relationship with someone in the next generation who could fill in as your heir. Just something to think about.

The second would be travel. I've always wanted to make a transatlantic crossing on a tall ship, something like this. Just a dream, but man, it'd be nice. Not sure I've got anything particularly interesting to say on that front, but yeah, travel.
posted by valkyryn at 6:23 AM on April 12, 2009 [1 favorite]

okay, now I feel I have something to work with. (I don't think the NHS is all that awesome but that's a minor issue as you are basically taken care of by them.)

since you have no debt you might consider saving every penny you can for the next year. this should allow you to build a nice cushion to use as an investment. you are not screwed if you lose it all and if you double it you're going to be even less worried. your housing market is in serious turmoil. nobody knows how long prices will be depreciated but everyone knows there aren't enough flats in central london. once you do have the savings required consider purchasing a flat or a house to rent out for a decade. pay close attention to location - only the absolute best will do. I don't care about the condition as long as it's structurally sound and not a hazardous lot but I care a great deal about location and view. such places will always have a market. rent it out for ten years, have another income stream, sell it then. or invest in another business. key is only to invest in things you (a) really understand completely and (b) are excited about. neither of those should be requiring any compromise or you should walk away from any deal.

I also think you should travel. take five to ten percent of your annual "I don't need this money" and spend it recklessly. you need to be able to say to yourself "hey, I am enjoying my life. I am not scrooge mcduck" or you'll hit a moment at some point where you begin wondering why you're doing all this. consider it like going to the gym or eating healthy food only that you are treating your soul to keep it from becoming sick. (I am a person who works too much. I don't need to but I can't help it, so I'm saying this to you because I wished I was able to heed my own advice.)

lastly... the cushion. leave that six-month wad of cash you never touch or need in a savings account where it can gain three to four percent interest annually. that's not a lot but you will at some point really need it and you should be prepared for such a moment.
posted by krautland at 6:34 AM on April 12, 2009

Well, I can tell you what I did and in fact am still doing.

I've pretty much always invested for income, as opposed to capital gains. I know the difference between one pound net of tax in my hand now and for certain, compared to the promise of one pound net of tax in my hand in the future. I always invested for income.

So as cash flow from my investments grew I kept diverting the revenue stream to acquire additional, cash flow generating assets. Every month the biggest problem I had was what cash flow generating assets could I acquire that would yield as much as my current portfolio.

About ten years ago my passive investment income started to approach my base salary and thus I, by definition, had achieved financial independence.

So I'd suggest that you continue investing and try to totally secure your financial future. It sounds like you're off to a great start, and by looking ahead and carefully planning, some day you'll be beholden to nobody. Having your own capital, your own means of support gives one breathtaking options.

In my own case about one year ago I quit my job and returned to Business School to complete an MBA. If it wasn't for this passive income stream I'd developed I would either have to disinvest or run down savings. Neither alternative is sustainable in the long run.

Best of luck!
posted by Mutant at 6:34 AM on April 12, 2009 [9 favorites]

one more thing: ask this question over in the free fatwallet.com forums. they will crucify you for every penny you do choose to spend but if you spend a month there reading a couple threads you will walk away with a million little ideas to further explore.

also: where the hell is mutant today?
posted by krautland at 6:36 AM on April 12, 2009 [1 favorite]

ah, just when I wondered he posted.
posted by krautland at 6:36 AM on April 12, 2009

I'd refinance the mortgage as you already plan to do. I'd also consider making accelerated payments on the mortgage. Don't opt to simply increase your monthly payment, as who knows what the world may throw at you. But do consider making extra payments on your mortgage each month as that'll save you a bunch in interest.

If you're comfortable with the amounts you're currently saving and investing, then the remainder can be used towards things like travel, long-term projects (that art studio in the garden you've always wanted, that collection of garden gnomes...), altruism, minor upgrades to your life that make you happy.

valkyryn makes an excellent point about the FU fund. If it all goes to hell in a hand basket, having that buffer is a great comfort. I've always had one since I started to be able to afford it, recently increased it a little given the current economic climate. It's great knowing that if one day you don't like doing what you're doing, that you have the freedom to say STFAGOS (sod this for a game of soldiers) and take off without worrying.

To sum, the money = freedom. Congrats!
posted by arcticseal at 6:44 AM on April 12, 2009

The best thing about passive income is that it enables you up to live life more fully, rather than have a nose to the grindstone existence. This is an opportunity that a lot of people will never have, and I can guarantee that if you do it, you will never regret it.

Quoted for truth.

This article was a great read for me, and might be helpful in your situation as well.
posted by Grlnxtdr at 6:54 AM on April 12, 2009

Pay off all debts, build a nest egg, then find jobs that make you happy, regardless of income.
posted by JuiceBoxHero at 6:54 AM on April 12, 2009

What I would do:

1- (I actually did this in response to a minor income bump a few years ago) Refinance the house so that it gets paid off sooner. Went from a 30 year to a 15 year. It is unbelievable how much interest you save doing this. Or, at least, pay extra every month. The only thing better than a passive income stream covering the mortgage payment is not having a mortgage payment at all.

2- Max out the retirement savings.

3- Start an "unrestricted" long term investment account. (At least in the US, most standard retirement savings is tax-reduced, with the restriction that you have to wait until a certain age before you can use the money.) I'd start an account outside of those restrictions so that I could (hopefully) have a nice chunk of money to be able to use if I wanted to retire early.

4- Do other things that send money into the future. Maybe buy an add-on health insurance policy that will make older age more comfortable. I presume this option is available in the NHS world. In the US, where medicine is already socialized for the poor, the young (in some states) and the old, there are add-ons that make it more comfortable. Like long term care. Medicare/caid covers the basics, but you can get policies that add stuff on.

4- Or other things like buying that little cottage by the shore that you'll retire to. Use it for vacations now, rent it out, and then when retirement comes, move there and sell/rent your current home.

5- Invest in education that will hopefully add to your income later on?
posted by gjc at 6:54 AM on April 12, 2009

@Houstonian - we intended "we're not looking for meaningful 'financial' advice" in regards to credit card debt etc - apologies for making it seem like we were being chatty rather then seeking ideas for our lifestyle.
posted by lilyflower at 7:10 AM on April 12, 2009

Do the job or business you love, regardless of income potential. For me it would be owning a recording studio.
posted by Ironmouth at 7:25 AM on April 12, 2009

I would work hard to get the mortgage paid down, and a savings cushion, then I would go back to school and change careers.
posted by theora55 at 7:41 AM on April 12, 2009

After I made sure my will and trusts were in order, I would, since I live in the US and have limited and expensive health care options, I would buy a tiny piece of land in a nearby country with great, cheap healthcare and put a little airstream trailer on it. Make it completely self- contained with solar energy and rainwater collection. Then use it as a vacation spot for me and a medical tourist stop-over for me and all my family and friends. I would research all the good doctors and dentists in the area and be like a health/tourist guide. And maybe rent it out by the week. I'm working on a plan like this right now.
posted by cda at 7:45 AM on April 12, 2009

Not to derail (I hope), but I'm surprised by how many people are saying they'd pay off their mortgages. I understand it from an emotional point of view, but financially wouldn't they be better off investing the money? That's provided that their mortgage's interest rate is lower than the return they could get on their investment, of course.

If I'm wrong, please correct me.
posted by The corpse in the library at 8:06 AM on April 12, 2009

I say pay off the mortgage, use the passive income to pay things like property taxes and bills, then work exactly as much as you want to and not a minute more; consider yourselves retired and live the life you want to live. If you have expensive hobbies, you may need to keep working, but you may be just fine with the passive income if you tend to live frugally and have some savings for emergencies.

Calculate how much you'll save on interest by paying off the mortgage. I guarantee it's a hefty sum. Imagine life without that payment every month. Go for it!
posted by bink at 8:08 AM on April 12, 2009

Immediately: I would get on my motorcycle and go for a ride. No destination in mind, no time frame, other than I have to be back for opera season in mid-May.

Obviously, your situation is different, as you may not have a motorcycle, and certainly don't have the wacky seasonal job that I do.
posted by mollymayhem at 8:42 AM on April 12, 2009

I would stop working and learn interesting things instead, cartoon-drawing, game programming, soldering simple electronics projects, learn sanskrit and japanese, learn to write.. umm.. better, this sort of thing.
posted by rainy at 8:47 AM on April 12, 2009

Maybe I'm misunderstanding the figures but an extra $2200 a month doesn't exactly strike me as life-changing in the "quit your job and become a professional student!" sense. If I were in your shoes I would be doing three things and would automate them:

* Using maybe 50% or so of that $2200 to turbo-charge my retirement savings, both for the tax return (don't know how it works in the UK) and for the potential to retire completely early.

* What mid-ish term goals do you have? Take a year off and trave the world, buy a holiday home, renovate the kitchen, buy your dad a kickass 60th birthday party, etc? Funnel maybe another 25% into that.

* The last 25% I'd split between charitable contributions and "fun money" - loosening up on the dining out/weekends away/hobbies budget.

But money is nothing without goals, so what I'd do with it may be completely irrelevant to you.
posted by jamesonandwater at 9:36 AM on April 12, 2009

Personally, I'd like to build my own house some day, so I'd probably keep working and pour extra cash into savings.

That said, I'd also probably take the opportunity to travel a little - possibly combine into research trip(s) to look for sites to build and/or look at possible architectural styles...
posted by Nice Guy Mike at 9:56 AM on April 12, 2009

I created a "passive income stream" by selling my paid-up house and moving to Paris, which pays the rent.
posted by Elsie at 11:28 AM on April 12, 2009

I'm sure you talked over your financial goals before you had this money, so you already know what you want and need to do. Just accelerate the time line. You should probably be doing a lot of things simultaneously, a few things for now, and the rest for the future. My husband and I are all about future freedom from stress, so given extra income, we've paid down all debts, kept our lifestyle simple, put more money away, and only then renovated the house, bought red sports cars, and stuff like that. We have time to travel later. But to reiterate, a little extra income didn't change our plans, it just let us do things sooner.
posted by zinfandel at 7:07 PM on April 12, 2009