It’s important to understand that residual income doesn’t have the same meaning for equity valuation as it does for personal finance. That’s because it doesn’t entail leftover cash, or so-called disposable income, but it has to do with the income that a company generates, after accounting for capital costs, according either to CAPM (Capital Asset Pricing Model), or APT (Arbitrage Pricing Theory). In other words, residual income valuation is the money the company is likely to be left with, once it covers opportunity costs (or risk costs), relative to the book value of Shareholders’ equity. Bear in mind that firms have no legal obligation to compensate shareholders, like they do for bondholders. However, without this form of compensation for the risk they’re taking with their investment, it’s unlikely they will attract investors. Here’s all of the above, laid out in a plain math formula:
3. Start as soon as possible. Building a livable passive-income stream takes a tremendously long time, largely because of declining interest rates since the late 1980s. Gone are the days of making a 5%-plus return on a short-term CD or savings account. Today, the best 12-month CD is at 2.5%, and the best money-market rate is about 1.85%, which is not bad, considering such rates were below 0.5% just a couple of years ago. Know that every $100 you save can generate at least $2.5 in passive income.
My returns are based on full cash purchase of the properties, as it is hard to compare the attractiveness of properties at different price ranges when only calculating down payment or properties that need very little rehab/updates. I did think about the scores assigned to each factor, but I believe tax deductions are a SIGNIFICANT factor when comparing passive income steams.
REITs have been gaining popularity in recent years due to relatively low bond yields following the sub-prime crisis of 2008. REITs are exchange listed instruments which give you exposure to underlying investment properties and their rental income. REITs are mandated to payout 90% of their income to unitholders in exchange for tax transparency. Resulting from this, most REITs function well as income instruments given the bulk of their profits is distributed to unitholders.
If you’d prefer to skip the startup phase, you might want to buy a blog that’s already built and earning revenue. This is actually pretty easy to do as a lot of people start blogs, and then get bored with them. Getting a blog going is a labor-intensive process, and it’s not uncommon for people to give up before they’ve reached their full potential.
Personal finance software can go a long way in helping you to take control of your money and meeting your financial goals. It’s important to note, however, that some focus more on budgeting and expense tracking while others prioritize investing portfolios and income taxes. Explore several different programs and read reviews to find the one that’s right for you.
Bonds are traditional fixed income instruments used by accredited or institutional investors to generate income. One large limitation of corporate bonds to retail investors tend to be their unit size, where the minimum investment amount is $250,000 per tranche. In view of this, corporate bonds tends to be out of reach for most retail investors. Another potential pitfall tends to be concentration risks for retail investors, where a substantial portion of the investment portfolio is allocated to a few companies. In the event of a bond default, the portfolio may potentially take a significant hit.