The Dividend FIREman 2018 Cash FIREhose Summary

Hello and welcome to Dividend FIREman’s first annual Cash FIREhose Report.  I am a lawyer seeking the bliss of early retirement, and my investment strategy involves creating several diversified streams of income.   I call these income streams “Cash FIREhoses,” and for the last 7 years, I have been building a diversified portfolio of five different Cash FIREhoses:  a Dividend Stock Portfolio, an index fund portfolio, a portfolio of real estate loans, a high-interest savings account (really just cash earning a bit of interest), and a portfolio of rental homes.

My goal is to build up these Cash FIREhoses to the point that the income they generate covers our monthly expenses, at which time I will put away my briefcase and bid “adieu” to my active trial practice.   When I finally go to the great courtroom in the sky, my hope is that my wife and children can then inherit the principal from these investments.

My original plan was to feature all of the Cash FIREhoses in this blog, but it became too much work to update them every month!  I also realized that I was spreading myself too thin trying to sufficiently explore and explain the workings of each of the different investments.

Thus my focus in this blog is on the Dividend Stock Portfolio.  However, once a year I will provide updates on all of my Cash FIREhoses.

Total 2018 Passive Income from Cash FIREhoses

In 2018, here’s the amount of passive income generated by each of the Cash FIREhoses:

Dividend Stock Portfolio $10,720
Index Fund Portfolio $18,649
Real Estate Loans $8,430
High Interest Savings $1,161
Rental Home Portfolio $0 cash flow
Total 2018 Passive Income (cash flow) $38,960

In 2012 I had a negative net worth of after-tax monies, and roughly ZERO in passive income.  I feel a combination of gratitude and excitement that we have been able to build these Cash FIREhoses over the last 7 years.

All of this passive income money was reinvested in 2018, which essentially means that our little green soldiers themselves earned (and invested) over $3,000 per month for us, without me having to do much of anything.   Passive income in action!

This amount represents an increase of $10,752 in total yearly passive income from our overall 2017 passive income ($28,208), a percentage increase of 38 percent.

Cash FIREhose Number 1 – Dividend Stock Portfolio

My Dividend Stock Portfolio is summarized here, and the actual portfolio can be viewed here.  In the last year, I have learned a tremendous about investing in dividend stocks, and I have transformed what was a formerly a hodgepodge of individual growth and value stocks into a true dividend stock portfolio.  I may make isolated portfolio changes here and there, but the dividend stock portfolio is now in its more-or-less final form.

This portfolio generated approximately $10,720 in passive income in 2018, an increase of roughly 51.5 percent from 2017’s total (7,075.85).  The dividend yield is roughly 3.56 percent, and my yield on cost is 4.2 percent.

Roughly 9.2 percent of my increase from 2017 to 2018 was the result of dividend increases.  This is good dividend growth, although a bit below what I expected before I ran the numbers.  But the real increases came from the capital that I invested throughout the year.  The income from my law practice varies significantly from year to year, but last year we had significant earnings, and thus I was able to pour almost $200,000 into this account, which significantly increased the dividend income.

Cash FIREhose Number 2 – Index Fund Portfolio

My index fund portfolio consists of four “total market” index funds:  a total US stock market fund, a total international stock market fund, a total US bond market fund, and a total international bond market fund. The ratio of stocks to bonds is designed to be roughly 75/25, although I have recently increased the bonds to closer to 30 percent of the portfolio.

You can read the details of this Cash FIREhose here.

From my year end statements, this Cash FIREhose generated $18,649 in dividends and interest in 2018, an increase of 26.7 percent from 2017 ($14,717) (note that the incomes on my 1099s are always slightly higher than the year-end statements, but I don’t yet have the 1099 for 2018, and thus I am comparing 2017 year-end statement income to 2018 year-end statement income).

The value of the portfolio itself dropped in 2018, from a combination of rising interest rates (which dropped the bond values) and stock market drops (which reduced the stock portfolio values).  But the income still increased, and this is the beauty of income investing:  the increase or decrease in the value of the underlying asset generally does not impact the amount of the income stream from the portfolio.

My yield on this account is roughly 2.45 percent at present, and my yield on cost is 2.8 percent.  I would expect that once I retire, I will take some of the money from these funds and invest in a high-yield dividend or income fund in the same family, which would increase the income yield from this account to roughly 3.5 percent.

Cash FIREhose Number 3 – Real Estate Loan Portfolio

I have set aside a small percentage of our net worth to invest in hard money real estate loans.  We have dozens of small loans, each of which is part of a larger loan on a particular property.  The loan to value ratios are 75 percent or better, and so far the loans have performed very well.

You can read the details of this account here.   In 2018, this Cash FIREhose generated $8,430 in passive income, all of which was reinvested.  We started this account at the end of 2017, and thus I won’t have year-to-year numbers until the end of 2019.

My yield on this account was roughly 6.7 percent in 2018.  The “yield on cost” metric doesn’t really add anything here, because these are straight-up loans and the value of my principal doesn’t really change.   At present I am reinvesting all of these monies into new loans.

These loans are riskier than our other investments.   It is not clear how these loans will perform when the real estate cycle turns downward.  I am hopeful that the favorable loan to value ratios for each loan will protect the principal, but time will tell whether this investment pays off.  I am doing this to increase our overall yield, and to diversify a bit from stocks and bonds. However, being the conservative fellow that I am, I am only using a small percentage of our net worth for this Cash FIREhose.

Cash FIREhose Number 4 – High-interest Savings Account

I tend to keep a decent amount of cash on hand, to serve as “dry powder” in the event that an opportunity presents itself, and to serve as an emergency fund for our family.  In 2018 this Cash FIREhose yielded $1,161, at rates ranging from 1.5 percent at the beginning of the year to 2.0 percent towards the end of the year.

I used some of this “dry powder” to buy certain dividend stocks at favorable valuations in 2018, and I also used some to purchase a couple of additional rental homes (details below).   I will hopefully be able to build the amount back up in 2019.

My goal is to have a year of expenses saved up in the account, at which time I will purchase a longer-term (probably 18 months or 2 years) CD for these funds.  We will then start over trying to build up more “dry tinder.”

I don’t expect the current 2.0 percent yield on this account to materially increase, but if interest rates further increase, it is likely this yield will also increase.

Cash FIREhose Number 5 – Rental Home Portfolio

This is another more speculative undertaking for Dividend FIREman.  I have been a landlord in the past, and I ended up selling the property because I did not like being on call at all hours of the night, dealing with tenants, advertising the property, etc.

This time around, I decided to use property managers for these properties.   The property manager gets paid roughly 8 percent of the rents, and other fees, in return for managing the properties, handling repairs, finding tenants, etc.

My original post on this rental home Cash FIREhose is here.  I currently have 9 small rental properties, all owned through an LLC.   These properties are all secured by fixed rate 30 month loans, at rates ranging from 3.5 percent to 6.5 percent.   Each property has at least 25 percent down, and each property is a small single family home.

We have been doing this now for a couple of years, and I have learned that even with a property manager, this undertaking is not truly passive.  I spend about 2 hours per week dealing with these homes, for things like funding emergency repairs, signing property management contracts and rental leases, dealing with my lenders and insurers, researching the future value/neighborhoods/etc. of the properties, and updating the financial files each month.

So far three of the homes have been financial black holes, and this has caused the entire portfolio to be cash flow negative.  The three “bad” homes are all older homes, and the “bad” has come from significant unexpected repairs in each case. I went against my rental house investment plan when I bought these older homes, but I did so because each is in a very good location and I was counting on appreciation in the value of the homes (which has so far occurred).  I am hopeful that these homes will perform better in 2019.

The good news is that all but one of the homes currently has a tenant, and a few of the homes have performed very well.   Moreover, the loans are being paid down every month (amortization), and the value of the portfolio has increased (appreciation).  We have also booked a year of depreciation against future profits (losses are carried forward), and the cash flow has covered all of the carrying costs except the unexpected significant repairs on three of our properties.

Overall we are in the black on this portfolio, when considering amortization and appreciation.  So even though these homes collectively do not yet generate reliable cash flow, they have been decent (although not great) investments overall. In the long run, once we have all of the homes fully fixed up and rented out, I am hopeful that this can be a steady, reliable stream of monthly income.  If not, we will sell the homes (hopefully at a profit), and deploy that capital in other income-producing investments.  If we sell, we would likely invest the portfolio in REITs, to keep the real estate exposure in our overall portfolio.

At some point this year, I will do a post devoted to lessons I have learned from owning single family rental homes.   Among those lessons are “don’t buy old houses!” and “make sure you are properly capitalized.”   We have also learned that the old adage “you can have time, or you can have money, but you can’t have both” is never truer than when referring to rental properties.    The time and headaches I am saving by using a property manager are costing me a decent chunk of my rents every month, so I have effectively traded lost time for lost money.

So far I think these investments are solid, although not yet true Cash FIREhoses.

Conclusion

2018 was a good year, in which I saw firsthand the power of passive income investing.  My 47 year-old self would have laughed out loud if I had told him that in a few short years he would have passive income of almost $40,000 per year.

Bottom line after 7 years – this really works, folks!  I think the keys are (1) investing as much as you can (we invest a very large percentage of our income every year), and (2) being doggedly consistent about investing, through good and bad conditions.  Time will tell whether this continues to work out, and whether the passive income continues to increase ever year as planned.  But so far it has been very gratifying to see our investment plan coming to fruition over the last few years.

Thank you as always for reading.  I look forward to hearing your thoughts and experiences in the comments.  Happy investing!

-Dividend FIREman

 

 

6 thoughts on “The Dividend FIREman 2018 Cash FIREhose Summary

  • Great recap, and even more impressive results! You guys did an amazing job in 2018 and are building up quite the passive income machine that will provide a nice income for many years to come. I’m in full agreement with you on your keys of investing as much as you can and being consistent no matter what way the market is moving.

    For real estate, I have opted to stick to REITs for now but the idea of rental properties continues to linger in the recesses of my mind. Hearing about your experience leads me to think REITs continue to be best for me right now, but I will continue to revisit that over time.

    I cannot wait to see what this year holds for you! Each cash FIREhose looks to be, or soon will be, on full blast. Congrats on all of the hard work required to get to this point.

    • admin

      Hey DD. I think you are making the right decision about the rental homes. It’s a great idea as a concept, but the reality is more time-consuming and unpredictable than I expected. Stay tuned for a future post where provide the detail of my first year as a landlord.

      Financially, I am down about $24,000 on these rental homes, and while the appreciation should make all of that back (and then some), it’s disappointing considering these were supposed to be cash-flowing assets. As an investment these homes may do fine, but as reliable Cash FIREhoses I’m not so sure. Time will tell!

      Thanks much for your comment. I’m looking forward to seeing how you do in 2019 as well.

  • Congratulations on the successful year! Truly awesome job. $38,960 from passive income with a 38% yoy growth is outstanding. It’s amazing that you had $3,000 per month go to work for you. I really like your strategy to have different firehouses for income. That’s something for me to think about. Good tips in your conclusion. Looking forward to your reports in the future.

    • admin

      Hey RTC! I have been lucky the last couple of years to earn extra money from my job, pretty much all of which I have invested in these Cash FIREhoses.

      With my job the income can vary from year to year, so we will have to see how much I can invest in 2019. Time will tell.

      Thanks much for your comment!

  • Congrats on the successful year! We also have rental homes as a part of our “passive” portfolio, and it’s definitely not passive even with property managers. We’re experiencing a similar situation to you, in that we have some good performers, some financial black holes as you put it, and some break-even. We have 15 doors and will spend the next 12-18 months trimming and stabilizing. We’d like to keep it to 10 doors going forward and focus on our online businesses, which are not passive but are scalable.

  • admin

    Hi Caroline! Congrats on 15 doors! That’s amazing and I know from personal experience how hard it is to acquire and manage that many.

    We are looking to add more properties but only after I figure out how to control the management expenses. We are also looking at possibly moving the properties into a single portfolio loan to make it easier to pay the mortgages every month.

    Thanks much for your comment! I am looking forward to seeing how you do with your properties.

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