Today we’ve got part four of our ongoing Q&A series.
Q. How to get passive income from option strategies?
A. Great question. The best way to generate income using options is to systematically sell uncovered puts and/or covered calls.
For those not familiar with options, they represent a contract to buy or sell 100 shares of the underlying stock.
When we buy an option, we pay a premium up front, and then the value of our option contract can go up or down based on how the underlying stock moves. BUT, our option contract gradually loses value over time as it approaches expiration.
That being the case, sometimes we can lose money even though the stock moved slightly in our direction. That’s incredibly frustrating.
This is why I believe selling options is the way to go.
When we sell, we receive the premium up front. And then we benefit from the fact that the option’s value falls over time. If the option expires worthless, we keep the premium free and clear. Then we can sell another option to generate additional income.
We have a full-fledged strategy to generate consistent income selling uncovered puts/covered calls in our core content for The Phoenician League. We walk members through exactly how to make it all systematic.
That said, I far prefer to use rental real estate as my passive income vehicle. Sometimes it’s fun to play around with options… but my focus is on real estate.
And that brings us to our next question…
Q. What’s the safest financial vehicle for passive income without a fluctuating principal?
A. Easy. Rental real estate. By far. And I prefer single family real estate because it’s so simple.
To be fair, the value of real estate can fluctuate. I’m not ignoring that part of your question.
But, as strange as it may sound at first, I don’t care much at all about what happens to the value of my properties after I buy them.
That’s because I buy each property exclusively for the cash flow it can produce. And the beauty here is that we know exactly what that will be up front.
Real estate cash flow depends on the purchase price, our down payment, our mortgage rate, and market rents. We know all of these numbers up front.
So if a given property doesn’t produce satisfactory cash flow – we just don’t buy it. There are no surprises.
And don’t forget, the return we generate from real estate isn’t limited to the monthly cash flow. That’s the primary driver… but we also build equity in the property as tenants pay down the mortgage. And we derive what can be very powerful tax benefits as well.
Also important – we have core infrastructure in more than a handful of what I call “boring” real estate markets. They are mostly in the Midwest.
These are markets where property values just don’t fluctuate that much – even when prices in other parts of the country boom and bust.
So if we buy real estate for cash flow and we buy in stable markets, we can build incredible passive income without having to worry about our principal losing value.
Q. How do you actually set up your business?
A. My suggestion is that we run our real estate business through Series LLCs. These are special LLCs that allow us to isolate each rental property within its own “series”. Here’s how it works…
When we establish a Series LLC, it will have a regular name just like any other LLC. Let’s call it XYZ LLC, for example. Then XYZ LLC will file a tax return just like any other LLC.
However, we’ll be able to create independent “series” within XYZ LLC. Series One will hold our first rental property. Series Two will hold our second rental property… and so on.
These independent series are treated as though they were independent LLCs for asset protection purposes. That is to say, Series One has absolutely nothing to do with Series Two – as long as they each maintain their own bank accounts and bookkeeping, as all independent companies do.
This structure allows us to protect each rental property individually. At the same time, the financials for each series flow into one single tax return for XYZ LLC.
So what we’re doing here is effectively creating a new LLC for every rental property we acquire. But we only have to file a single tax return, regardless of how many independent series we have.
This approach maximizes our asset protection and our tax advantages while keeping everything as clean and simple as possible.
We talk a lot more about LLCs, taxes, and asset protection in The Phoenician League core content. We can also connect members to an LLC specialist who helps us get everything set up correctly.
For more information on how to join our investment membership, please go right here: The Phoenician League Membership Page