How to Passively Earn $8k/year from Buying a $16k Book Royalty

Thank you, Nick, for joining. So Nick is a little different in that he didn't really come to me with a question. He just emailed me about what he's doing and he's buying book and music royalties. And I thought, that sounds really cool. Let him. Why don't we just wrote down about that for a few minutes on my show. And he said, great. So welcome, Nick, to the Kerner office.

Thanks for having me, Chris. I big fan and yeah, excited to chat about some interesting investments today.

All right, me too. Thank you. By the way. And tell me approximately how many deals you've invested in so far.

Let's see, probably done about 10 or so and then hold about six or seven both personally. In between, we have small little friends, family investment fund.

Okay, and then what dollar amount are you investing in each of these on average?

These could depend from, you know, as low as 20 grand, up to 100, 200 grand overall.

Okay, so I should probably back up and I'll let everyone know. We were already talking and I forgot to record, so I'm going to ask Nick to repeat a couple things. So just tell us briefly what the thesis is with investing in book and music royalties. Why do you like it compared to more traditional things like the stock market or real estate? And what are your goals moving forward with it?

Totally. I like it because it's weird and a lot of people don't do it. And I like obscure investments, but more specifically, it's uncorrelated returns. So stock market goes down, you might cancel your country club, but you're probably going to keep your $10 a month Spotify playlist. The yields are pretty attractive. It's protected in the sense of it's intellectual property, so you get revenue for the life of the author, plus 70 years. And a lot of these songs have really good staying power if you buy them some amortization tax benefits. And then the industry as a whole, there's a lot of pressure in support of artists getting paid rather than some of these big universal Warner companies. So there's a lot of kind of upward pressure and we're buying those same rights from a songwriter or producer. And yeah, it's not very volatile. It's not very crazy. Pretty similar to a corporate bond in terms of kind of the risk structure. Yeah.

What would you say the annual yield is on your 10 investments on average? And what's like the best and the worst?

We are doing low double digits. It's fairly stable, growing slightly, I think, on kind of the. The group money that we have we're about like 12% a year.

Okay, and then what's the best and worst out of that bunch?

Yeah, the best is the. I bought a book asset off for book royalty off of Craigslist like 10 years ago. I bought that for 35 grand and it was paying 12 grand then and that's doing 16,000amonth or excuse me, 16,000 a year. I wish it was a month currently. So that's my best performer.

Okay, that's probably like the best opener of any party story I've ever heard. Yeah, I bought this book royalty off Craigslist for 35 grand once. So you paid 35 grand and it's paying you 16 grand a year today, currently?

Yep.

And did you, you just randomly found it on Craigslist or how were you. How did you find this?

Yeah, I was few years into my career, I bought 1% down condo and then remodeled it myself. Got a 90 grand HELOC and I was like, I need to deploy this capital as quick as possible. And my other buddy who I do this with, he's a cfa, one of the kind of better analysts in this space. We're worked at Royalty Exchange, which is where an ebay for these things, these music royalties and book royalties are cool investments. So I posted on Craigslist buying oil and gas royalties, music royalties, I guess. So that's the post. And I just kept posting that and this guy reached out to me and he said, hey, I'm moving to Alaska to go fly planes and fly fish. And I used to be a literary agent and I want to sell you this thing. I was like, all right. And he gave me about 120 pounds of paper for due diligence. I didn't really know what I was doing, but got some upwork attorneys and figured it out and wrote him the check. That was it.

You were my kind of guy, man. Like, I swear, you're the same. This is totally something I would do. Holy cow. Okay, what year was this?

Let's see, maybe 2016.

Okay, so you're just having this one off conversation with a friend and he's, you've got 90 grand to put into something and you've got this sense of urgency because it's burning a hole in your pocket. And coincidentally your friend says, look at royalties. So you go to Craigslist and you post in the looking for royalties section, which should exist apparently. And this guy wants to move to Alaska and he wrote a book then.

No. So he was the agent for a best selling author. So that author still Puts out CJ boxes. So he does Western kind of crime books. And he puts a new book in the same series out. There's been a few TV series. Yes. Good. Good books. But he had an interest in the first six because he was the first agent. And then that author has moved on to a new agent.

Okay, so now. So for these first six books, the original author gets nothing for them. Correct.

The author gets a considerably larger chapter or the agent. The literary. The first agent. Yep. Had a 7.5% interest in the net income of the books. And so he sold that seven and a half percent interest to me. So he doesn't receive anything. He got his check and he's fly fishing and flying around in a plane, which sounds awesome. Okay.

All right. All right. Sorry. So he just needed to get liquid so he could go fly some planes. And he. What do you think the gamble was that he took like that. This. These first six books were past their prime. Or did he just really need money and he wasn't even taking a gamble? And he knew he was selling something pretty good.

I think he knew he was selling something pretty good. It's obscure in the sense of there's not anywhere to go buy these things, especially for a book that's music trades fairly regularly. Books, I don't know where I would go sell that if I needed to. And he. I guess it's all checks. There's no direct deposit for this book stuff. So he's like, where I'm going, there is no mail, and I would have to fly hundreds of miles to go get the mail and deposit the check. So that was his main issue.

You lucked out. So you lucked out. In a sense. You did. Because the fact that logistics even played a role in this is so funny. Like, how many places can one move to where there's. There's no mail? You know, I don't know.

Yeah, I got an incredible deal, and I had no clue. And it was scary for me because I'd never written a $35,000 check.

Yeah.

In my life. So I'm like, can I buy this? Is this actually something that you can purchase? Yeah. So, yeah, it all worked out, and it's still growing, so I'm stoked on it.

Geez. So at the time that you bought this, what was he receiving per month? What did you think the ROI was on day one? Versus. And I think you told me this in the beginning, but I can't remember first what it is today.

It was. So it pays twice a year. It was paying roughly $12,000 a year back then. So I knew I was getting at a three times multiple.

Okay, so 3x multiple. Okay, perfect, man. You can go to Omaha, Nebraska and buy an H vac business for a 3x multiple and then start driving all over town swapping out condensers. Or you can post to Craigslist and Send a stranger 35 grand and hope and pray that you get a passive 3x multiple. This literally is passive, right? Like, quote, there's no such thing as passive income. But could you get more passive than this?

I do nothing. So no, I don't think that's possible.

Wow. Okay, so this kind of whet your appetite and you're like, why even invest in other things if this exists?

Yeah, More realistically, everything else you buy in this space is not as good as the first one. So if we're buying now, a really attractive price might be five, six, seven times multiple. And for really high quality things, you're paying closer to 8, 9, 10. So it's still attractive returns. But this isn't the go buy a business at three times and see 40, 50% IRR or whatever.

Now, what was the worst one that you've done so far? And do you think there's a chance it could turn around?

Yeah, we haven't bought anything that's. There's a ton of junk out there. So you go on royalty exchange, like most of the stuff's junk, there's a big decay curve, and you got to look at is this recurring revenue from Spotify. So you buy something that's old and stabilized. You know, it's in someone's Spotify playlist, they listen to it once a week or whatever, and then it's pretty consistent. So we haven't had anything that's like a clear loser. We've had stuff that has pretty much been flat or slightly growing. And our due diligence process has been pretty good to pick out stuff that does what we expect it to.

Okay. Is royalty exchange the de facto place? You shop for these nowadays?

No, we go through brokers. We look on royalty exchange just because there's a lot of deal flow there. But stuff tends to be more expensive than we can get it off market. Which off market is different in that sense?

Yeah. Do you think there's a business opportunity here for someone to create a more streamlined marketplace? Or surely you've thought of opportunities to make this industry more efficient.

Yeah, from an efficiency play it would be do. There's a lot of companies that have tried that, and I think the Biggest thing, the challenge is the actual deal flow and transacting these because once you say, hey, we got a deal. You have to go say, hey, I've got one and a half percent interest in this song from a producer side and then a songwriter side. And then none of this stuff was ever made to change hands. So then you go to Warner and it can be like a multi month process to just say, hey, the ownership has changed. So yeah, there's some models out there of crowd vesting and exchanges. I don't know what I would do. I would probably just raise a bunch of money and then go allocate it and go with a fund model, I feel.

Do you ever study the Lindy effect or think about that? Are you familiar with the Lindy effect?

Give me the.

So the Lindy effect is basically the principle that however long something has been around is as likely as it's going to be around in the future. So if you buy an H vac business in Omaha that's been around for 50 years, statistically speaking, it will be around for at least another 50 years.

Okay, sure.

Which two month. A two month old startup statistically has two more months. So I think of it like this, where if you're buying Bob Dylan, that's a pretty safe bet, which means you're probably going to get a lower return. But if you're buying some guy that went viral on Tick Tock, it's a gamble, right? But it could be a really good gamble. He could be, he could be dead of a drug overdose in, in six months or he could be the next Taylor Swift.

The, the overdose would probably actually help the income.

That's. I was thinking that. Yeah, I was thinking that it's just a gamble you have to take. Right. Just like anything. What do you think helped this six book deal that you bought? What do you think helped it improve? Was it a co. Like just a Covid phenomenon or did something happen with the author or is it just. You can't attribute it to anything?

Yeah. So everything we buy is minority interest. So there's someone else who's got a vested interest in making the songs or the book successful. This author has puts out a new book every single year in the series that hits the bestseller. And so I have the first six and there's, you know, 26 books in the series. It got picked up. Big sky was picked up and turned into a TV show, which is one of the other book series from the same author. And then there's also TV series called Joe Pickett which is the name of this series. So that got a lot of interest in it. Between the new books and the TV shows that's been a consistent bump up. So that's where I would attribute the success of the book deal.

Is there a world where you could buy a minority or a majority interest in these rights and then have some sort of an influence over how well that artist or author does? Like maybe you're in the industry and you're able to affect the outcome more. Are people doing that?

Totally. So that's kind of hypnosis. The big one of the biggest investment funds in the space. Their pitch is hey, we can pay 15 Acts 16x and we have a whole team of people who will go out there and try to place this song or increase its publicity and that's their strategy. And you probably hasn't worked out as well as they thought it would at least how the numbers show.

But yeah, maybe they overpaid for stuff thinking that their effect would be greater than it actually ended up being. Especially if you're doing it at scale. Right. Like you can only promote so much.

Totally.

Now. What do you think? Before I hit record we were talking about suno.

Yep.

Which Suno is like this AI music generator. How do you think that plays into this at all? I'm sick of hearing people say AI is going to disrupt this and that and then we learn actually like people are pretty important and AI can disrupt a lot. But I think that I look at it like self driving cars. There's that last 5% will take as long as the first 95% did to disrupt. So on one hand it's what is AI going to do to all these rights if you can replace Taylor Swift with a click of a button. But the other hand it's how easy will that be? What are your thoughts on that?

I'm with you. Just like ChatGPT now of the quality of writing is not there. I listen to a Sunos make a Sunos song and it's fun but I haven't listened to the Suno songs on my playlist ever. Yeah, I think it's you know, night and day difference between equality produced song with someone who's experienced and good background singers and good producer versus hey, the computer is going to go make some of the stuff. I think it's wildly powerful but I think we've got a long time until we see stuff that's like actually on par with high quality music today.

Yeah. I actually when I first discovered Suno I couldn't sleep that night. Not because of Suno, but. So I stayed up, I came here in my office and I pulled out my MacBook and I'm like, all right, how can you use this to go viral on Spotify? And I went down this rabbit hole and I found all articles about people that had been doing this and trying this for months now and. And some with some success right there. There has been some success. And Suno gives you all the rights. Like you. You could make a. A hit on Suno legally and upload it to Spotify and make a lot of money on it. And I forget what the roadblocks were, but I don't know, I just think we're still too early. Like, I look at this phase of AI as like the. When I first got an iPhone, the best app was like this fart noises app.

Oh, yeah.

And I feel like we're still there in AI and it's like fun and it's quirky. But then Uber came along years later and like harnessed like the underlying infrastructure of the iPhone to really change the game. It wasn't just like an app that appeared useful or funny on the surface. It was like the actual utility in the technology.

Totally.

And I feel like that's what AI is doing. Like, it's. The plumbing of AI is really helping boost the capabilities of companies large and small and it's leveling the playing field.

Yeah. And there's probably still those second and third level effects out there where you could take advantage of AI. So maybe it's not making songs, but it's I'm going to go make ringtones or noises or something else. That is an opportunity for.

Yeah, like my newsletter talked about just getting someone's attention with a custom Suno song. It's just like replacing a quirky subject line of an email. And you're not going to sell them the song. Maybe you do, you're just using it to get their attention. Especially if it's someone who's over 50 years old and probably won't know about Suno for another three or four years. It's really novel and unique to it.

Totally. Yeah. Perfect example to separate yourself, get buy in and exactly like you said, if I can do this, imagine what else I can do and add a ton of value to someone who's out there doing H Vac every day, but would like some more business.

Awesome. Nick, thank you for coming. If anyone wants to ask you questions, I don't even know if you want to answer them, but if you do want to answer questions about royalty investing. Where can they find you? Twitter.

You can send on Twitter my way. Happy to talk about it. It's fun stuff. Yeah.

Okay. What's your handle?

It is my first name and last name with the first two letters switch. So it's pic, P, I, C, K. NAT trick, N, A, T, R, I, C, K. Okay.

And we'll link to it in the show notes as well.

Cool. Thanks, Chris. Appreciate everything you do.

Yeah.

Keep up the awesome.

Thank you. Thank you, Nick. I appreciate it. Have a good day.

Cheers.

Bye.