You might have already heard the phrase, “rich people don’t work for money, they have their money work for them.”
What does this mean exactly? Is your money going to start answering the phones at your office or take up your tasks at work? No. What this phrase means is that rich people use their money to make more money, freeing up their time to concentrate on other things in life like running a business or spending time with the family.
Passive income is the term used to describe revenue generated from assets that don’t require any input on your behalf. Income-generating assets are the key to wealth, and any seasoned investor will likely have an extensive portfolio of assets generating them a steady positive monthly cash flow.
So, what are income-generating assets? Can you buy them at the store?
In this article, we’ll take a look at the top assets you should own in your portfolio to generate passive income.
Passive Investing for Amateurs
- 1 Passive Investing for Amateurs
- 2 Essential Passive Income Vehicles for Saving
- 3 Fixed Income and Bonds
- 4 Real Estate
- 5 Real Estate Crowdfunding
- 6 Peer-to-Peer Lending Companies (P2P)
- 7 Dividend Investing
- 8 Online Assets
- 9 Wrapping Up – Start Investing Early in Your Life
If you’re new to the world of passive income and income-generating assets, then we put together this plan to help you get from newbie to seasoned investor. Before you can generate passive income, you need to have your finances in check.
If you’re spending more than you earn, you have a mountain of debt, and you have no savings, then you don’t need passive income, you need financial advice. Speak to a financial advisor about creating a plan that whittles away at your debt load while starting a savings account.
Savings are a critical component of getting off on the right foot when you start to build your income-generating asset portfolio. Without savings to fall back on when you hit a tight financial spot, you’re more likely to cash in your investments out of economic desperation.
In many cases, selling your assets earlier than expected results in a severe financial loss that puts you back behind the eight-ball in terms of your finances. So, before you even think about passive investing, it’s time to grow your cash position.
Essential Passive Income Vehicles for Saving
You might already own a 401(k) or IRA through your employer. However, you’ll only gain access to this cash when you turn 59.5-years old. If you have to draw down on your account before this date, you’ll end up paying penalties and fees on any money you withdraw.
Therefore, relying on your IRA or 401(k) to help you through a cash flow issue when you’re young is out of the question. You need to start your savings journey using a short to medium-term investment that grows your cash position while remaining relatively liquid.
A liquid investment is something that you can cash out tomorrow if you need the money. IRAs and 401(k) plans are some of the most illiquid investments, as they can take months to access, and when you do close them early, the penalties don’t make the effort of saving worthwhile.
Visit your bank and open a Certificate of Deposit (CD) instead. Banks are always looking for more capital. By taking a CD with a bank, you agree to pay them a fixed amount every month in return for interest on your money.
The bank then turns around and lends your money to the market. As a result, CD accounts have higher interest rates on offer from the banks when compared to facilities like standard savings accounts. You can get CDs in a range of maturities, from a few months to a few years.
CDs are still relatively illiquid, as you need to give the bank 30-days’ notice if you want to withdraw early. There might also be penalty fees that apply for early withdrawal as well. However, you can get around this problem by opening a CD with a short maturity date, such as three months to a year.
Fixed Income and Bonds
Bonds are another attractive savings vehicle for long-term growth. Bonds couple interest earnings to the Federal Funds Rate, and you earn coupon payments on your principal investment. However, while relationships are a stable and liquid investment, they don’t offer much in the way of returns. At the moment, you can expect a yield of 1.75%, and if interest rates drop, then your profits do as well.
Considering that the Federal Reserve is currently entering into a period of interest rate easing, don’t expect your bonds to start producing epic returns anytime soon. There are plenty of options when it comes to investing in the bond markets.
Anyone can purchase an ETF bond, such as the IEF (7 to 10 Year Treasury Note), MUB (the muni-bond fund), or invest in a fixed income fund, such as those held by market-makers like PIMCO. It’s a great way to diversify an extensive investment portfolio, but as a savings vehicle for passive investment purposes, the return doesn’t beat the inflation rate.
Many people make the mistake of thinking that buying and living in their home counts as an asset. In reality, the home is yours – only as long as you keep paying your mortgage.
Even if you have no mortgage on your property, you still need to pay for maintenance and property taxes on your real estate. Stop paying your property taxes, and you’ll find out that the government actually owns your home, not you.
You need to look at your primary residence as a liability, not an asset. Real estate can be part of an investment portfolio, and its how the wealthy manage to keep their wealth. However, these individuals take a slightly different approach to managing these assets.
When an investor buys a home, they are planning to lease it out to tenants. If the amount the investor receives in rent is greater than the cost of the mortgage, property taxes, management fees, and maintenance, then they are in a “positive cash flow position.”
Positive cash flow means that the expenses of the property are less than what the investor is receiving in rent. As a result, they come out with income at the end of the month for doing nothing. Over time, this positive cash flow accrues in savings or investment accounts, growing the investor’s wealth.
Do you see the difference between buying a home and investing in real estate?
While real estate is somewhat illiquid, if you want to sell the property, you can always borrow against the value of the property, giving you “leverage.” You can use this leverage to put a down payment on another piece of real estate and continue to grow your asset portfolio and your wealth.
Real Estate Crowdfunding
Many newbies to investing don’t have enough capital to buy an investment property. Some savvy investors saw this as an opportunity, launching “crowdfunded” real estate deals that are available to both accredited and non-accredited investors.
An accredited investor has a net worth of more than $1-million or earns an annual income of over $200,000. Typically, accredited investors are the only investors allowed to undertake group investments in the property market.
However, crowdfunded real estate deals smash these conceptions, allowing the average joe to invest in the property market. Crowdfunding platforms offer deals to its network, allowing you to take partial ownership of the investment among a pool of investors.
Sites like Fundrise also offer crowdfunding opportunities to both accredited and unaccredited investors. With Fundrise, you have access to many different types of properties, including commercial buildings like hotels.
|Fundrise Real Estate Crowdfunding - Visit|
|Product Type||Real Estate eREITs and eFunds|
|Potential Return||Average return in 2018 was 9.11%|
|Fees||Around 1% (Asset Manage Fee 0.85% & Advisory Fee 0.15%)|
|Property Types||Commercial, Residential, Single Family|
Sites like Roofstock Allow unaccredited investors to invest in the single-family home market using a crowdfunding model. You invest a portion of the entire amount into the property, along with other investors. You then get a return based on the positive cash flow generated by the asset, as well as a profit on the capital appreciation of the property if you decide to sell.
|Roofstock Rental Property Investing - Visit|
|Product Type||Equity, Direct Ownership|
|Potential Return||Varies by Property|
|Fees||0.50% setup fee|
|Min Investment||From $500 with Roofstock One|
|Property Types||Single Family|
Crowdfunding makes real estate investment possible for those investors that don’t have the capital or the time, to manage an investment themselves.
These platforms research the deals, complete the due diligence, and manage the properties for you. All you need to do is select the deal that interests you and send them your money.
Peer-to-Peer Lending Companies (P2P)
P2P lending provides financial services like loans to the general community. The model relies on the fact that many people can’t source loans from traditional lending institutions like banks. As a result, these people resort to alternative lending companies that can source them the finances they need.
P2P lending companies match you with a person looking to lend money. You then engage with the platform for the legal agreements and receive your payout. However, you can invest in P2P companies, as well. These platforms are always looking for new sources of capital, and they’ll pay you a return if you park your money with them.
Some P2P models can offer returns as high as 9%. However, there are many scam platforms, so make sure you go with a reputable P2P lender when using this option.
Investing your money into large-cap companies listed on stock exchanges is an excellent way of earning passive income. There is a list of blue-chip companies on the S&P500 that consistently increase dividend payouts on an annual basis.
For example, if one of these companies earns $10 per share and pays out a dividend of $7.50 per share, then that’s a dividend payout ratio of 75%.
The following year, the same company might earn $20 per share, and pay out a dividend of only $5. In this case, the payout ratio reduces to 50%, because the company decides to spend more in development or asset purchases to expand its business. However, the absolute dividend amount will increase.
Dividend stocks are usually more mature companies that have stable pricing in the markets and have less volatility in their price movements. Financial companies, telecoms, and utilities are all examples of dividend companies offering stable returns.
Biotech and tech companies reinvest a significant amount of earnings back into the development of the company, meaning that they don’t offer dividend returns to investors.
One of the best strategies for getting exposure in your portfolio to dividend stocks is through the use of ETFs like VYM, DVY, and NOBL. These exchange-traded funds are easy to manage using robo-advisors, like those on offer with the Betterment and Personal Capital apps for your mobile device.
The internet changed the way we communicate. In 2019, America will spend more than $500-billion online. Information products are a great way to build an income stream that brings you passive income every month.
If you have expertise in a niche, then you can leverage your knowledge by producing an information product that sells through an automated process. For instance, you might be a whizz at fixing computers.
You could make an internet course that teaches people how to build and fix their computer, without the need to take it into an IT expert for a service or repair. You then build a website that promotes your course, and market online using Google AdSense and Facebook ads.
Eventually, your site will start receiving traffic, without you needing to spend any money on marketing. Since it’s a virtual product, you never run out of stock, and you don’t have to worry about office or warehousing space.
Wrapping Up – Start Investing Early in Your Life
Research shows that starting your investment journey early in life pays off tremendously in your retirement years. Learning to invest starts with building positive habits around how you spend and save money.
Starting a savings account to grow your capital is an excellent example of the effect capital has on your investment mindset. When you begin to see your investment account grow every month, you’ll want to add more to it to accelerate your results.
After a few years of practicing diligent saving and investment of your money, you’ll change how you perceive money and its role in your life. Building a portfolio of income-producing assets takes time. However, if you change your spending and saving habits, there’s more of a chance of you ending up with a sizable investment portfolio that earns passive income.