Passive Income: A Few Final Options
Remember that you don’t necessarily need to limit yourself to one approach. In a perfect world, you’ll have many ways to generate revenue streams without breaking your back. Here are some great ways that may make that happen.
Real estate investment trusts (REITs)
Description : REITs allow an investor (like you) to buy shares in a portfolio that includes commercial real estate like apartment complexes, warehouses, medical centers, retail locations, data centers, hotels, infrastructure, and more.
Risk Level : REITs can have varied returns and fluctuate strongly based on interest rates, geographic demand, and other factors.
Possible Return : One of the reasons REITs have drawn so much attention recently is because they have shown historically to outgain even the stock market.
Initial Investment Size : Most REITs can be invested in for under $1,000.
Liquidity : REITs are considered highly liquid because they can be bought or sold anytime.
Work Required : It’s vital to conduct a heap of research to ensure you understand this investment type’s risks and intricacies.
Skillsets Needed : Critical abilities for this type of investing include analytical skills, discipline, patience, persistence, mental stamina, focus, risk assessment, and emotional awareness.
Other Possible Pros : In addition to the advantages mentioned above, REITs can provide diversification across industries, regular dividends, and potentially certain tax advantages.
Other Possible Cons : Because of fluctuations in real estate and other markets, REITs may not be suitable for a short-term investment strategy.
Renting out a vehicle or equipment
Description : Various apps and websites exist to rent out a wide variety of types of vehicles or implements.
Risk Level: There’s a risk of damage anytime someone uses your property, so you’ll need to ensure your insurance covers renters.
Possible Return : Over time, the income from renting out things you own can be substantial and help pay for the cost of ownership.
Initial Investment Size : Typically, an item is desirable to rent because it’s too expensive for most people to buy outright. For this reason, there will be a significant outlay initially unless you own the item.
Liquidity : Another advantage of modern technology is that it’s relatively easy to find buyers for your vehicle or equipment should you decide to sell.
Work Required : This is a gray area in terms of the income being entirely passive because you’ll need to perform maintenance and likely cleaning, along with processing requests and maintaining a schedule.
Skillsets Needed : Attention to detail, ability to manage scheduling, and customer relations skills will come in handy.
Other Possible Pros : You could eventually own a valuable resource for a significantly reduced net cost.
Other Possible Cons : You won’t be able to use your property while it’s rented out.
Owning a stock that pays dividends
Description : Some companies pay those who invest in their stock a dividend, usually every quarter.
Risk Level : While risk is always associated with investing in stocks, companies that pay dividends tend to be more stable and entrenched in their industry. That isn’t to say the risks are negligible.
Possible Return : Dividend payouts of 1-6% of the value of the stock are considered typical.
Initial Investment Size : Some dividend-paying stocks can be purchased for a single-digit amount of dollars.
Liquidity : Stocks are bought and sold constantly, so the level of liquidity is high.
Work Required : Quite a bit of research is required to fully grasp the relative merits and risks of different investment options.
Skillsets Needed : To successfully invest in stocks, it’s vital to have research skills, analytical abilities, and the steadiness to ride out the ups and downs of the market.
Other Possible Pros : Because they tend to be more on solid footing in their industry, dividend-paying stocks have historically outperformed the rest of the stock market. Additionally, stocks that provide a dividend can produce two forms of value, given that the stock itself can appreciate.
Other Possible Cons : Two important factors to remember when investing in dividend-generating stocks are that the dividend may fluctuate and that there can be an additional tax burden because of the dividends.
An ownership stake in a business not requiring active involvement, such as a limited partnership.
Description : A limited partnership is a business agreement between two or more people. The general partner manages the business, while the limited partners invest but don’t do anything to run the operation.
Risk Level : The risk for a limited partner is capped at the amount of their initial investment. That said, the risk of losing it all is genuine.
Possible Return : Because the situations involved in the various types of limited partnerships are so different, there’s no way to predict the return any individual investment will realize.
Initial Investment Size : Just as the business dynamics vary, so do the beginning investment levels.
Liquidity : Depending on your limited partnership agreement, you may need permission from the other partner(s) to remove your money from the business.
Work Required : While you’ll likely want to keep an eye on how things are going, one of the advantages of a limited partnership is that they are designed to keep your workload to a minimum.
Skillsets Needed : Like any other serious investment of your hard-earned cash, you’ll want to conduct serious amounts of homework before committing to start a business.
Other Possible Pros : Some advantages people who invest money into a limited partnership may enjoy include ease of setup, personal liability protection, certain tax advantages, and fewer ongoing obligations than other types of business investments.
Other Possible Cons : The drawbacks to investing in a limited partnership include the limited influence on management decisions and difficulties in transferring the business to another owner or type of business.
Peer-to-peer (P2P) lending
Description : Peer-to-peer lending is the use of technology by individuals to lend money to others without going through a more traditional financial institution like a credit union or bank. Usually, this happens through an app or website.
Risk Level : When you’re lending money, there’s always a risk the funds you lend out won’t be repaid. It’s important to understand that in P2P lending, any individual loan you make could result in losing all your money. For this reason, it’s a good idea to diversify your loan portfolio. But remember, your overall return may differ from the amount you expected, especially if there’s a large-scale financial downturn when you’ve got money tied up in outgoing loans.
Possible Return : Returns in the range of 7-11% per year have been reported by some who invest in P2P lending.
Initial Investment Size: Depending on the site or app, you may be able to start lending for as little as $25.
Liquidity : P2P loans are generally less liquid than many other investments because you typically can only access your funds at the end of the loan term unless you pay a fee.
Work Required : There’s relatively little work associated with P2P lending beyond the initial setup and deciding to reinvest your money over time.
Skillsets Needed : A basic understanding of lending and the ability to weigh risks and rewards will be useful if you choose this avenue.
Other Possible Pros : You may be able to generate tax-free income from P2P lending if you invest through an Innovative Finance Individual Savings Account (IFISA).
Other Possible Cons : The amount of money you make off loans may be lower than expected if the borrower repays their loan early.
Description : This is a different animal, given that instead of an ongoing income stream, you’re looking to make a set amount to fund a specific project. Crowdfunding involves using a website or app to solicit money. For this piece, we’ll assume you’re not giving up equity in a business as part of your fundraising.
Risk Level : The risk is mild because you don’t necessarily need to put forth your own money. The main risk is reputational in case you’re unable to follow up on what you said you would do with the money.
Possible Return : The returns can be tremendous, given that you’re essentially asking for money without providing much for it.
Initial Investment Size : No startup money is needed to make a crowdfunding plea, but it’s a good idea to provide investors/donors with something to express your gratitude.
Liquidity : After your fundraising period ends, you typically will need to wait 7-14 days to get your money.
Work Required : The work can be as simple as writing a few paragraphs about why people should give you money and sharing a few pictures.
Skillsets Needed : Persuasive writing ability is the primary skill that will come in handy here. It’s also wise to research best practices for raising funds to give yourself a better chance of success.
Other Possible Pros : If you’re looking to start a business or launch a product using the money you’ve raised, you can use fundraising to build an audience for your services or product. On top of that, you’ve got an excellent source for feedback and potential future investors.
Other Possible Cons : There’s no guarantee your request will resonate with anyone, so you could put in work and receive little to nothing in return. If you’re looking to start a business, you may give away the idea for your business to anyone who sees your fundraising pitch.
There you go! Now, you have a variety of ways to potentially earn passive income. It’s important to consider which ones fit best with your circumstances and abilities. Once you’ve got a handle on the methods that might work best for you, empower yourself to start giving them a shot. You never know where they might take you!
HomeStreet Bank does not provide tax, legal, or investing advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investing advice. You should consult your own tax, legal, and financial advisor before engaging in any transaction.