A remarkable technique to enable you to earn extra cash flow is through passive income investments, especially now that inflation is disrupting the entire economy.
When times are good, passive income can help you make more money. It can also assist you in getting by if you are unexpectedly laid off, decide to take time from work, are planning to retire from your main business or profession that provides your income currently, or if inflation continues to eat away at your disposable income.
Any professional financial advisor will tell you about the benefits you will have if you generate passive income and the various means to get there.
What is Passive Income?
You can make money passively by working little or with no ongoing labor. You won’t need to take care of a passive income stream every day once you’ve identified and established one, but that doesn’t mean you won’t need to work on it occasionally.
Before reaping the benefits of a passive income stream, you typically must invest time, money, and other resources to set it up. However, the process can be simplified tremendously with the help of an investment expert. Entrusting the right financial advisor with your passive income plans can do wonders for your personal finances.
Passive income, according to the Internal Revenue Service (IRS), might come from real estate or by owning a business or other savvy investments that a person isn’t actively engaged in, such as dividend-paying stocks or royalties.
Top Passive Income Investments
In order to avoid failure within your investment strategy, wasting both time and money, a professional advisor can help you determine the optimal types and mix of passive investments.
We have prepared a list of what we believe to be some of the best passive income investments:
1) Real Estate
Real estate makes an excellent source of passive income due to the inherent opportunity for multiple means of income. The two primary resources for passive income from real estate are::
Rental Real Estate
Renting out properties is one of the most popular methods of generating passive income. It requires much analysis and research including that of the area, the potential renters, and the overall market – but when done right, it can be a highly profitable long-term investment.
Rental real estate may require a large initial investment. Consulting with an investment advisor who is very experienced in this area (few are!) can help you complete a cost-benefit analysis and determine both income and tax benefits from the investment, and help ensure that this is the right type of investment for you.
Residential rental properties are not the only option. There are multiple ways to capitalize rental real estate:
Holiday or Vacation Rentals
Short-term rentals provide an opportunity to rent out a property as a holiday rental in a well-known tourist area. These types of investments generally offer a reduced number of “rentable days”, however, the rental income during holiday periods is generally at a much higher rate than typical rental properties. Once the mortgage is paid off, you are free to keep receiving rental income indefinitely and to sell or recapitalize the property to increase your overall portfolio value.
One of the most successful real estate investment kinds is commercial property. In addition to the high return on investment, especially if the property is in a booming area, you will be renting to a company rather than a person. This implies that everything will go more smoothly because companies typically care about their reputation and will take good care of the property.
Commercial properties typically have a higher rate of return than residential properties. An average annual return between 6% and 12% is common for commercial property, depending on the area, current economy, and external factors as opposed to an average of under 4% for smaller residential properties.
Commercial properties also offer an opportunity that residential properties do not: triple net leases. This simply means that, unlike residential real estate, you are not responsible for the maintenance and upkeep of the property.
Real Estate Investment Trusts
If you want to generate income from real estate, but directly owning the rental property or properties (something we specialize in helping our clients achieve at Ridgewood Investments) is not a feasible option for you, a REIT can prove to be your ideal passive income investing option. Regular individuals can profit from earnings from real estate investments thanks to REITs, which pool the funds of numerous investors, without having to individually fund, operate, or buy any real estate.
2) Peer-To-Peer and Private Lending
Peer-to-peer and private lending is a platform type that enables users to loan and lend money without depending on a traditional financial institution to oversee transactions. This is often referred to as crowd lending or social lending or just direct private lending, which directly connects lenders and borrowers, typically via a website or an app.
There are many reasons why someone may seek private lending sources as opposed to traditional lending. It could be as simple as the individual or business does not have sufficient credit for traditional lending. It could also be that the money is needed for a new business startup and would not be a suitable prospect for traditional lending.
It eliminates the need for a middleman financial institution by allowing borrowers to get loans directly from other individuals or organizations. Investors in direct private lending seek a higher rate of return on their cash assets than they would find in a regular savings account or deposit certificate.
Peer-to-peer lending has a moderate risk that the borrower(s) may not repay the loan(s). To reduce risk, it is often a good idea to diversify amongst several borrowers. A great investment advisor can help you figure out what model is best for you, as well as how to best distribute your money in order to ensure a lower default risk.
3) Dividend Investing
When you own dividend-paying stocks, you receive a share of the profits of the company you have invested in.
There can be hazards involved in investing in dividends when not properly researched. Companies may experience financial difficulties and either not be able to pay out dividends or have to reduce them. For larger dividend yields, look to preferred equities or dividend aristocrats.
These hazards can be mostly avoided with the help of a financial advisor. Instead of stressing about your dividends and feeling unsure if your passive income stream is safe or might lead to loss, you can trust a finance professional to aid you in choosing the best company stocks to invest in.
One method of investing in dividends is using dividend funds.
Mutual funds or exchange-traded funds (ETFs) that track dividend stocks are known as dividend funds. This is different from a traditional index fund, in that it distributes dividends to investors based on the profits generated by the investments that make up its underlying portfolio. Diversification, revenue, and a possible inflation hedge are all benefits of investing in dividend funds.
These funds are helpful for creating a supplementary source of income because they routinely distribute dividends to investors. Dividend funds, which provide diversification in a single basket, can aid in risk management in an investment portfolio. Depending on its main goal, a dividend fund may hold a variety of stocks.
Establish Your Passive Income Stream
Starting to generate passive income is not something that can happen overnight. It requires thorough research of the different options of passive income investments, and an analysis of what best benefits you and your finances.
While we encourage creating a passive income stream sooner rather than later, do not rush into it without professional financial help. Get in contact with us and let’s find out together the best way to make your money work for itself, even when you sleep.