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What are the best passive income investments?
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In this article, we will break down the notion of Passive Income Investments so you know all there is to know about it!
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Table of Contents
What Is Passive Income Investments
Passive income investments are investment instruments, securities, or assets producing a constant stream of cash flow or money without the investor actively monitoring the asset or exerting material effort.
In other words, once you invest your money in the passive income investment opportunity, you can expect to receive cash flow “passively” or without having to put in much of your time.
“Passive income” is a phrase used to refer to a stream of income generated with little to no involvement of the business owner, investor, or the recipient of the income.
It means that once the passive income asset is set up or acquired, the investor or owner can expect to receive future cash flows at regular intervals.
An “investment” is defined to be the action or process of investing money for profit.
To “invest” or “make an investment” is the process of purchasing a stock, bond, security, asset, or another instrument with the objective of generating a return on the capital invested.
For example, a top passive income investment is in the area of real estate and rental revenues.
An investor looking to generate steady income can invest in a real estate asset and collect rental revenue or income over the life of the investment.
Not only the investor will earn passive income by cashing rental income every month but if the investor keeps the investment long enough, he or she can also generate profits on the value of the real estate asset (and generate capital gains).
The strategy of buying and holding an investment long term is called passive investing.
I dive into the notion of passive investing in another article of mine and it would be a great complementary read for you.
Best Passive Income Investments
What are some of the best passive income investments that you can consider?
Let’s look at some passive income investment opportunities that may be the best candidates for you to potentially invest in.
Real Estate Investments
Many investors love to invest in real estate to generate important returns over time.
Real estate properties are truly great investment opportunities allowing investors to generate a long term and passive stream of income.
When you buy a rental revenue property, your tenants will pay rent every month allowing you to generate a constant stream of income for the entire time you hold the real estate property.
Even though it may take some time, effort, and cost to maintain the real estate property, the effort is minimal in most cases to keep the rental revenue coming in.
If you are considering to invest in a real estate property, you’ll need to make sure you have a decent amount of money to put as initial cash down payment (20% down payment in many cases).
Just like every investment, you’ll need to carefully assess the risks and rewards of your particular investment as not all real estate properties are created equal.
Real Estate Investment Trust
Real Estate Investment Trust or REITs are investment instruments that you can buy into if you don’t want to actually buy a physical real estate property and manage it yourself.
A REIT pools investor money to purchase real estate investment and then pays out most of the passive income it generates with its real estate assets as dividends.
In essence, it’s like you are buying a share of stock and earning dividends along the way.
The advantage of a REIT is that you buy into a pool of real estate properties giving you exposure to the real estate market and you earn passive income through the dividends that you get.
The possible downside for high tax bracket individuals is that dividends are generally taxed as regular income.
As a result, an investor may see a good portion of his or her returns get chipped away due to the taxes imposed on dividend income.
Dividend Stock Investments
Dividend stock investments are one of my personal favorites.
Dividend stocks are shares of stock in publicly traded companies that regularly pay dividends to the stockholders.
This is one of the simplest and easiest ways to start investing in the stock market.
Dividend-paying companies are typically companies that are industry leaders, are well-established companies for a long time, tend to operate in a mature or stable business segment, and have a track record of earning profits year-over-year.
The companies that have extra profits left in their retained earnings can declare dividends and pass those profits to their shareholders as dividends.
Inventors like dividend stocks as they can expect to receive passive dividend income and eventually sell the stock for a profit.
You should analyze different dividend paying stock investments before investing to ensure that you are comfortable with its risk and reward potential.
Some investors choose companies that have been paying dividends for at least twenty-five years in a row demonstrating their financial strength and stability (these companies are referred to as dividend aristocrats).
Index Fund Investments
Another passive income investment opportunity to invest in index funds.
Index funds are essentially mutual funds or exchange-traded funds that hold stocks and securities consistent with a particular market index.
As an investor putting money in an index fund, you can expect to generate a return or profit consistent with the market average or the market index.
For example, you can have an index fund that tracks the performance of S&P 500 or the Dow Jones Industrial Average.
This means that the fund will hold stocks and securities that mirror those market indexes and keep the same asset composition.
Although investors may earn less money than investing into an active fund, it’s still an attractive passive income investment option as the index fund will have lower management fees and will be more tax efficient.
Peer-to-peer lending is a type of investment that is relatively recent and is also known as crowdfunding.
Peer-to-peer lending is the process of an investor lending money to a business directly through an online platform.
If you have extra cash that you’d like to invest in a business, you can go to platforms like Prosper and LendingClub to invest your money and get connected to a business.
Once you invest, as an investor, you don’t have to do anything else and you don’t have to participate in the business.
The investment is essentially a loan that you give to the business who will then need to reimburse your principal along with interest.
Bond ladder is when you invest in several bonds with different maturity dates strategically selected to mature over a specific period of time.
The bonds have a “staggered” maturity date allowing you to keep your bond investment continually rolling when one matures, you’d reinvest in another (and so on).
The ladder investment strategy allows you to mitigate reinvestment risk in case you have all your money maturing and the bonds available in the market do not offer an attractive yield.
Investments in bonds are generally low risk investments and therefore good passive income investments.
If you structure your bond investment in such a way that you receive coupon payments (or interest payments) or create a bond ladder, you can earn passive earnings in a safe and steady fashion.
A GIC, or guaranteed investment certificate, is a very safe investment where you deposit your money at a bank or with a financial institution and in return you get interest on your money.
GICs are attractive to investors as your money is effectively “guaranteed”.
This means that you are sure not to lose your principal in this investment instrument.
However, since you are taking little risk, you will only cash in a small return on your investment.
This means that you have the potential to earn a passive income but you will not necessarily build wealth over time if you are fully invested in GICs.
High-Yield Certificate Deposit
A certificate of deposit is a way for you to earn interest on your money.
You can purchase a certificate of deposit from a bank where you invest your money for a pre-determined period of time (and you don’t touch your money) and in return the bank will pay you an interest rate premium.
A “high-yield” certificate of deposit is a type of CD that offers you a high-interest rate premium.
CDs are safe investments that can provide you with passive interest income.
However, compared to other investment options, they are not the most profitable ones.
You can expect to receive interest similar to what you’d get by putting your money in a savings account.
Other Types of Passive Income Opportunities
In this article, we focused on financial passive income investments.
However, in addition to investments in real estate, the stock market, or other financial markets, you can also invest your time and money to generate passive income in other ways.
Here are some passive income opportunities that may (or may not) be suitable for you:
- Affiliate marketing
- Build your own website
- Buy a car wash
- Buy an existing business
- Buy annuities
- Buy vending machines
- Cashback sites
- Create an app
- Create an online course
- Design T-shirts
- Earn royalties
- Email marketing
- Flip websites
- Flipping retail products
- Fractional investing
- Instagram sponsored posts
- Invest in farmland
- Invest in funds
- License music
- Network marketing
- Passive income blogging
- Renting storage space
- Renting your house
- Sell stock photos
- Selling digital products
- Selling information products
- Start a dropshipping store
- Starting a YouTube Channel
- Student income share agreements
- Write ebooks
Passive Income Investment Takeaways
So what are Passive Income Investments?
Looking for some passive income investment ideas?
In this article, we have looked different ways you can invest to earn passive income.
This blog is dedicated to the concept of passive income and how you can build wealth over time through strategic investmetns.
I believe, just like many prominent investors, that the best way to build wealth is to find ways to generate passive income.
We have covered many passive income investment options in this article but my personal favorites are real estate investments and dividend stocks.
Of course, that’s just my preference.
You have many investment options to choose from, such as:
- Real estate investments
- Dividend stocks
- Index funds
- Peer-to-peer lending (or crowdfunding)
- Bond investments
Let’s look at a summary of our findings.
Passive Income Investments
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