Passive income is income that comes in without effort or time in the being expended to create it. Once you make the initial required investment of time or money, the investment produces returns automatically over time, with minimal intervention. There are many different types of passive income investments, and they are certainly not equal. Some return more than others, and some require larger or smaller investments of time or money than others. If you are looking to add some passive income to your portfolio, it is essential to know what options are out there for you and how they compare. In this article, we will examine four possible options for you to consider.
1. Real Estate Investment
There are many different ways to invest in real estate. Some investments are direct, while others do so indirectly. Real estate has remained a popular passive income investment choice for many decades, despite numerous ups and downs in the real estate markets.
Rental properties are the first and most obvious form of passive income property investment. Typically, a real estate investor will need to come up with a 20 percent down payment upfront to buy the property, but that may not be difficult for someone with a healthy amount of savings and an established investment portfolio. Once the property has been purchased, it can be rented out to tenants. The monthly rent checks provide a passive income in the form of profit over the investment and maintenance expenses. If you do decide to invest in rental properties, it is wise to have a competent property management company to handle all communication with your renters.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts are a way of investing without needing to purchase an entire property and deal with renting it out to tenants. Real Estate Investment Trusts typically own several properties within the trust and then allow investors to buy shares of ownership in the trust, similar to the way a mutual fund works with company stocks. REITs then pay out 90 percent of any income generated by the group of properties as dividends to investors. This provides a stream of passive income. Dividend income from REITs is taxed as regular income, so keep that in mind if you are an investor who is in a higher tax bracket.
Real Estate Crowdfunding
A third solution to creating passive income through real estate investing in real estate crowdfunding. This exists as a middle-ground option between the previous two. Investors in real estate crowdfunding will have their choice of equity or debt-based investments in commercial and residential properties. In contrast to a REIT investment, investors can take advantage of the tax benefits of full ownership, including deductions for depreciation. But as with the REITs, investors are free from the burdens of maintaining a property and finding good tenants. This creates a sort of best of both worlds option for investing in real estate.
2. Peer-to-Peer Lending (P2P)
The P2P or Peer-to-Peer lending industry was formed just over ten years ago yet has grown dramatically in that time to become a significant investment category. If you would like to help others reach their goals while creating passive income for your portfolio, peer-to-peer lending could be a good option.
It is easy to get started with P2P investing, and two of the largest P2P investing platforms, Lending Club and Prosper, both let you get started with as little as $25 to invest. You also do not need to be an accredited investor. Each company has its own rules as to who can participate in investments, so be sure to read them to see if you are eligible.
Rates of return are determined by the credit risk of the loan recipient and typically range from about 5 to 12 percent. Once you’ve decided to invest and made your initial investment, all you need to do is wait for the investment return to roll in.
3. Corporate Dividend Stocks
Owning dividend-paying stocks is perhaps the easiest way to create some passive income in your investment portfolio. As the underlying company makes quarterly earnings, a portion of those earnings will be given to investors, who are issued dividend payments. These payments will be deposited directly to your investment account as cash, or they can be set up to purchase additional shares to grow your quarterly passive income automatically.
The income from dividends is known as a “dividend yield,” and it varies from company to company and from year to year. If you are unsure which dividend-paying stocks to invest in, look for those that fit the “dividend aristocrat” label, which means they have consistently paid increasing dividends for the past 25 years.
4. Index Mutual Funds & ETFs
Index funds are assets that are tied to a specific market index. These funds are typically packaged as either mutual or ETF (Exchange-Traded Fund). Many are available as both. The funds mirror the performance of the underlying index they track.
Because these are passively managed (rather than actively), they tend to have lower fees due to the reduction in management costs. They also have a lower turnover rate than other funds, which makes them more tax efficient.
Passive income investments can be helpful when you desire a hands-free approach to investing that creates a steady stream of income for your portfolio. The types of passive income investments described here come with different risk profiles and returns for each. As with all investments, it is essential to get the advice of a professional to help you maintain a properly diversified portfolio that suits your risk tolerance preferences and financial goals.