7 ½ Investments to Generate Passive Income
Most investors would agree that making money while you sleep is the ultimate end goal. Passive income investments typically offer much more flexibility than traditional assets, allowing you to generate passive income which can be reinvested as you earn or collected as profit.
We’re big believers in long-term goals and for many people, passive income investments represent a relatively safe and adaptable way to reach these goals. If you’re looking to achieve early retirement for example, having a broad portfolio of assets generating income can set you up for success going forward.
With that in mind, here’s our list of the best investments to generate passive income and how they can be utilised in a wider portfolio.
1. Real Estate with a Long-Term Holding Pattern
It might seem biased to include real estate in this list, but the truth is, property investment is one of the most commonly chosen passive income investments for a reason. With a long history of reliability and flexibility compared to other investment assets, a long-term strategy focused around property can offer some of the best returns.
How Can I Earn Passive Income with Real Estate Buy-to-Let?
In theory, it’s simple. Buy a property and rent it out. The rental returns are your passive income and can be used in a variety of ways. Commonly, you’ll find investors looking to scale once their first property is delivering income, re-investing to build up a portfolio of multiple properties.
Once you have a selection of properties, you still have a number of options. You can either sell and reap any capital gains made on the property since purchase or, if you have a long-term goal in mind, continue to rent them out to maximise your profits. The key thing to remember is, the rental income pays for the property’s mortgage while still delivering a small profit. Once you’ve paid off the mortgage? It’s pure profit.
What makes property unique is it also offers a second stream of income alongside the rental returns. Capital appreciation, mentioned peviously, can also build during this time, meaning even more profit if you’ve chosen a good location and quality development. The UK property market, for example, has a history of following set price cycles that offer excellent returns provided you ride the wave – prices doubled between 2001 and 2015 despite the financial crisis in 2009.
The most important thing to remember is that this ‘long-term’ strategy is reliant on consistent rental income, otherwise you may find yourself paying out of your own pocket. Always work with established professionals, do your research into the rental market in your chosen location and buy quality upfront to maintain a good flow of happy tenants.
2. Dividend Stocks
Dividend stocks are another traditional choice for those just starting their investment journey. Offering a predictable income and long-term growth potential, dividend stocks may not offer the most lucrative returns but they’re dependable and work well as part of a wider portfolio – provided you invest with the right companies.
How Can I Earn Passive Income with Dividend Stocks?
Building passive income via dividend stocks is all about choosing the right company. Once you’ve invested and the company is earning, that money is paid back to you as a dividend. At this point, you can collect the dividend as a cash payment into an investment account or even reinvest for additional shares.
There are a number of different strategies related to dividend stocks that typically depend on the risks you’re willing to take. If you have a high-risk dividend stock, for example, you’ll earn a better return than you would for a low-risk alternative. As you’d imagine, having a varied portfolio of both is usually recommended.
It helps that investing in dividend stocks is easier than ever as technology has advanced. There are now a number of online brokers that can help you get started quickly and most of them don’t charge trade fees, which can save you money later down the line.
3. Real Estate Crowdfunding / Syndication
Real estate crowdfunding is a form of investing that is growing in popularity, especially as property prices continue to increase. It can be a great way for investors to access a property investment they’d never usually be able to afford – making it particularly popular with millennials.
According to online crowdfunder UOWN, 54% of people partaking in property crowdfunding are aged 18 – 30, mainly as a way to save money for a deposit or utilise an inheritance.
While many ‘traditional’ syndications were created for large-scale projects such as apartment complexes and commercial buildings, we’re increasingly seeing crowdfunding opportunities for projects of all shapes and sizes.
How Can I Earn Passive Income with Real Estate Crowdfunding?
Investing in a crowdfunded property is one of the truly ‘passive’ investments you can make for several reasons. Firstly, it requires very little time investment – generally there will be an assigned manager of the investment that covers the day-to-day, leaving you to reap the benefits.
Similarly, because you’re part of a larger ‘crowd’, financial risk is mitigated across the entire group and everyone still receives the tax benefits associated with the investment. While returns will be shared, and thus lower, real estate syndication remains an accessible investment asset that can still prove lucrative. For those that prefer total control however, there may be more suitable alternatives out there.
4. Index Funds
Generally considered an ideal ‘core portfolio holding’ for achieving long-term goals such as retirement, an index fund is a mutual fund built to match or track a financial market index. Because of the way they’re constructed, they offer low operating costs, low portfolio turnover and exposure to a broader market.
How Can I Earn Passive Income with Index Funds?
Index funds are tied to a specific market and designed to deliver low risk consistent income rather than ‘beating the market’. Passively managed and relatively secure, the idea is to choose a variety of investments that balance out potential risks – increasing your diversification and generating steady passive income at a lower cost.
Although returns are typically lower than other riskier investments, index funds are designed to be the core of a much wider portfolio and have been described by Warren Buffett as a ‘haven for savings for later life’.
5. Rent a Room
Not ready to commit to an entire new property? Why not rent out one of your rooms on a site such as Airbnb? This can be a particularly effective way of building passive income if you live near a tourist hotspot or a key amenity such as a conference centre or sporting venue, where you can rent out a room (or even the entire property) on a short-term basis for a nice sum.
How Can I Earn Passive Income by Renting Out a Room?
While having a separate property is the ideal way to let, it’s not always cost-effective or even feasible if you’re just starting out. Renting out a room short-term, or even taking in a lodger, can be a quick way to start building passive income, especially if you have the space or don’t spend much time at home.
While it would have been done on a much more informal basis in the past, the process of letting a room has been made much easier by platforms such as Airbnb, where it’s relatively simple to get started. With the last Airbnb report highlighting around 8.4 million inbound guests in the UK in a single year, there’s plenty of demand on the platform even despite current restrictions.
6. Peer-to-Peer Lending
When compared to other investment vehicles on this list, Peer-to-Peer (P2P) is a relatively new industry, popular due to the flexibility and accessibility it provides. Put simply, P2P is when an investor lends money to a peer, whether that’s someone they know personally or not. Once the venture starts earning money, they receive the passive income as part of the baked-in interest rates.
How Can I Earn Passive Income through Peer-to-Peer Lending?
Due to the increasing popularity of this investment type, there are a number of platforms available that make the process a lot simpler. With different lending opportunities available and the opportunity to create a crowdfund, it provides a flexibility that many other vehicles can’t offer.
Despite being a ‘new’ industry, there is evidence that rates of return for P2P lending are actually very competitive, averaging 10% annually just a few years ago. While it requires plenty of due diligence to set up, once everything is in place, P2P can be an excellent source of passive income.
7. Private Equity / Trusts
Historically, private equity investments have been one of the better options for investors with a long-term strategy in mind. It involves investing directly into a private company and receiving passive income when the investor capital is used to add value to the company – such as making more sales or selling for a profit.
How Can I Earn Passive Income through a Private Equity Investment?
In the past, private equity investment was reserved for investors that could provide a substantial amount of money over the long-term, giving the company time to properly utilise the capital and deliver returns.
As the industry grows however, we’re seeing more investors work alongside private equity firms. These firms will generally have a wide portfolio to mitigate risk and generate higher income for investors – it’s just a matter of researching the right firm to help you meet your goals.
½. Affiliate Marketing
You might have noticed that we’ve described 7 investment types so far. Affiliate marketing is our ½. While it doesn’t fit the traditional definition of an ‘investment’, it’s still a great way to build passive income over the long-term. Affiliate marketing involves having a website or a platform that you can use to promote other companies (affiliates). When someone uses your link to purchase with the other company, you get a chunk of passive income.
How Can I Earn Passive Income through Affiliate Marketing?
We describe affiliate marketing as our ‘½’ because it’s less focused on investing money but investing time. The initial set-up can be lengthy, depending on your approach. You only really need two things to make this form of marketing work: online traffic and the affiliates. Unfortunately, building these up to a consistent, effective standard can be difficult but once it’s done, it requires very little management.
Once they’re in place, you’ll start earning the true definition of passive income – to the point where you could be earning hundreds while you sleep. Because it’s based around a 24/7, always online method, there’s huge scope in affiliate marketing and a very low cost of entry – provided you have a way of bringing in traffic.