Every time someone brings up the idea of a passive income-earning opportunity, we stop to listen. Of course, there are times when the deal is too good to be true, but in most cases, a reasonable proposition keeps us asking for more.
The idea of your money working for you as you sleep is appealing, and with billionaires showing that you can earn passive income and live off that income, it makes sense to look for the best passive income-earning opportunities.
What is Passive Income?
Passive income represents the source of revenue that continually generate revenue, even after the initial work is done. For example, the royalties from a film or a book. Note, however, that this doesn’t mean that we all have to write books or script blockbuster movies since, as we are all aware, we can’t all fit in the film and literary worlds. What the example above drives at, however, is that the source of passive income should be the gift (in this case, the asset) that keeps giving. It’s also worth noting that the gift that keeps on giving can be big or small.
According to Investopedia, passive income represents the money flowing regularly without a substantial amount of effort put in creating the income.u
The general idea behind passive income sources is that you have made or have to make an upfront investment in money and/or time, but once the ball starts to roll, you won’t have to put in much effort to maintain the investment and to keep the ball rolling, and the money will keep coming.
The catch, however, is that not all sources of passive income are created equally; some promise high regular returns after years, others will bring in smaller but regular returns after a short time, and there also are the investment options that bring in high returns regularly and after a short time.
If you are an investor, your choice of investment will depend on how much you are willing to invest, your risk profile, as well as the passive income investment strategies you wish to pursue.
In the next section, we’ll look at some of the best passive income investments you could pursue. But before we jump into all that,
let’s first look at the things you need to do to build a worthy source of passive income.
Save until it hurts
Attaining financial freedom and earning good money in passive income is not a pretty process. It requires a great deal of hard work, but even more sacrifice. For example, you might think that you are saving enough or even more than enough in your retirement IRA or 401(k) savings account, but you will soon realize that you aren’t. For passive income, you must make many sacrifices on pleasures to ensure that you’ve put away more than enough money to earn significant returns.
Focus on the Income-producing assets
If you are going to build a high-earning investment business that brings in more than enough income, then you need to invest in the investment assets that are known to generate high yields. The internet earning opportunities might appear fancy, and they are advertised as sexy, but they don’t offer enough passive income, always. Therefore, you might want to opt for options like the dividend-generating stocks or a certificate of deposits.
To build a liveable amount of passive income, you must be extremely patient. Just like Rome, which wasn’t build in one day, your investment will not bring in the high returns you desire as soon as you begin. With declining interest rates and the constant changes in the markets, you need to begin investing as early as possible.
Start from the end
The best approach to goal-setting involves starting from the goal, working backward. In this case, if you are thinking of a passive investment income that you can live on comfortably, then you need to know exactly how much you will need to start with and how you will be able to put in now to get the desired amount after a specific time.
Asset class diversification is regarded as the most common investment strategy, but are you doing it right? The truth is that when it comes to investments, capital preservation is one very underrated aspect. Therefore, the next time you think of investing, think of how you can diversify your investments right.
Bank on the power of compounding interest
As mentioned above, the best way for you to generate a large amount of money in passive income starts with putting away money. You not only need to put away money, but you also need to make sure that you are putting away as much money as possible. However, this doesn’t mean that you must be earning thousands of pounds to get started and to build an investment portfolio.
While putting away as much money as you can, remember that the money you put away today is worth more than the money you’d have tomorrow. Yesterday’s money is always worth more than the money you will make tomorrow. So, if you are going to invest in a way that’s going to earn you enough revenue passively in the next few years, you must put away just as much money.
So, let’s say you wish to put away £5,000 in a year. To meet your goals, you need to start saving today. Put your savings in the fund to ensure that it earns interest even as you keep saving. Diversify your investments as you build your portfolio and be smart about it.
One of the best funds you could put your money in us the iShares UK Dividend UCITS ETF, a fund that tracks the FTSE UK Dividend Plus Index. This fund also includes 50 of the top-yielding companies that have been listed in UK’s FTSE 350 Index. The best bit is that this index costs 0.4% annually, and it presently reports an income yield of 6.9%.
Now that you know what to consider when looking for the best passive income opportunities, here are some of the passive income investments you could try.
Real estate is the oldest investment trick and strategy in investment books, but it is also the best investment option for anyone looking for a good source of passive income. While the returns from real estate might not be as much as they were in the past, given the ups and downs in the real estate market, this investment class remains the preferred investment choice for most investors all around, especially for investors looking for reasonable long-term returns.
To invest in real estate, you might have to put down a 20% down payment to purchase that property and this might be an issue/ barrier for you if you don’t have much saved up, but once you’ve paid up for your first piece of real estate, often the returns are pretty good. But you need to be smart about investing and reinvesting your earnings, especially if you wish to build a bigger real estate investment portfolio.
An alternative to buying real property to having a place in the real estate world would be in the form of REITs (Real Estate Investments Trusts). REITs are an excellent form of passive investment income in the real estate world, and it works best for investors who are not interested in the burdens of managing the property on a day-to-day basis. Besides being a great form of real estate investment, you might also want to invest in REITs because of the 90% payout of the taxable income, which is paid out as dividends to all the investors. The only catch, however, is that the dividend will be taxed as ordinary income, which means that if you are an investor in the higher tax bracket, the tax matter will be an issue for you.
But those two are not the only investment options in real-estate – you could also try the real estate crowdfunding option. Real estate crowdfunding is the middle-ground option for individuals interested in investing in real estate. With this option, all investors have the choice o investing in debt or equity investments in residential and commercial properties. But unlike REITs, the investors get to enjoy the tax advantages associated with direct property ownership. These advantages include depreciation deductions.
If you are looking for an easy investment option, then you’d want to try out the dividend stocks. Dividend stocks are among the easiest investment options for investors, and it’s a good source of passive income, with investors getting paid to own the dividend stocks.
In this investment approach, a company brings in its earnings, but part of the earnings are siphoned off and reinvested with the other part paid to the investors as stock. Often times, the reinvested dividends are used to buy additional shares.
Regarding the dividend yields, you should know that the yields will vary significantly depending on the company one is investing with, as well as the prevailing economic conditions.
Note that if you are unsure about the best dividend-paying stocks for you to choose from, then you can choose the ones that fit the dividend aristocrat label for dividends. The aristocrat label for the dividends means that the dividends where the company is reported to have offered an increasing amount in dividends in not less than 25 years.
The high-yielding stocks in the FTSE 100 fund with 10 years of saving £5 daily would earn you an income stream of £2,000 if you work with an earning rate of 7.8%. 20 Years later, you’d make £6,500 at the 7.8% target yield. You will earn even more if you save up £10 a day. Today, this might sound like much money, but in 10, 20, or 30 years, you will be glad you put away that £5 each day.
The Peer-to-Peer/ P2P lending industry is a big thing today, and in an industry that is just over a decade old, the P2P industry has grown significantly.
The P2P lending industry is a particularly great investment today, and it’s an ideal fit for the investors interested in helping other people in need of funds while improving their investment portfolio.
Besides the huge returns expected from P2P lending, this investment option is also appealing because it has fewer barriers to entry (in comparison to other investments); your investment could be a loan as little as £25.
The other advantage of investing in P2P lending is that this investment platform opens its doors to different investors, including the non-accredited investors, not just the credited investors. Non-accredited investors often invest through crowdfunding.
How profitable is P2P lending as an investment? Well, this investment could be quite profitable, especially if you don’t mind taking on a bigger risk. The returns also depend on the borrowers on the lending platforms, but generally, the returns range from 5% to 12%.
Index funds refer to the mutual funds not tied to specific market indices. The index funds are designed specifically to mirror the performance of all the underlying indices that they track, in the process, offering several advantages over a good number of investments for investors looking for a passive income source.
Note that the index funds are managed passively with the securities included in the funds not changing unless the components of the index change. In the investment sense, the passive management of the fund means lower management costs, as well as a low turnover rate, which makes yields from the index funds tax efficient. The low turnover rate also reduces the drag, which would detract the returns.
If you are unsure about getting into the index funds investments, here’s an idea – save £5 daily for a year. You should have £1,825 at the end of the year. Now, take this money and invest it in one of the low-cost FTSE 100 Index Tracker funds. At a dividend yield rate of 4.5%, you’d earn £82.12 yearly. You could also buy the high-yield dividend funds or stocks.
Certificates of Deposit (CD)
Investments in CDs don’t promise high returns as they would in the past where a CD would have a yield of at least 4%, with CDs currently having a return of 2.5% for a five or 7-year CD.
But even with the low expected returns, investing in CDs is a great investment decision since there is no minimum income or net worth investment needed for one to get started. Also, you don’t have to be accredited to invest in a CD- all you need to do is to walk into your local bank and then open up a CD account for a specific duration. Also, you get to create an individual account or a joint account.
Now is the best time for you to start putting away money if you wish to earn a passive income and feel the impact of your money working for you. Keep putting that money away, and when the time is right, put it in a long-term investment fund or any other investment instrument.