The ultimate objective of investing is to generate profit.
You could purchase an item at one price with the expectation that the market price will rise and you will be able to sell it for more in the future.
The outcome of a wise investment decision is the gain acquired by purchasing at a lesser price and selling at a higher price. Until you make the choice to sell, you won’t get any more money.
There’s certainly nothing wrong with this type of investment. If the objective is to create a diversified portfolio which will ensure financial growth going forward, it may be worthwhile to look into income-producing investments.
In other words, income-generating assets are investments that give you a regular source of money simply through having them. This has been our own focus to achieve financial freedom in 10 years or less. Buying specific income earning assets that kick off cashflow month-in, month-out.
The benefits of investing are not only based on a potential increase in the asset’s selling worth, but also include a periodic payment of actual money.
The money earned from the resulting cash flow is known as “passive income” since it does not require any additional efforts to procure. The income-generating asset does the work for you.
An income-producing asset increases your monthly budget, instead of reducing it. Having a nice new car is great, however, the money that has to be paid monthly for the loan and insurance coverage can reduce your available cash each month.
Unless you make a living by renting out cars, it is reasonable to consider getting a new vehicle as an expense rather than an investment.
A revenue-generating resource increases the money you can use to purchase different items (or to put into investments) separately.
Revenues derived from holdings may demand a varying degree of involvement from the proprietor.
Many financial products such as CDs require very little work to maintain after they have been bought. Acquire the asset and then gather the regular interest payments due.
On the flipside, investing in real estate demands much more consideration, particularly when you are managing the tenant duties by yourself.
Advantages of Income-Generating Investments
Accumulating wealth over the long-term requires a consistent source of income that requires minimal effort and time. This presents a great chance for advantageous investment.
Income obtained via a job necessitates a compromise—the hours you give in return for the salary you take home.
Time put into a job is not usable for fun activities or making money in any other capacity.
But if your income comes from owning a source of revenue-producing property, you’ll have more freedom to do what you please with that time.
You may choose to keep dedicating that same amount of time to work which would lead to more money coming in and more resources to invest.
You could use the time to go fishing with a fly rod or start sculpting.
The essential thing to recognize is that passive income provides the opportunity to do whatever you want due to the fact that you don’t have to invest as much time on working – or you don’t need to take up employment at all if your passive income is enough to fulfill all the requirements of your income.
Retirement Planning
The income made from investments that produce returns can prove highly advantageous when it comes to preparing for retirement. Having a reliable income source gives one a sense of security when it comes to budgeting and is ultimately beneficial, as it allows them to maintain and preserve the assets they have amassed.
For your monthly bills, when you have to liquidate property to cover them, your total net worth decreases month after month, and the actual items disposed of lose their ability to bring in funds or increase their worth over time.
As investment growth dwindles, you will have to increasingly rely on withdrawing money from your savings until your retirement fund has been significantly depleted.
Money or property that you use to finance your retirement cannot be inherited by your descendants.
In contrast, possessing something that gives you a regular source of income can supplement your cash flow without diluting the worth of your assets.
Cash Flow
As well as providing a steady stream of income, an invested asset could also increase in value over time.
Think of a rental property. Tenants’ monthly rent payments are a factor that can add to your financial resources, and in some cases, the value of the property may also grow (depending on the real estate climate).
You have the potential to build up overall financial well-being by leasing a property. This could involve gaining additional income through collecting payments, as well as potential appreciation of the asset in value over time.
Firstly, giving out money to cover expenditures and to put resources into other investments–as well as any gains in the intrinsic value of the asset.
Taxable income derived from sources such as revenue-producing investments has to be declared on the tax forms.
Nonetheless, many of the fees related to sustaining a source of revenue-generating property are able to be removed from taxes, and some kinds of passive income can take advantage of certain tax benefits (for example, stock dividends are generally subject to a smaller rate than wages from a job).
The money you acquire from the renter for leasing your property should be registered as taxable revenue.
The cost of keeping up and taking care of the property, such as paying a property management company, can usually be deducted.
The Best Income Earning Assets
Investment Real Estate
Real estate bought with the intent to generate a profit rather than to inhabit is commonly referred to as investment property. When you purchase an investment property, it is typically not for the purpose of it being your main habitation for years to come or for use as a base for your business operations.
Most frequently, regular passive income gained from an investment property will be in the shape of rental expenses from a occupant.
Investment property that brings in income can range from a small apartment, townhouse or single-family home that you rent out, to a large commercial building where numerous tenants are located.
The rent that is paid should cover expenses like the mortgage, property insurance, taxes, utilities and repairs, with some extra for profit. Ideally, this extra would be a reasonable amount.
In addition to rental income, profits from investment in real estate can come from an increase in the property’s value over time. Nevertheless, this form of profit is not consistent.
The drawback to real estate as a means of making money often mentioned is that being a landlord can be difficult.
The legislation of certain areas concerning rental housing typically involve an array of obligations on the part of the property owner.
Nevertheless, it is possible to hand over all the duties of maintenance and ownership to a property management group for a set fee, though that price tag could potentially reduce the place’s return on earnings.
Other types of real estate investments are on offer that are more hands-off. Our favorite type of investment real estate is turnkey real estate.
Rental Income
Using rental properties as investments is an efficient way to earn passive income. But it often requires more work than people expect.
John H cautions if you do not invest the time necessary to create a moneymaking opportunity, you risk losing more money than you started with. Jim Graves, from Los Angeles, holds an Accredited Investment Fiduciary title and authored the book “The 7% Solution: You Can Afford a Comfortable Retirement.”
To earn passive income from rental properties, Graves says you must determine three things:
- How much return you want on the investment.
- The property’s total costs and expenses.
- The financial risks of owning the property.
Putting it another way, if you wanted to make $10,000 a year, you would need to collect rent of $3,133 a month in order to cover the mortgage of $2,000 and other expenses of $300 a month.
It is essential to ponder if there is a demand for your property. What if you are confronted by a tenant who is tardy in making payments or has harmed your property? What if you’re unable to rent out your property? Any of these factors could cause a significant decrease in your passive income.
And economic downturns can pose challenges, too. You may have tenants that abruptly have no means of paying their rent while you are still obligated to make the payments on the mortgage. You might not be able to gain the same amount of income from renting out the house as before due to decreased wages. The cost of houses has rapidly grown because of comparatively low mortgage rates; thus, your rents may be inadequate for covering your outgoings. It is a wise idea to consider any potential hazards and develop alternatives to provide safety.
Buy Crowdfunded Real Estate
If you wish to invest in property but don’t want to manage or handle any of the work involved, you could consider making use of a crowdfunding platform. This would remove the need for you to take charge of repairs, dealing with tenants and other tasks. An experienced investment group does the research to select the appropriate real estate for you to invest in, so you can decide how much money to put into it based on your level of comfort.
An annual management fee will be required to be paid to the real estate platform, and the minimal sum invested could vary from small amounts of ten dollars to very large sums of tens of thousands.
You can have access to exclusive real estate investments that have potential to be financially rewarding, which have been scrutinized by experienced investors. It’s possible to view the investment returns offered on different platforms, which allows for an estimation of likely gains and how long it should take to gain them. Real estate can be used as a way to diversify an investment portfolio, reducing the overall fluctuation in returns.
Certain platforms put money in stocks whereas others invest in bonds. Usually, investing in stocks carries a bigger chance of a higher reward but also a greater possibility of loss, while investing in debt comes with a lower potential return but also carries less of a risk. You must meet certain qualifications to be able to use certain platforms, such as having an income or assets that meet a certain minimum requirement. Popular platforms include Fundrise, Yieldstreet and DiversyFund.
It is your responsibility to invest in a variety of crowdfunding platforms. The past performance of investments does not guarantee similar returns in the future. You will need to determine what should be purchased. Consequently, perusing the prospectus for any purchases you are considering and comprehending the advantages and disadvantages are necessary.
Furthermore, since real estate is usually supported by large amounts of borrowed money, it tends to be more vulnerable to the effects of any economic slump. Be sure to know for how much time your funds will remain tied up in the investment and when you have the ability to get to it, especially in the case of an urgent situation.
Peer-To-Peer Lending
A peer-to-peer loan is a type of personal loan that is arranged between yourself and the borrower, and is organized through the help of a third-party service, such as Prosper or LendingClub. Apart from Funding Circle, which extends loans to enterprises and allows higher borrowing limits, and Payoff that favors borrowers with improved credit ratings, there are other players in the market too.
As a lender, you gain revenue from the interest payments that are made on the loans. In case of a failure to pay back, you could be left without any compensation since this loan is not backed up by collateral.
To cut that risk, you need to do two things:
- Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com and LendingClub, the minimum investment per loan is $25.
- Analyze historical data on the prospective borrowers to make informed picks.
It may require effort to understand the specifics of peer-to-peer financing, so it isn’t a hands-off investment, and you should be vigilant in examining possible borrowers. You have to keep meticulous tabs on the money you are receiving when putting funds into various loans. If you’re looking to create an income stream, you should reinvest any money you make from interest.
In times of economic recession, it is more likely that personal loans with a high interest rate will not be paid in full, thus causing the default rate to be higher than usual.
Dividend Stocks
Those who own shares in businesses that issue dividends will get payments at defined time periods from the firm. Firms disperse funds on a quarterly cycle to shareholders which are taken from their income; and all it takes is to own the stock. The larger the number of stock shares one holds, the more dividends they will be paid.
Earning money through dividend-yielding stocks is possibly the least active approach as the source of income doesn’t call for participation other apart from the original economic investment. Your brokerage account will be credited with the funds.
The tricky part is choosing the right stocks.
An illustration of this would be the case of firms that dispense a very large amount of dividends, which may not be able to maintain it over time. Many inexperienced people make haste and buy a stock without fully researching the company that is creating the stock. It’s necessary to take a thorough look at every company’s website and have confidence in their financial papers. It is recommended that you take two to three weeks to look into each firm.
It is possible to invest in dividend-bearing stocks without expending much energy analyzing companies. Graves advises going with exchange-traded funds, or ETFs. Exchange Traded Funds (ETFs) are similar to stocks in the sense that they can be purchased and sold on an exchange but allude to investment funds which carry several under-laying assets such as equities, bonds and commodities. ETFs help to disperse your possessions, so that if one business decreases its compensation, it won’t have a major influence on the ETF’s worth or dividend. Here are some of the premier ETFs to choose from.
ETFs are perfect for newbies due to their comprehension, high liquidity, affordability, and the possibility to earn more due to minimal costs in comparison to mutual funds.
There is the potential for stocks or ETFs to decrease sharply in a limited amount of time, particularly when moments of disturbances arise, similar to what was witnessed amid the coronavirus pandemic in 2020 which shook the monetary markets. Financial difficulties may lead certain firms to completely eliminate dividend payments, whereas funds with a wide array of investments may be at a lesser disadvantage.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.
