7 1/2 Investments to Build Passive Income Streams
Generally speaking, making money is both the main incentive and the ultimate end goal of investing. Making money without actually having to do anything is often an investor’s dream. This is what makes passive income streams such appealing prospects.
The main opportunity that passive income offer is flexibility. Aside from generating additional revenue, it opens up the chance to reinvest funds and reach long-term milestones.
We believe that long-term goals are the backbone of a successful property investment portfolio, many of which can be achieved through the use of consistent passive income streams.
There are plenty of passive income investments out there, many of which can be adopted to help you meet long-term goals. In this article, we explore the best passive income investments and how you can adapt them to your wider strategy.
What is passive income?
Income from investment is commonly split into two categories: active income and passive income.
Active income is regarded as the returns that you earn from consistent involvement, such as your career. On the other hand, passive income is regarded as any earnings that come from an investment where the investor isn’t required to be actively involved – such as rental properties, limited partnerships, investment funds or shares.
This form of income is useful for investors that already have a day-to-day role and want to supplement their current income, with the aim of achieving long-term goals such as early retirement or building an inheritance.
What passive income investments are there?
The following investment vehicles can deliver passive income for investors over the long-term.
1. Dividend Stocks
Dividend stocks are typically more traditional investment assets and suitable for those looking for a lower-risk passive income stream. Over the years, dividend stocks have become fairly robust investment assets, offering an income from regular dividend payments as well as the growth of the stock over time.
How to build a passive income with dividend stocks:
When it comes to dividend stocks, choosing the right company is key. You’ll need to research different businesses and get familiar with dividend yields (an annual dividend presented as a percentage of the stock price), which will kickstart your passive income streams.
Once you’ve invested and the company is earning, you’ll receive your money as a dividend. At this point, you will have the option to withdraw this dividend into an investment account, or alternatively you can reinvest for additional shares.
Like any investment, there are a number of different strategies that come with dividend stocks, all of which depend on how risk averse you are. For example, high-risk dividend stocks typically have higher yields than their low-risk counterparts. For optimum investing, a combination of the two usually works the best.
2. Long-Term Investments in Real Estate
This wouldn’t be a completed list of the best passive income streams without real estate. It’s no secret that over the years – and especially during the pandemic – property has become known for its resilience, offering consistent growth and competitive yields throughout.
How to build a passive income with real estate:
To build a passive income with real estate, you’ll need to purchase a property and rent it out. The rental income you receive each month will be your passive income, which can be used in several different ways.
For those who want to maximise their passive income streams with property, using this profit to scale a portfolio is often recommended. Once you have built up a collection of multiple properties, you’ll have more opportunities to reach your long-term goals. Not only will the multiple streams of rental income pay off your mortgages quicker, you’ll also receive a bigger profit once these are completed.
While the consistent rental income that property offers is one of the many advantages of this investment asset, the opportunity for capital growth acts as an almost ‘hidden’ stream of passive income.
If you’ve chosen a high quality property and an evergreen location, you could stand to make a significant profit if you were to sell the property after 10 years – you just wouldn’t see these returns immediately.
More specifically, property prices in the UK have long been on an upward trajectory – bar momentary dips. Ten years ago, the average property price stood at just £176,352, but at the time of writing, this is over £100,000 more at £284,950.
Property can easily be one of the best passive income investments, but it’s crucial to remember that this asset performs best with more time in the market as opposed to timing the market. As well as offering a consistent monthly income, this asset also has the potential to appreciate in capital over time, bringing investors’ long-term goals well within reach.
3. Rent a Room
For those with an interest in property but not enough funds to purchase an entire property, renting out a room can be an effective way of generating a passive income stream. With the rise of short-stays and sites such as Airbnb, renting out a room is an easy way of making some money with what you already have.
How to build a passive income by renting out a room:
Purchasing a buy-to-let property can be expensive, so renting out a room is a great way of starting your passive income streams and progressing towards an entire property. This route also comes with two different options – you can either do short-term rentals, which could mean higher rates, or you could take in a lodger to have the reassurance of a long-term passive income.
Either way, the process is relatively simple. If you choose to go down the short-term let avenue, platforms such as Airbnb allow you to make an account and advertise your room to millions of potential guests at the touch of a button. In fact, the platform receives up to 8.4 million inbound guests in the UK every year.
It’s important to remember that renting out a room could require some research around regulations, as the guidelines around short-term lettings are changing.
4. Peer-to-Peer Lending
Peer-to-Peer lending is fairly self-explanatory, and involves an investor lending money to a peer, regardless of whether the investor knows the person they’re lending to. While this is a relatively new concept compared to the likes of dividend stocks and property, its flexibility is causing it to become increasingly more popular amongst investors.
How to build a passive income through Peer-to-Peer investing:
Once an investor has lent the funds to a peer and the venture has started earning money, the investor will then begin to receive a passive income as part of the agreed-upon interest rates. There are a number of different avenues that come with Peer-to-Peer lending, such as the opportunity to create a crowdfund, highlighting its versatility as a passive income stream.
While this is a relatively new investment asset, Peer-to-Peer lending offers fairly competitive returns. Averaging an annual rate of return of around 10%, this is quickly becoming one of the best passive income investments in the market for those willing to carry out the initial due diligence.
5. Real Estate Crowdfunding
As property continues to grow in popularity and prices remain on an upward trajectory, real estate crowdfunding is becoming one of the more common passive income streams. In addition to offering investors additional income, this allows investors to access properties that may have initially been out of reach.
This investment asset is becoming increasingly more popular amongst the younger demographic, with online crowdfunder UOWN finding that 54% of people partaking in property crowdfunding are aged between 18 and 30.
How to build a passive income with real estate crowdfunding:
Crowdfunded property is almost the definition of a passive investment. For the investor, this asset demands very little time and effort. There usually is a designated manager of the investment who maintains the day-to-day upkeep of the asset, meaning all the investor has to do is cash in their returns.
Crowdfunding is typically chosen because of the financial risk it can mitigate. Due to the nature of this investment and the notion of investing as a ‘crowd’, the risk is spread across the entire group.
This also means that the entire group shares the returns, which can deliver less profits overall. As such, crowdfunding can be useful for investors that want to invest in property but don’t have the capital to implement upfront.
6. Index Fund
Generally speaking, an index fund is a type of mutual fund designed to match or track a financial market index. Index funds are considered ‘ideal core portfolio holdings’ for achieving long-term goals such as retirement.
Combined with low maintenance costs, broad market exposure and low portfolio turnover, index funds are considered to be some of the best passive income investments because they are inherently diverse and largely managed for you.
How to build a passive income with index funds:
While a lot of investments are designed to ‘beat the market’, index funds are more focused on providing a consistent passive income. With broad exposure to several different markets, investors are encouraged to choose a variety of different investments to balance the potential risks. By doing so, investors will benefit from a diverse portfolio and a steady income.
The stability of index funds means that in comparison to higher risk investment assets, the returns on this vehicle are typically much lower. However, many experts believe that an established portfolio is often built on the foundations of an index fund that can later be expanded upon.
7. Private Equity/Trusts
Private equity investment involves investing in a private company and drawing a passive income when investor capital is used to increase the value of the business. Over the years, private equity investments have become popular amongst investors with a long-term strategy in mind, which has solidified its place as one of the best passive income investments in the market.
How to build a passive income with private equity investments:
As this investment avenue continues to expand, we’re seeing more investors choose this route. Private equity companies will usually have a broad portfolio in order to reduce risks and maximise investors’ income.
To begin receiving a passive income from private equity investment, you’ll need to research the right firm for you, and consider which one would be best for achieving your long-term goals.
½. Affiliate Marketing
Last but by no means least is affiliate marketing. While this only qualifies as half an investment, affiliate marketing is still a great way to develop a passive income in the long run. To get involved in affiliate marketing, you’ll need to have a platform of some kind to promote other companies (affiliates). When you link to a company and someone purchases the product, you’ll get a portion of the sale – this is the passive income.
How to build a passive income by affiliate marketing:
In comparison to the previous seven passive income streams we’ve mentioned, affiliate marketing is focused more on investing your time as opposed to your money. Initially, affiliate marketing can be fairly time-consuming, as it is largely dependent on online traffic. If you don’t already have a platform with high volumes of traffic, you’ll probably need to dedicate a significant portion of your time to building this.
However, once you have this in place, you could quite literally make money in your sleep. The internet never sleeps, so affiliate marketing is one of the best passive income investments for those looking for an asset with low costs but high potential.