Building Passive Income: How To Make Your Money Work For You

In today’s fast-paced world, many investors are looking for ways to generate income with minimal ongoing effort. Passive income offers a path to building wealth without constant management, allowing you to focus on other priorities.

This article will explore the concept of passive income, its unique benefits, and why farmland offers a promising opportunity to create steady, long-term returns with low involvement.

What is Passive Income?

Passive income is money generated from investments, properties, or other enterprises where you are not laboriously involved. As opposed to active income such as hourly wages, salaries, tips, or commission, the point of passive income is to generate wealth with minimal long-term effort. According to U.S. Census Bureau data, an estimated 20% of American households earn passive income through dividends, interest, or rental property.

Passive income is often generated after an upfront investment of time or money. Investments that require time are often required to build products that are later sold or monetized. This includes writing books or creating websites, blogs, or online lessons and courses. Passive investments that require money typically acquire assets that generate continual value over the long-term with minimal involvement by the investor.

Let’s take a look at examples of these types of investments.

Types of Passive Income

Traditional Financial Investments/Equity

Many traditional financial instruments have the ability to generate passive income. Holding equity shares of companies that pay dividends allows investors to collect periodic payments. Understanding the appeal of dividends to investors, companies in the S&P 500 increased their payouts shareholders by over 11% in 2021.

Investors can also opt for shares of index funds or ETFs, which automatically rebalance holdings to maintain returns and offset risk. This general style of investing is expected to be more popular than active investing by 2026. Annuities that pay fixed future cash flow typically only require a one-time upfront investment, while high-yield savings accounts only require money be held in a specific account (sometimes for a specific amount of time).

Cryptocurrency/Blockchain Assets

The rise of digital assets has introduced a new wave of passive income opportunities. Non-fungible tokens (NFTs) can be rented to other users or assessed as royalties between 5%-10% of the asset’s price. Cryptocurrencies that use proof-of-stake protocols can be committed to a blockchain network in exchange for yield-generating returns ranging from 3% to 15% for established networks. Cryptocurrencies can also be lent, mined, or held in interest-bearing accounts. Fractionalized equity ownership also allows greater liquidity in otherwise illiquid markets.

Real Assets/Real Estate

Real assets, such as real estate, are another popular passive opportunity. The rental market is booming for landlords; 44.1 million households in the United States rent their homes as opposed to owning, and rental rates for a one-bedroom apartment have increased 21% from 2020 to 2021. For investors who do not wish to operate their properties, sites can be overseen by property management companies or through platforms like Airbnb. REITs also generate passive income, as these investments must distribute at least 90% of their earnings each year to maintain its tax-free status.

Ownership of farmland real estate, made possible through platforms like FarmTogether, provides investors with a triple passive income source, without first needing to become agricultural and business experts.

Fintech/Digital Platform Investments

The growth in digital assets has been made possible by digital platforms. These all-in-one online investing destinations have introduced new ways for investors to earn money, interact with illiquid markets, and receive greater market transparency. Online peer-to-peer lending systems were created in 2005 and are expected to continually experience rapid growth in the next decade. Investors looking for automated ways to rebalance their portfolios can rely on robo-advisors, coded financial programs that use math and algorithms to automatically suggest or make portfolio decisions. Last, fractionalized assets now allow investors to buy digital equity shares in traditionally inaccessible markets like farmland. FarmTogether solicits the offerings and manages the properties while investors simply possess ownership in the agricultural sites of their choosing.

Benefits of Passive Income

There are several benefits of passive income. First, and the most obvious, is that it can generate wealth with minimal effortPassive income also capitalizes on the passage of time, allowing investors to “set it and forget it” while they focus on their day job or other, unrelated tasks. Through the rise of technology and investment platforms, such as FarmTogether, certain passive income streams might not require investors to be in a specific physical location - where you live is entirely independent of the passive income being earned. While generating passive income does not guarantee wealth, a majority of self-made millionaires reported having at least three streams of income.

Additionally, income generated by rental property, limited partnerships, or businesses where a person is not actively involved, receives favorable tax treatment. Investors can receive tax deductions on repairs, maintenance and property taxes, while receiving the added benefit of long-term capital gains tax caps at 20% - favorable for high-income earners capping out at the top 37% tax bracket. Certain passive income streams are also not subject to Social Security or payroll taxes.

Generating Wealth With Farmland

Farmland has historically produced both cash flow and asset appreciation over several decades. In 2021, U.S. farms received an estimated $427 billion in cash receipts, with $233 billion coming from crop sales—an increase of nearly 18% from 2020. Permanent crops, such as apples and pistachios, have historically provided strong passive income. A long-term study from 1994 to 2019 showed an average cash yield of 10.3% for permanent crops. Additionally, farmland has created wealth through property appreciation, with the average cropland value per acre rising by 7.8% in 2021.

With its track record of consistent returns, farmland presents a unique opportunity to build a passive income stream while benefiting from long-term property value appreciation.