Building Passive Income: How To Make Your Money Work For You
Warren Buffet famously said, “If you do not find a way to make money while you sleep, you will work until you die”. Although the current going rate for lost teeth hidden under pillows is almost $5 per tooth, Buffet wasn’t referring to the tooth fairy. The wealth he spoke of refers to passive income.
Let’s explore passive income, the unique benefits of the income stream, and how farmland presents a solid passive income-generating opportunity.
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).
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
In 2021, farms across the United States received an estimated $427 billion of cash receipts. Of this, $233 billion were from the sale of crops - up almost 18% from 2020. Specifically, permanent crops, such as apples or pistachios, have historically delivered tremendous passive income.. A long-term study looking at crop investments from 1994 to 2019 showed an average cash yield for permanent crops of 10.3%. Farmland also creates passive wealth creation through appreciated property values; the average cropland value per acre increased 7.8% in 2021.
FarmTogether is capitalizing on this opportunity and enabling investors to access fractional shares of farmland for the first time.FarmTogether takes care of all the heavy lifting, from sourcing to operations and distributions, to make the process as seamless – and minimal – as possible, Cash distributions are sent according to the investment’s harvest sales schedule either quarterly, semi-annually, or annually, and FarmTogether will distribute all required tax documentation at the beginning of the subsequent year. FarmTogether also provides photos, videos, and financial updates on each investment for those looking to be a bit more involved . At the end of a property’s target hold period, FarmTogether manages the disposition of the property including allocating proportional shares of capital gains and returning original investment principal.
Building Your Passive Income Stream
Passive income grants investors tremendous financial freedom to generate wealth with minimal ongoing effort. Modern opportunities, such as farmland, have historically generated investment cash flow and asset appreciation over the last several decades. By investing through digital platforms like FarmTogether, investors can share in the rewards of this asset class – without needing to lift a finger. With a team of experts in the financial and agricultural sector, FarmTogether is prepared to help you move closer to your financial goals through passive income opportunities.
Interested in learning more about farmland as an asset class? Click here to read our FAQ or get started by visiting ways to invest.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.