12+ Passive Income Investments & Ideas
Passive income investments present an opportunity to take a one-time investment and turn it into a recurring source of income without having to do much work to realize gains.
Examples of passive income investments can include owning rental property or dividend-yielding investing. While these are some of the most common types of passive income investments, they are by no means the only options.
Let’s take a look at some of the most common passive income investment ideas available today and explore where each might fit within your portfolio.
What is a Passive Income Investment?
Passive income investments are investments that can generate income with little to no active input by the investor. As opposed to active income investments, which require that someone – or yourself – acts in the role of a portfolio manager, the goal of passive income is to generate wealth with minimal long-term effort.
These types of investments are either debt- or equity-structured, which means investors make an up-front capital investment only once to receive residual income payments.
There is often a small upfront investment of time to set up your passive income stream—whether that’s researching opportunities, activating an account or working with a platform to get you set up with your investment. But, after that, there is typically no active management required for these financial assets.
Passive Income Investments to Know This Year
Passive income investments are designed to provide a balance between risk and reward, while requiring very little work on your part to turn a profit.
However, not all passive income investments are created equal. Some may offer a larger revenue stream than others but require more capital to get started. Others could seem like a safe bet, only to reveal themselves as a passing trend once the initial hype and investing FOMO dies down.
Passive-income-producing alternative assets, like farmland or rental properties, have the potential to add the best of both worlds; these alternative assets can offer competitive returns while experiencing historically less volatility.
Read on to learn more about some of the most popular passive investment options available today.
1. Real Estate
Real estate is one of the most well-known passive income opportunities. You can opt to buy real estate yourself, be it commercial or residential, and rent it to businesses or individuals. You can also invest in farmland real estate or in a real estate investment trust (REIT). We will discuss each of these opportunities in greater depth later.
Real estate is an income-producing real asset, which means it’s a tangible investment that tends to retain value in most economic scenarios. Historically, real estate values have remained relatively steady during stock market fluctuations and broader economic downturns; from 1992-2022, the National Council of Real Estate Investment Fiduciaries (NCREIF) posted average annual returns of 8.39% with a standard deviation of 7.62%.
You can pick out real estate opportunities almost anywhere to get started. That might mean buying a rental property down the street or in a growing city across the country. Real estate can also offer a decent amount of flexibility as far as startup capital is concerned, meaning you can start with a smaller property before scaling. This can allow you to fine-tune the amount of money you want to put into the property and can help make it easier for you to dial in the right amount of risk for your investing goals.
2. Rental Properties
Purchasing a rental property is one common way to earn passive income through real estate. Investors can receive earnings through both rental income and appreciation, where rental income can offer quicker returns and appreciation is linked to increasing property value.
There are several factors you might want to consider before becoming a property owner, however. For example, your rental property might not always be occupied, so you may want to consider how many months out of the year you can afford to keep up with mortgage payments without a tenant. You may also need to make an initial investment into renovations or repairs, depending on the condition of the property, as well as pay for insurance, waste management, and any recurring upkeep.
These expenses can delay how quickly you can begin to make passive income through this investment. You’re also not guaranteed to see your property appreciate in value, or at least not as fast as you might hope.
Investors do, however, often have the added benefit of frequent lease renewals, which can help hedge against rising prices. Many experts predict that rental price gains may improve in 2023. Meanwhile, yields are expected to rise to 8.4% by May of this year, which is an improvement on the 5.8% of June 2022.
3. Farmland Investing
Farmland investing can provide many of the benefits of real estate investing, while offering an historically higher average annual rate of return with less volatility. From 1992-2022, farmland delivered average annual returns (income + appreciation) of over 10%, outperforming real estate, bonds, and even the S&P 500.
Farmland returns are driven, in large part, by the asset’s stable supply-demand fundamentals: unlike real estate, farmland is a finite resource. In 2010 the average acre cost $2,700. Now, it’s at a record $5,050 per acre. That’s why FarmTogether’s slate of farmland investing opportunities has a target hold date of 10-12 years. Investors can observe decade-long trends to see where farmland value might go in the future.
Another unique value proposition of farmland is the different methods of seeing returns. First, the land itself can appreciate, meaning your investment can become more valuable over the long-term. Second, the crop yield from the farm can also deliver income after each harvest. This can also help act as a hedge against inflation if commodity prices increase. Third, depending on the structure of the investment deal, you could earn income from rental payments made by the operator.
Having multiple revenue sources can help ensure that you have money coming in from your investment, without having to depend on one performance element. This is a key differentiator for farmland that other real estate investment types don’t often match.
When you invest with FarmTogether, you can access a range of opportunities that are targeted to deliver anywhere from 3 to 9 percent net cash yields. Moreover, farmland investments have experienced historically less volatility than both traditional and alternative asset classes over the last several decades. This can make farmland investing a more compelling prospect than other safe havens, like bonds.
With historically steady value appreciation, higher stability, and the potential for multiple revenue sources, farmland investing can be a strong option as a passive-income investment.
Learn more about investing in farmland.
4. Investing in a REIT
REITs or Real Estate Investment Trusts invest in income-generating real estate across a range of sectors. When owning a share of the REIT, investors can gain the benefits of real estate investment without having to conduct the legwork, research, and costs that occur in direct property ownership.
Plus, with a REIT, your investment dollars can go further: the management firm takes care of maintenance and repairs and deducts a certain percentage from your return. That means you won’t have to dive into the nitty-gritty of maintaining a property like you might if you invested in real estate individually. The S&P 500 Index tells us that REITs have an historical average ROI of 11.8%.
It might be hands-off in terms of having to maintain the properties in your portfolio, but you might get less of a payout. REIT investing is similar to fractional property ownership: the amount you own depends on the size of your investment. A larger investment has the potential to provide a larger return, which could mean more passive income.
5. Dividend Stocks
Dividend-yielding stocks represent another passive income opportunity that investors can find across many sectors. Companies that offer dividends to shareholders either provide them as cash payouts or by way of additional stock. Thus, these assets can deliver cash on a recurring quarterly basis, as long as the stock performs well.
Some sectors are known for having more dividend-yielding stocks than others. Many dividend stocks are associated with industry incumbents or long-standing businesses. They tend to not have the same need to reinvest as their upstart rivals or smaller companies looking to scale. While they may not have the skyrocketing stock prices that tech companies may experience, they can usually offer a steady source of passive income. Meanwhile, the tech sector is less dividend-driven, primarily because these companies tend to be newer and often reinvest profits into their business instead.
There are a few potential downsides to investing in dividend stocks. These stocks tend to be low growth: you’re likely to make a modest return, but you shouldn’t expect double-digit growth. The average dividend yield on dividend-paying S&P 500 index companies historically fluctuates somewhere between 2% and 5%. Plus, there is no guarantee that a dividend-paying stock will do so in the future.
Companies don’t typically advertise that they pay out dividends to shareholders. However, you can look into an informal category of stocks known as “Dividend Aristocrats.” Dividend Aristocrats are S&P 500 listed companies that have paid out increasing dividends to shareholders every year for at least two and a half decades.
Bonds allow investors to lend money to corporations and governments, while receiving periodic interest payments, most often on a semi-annual basis. Issuers might sell bonds for a wide variety of reasons, including to finance an acquisition, pay for ongoing capital expenditures, or refinance existing debt.
For decades, many investors have benefited from the stable passive income that bonds can provide. While bonds have averaged just 4.64% average annual returns over the last three decades, they’ve experienced historically less volatility than their counterparts. While high-yield bonds can offer slightly better returns, they can also be much riskier.
However, in recent years, bonds have become increasingly correlated with stocks. This means they may not be as effective of a hedge against declines in the stock market as they once were. Plus, in 2022, the bond market had the worst-ever year on record: intermediate-term Treasury bonds lost 10.6% and U.S. government bonds with a maturity rate of 30 years lost 39.2%. After observing the returns for the past decade, experts say that the average return on bonds is just 1.6%.
7. Investment Funds
Be they mutual funds, index funds, or exchange-traded funds (ETFs), investment funds can help take the stress (and risk exposure) out of buying individual stocks yourself. Instead, the fund invests in several private or publicly traded products on behalf of the fund participants. With this passive investment opportunity, you don’t have to pick out and monitor each of your market positions since you’re leaving that work to a manager, or in many cases, an algorithm.
Investment funds don’t pay out cash to investors. Instead, they can incorporate stocks into their holdings that are likely to pay a dividend to shareholders. Since you’re a shareholder by way of the index fund, you may get an additional value for your investment.
Not all investment funds are created equal when it comes to minimizing fees and maximizing passive income, however. Mutual funds, for example, come with manager fees that may reduce your returns. Index funds and ETFs offer fewer broker commissions and lower expenses, but may not give investors the level of nuance needed to build the optimal passive income portfolio. The right investment fund for your portfolio will depend on your investing goals, risk tolerance, and investment minimum. Mutual Funds
Mutual funds are either passively or actively managed by an investment manager who then takes a percentage of the fund’s returns. Thus, when you invest in a mutual fund, you’re able to take a more hands-off approach to running a vital part of your portfolio. The fund manager picks the assets and the size of the investment—all you need to do is track your investment’s returns and the fund’s overall performance, which can vary depending on the fund.
Some of the highest mutual returns over a 5-year period range from 2–10%; as of February 2023, American Funds Washington Mutual F1 has a 5-year average annual return of 10.14% while the Thrivent Mid Cap Stock Fund has a 5-year average annual return of 9.23%.
There can be downsides to investing in a mutual fund, however. Manager fees can be expensive, which may cut away at your potential passive income. Managers can also take their own approach to building the fund’s holdings, which you may not agree with.
Index funds can offer another historically appealing option for passive income investors. These funds function similarly to mutual funds but without the management fee. Instead of being actively managed by a financial institution, index funds make asset allocations based on proprietary algorithms and seek to track the performance of market indices. This can help maximize the upside for investors by reducing costs like management fees.
Index funds have historically produced a reliable source of passive income; the S&P 500 Index fund saw an average annual return of 9.43% over the last 30 years. Since they tend to include investments across a variety of sectors, they can help reduce the impact of the stock market volatility on your portfolio.
However, because index funds are inherently tied to public markets, they are still exposed to fluctuations in prices caused by investor sentiment and demand. In 2022, the S&P 500 Index finished the year down 18.11%.
ETFs can be another compelling option for investors looking for maximum flexibility with their investments. ETFs, or exchange-traded funds, trade just like a stock does, but can be traded all day (rather than once a day after the market closes). The top-performing ETFs of 2022, including iShares MSCI Turkey and Vanguard Energy, had an annual return between 44% and 99%.
Investors can buy much smaller amounts of ETFs for their portfolio because they trade as stock market shares, whereas mutual funds require investors to hit or exceed an investment minimum. All you manage is the buying and selling of your ETF.
8. Intermediate-Term Bond Fund
An intermediate-term fund bundles together a slate of bonds that tend to mature between eight and 15 years.
With an intermediate-term fund, you can help diversify your portfolio without having to source the best bonds yourself: many of the top offerings include well-rated bonds that can offer significant payouts, meaning you can help prime yourself for growth without needing to conduct a ton of research. In this regard, intermediate-term funds are similar to mutual funds and REITs: you can leave the heavy lifting to the professionals and focus on long-term performance instead.
This can be an attractive opportunity for investors who are looking for lower risk options with dependable–albeit moderate–recurring income. For example, the Vanguard Intermediate-Term Bond Index returned -12.67% over the past year, 2.18% over the past three years, and 0.69% over the past five years – but 1.39% over the past decade. For investors interested in stability, but who are not willing to sacrifice high returns, alternative assets like farmland might be worth exploring.
It’s important to note that intermediate-term bonds can be impacted by inflation: when the dollar loses value, you may find your long-term bond investment doesn’t equate to as much cash as you’d hoped for when you first added it to your portfolio.
9. Peer-to-Peer Lending
Peer-to-peer lending requires little to no work on the part of the investor after they’ve made their initial deposit. Instead of lending or investing in a business on your own, peer-to-peer lending companies pair investors with a selection of opportunities that they then manage on investors’ behalf. The barrier to entry for this kind of investing can also be lower than that of a private equity fund (more on that below), which can make it appealing to qualified investors who may not want to put such a significant amount of money into one holding. Some P2P lending platforms have historically offered average annual returns between 5–10%, but like all investments, returns are not guaranteed.
There can be downsides to peer-to-peer lending, however. It can be riskier since the quality of the investments may vary, and you’re not necessarily primed for long-term returns the same way you might be with other opportunities. For example, farmland investing can provide a more historically stable underlying investment, which could be a better fit within your passive income investing strategy.
10. Private Equity Investing
Private equity investing is another common passive income investment option. When you invest in private equity, you can expose your portfolio to a range of investment opportunities outside the public market. This includes investing in private companies, participating in leveraged buyouts, and other opportunities that come with a historically higher return than most conventional investments. This is because investments in private equity are not necessarily correlated to the public market, can be longer term holds, and have more control in the companies they’ve invested in. Private equity has historically surpassed the typical return rates of many other managed investments, with just under a 10.5 % annual return from 2010-2020.
However, private equity firms have had a challenging past year, in terms of both lower returns and deal volumes, due to rising inflation, impacts of the war in Ukraine, and restricted access to private equity’s traditional financing sources. It’s also important to note that most firms charge a 2% management fee based on assets, as well as an average of 20% of profits made.
11. High-yield Savings Accounts
A high-yield savings account is a federally insured savings account with earning rates higher than the national average: annual return rates have historically been between 3 and 4%.
Online banks and credit unions typically have lower operating costs compared to smaller financial institutions, so they can afford to charge less in fees. These interest rates are categorized under something called annual percentage yields, or APYs.
High-yield savings accounts work similarly to other savings accounts. Once you deposit money into the account, your bank starts paying you interest based on the amount. However, a high-yield savings account can offer a much higher APY than a traditional savings account at a smaller bank.
Investors might use high-yield savings accounts to save money for things like an emergency fund, a vacation fund, a wedding budget, a down payment for a home, a car, education, and more.
12. Money Market Account
A money market account, or money market deposit account, is an interest-bearing account provided by a bank or credit union. These accounts can provide higher interest rates than standard savings accounts, while offering check-writing and debit card uses (unlike high-yield savings accounts or Certificates of Deposit).
MMAs are often better suited for short-term financial goals (like emergency funds) than long-term purposes (like retirement) and can hold more of your money, often requiring higher minimums than standard savings accounts.
While money market accounts can offer higher returns than standard savings accounts, they may not be as high of a return as high-yield savings accounts. The average APY of money market accounts with balances of less than $100K is .23%, while standard savings accounts can pay.21% and high-yield saving accounts can pay between .5% and 3%. However, money market accounts offer more flexibility and direct access to your funds (such as through ATM withdrawals.)
13. Certificate of Deposit
A certificate of deposit, or CD, is another savings product that can provide passive income. CDs earn interest on a particular sum of money for a fixed period–you cannot hold it as long as you want. This money cannot be touched over the fixed period without a penalty, while in a savings account or money market account you can withdraw and add money throughout your investment.
However, CDs can offer higher interest rates than traditional savings accounts based on the contingency that the money goes untouched for the determined period. Five-year CDs have an APY of 1.21%, while one-year CD’s have an APY of 1.28%.
While there is a lower opportunity for growth with CDs than with other traditional investments, they tend to have the highest yields among bank accounts.
Choosing the Right Passive Income Investment
Ultimately, selecting the right passive income investment comes down to the option that best aligns with your overall portfolio goals. If having a small amount of recurring income with minimal work is the goal, then a hands-off approach through a managed investment might be the way to go. If, on the other hand, you want to take a more active role in your passive income investment, delving into some of the other, higher-yielding options may be right for you.
For those who want the best of both worlds—a strong opportunity for passive income with minimal work—consider farmland investing with FarmTogether.
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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.