Having the comfort of knowing your portfolio is generating value is great. Being able to have your money work for you by generating passive income is even better. Passive income investments provide a fantastic opportunity to take a one-time investment and turn it into a recurring source of income without having to do much (if any) work to realize gains.
The best passive income investments generate steady income with as little work as possible on the part of the investor—but not all passive income investments are created equally. Some offer a larger revenue stream than others, but require more capital to get started. Others may seem like a safe bet, only to decline in value depending on the whims of the market.
Here are the top five passive income investments, in no particular order and all with their unique benefits, that provide returns—be they big, small, inexpensive, or capital-intensive.
Real estate is perhaps the most well-known option as far as passive income investments are concerned. There is a wide variety of real estate investing options out there depending on your budget, risk appetite, and willingness to get directly involved in maintenance and upkeep. Some may pay out more than others, depending on how much money (or effort) you’re willing to spend.
Purchasing a rental property is perhaps the most straightforward way for making passive income through real estate. Rentals will make recurring revenue so long as your property is occupied, your tenant pays on time, and you’re charging more in rent than any other expenses you may have for the property (such as a mortgage). If buying and managing a rental property isn’t for you, a real estate investment trust (REIT) might be a better fit. REITs offer recurring dividends based on the revenue made during a given period.
One of the biggest draws for real estate as a passive income investment is its ability to retain value in most economic scenarios. Real estate value isn’t dependent on stock market fluctuations, and can withstand broader economic downturns.
Farmland investing is the newest opportunity on the block, not because it hasn’t existed prior, but because it hasn’t been widely accessible to investors until now. Farmland provides an excellent opportunity for people to realize passive income based on their initial investment. With farmland investing, you can have an ownership share in a farm from anywhere across the country, and across several kinds of crops. As one of the best passive income investments, farmland typically offers a steady, reliable return without requiring any additional maintenance (like you might find with real estate investing). Even when real estate prices fluctuate, most farmland investing opportunities remain stable: after all, the primary use for the land is food, rather than habitation or other kinds of commercial enterprises. In times of financial crisis, even during a recession, farmland investments are resilient. In fact, farmland is an investment with historically low volatility: over the past ten years, American farmland has risen in value over 6% each year.
One of the other unique value propositions farmland provides is its triple revenue sources. First, the land itself can appreciate, making your investment more valuable; your profit margin grows gradually over time as the land itself increases in value. Second, the crop yield from the farm can also bring in passive income, with a portion going to investors after harvest. Third, you earn returns from standard farm operations and lease payments.
And, when you invest with FarmTogether, you’re given a choice of opportunities that are earmarked to deliver anywhere from 3 to 9 percent cash yields—an enviable sum compared to other passive income investments.
Stocks that offer dividends are a great addition to any portfolio. That is, if you’re fortunate enough to pick a stock that’s primed to deliver them, and are willing to sell. Unlike the other candidates for best passive income investment opportunities, dividend-yielding stocks aren’t a specific asset class. Nor do they specifically offer direct passive income on a recurring basis. Rather, dividend stocks are paid out by a company that offers existing shareholders with additional shares in lieu of paying cash.
Although dividend-yielding stocks aren’t a passive income investment, strictly speaking, they are still a savvy financial asset to have in your portfolio if generating passive income is paramount. As soon as the additional shares are yours, you’re free to sell them at will—turning your additional stocks into cash in the process. You’re only taxed after selling these stocks as well, just like you would be for any other stock sales (if a profit is made in the process).
Picking stocks that pay dividends is tricky, however. There’s no clear way to determine which companies will offer dividends aside from past precedent. Some large-cap businesses have a track record of paying dividends (or even having stocks split, which doubles your holdings in the process). In order to invest in a company’s stocks that are likely to offer dividends, your best bet is to research companies with a history of doing so, and hope that your choices pan out.
Index funds offer another solid option for passive income investing. 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. This maximizes upside for investors while reducing costs, such as manager fees and others.
Much like dividend stocks, index funds don’t pay out cash to investors. Rather, 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 get a piece of the pie, which generates additional value for your investment.
Index funds may not have the blockbuster returns of real estate, farmland, or dividend-generating stock investments, but they do produce a reliable source of passive income as your holdings of the fund remain intact. Plus, they’re far less expensive than other passive income opportunities in terms of fees.
Private equity investing is an excellent option for making the most of your passive income investment. Participating in a private equity firm can avail you to a wide variety of opportunities to put your money to work for you. These firms are managed by financial experts who identify opportunities to invest money into businesses, modify their practices to maximize revenue, and then sell their stake for a profit (if they’re successful).
Investing in a private equity firm is inherently risky: you don’t have the same oversight and regulation with this option as you would with an index fund or direct stock ownership. But, on the other hand, you’re unlikely to generate anywhere near as much passive income with either of those options as you would through private equity.
If you do decide to go with private equity investing, be ready to pay hefty fees. Most firms charge a 2 percent management fee based on assets, as well as an average 20 percent off profits made.
Ultimately, the best passive income investments are those that align with your overall portfolio. If having a small amount of recurring income with minimal work is the goal, then a hands-off approach through a managed investment is the way to go. If, on the other hand, you’re willing to get your hands dirty and take an 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 high opportunity for passive income with minimal work—farmland investing is the clear favorite. Getting started with FarmTogether is simple, and the upside is enormous.