- Passive income allows investors to generate an additional income stream without having to put in physical work on their end.
- Some of the most common sources include rental real estate, stock dividends, small business investing, etc.
- While passive income is a great way to achieve financial goals, it may not be suitable or the best option for every situation.
One of the best ways to increase your net worth and annual income is to pursue a passive income strategy. Passive income is beneficial because you do not need to put in the time or work on your end to generate the income stream. Instead, you need to invest some of your own capital and allow your money to start working for you.
This strategy is beneficial because you can work your existing job while utilizing these investments to create an additional income stream. This extra income can be used to cover expenses or can be used to save and invest toward a future goal. Many investors aim to create enough passive income to replace their full-time employment. This can lead to financial independence and often an early retirement.
However, it’s important to remember that passive income may not be the best option for everyone, as each strategy has its own set of pros and cons. To ensure that a passive income strategy aligns with your overall financial goals, we recommend consulting with a trusted financial advisor before committing to an investment. Additionally, there may be other ways to increase your income that we have discussed in this article, so it’s always worth considering all of your options before making a decision.
Rental Real Estate Investing
Rental Real Estate is by far one of the most common passive income strategies. However, for the income to be passive, the investor must perform minimal work. This means that the property cannot require a lot of upkeep or repairs that the owner completes. Using a 3rd party property manager to help run the renal property is a great way to ensure the investor does not put in more work than needed.
Since a mortgage can be acquired to buy a rental property, less capital may be required upfront to achieve this revenue stream. However, this means that debt would be necessary, and leverage always increases the risk of a strategy since you are obligated to make monthly payments whether or not you have a renter currently in the property.
A much more straightforward and perhaps less exciting way to create passive income is to buy a dividend-paying investment. This could be stocks that pay a recurring dividend, bonds that pay a regular coupon amount, or an ETF or Mutual Fund that distributes the underlying dividends. Investing in these types of securities will receive periodic payments from the owned assets. Unfortunately, equity dividends can fluctuate based on the underlying company’s performance or security, so future dividends are never guaranteed.
Also, the amount of passive income derived from dividends or bond payments can be relatively low, so a more significant amount of capital may be required to achieve similar outcomes of other passive strategies. Finally, the value of the underlying stock or bond can fluctuate, which may help or hurt your investment portfolio depending on the direction of the price changes.
Small Business Investing
The last strategy we wanted to mention is small business investing, or angel investing. This is when a small business or sometimes just a potential business seeks out investments from others to grow their business. Angel Investing is when someone helps fund a company at the very early stages.
Small businesses may seek out investors for various reasons, whether they are just starting out or looking to expand their current operations. As an investor, you would typically receive partial ownership in the company and a share of future profits. However, this type of investment carries a high-risk level, as a small business’s future is often uncertain. Therefore, it’s important to carefully consider whether the investment will truly benefit the company’s profits or if it is merely being used as a temporary fix for a struggling business. In addition, keep in mind that unless you play a larger role in the company, your profits from this type of investment will likely be passive in nature.
Speak With a Trusted Advisor
If you have any questions about changes for 2023, your investment portfolio, taxes, our 401(k)-recommendation service, or anything else in general, please give our office a call at (586) 226-2100.
Please feel free to forward this commentary to a friend, family member, or co-worker. Also, if you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation, please give us a call so we can discuss it.
We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Zachary A. Bachner, CFP®
with contributions by Robert L. Wink, Kenneth R. Wink, James D. Wink, and James C. Baldwin