When thinking of the best ways to establish a financial cushion and overcome reliance on any one income stream, it is advantageous to diversify your income sources. This means having several streams of income coming from different investments or assets generating money.
In fact, many successful people choose to do this by utilizing income-producing assets, or assets which generate cash flow. Specifically, the definition of an income-generating asset is an investment which generates consistent, recurring revenue, cash flow or income over time.
In fact, assets that generate income require various amounts to get started. Some are investments which require little to no money to begin, while others require significant amounts of capital to grow and maintain the investment over time. Further, cash-flow assets are not only a resource for experienced investors, but also for anyone who wishes to make money while you sleep.
With proper research, planning, and some initial money, anyone can diversify their income streams through investing in passive income activities. Let’s have a look at some of the income-producing assets to drive your cash-flow.
1. Living Off Dividend Stocks
Dividend-paying stocks are a great way to receive consistent earnings throughout the year. Usually, these stocks are from more mature and established companies who are able to part with their cash flow more easily. This occurs because there are fewer opportunities to invest and grow the company and the best manner to invest these funds would be to return the cash to shareholders.
No two companies are the same and therefore the percentage rate for your dividends (dividend yield) varies by company. Quality companies which have consistent earnings and pay shareholders dividends regularly are commonly referred to as “blue-chip stocks.” They tend to carry less risk than growth companies, all things being equal.
Investors tend to invest in blue chips because these companies’ underlying assets, which generate income for shareholders, have more market certainty and do not need to take significant risks to continue as a going concern.
Exceptions to this certainly exist but by and large, their size and maturity often result in less risk-taking on the part of investors. Today’s best financial apps offer the ability to invest in these high-quality companies.
Finally, dividend paying stocks tend to be reliable, even when the economy struggles. You can pick individual shares to invest in if you want. Alternatively, you can invest in index funds that specialize in high-yielding dividends, such as:
Dividend-Focused Mutual Funds:
If you have the desire for living off dividends as a major source of income, you might also be delighted to know they can act as a tax-advantaged investment if they count as qualified dividends.
For reference, for a dividend to be considered qualified, generally it must be paid on stock you have held more than 60 days during the 121-day period that began 60 days before the ex-dividend date. This is the first date new investors are not entitled to receive the stock’s next dividend.
If the dividends meet this requirement, you would only need to pay the passive income tax rate on them, lowering the amount you would need to pay to Uncle Sam each year on your income-generating assets.
To invest in dividend-paying stocks, you may consider using Webull, one of many great Robinhood alternatives. The investment app doesn’t charge trading commissions, has no account minimums and even comes with two free stocks for opening an account and depositing at least $100.
2. Bonds and Bond Index Funds
Stocks and bonds are talked about together as often as macaroni and cheese. Bonds are essentially a loan you give to the government or a corporation. These are very stable (as compared to bonds) and you’ll know exactly how much money to expect back when you invest in a bond.
Longer-term bonds tend to carry higher interest rates as a means for compensating you for holding their debt longer. However, you can choose to invest in bonds of different terms based upon your personal investing objectives and goals. You might prefer some shorter-duration cash flowing assets and therefore opt for shorter-term bonds set to mature in the coming few years.
Compared to stocks, bonds have a smaller return, but are also lower-risk. Depending on the type of bond and the current financial climate, interest rates vary. Usually, bonds yield between 1-8%, depending if you wish to purchase governmental debt, investment grade corporate debt, or high yield (junk) bonds. If you’re looking for one of the more stable income-producing assets, bonds might be a fitting path for you.
Alternatively, you might avoid investing in individual bonds and opt for bond index funds, either as a mutual fund or exchange traded fund (ETF). This diversifies your risk from holding just one bond and instead provides you a diversified portfolio which tracks a broader bond index benchmark.
Some popular examples include:
Bond Mutual Funds:
As a useful application of bond investing, consider the circumstances of what potential home buyers want to do with the liquid assets while saving money for a down payment. Depending on the timeline set for having enough to afford a down payment, these investors might wish to have some mix of bonds and stocks to limit their downside, earn some income, and also have potential for some upside as they save more and near the purchase date.
If you want to consider short-term bond funds as part of your broader portfolio for savings like these, you might consider using one of the best financial apps for young adults and using an investing service like M1 Finance. This robo-advisor allows you to create “investing pies” which allocate money into specific funds either of your own choosing or based on 80+ professionally-created portfolios.
You might wish to invest money in the Vanguard Total Bond Market ETF (BND), the Vanguard Short-Term Bond Fund ETF (BSV) and the Vanguard Short-Term Corporate Bond Index ETF (VCSH). All of these funds carry respectable yields north of 2% (as of May 2020) and represent low risk since most of the assets are Treasuries or corporation with high credit ratings. You can use M1 Finance to build a portfolio of these ETFs and have your future contributions automatically contribute to the allocation you choose.
This might match your investment goal of investing in bonds as income-generating assets while also building your down payment fund. Further, M1 Finance doesn’t charge fees for managing your assets, so you don’t need to worry about those types of investment expenses eating away at your hard-earned money.
If you want to do some more due diligence to decide which bond funds will handle your needs best, have a look at the best investment research apps.
3. Peer-to-Peer Lending
If you prefer, you can lend to people instead of banks to make a profit. With peer-to-peer lending, sometimes referred to as “crowdlending,” you loan money to people who pay back your money with interest. People prefer to borrow from other people when they have bad credit that would result in extremely high interest rates from banks.
For you, as the lender, this means there is the risk the person won’t pay back all of the money they borrow. However, if you’re willing to take the risk, you can end up making a significant amount of money. It’s safer to use a platform, such as LendingClub, than finding people to lend money to on your own.
With LendingClub, the risk is spread out across multiple borrower loans and can be as low as $25 per originated loan on the platform. You have the option to invest automatically, or if it makes you feel more comfortable, set filters for which loans to target for investment.
For example, you might filter out people who have very low credit scores, high numbers of inquiries or credit utilization ratios. The service offers more criteria for you to sort through loans you would have interest backing.
LendingClub works to get late or delinquent payments from people who default. If you’re willing to take a bit of risk for possibly high gains, consider peer-to-peer lending as one of your income-producing assets and sign up for LendingClub.
4. Real Estate Investment Trusts (REITs)
Some people consider Real Estate Investment Trusts (REITs) to be the mutual funds of real estate. REITs are a collection of properties operated by a company that uses money investors give them to buy and develop real estate. You can choose to invest in trusts that build condos, apartments, business buildings, or other facilities.
REITs pay you dividends. These are a fitting income-producing asset for people who want an easy way to get involved with real estate investing without having to purchase property themselves. You can get started by talking to a broker about buying a REIT.
5. Real Estate Crowdfunding
It might come as little surprise, but investing in real estate appeals to many people for multiple reasons: the tangible nature of the investment, low-correlation with the stock market, multiple return components (price appreciation and rental income), tax advantages, and more.
However, the hands-on factor of owning property and acting as a landlord deters many people from getting started. Thanks to the advent of fintech, or the use of technology to enhance and automate certain financial transactions and processes, many companies now offer the opportunity to invest in real estate with or without owning property.
Currently, one of the leading (and easiest) ways to get started with real estate investing is through crowdsourced lending or purchasing. Several online platforms cater to this investor demand by providing various levels of service, investment options, and different points of investment in the real estate value chain.
This results in you avoiding any aspect you might not wish to participate in, such as owning or managing properties but still gaining exposure to these alternative investment options.
Depending on the type of investment you wish to make in real estate crowdfunding ventures, you have multiple options available to you. Let’s take a look at some of the most popular options available and how they differ from one another.
Investing in Individual Properties
Some platforms like EquityMultiple allow you to invest in specific properties. However, despite this platform allowing you to invest in individual properties, it still carries significant differences in the types of projects financed.
One major distinction about this platform is the fact that it only allows access to accredited investors.
Accredited Investors: This means only wealthy and affluent investors having an aggregate net worth of over $1,000,000 and earning over $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years with a reasonable expectation of reaching the same income level in the current year.
For EquityMultiple, your money will be invested in commercial real estate and carry a $5,000 minimum investment. With this platform, you have the option of selecting from several available projects.
Investing in Real Estate Portfolios
While EquityMultiple focuses on investing in individual real estate properties, other companies focus on investment in real estate portfolios, or several properties in one investment. In theory, this diversifies your investment risk while providing you access to several properties simultaneously.
To date, the most popular real estate investment platform offering a portfolio approach is Fundrise. This investment platform provides several options for you to review and invest your money. Their available portfolio options include:
- The Starter Portfolio – This option allows investors to start investing in real estate with as little as $500.
- Core Portfolios (Supplemental, Balanced, and Long-Term Growth) – Each of these “Core Portfolios” comes with a higher minimum investment of $1,000 and targets a different investment objective. Supplemental aims to provide additional passive income, Long-Term Growth invests money for the primary goal of capital appreciation, while Balanced focuses on both of these investment objectives. By offering these investment portfolio options, investors can choose which investment objective best aligns with their financial goals.
6. Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are offered by most banks and credit unions and are easy to open and understand. CDs are almost risk-free and insured in the United States for up to $250,000. They are another savings instrument like savings accounts but come with longer-term commitments, varying from three months to five years.
They work by having you lend money to a bank for a set amount of time (the “term length”), with longer term lengths typically involving higher interest rates. Much like any interest-bearing asset, the longer the term length or commitment, the higher interest rate and return you can expect to earn in exchange for losing access to your money for longer.
During the term length, you gain interest on the principal at a rate usually higher than that of a high-yield savings account. If you take money out during the term length, you’ll have to pay a penalty, so it isn’t wise to invest money you anticipate needing in the near future.
Keep in mind that some CDs might have a lower interest rate than inflation and if that happens you may lose money. Depending on your current financial objectives, holding money in a risk-free CD might be one of the best investments for young adults who have short-term financial goals they need to meet.
7. Short-Term Rentals
Rather than investing in creating buildings, another income-producing asset is renting out property that already exists. The basic idea is to own a house or apartment, rent it out to tenants, and make money off of the rent checks each month.
However, investor beware: this can be a lot more complicated than it initially seems and it’s possible to get tenants who don’t pay and you can’t legally make leave. A safer option is to do short-term rentals of a house, or even just a room, through reputable services, such as Airbnb.
In eligible countries, Airbnb’s Host Guarantee program gives you protection up to $1,000,000 in damages to covered property in the event of guest damage. Depending on your location and the type of accommodations you’re providing, Airbnb can be very profitable without the headache of badgering tenants for rent.
My wife and I hosted an AirBnB in a lock-off unit in the rear of our house for two and a half years. With payments from these short-term rental guests and long-term tenants in the adjacent unit, we managed to have these renters pay for our entire mortgage. While flipping the room between guests at first took a considerable amount of time, once we established a routine and segregated duties between ourselves, the task became considerably more efficient and worthwhile.
By the end of the first 6 months, we had a set routine and flipping the room took less than 20 minutes (not counting laundry). We created a short-term rental checklist for tasks which needed to be done between guests and this covered every cleaning task, inspecting for damage or needed repairs, and left no remnants of the previous guest who stayed.
We quickly earned tens of 5-star reviews and averaged north of 4.8 stars, earning Superhost status for several quarters before we decided to move to California. The experience helped us to save for a down payment quicker by covering our living expenses.
8. Land Rentals
You don’t need to rent out buildings. Another option is to rent out land. Depending on the size, location, and characteristics of your land, there are various options for how you can rent it. If you have fertile soil and an expansive enough plot of land, you can rent it to farmers.
You can do this privately or through a matching service, such as Shared Earth. If you don’t have enough land for a farm, you can rent it to someone who wants a garden. YardYum can match you with potential renters.
You can also have people with dogs pay to use your land as a dog park. This is more popular in urban areas where there aren’t many open spaces readily available. The website Sniffspot lets you list your land or you can create an ad elsewhere on your own.
9. Car Rentals
Cars are a depreciating asset, but it’s still possible to turn your vehicle into an asset which generates cash flow by renting it out. You can choose when to rent it out so that you always have it when you need to use it. Websites such as Getaround and Turo will let you list your car for rent and set the time frames.
You could also make a deal with someone you trust who would like to use your car to drive for Uber or Lyft. Your car’s value will depreciate faster the more miles that are put on it, but if you’re making income more quickly than the depreciation rate, it can still be worth it.
Be aware: this may run afoul of insurance coverage policies and result in loss of coverage or lack of a claim being honored if something should occur. Check your policy to see what terms apply. Often, car insurance carriers require a special type of insurance policy for ride-sharing to honor any claims made against policies. It is not recommended if this places you at risk for liability. Carefully consider this decision before moving forward.
If you have been followed investing for any significant amount of time, you likely have heard of how some investors made serious money by investing in a small company now known the world over. People like Peter Thiel who invested in PayPal or Ashton Kutcher who invested in Uber before they created new platforms millions now use on a daily basis.
Just as likely, you’ve also likely heard of people who invested in companies thought to be the next big thing but in fact turned into abject failures. Think companies like Theranos, who now no longer exist.
In the world of start-up investing, your investments often either turn out as home runs or strikeouts. Their success depending on how well the companies’ founders execute and lead their company to glory (e.g., going public or being acquired) or failure.
When it comes to investing in start-ups, anyone who chooses to invest in start-ups should be aware that losing all of their investment has a high likelihood.
loosened the restrictions placed on startup crowdfunding platforms. Some platforms, like , allow access to both accredited and non-accredited investors to invest in pre-vetted businesses and start-ups from around the country.
Depending on the stage of investment you target, you will see differing levels of risk. Meaning, for those interested in investing in early rounds of financing, they will face significantly higher risk (and reward) than those who fund a later round of funding as the startup scales.
Because screening startups can be notoriously difficult, crowdfunding platforms like NextSeed look to bridge this screening gap.
The investments NextSeed provides both rely on earning income from investments held in startup companies funded through the platform. The two primary investment options are:
- Revenue-Sharing Notes – these are agreements the startup business receiving funding will pay investors a percentage of their monthly revenue until they receive the total repayment amount
- Term Notes – These act essentially as a business loan with a fixed interest rate repaid in an agreed amount of time
One thing to keep in mind before investing through platforms like NextSeed is the risk inherently involved in startup investing. Before jumping in with a significant amount of your net worth, consider opening a NextSeed account to learn more about how the vet companies and then consider dipping your toe in the water with a small initial investment.
Signing up for an account does not constitute an obligation to invest in companies on the platform.
Cash flow assets can be digital as well. You’ve likely heard of people who “flip” houses by buying them and reselling them at a higher price. You can do the same thing with a website, but with a lot less work.
Basically, someone researches upcoming popular topics or news, gets domains they expect others will want to own, and sells it to them at a higher price than it cost to buy. Much like a fixer-upper, you can take a website with minimal traffic, build it up and then flip it for a profit if you find a lucrative niche an investor would want to target with affiliate marketing.
When people think of royalties, music is the first to come to mind, but royalties can apply to other creative products, such as art, natural resources, and more, as well. You don’t have to be the musician or artist who created a song or piece to profit from it.
In the world of art, you can invest in royalties and receive payment every time your product is used. An easy way to get started is to check out Royalty Exchange. This website allows you to buy music royalties from musicians.
And if you’re looking to invest in art for capital appreciation instead of just as assets generating income for your financial needs, consider investing in art with MasterWorks. The platform allows you to invest in “blue chip” art and profiting when the company sells this art for a higher value than it was acquired.
13. Money Market Accounts
Money market accounts are similar to online savings accounts, except they aren’t FDIC insured. Meaning, they don’t carry the obligatory $250,000 in insurance against assets held in the account in the event the depository institution fails. Because these accounts carry a slightly higher risk, they tend to pay more than a traditional savings account.
Different than CDs, which can charge penalties for early withdrawals, you can close a money market account at any time. Further, you usually also carry the ability to withdraw money from the money market account each month.
However, some may come with a limit to the number of withdrawals you can make in any given month or specific period of time. Make sure you read the fine print on any account when you open it to be sure of the terms and to avoid any penalties which might trigger as a result of excessive withdrawals.
Of final note, most money market accounts carry account minimums, especially if you want to earn the best rate.
14. Collateralized P2P Loans with Constant
Another income-generating investment option, , offers P2P lending though in a different flavor than LendingClub (#3) mentioned above. This service differs by serving as an alternative investment platform and offers only securitized peer-to-peer loans.
This means that Constant requires collateral, specifically cryptocurrency, to back all loans made on their platform. Because these loans come backed by collateral, they represent a lower risk than a non-secured P2P loan, all things being equal.
What I want to state out right, however, is that Constant is not a federally-insured savings vehicle like some of the previous options mentioned above. Rather, is an alternative investment platform which offers interested investors attractive risk-adjusted returns.
The securitized nature of the loans makes the platform safer than conventional lending platforms like LendingClub, Prosper and others which do not require collateral to back the loans.
To compare how this service stacks up in terms of risk, please visit read more on mylist. In short, the most pertinent statistics include:
- Defaults: The rate was around 6% in 2019. Please note this simply means borrowers didn’t repay on time – investors still got their principal and earned interest.
- Non-performing loans as a percentage of pool assets: Constant doesn’t have any non-performing loans as of 6/1/2020. If a borrower defaults or their collateral value falls to threshold, the collateral is sold immediately to repay investors.
- Creditworthiness of borrowers using the pooled funds: Constant doesn’t assess the creditworthiness of borrowers because they don’t need to. All lending is over-collateralized.
- Industries targeted for these loan products: Constant’s products are best suited for investors who want consistent returns on a collateral-backed product, those who want a better return on their savings, or who want to diversify into secured lending.
Finally, one very important item to note about Constant is its investor returns track record: No investors have lost their principal since Constant launched in early 2019.
If this sounds like an income-producing investment of interest, consider opening an account for as little as $50.
When you open an account and make an initial deposit, you’ll receive a $10 bonus as an added incentive for opening and funding your account.
Let Income-Producing Assets Diversify Your Financial Resources
Make your money and property work for you by turning them into income-producing assets. The phrase “don’t put all your eggs in one basket” can apply to income streams as well so it’s a financially literate idea to diversify your income and see how to build wealth for long-term financial security.
Before proceeding with purchasing or investing in any of the above methods for acquiring assets which generate income and cash flow, make sure you carefully consider the amount of risk you’re willing to take. These best income-producing assets can help you to reach financial independence if you use investing strategies wisely.
Previously published on Youngandtheinvested.com.
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