5 Smart Passive Income Ideas To Build Wealth in 2021 (and Beyond)
What if you could earn money… when you’re not working?
Although it may sound like a dream for many, the truth is that it isn’t as far removed from reality as you may think.
Thanks to the internet and today’s improved accessibility to financial markets, anyone can find ways to earn money without always being on the job. This can be done by purchasing assets that generate an income while you sleep – also called passive income.
When you start earning passive income, you start to understand the power of separating time from money and ultimately, how life changing that can be.
Suddenly, you have more time to spend with your kids, more time to travel and in many cases, retire early.
There are many different ways to make passive income, but assets that generate a monthly income really are the holy grail in investments.
What kind of assets generate passive income?
Income producing assets are bought with the intention of generating cash flow later on.
Essentially, they are investments that you can use to grow your wealth and create multiple streams of revenue.
These are different to assets such as art, gold and cryptocurrency, which only produce income when sold.
Most income generating assets are passive in nature. Once bought, they require various degrees of upkeep or maintenance – with investments such as property investing, you’ll need to manage tenants. But with P2P lending and stock market investing you just need to log onto your broker and deposit money.
Both types of assets are appreciating assets (resulting in a growth of value over time) – the difference is how they generate revenue. The good thing about passive income assets is that they appreciate over time and produce a monthly income.
At the end of the day, the best type of asset depends on how much you can commit and what your goals are. There’s a time and place for each type of asset, but if you’re looking for an income, make sure you’re purchasing assets that generate monthly revenue.
5 ways to generate passive income
1. P2P lending
Peer to peer lending involves lending money to people online for profit.
As an investor, you offer loans through a platform, and receive monthly interest payments until your principal is fully refunded.
As a P2P investor, you are essentially investing in somebody else’s debt. With P2P lending, these loans could be personal loans, property loans, SME business loans and even car loans.
Since you are essentially acting as a bank – by lending money online – you get interest payment every month – just like you do when you pay off your credit card!
Those interest payments are your monthly revenue – which compounds over time.
The benefit with P2P lending is that since most of the loans are unsecured, you get access to interest rates that are totally unheard of in normal savings accounts (up to 16% with Swaper!).
Not only that, but P2P investing doesn’t require much maintenance: deposit your money, set your interest rate, and let it do its thing. No need to research profit and loss statements, bid on a property or fix broken boilers.
P2P investing is also a great way to diversify from other investments and expose your money to other industries. This way, in the next economic downturn, your money is more protected, and you don’t make big losses.
2. Stock market investing
The stock market generates income in the form of dividends, which are a profit-sharing mechanism. Not all companies offer dividends, so it is important to be mindful of the stocks you are picking.
Investing in companies that pay healthy dividends is a tried and tested method to producing a passive monthly income.
Having said that, receiving enough of an income to live on does require quite a hefty portfolio – if you want to get €1,000 per month, you will need to have around €100,000 invested. It’s also important to make sure you are investing in the right companies that offer regular monthly dividends.
Although stocks are liquid and easy to buy and sell, prices fluctuate during stock market crashes – such as the recent one in 2020. Market events such as the pandemic can cause companies to stop paying out dividends, affecting your portfolio.
This happened recently in 2020 when Disney stopped paying out dividends.
3. Property investing
Property investing is definitely the oldest passive income asset: buy a property, find a tenant and rent it out. Their rent is your monthly income. Sound easy enough?
As you can imagine, property investing is far from easy. Although the real estate market is viewed as less risky than some investments, it is a hard asset to get into since it often requires a lot of money for a deposit.
How does it work as an income generating asset? First, you get a mortgage on a property and make sure you can charge rent that covers your mortgage, bills and renovation. This allows the house to pay for itself – and gives you a bit of profit on the side.
With that bit of profit, you can eventually afford to purchase another property. The profit of your two companies continues to snowball, and so forth. It’s no wonder 90% of millionaires attribute their wealth to property investments!
However, property investing has a huge initial access barrier which makes it unrealistic for most average earners. You will need a big chunk of upfront cash for the deposit, some buffer for maintenance and time on your hands to manage repairs and tenant management.
4. Small businesses
Investing in small businesses happens through angel investing, crowdfunding, SME loans or individual investments. Your involvement varies depending on your level of investment.
If you’re just looking to own shares in a company, returns can be high (20 – 25%), but a lot of companies do fail. If you are willing to get more involved as an angel investor, then you won’t deal with as many failures but you will need to commit a lot of time. You can also set up your own business – but we’re not sure that qualifies as passive income.
If you own shares in several companies, you’ll earn dividends that can be paid out monthly or quarterly – or you may sell your shares at a profit if the company goes public.
You can also invest in businesses by offering them loans through a P2P business loan platform. Just like a P2P lending platform, you’ll get monthly income in the form of interest payments. The main difference is that returns are usually lower, at around 6%.
5. REITs
REIT stands for real estate investment trust, and is a type of asset designed to help investors get into property investing without having to commit a huge amount upfront.
As an investor, you get access to publicly traded shares from property developers and investment companies. So, if you’re interested in property investment but don’t have the upfront funds, this would be a good alternative.
REITs can hold both personal and commercial properties such as office buildings, apartment buildings and other real estate. They typically offer a diversified property portfolio to investors and usually hold a proportion of each type of property.
Just like the other assets mentioned on this list, REITs can provide monthly or annual income. However, REITs usually return between 5% and 8% per year.
Like stocks, you receive monthly revenue in the form of dividend payments.
The best passive income strategy for you?
So, you want to buy passive income assets.
But what if you don’t have much to start with?
In that case, you want to start small. Start with small investments that don’t require huge amounts of money.
This rules-out property investing and small business investing.
If you don’t have much to start with, then you’ll want to look at P2P investing, stock market investing and REITs.
All these three are good income generating assets – deciding between them is up to what you are most comfortable with and which one meets your goals. If you are already heavily invested in stocks, for example, then it’s worth getting started with P2P investing or REITs.
The good news is that with peer to peer loans, you can start with very little. In fact, with Swaper you can get started with as little as €10 and make healthy returns of 14%.
Conclusion
Is passive income just a dream?
Or something you’d like to try out for yourself?
We believe that anyone can start making an income from assets, and that all it requires is starting small. If P2P investing is a passive income asset you’re willing to try out, we can help you get started at Swaper.
Ready to start making a passive income? Create an account today.