From the ancient times till the present world a few things remain constant. Day and night, summer and winter, seed time and harvest and of course, financial hardship and limited funds. No matter what the economy looks like, there are always avenues to earn money aswell as investment opportunities. Discovering how to earn passively is only a function of how willing you are to latch on opportunities as they come and there are lots of them.
Ever heard of the term “passive income”? Of course, it’s been a common tongue in recent times as more people are seeking alternative ways to cope with their ever increasing bills. Passive income is simple earning money with little working effort or without being actively involved. Jobs under this category may start with active participation from the beginning and require little effort in the long run. Imagine sitting in the comfort of your couch and your credit balance keeps increasing by the minute.
In his study on the habits of rich people, author Tom Corley was able to gather that 65 percent of them had three streams of income, while 29 percent had five or more. Most of the extra sources of income are passive investments. If you are looking to join the millionaires club, you may want to consider diversifying your income streams.
In this article, some passive ways of earning money or earning with investments will be explained. Your research does not stop here though; there is a lot more ahead. This is a good foundation for that decision making process that could transform your net worth — and your life ultimately. Below is the first list to be discussed in this write-up:
- Dividend Stocks
- Real Estate
- Better Globe (Tree Investment)
- Index Funds
- ETF (Exchange-Traded Fund)
ETF involves trade of investment fund on stock exchanges, and it is similar to trading stocks. An exchange-traded fund features assets; bonds, gold bars, commodities, or stocks and is known to operate with an arbitrage system structured to facilitate continuous trade that is close to its net asset value.
Generally, ETFs track an index, be it bond or stock index. Distributors can only trade ETFs directly with authorized persons (large stock-brokers). They have to establish agreements with the latter in what are called creation units. Creation units are big blocks of ETF shares in their thousands, which are usually traded in-kind with baskets of the underlying tradable financial assets.
Authorized persons may wish to start a long-term investment, but they will become market makers on the open market most times. These market makers are able to trade creation units with their underlying financial assets to ensure the provision of ETF share liquidity. This also facilitates the approximation of the net asset value of the underlying assets by the intraday market price. You can invest by making use of a retail broker to trade exchange-traded funds on this secondary market.
Furthermore, this kind of investment platform utilizes the valuation feature of a unit investment trust or mutual fund. Do not mistake closed-end funds for ETFs, although both have certain similarities. ETFs are also good for short-term investment.
Investing in ETF
Exchange-traded fund may be a good investment platform for you if your budget is low. It is a low-cost investment that is characterized by stock-like features, low management costs, transparency, flexibility in trading, market exposure and diversification, and tax efficiency. ETFs do not have any minimum fees. The minimum you are required to pay as an investor is the price of one share of the ETF in addition to commissions and fees.
It has been on-going in the United States and Europe for over two decades. ETFs can be high risk or low risk depending on which type you are going for and if they are used correctly. Average annual return as at 2017 (for 10 years) was 12.6%. The types of ETFs are listed below:
- Index ETFs
- Stock ETFs
- Bond ETFs
- Commodity ETFs
- Currency ETFs
- Inverse ETFS
- Leveraged ETFs
- Actively Managed ETFs
- Exchange-traded Guarantor ETFs
2. REITs (Real Estate Investment Trusts)
These are companies that own, finance, and manage real estate properties which generate income. For your company to be considered as an REIT, it is required to attain some standards. Companies like these trade/operate on major stock exchanges and investors are surely entitled to benefits.
REITs are modeled after mutual funds and give investors an opportunity to claim ownership of valuable real estate. They also provide an avenue for dividend-based income and total returns to be accessed. Investors have access to regular streams of income, long-term capital appreciation, and a multifarious market.
The types of commercial real estate owned by REITs include hotels, warehouses, timberlands, hospitals, office buildings, apartment buildings, shopping centers, data centers, and so on. Investors can choose to buy stocks from mortgage REITs, private REITs, public non-listed REITs, and equity REITs. REITs can choose to have one or more types of properties in their portfolios. They utilize major exchanges for public trade.
Stockholders earn a share of the income generated without having to make purchases, manage anything, or finance property. This is a passive way of earning money.
Business models of a great number of REITs are easy to figure out. They lease space and collect rent. The income generated is paid out to shareholders as dividends (at least 90 percent of taxable income). This investment can simply be referred to as “real estate working for you”. It provides high dividend yields and has good potential for long-term capital appreciation.
Investing in REITs
Individuals can decide to purchase shares on the platform, which are listed on major stock exchanges (like other public stocks). Shares can also be bought in a REIT mutual fund or exchange-traded fund. Analyses of the investor’s financial objectives are handled by brokers, investments advisors, or financial planners who give recommendations based on the right investments to inject money into.
The prices of REIT shares are set by the market throughout the trading day. When assessing the investment value of the shares, analysts take the following into consideration:
- Expected appreciation in earnings per share.
- Expected return from stock in consideration of price changes and the current dividend yield.
- Corporate structure and quality of management.
- Basal asset values of the mortgages, real estate, and other assets.
- Current dividend yields in relation to other yield-oriented investments; for example, utility stocks, bonds, and so on.
- Dividend payout ratios under REIT FFO.
It is important to note that REITs are high-risk investments, although the average annual return from 2010 to 2017 was 12.99 percent. Entry costs are low, but management costs are not cheap.
Investment funds are alternatively called funds, investment pools, managed funds, collective investment vehicles, or collective investment schemes. In legal spheres, it is known as undertaking for collective investment in transferable securities (shortened as collective investment undertaking).
It is a method of investment that involves acting with other investors for the purpose of benefitting from a group effort. A fund may be held by the public or sold in a private placement. It can be held by the public as an ETF, mutual fund, closed-end fund, or special-purpose acquisition company. If sold in private placement, it will be in form of a private equity fund or hedge fund. The merits of this kind of investment are given below:
- The ability to reap from economies of scale, that is, the costs of transactions will be lower.
- Reduction of risks through increment in the diversification of assets.
- Hiring of experts in investment management. This will prove to be beneficial in terms of better risk management and returns.
Funds are promoted with a wide collection of investment aims that may target either specified industry sectors or geographic regions. Depending on the geographical location (country), investors may be biased towards the domestic market due to reasons such as lack of currency risk and familiarity. Investors choose which fund to focus on based on the specified investment aims, fees, and past performance.
Investment funds also include specialized investment platforms such as common and collective trust funds. These are special bank-managed funds that are designed to connect assets from qualifying pension trusts/plans.
The structure of an investment is largely defined by statute, company law, or legal trust. In a typical setting, there will be the presence of a fund/investment manager, fund administrator, Board of Trustees or Directors, unitholders or shareholders, and distribution (marketing) company. As a shareholder, you have the rights to assets and income generated.
An Open-end Fund
This investment vehicle is equally divided into shares whose prices vary in direct proportion to the difference in value of the fund’s net asset value. There will be the creation of new units or shares in order to match the current share price, each time money is injected.
In the same vein, assets are sold to match the current share price, each time shares are redeemed. This ensures that there is no demand or supply created for the shares. They will continue to reflect the basal assets directly.
Open-end funds are either single or dual priced. When single priced, the prices for the units or shares are the same during purchases or sales. When dual priced, the purchasing price is higher than the sales price.
A limited number of units or shares are released in closed-end funds. This happens through private placement or an IPO (initial public offering). If the issuance is done through an IPO, the shares will be traded directly through the fund manager or an exchange in order foster a secondary market that is influenced by market forces.
The shares may trade at a premium to net asset value, if demand increases. Decrease in demand can have an impact on trading in the sense that there will be a discount to net asset value. More unit or share offerings will be made by the platform if demand increases (share prices may be affected).
Investing in Funds
In funds, investment risk, which is also called capital risk, is greatly reduced due to diversification. A single equity investment is more likely to collapse due to various reasons. You are likely to lose your capital in the event of this. On the other hand, when you invest in multiple equities, the likelihood for your investment failing is greatly decreased. If you do this, the investment principle you would be following is “spreading risk”.
Funds are differentiated by asset-based categories (property, equity, bonds, etc.), and are separated by their geographic markets or themes.
In open-end funds, initial charges are levied on the buying of units or shares. Some funds may waive the initial charge and settle for an exit charge instead. In closed-end funds, the investors face brokerage commissions. There will be an annual management charge (AMC) to cover certain costs. Fees or charges vary from one vehicle to another.
4. Dividend Stocks
People that invest in dividend stocks are at an advantage due to the regular payments. There is also the opportunity to reinvest the dividends and obtain more shares of stock. Many dividend-paying stocks are from corporations that are known to have financial stability. There is a high probability for their stock prices to increase, hence the enjoyment of regular payments by the shareholders. Some of these companies raise their dividends as time goes on.
Corporations that are consistent with the payment of dividends are always healthy in terms of their finances. Apart from that, they are known to generate regular cash flow. Their stock prices are less flexible in relation to the market. Companies in such category pose less risks than the ones that do not pay dividends and have more flexible price movements.
Dividend stocks can be seen as an attractive avenue for passive investments for the younger generation. It is good for the long haul. The older generation is not left out because it is a way to set themselves up for a steady income flow in view of a retirement plan.
Investing in Dividend Stocks
This type of investment is similar to purchasing any other kind stock. To begin, you need to open a brokerage account with a broker. You will proceed by the funding the account. Your research on which companies to put your money in will be based on reputation. You can seek the help of online stockbrokers who will aid you in this quest (probably with the use of screeners).
Investors are open to the power of compounding, which involves the generation of earnings and reinvesting them. With this, you are basically generating earnings from your earnings. Additional shares of stock are bought, leading to greater dividends. Four things are needed for this to take place: an initial investment, dividends (earnings), reinvestment, and time.
Corporations that have had high-yield dividend stocks in 2019 include BP, Icahn Enterprises, Brookfield Property Partners, Cedar Fair, BCE, and so on.
Keep in mind that shareholders also have to pay income taxes when they receive dividend payments. The investment can go on for a long period and the risk is low if you are with the right company. In the basic materials sector, the average stock dividend yield is 4.92%, while the basic material stocks in the S&P 500 yield an average of 2.5%.
5. Real Estate
Real estate investment is a long-term capital intensive form of investment that involves the buying, owning, managing, renting and/or selling of real estate for gain. Capital may be raised from mortgage leverage and its success depends on high cash flow. The risks are high when the processes involved are not completely understood and properly managed by the investors.
Investors face a major challenge; the fact that real estate markets in a great number of countries are not well-organized. Apart from this, each property is unique to itself and not directly replaceable. This is why there is need to conduct proper research in order to locate lucrative properties, despite the presence of other competitors.
Information asymmetry is another challenge that you may face as a competitor, but acquiring adequate information can save you from this. Information asymmetry exposes an investor to transactional risks. However, the situation creates avenues for investors to acquire properties at bargain prices. Being in the know is key. You can beat the competition through the following:
- Real estate agents
- Real estate brokers
- Market listings
- Government bodies
- Public auction
- Private sales
- Real Estate middlemen (wholesalers) and investors
The market listings can be gotten through a Multiple Listing Service or Commercial Information Exchange. Public auctions may include estate sales, foreclosure sales, etc. Flipping is a term that describes the buying of real estate and quickly reselling the property for gain. The term is, however, not limited to real estate.
Private sales are also referred to as FSBO (For sale by owner) which involves the selling of properties without the representation of a real estate agent or real estate broker. The owner may utilize online listings or market listings for publicity, but the sales process will be done with the help of a solicitor/lawyer.
Investing in Real Estate
If you have eyes on a particular property, you will need to do the needful ― which is to investigate it and verify the status and condition of the property. On completion of those steps, you will proceed to negotiate the seller’s price and terms. This will be followed by the execution of the contract for sale.
The process can be quite complex so it is advisable to hire a real estate agent and an attorney to guide you through the process. As a real estate investor, you should learn how to manage and evaluate risks because you may have to take them at every stage. This type of passive investment is regarded as high-risk. The following are possible risks that you may face:
- Adverse possession.
- Fraudulent sale or overpayment during purchase.
- High taxes.
- Personal injury, disasters, or fire.
- Destruction of property by tenants/wear and tear.
- Environmental hazards.
- Building component or system failure.
- Economic downturn
- Cash shortfall
- Market Decline
Think about properties that are facing foreclosure. When a homeowner has defaulted on his/her mortgage loan, the property is deemed to be in pre-closure. It can be bought at a public sale (sheriff’s sale or foreclosure auction) when formalities are being carried out.
If the property was not sold at the auction, the lenders will claim it. The term used to describe such properties is REOs (Real Estate Owned). With your investment, you can begin to put up properties/apartments for rent. Real estate surely pays a high dividend when you make a wise investment. REITs is an avenue to gain good exposure to it.
6. Better Globe (Tree Investment)
Better Globe is regarded as an ethical, sustainable, and long-term passive investment opportunity. This should get you interested if you would like to aid people living in poverty on the side, as well as make the environment safer. Money can be made at the same time.
The system has a good reputation. In 2017, over twenty thousand people earned 15% annual returns. As at now, the company has over thirty thousand customers in over a 100 countries. It is a low-risk investment with high returns.
Better Globe seeks to plant trees in order to improve the ecosystem and make money, but it is far more than just planting over two million trees since its inception.
Investing in Better Globe
Determining how much you should invest in Better Globe should be in consideration of your reasons for investing, long-term goals, and so on. The bottom line is that you should not invest all your money into it.
Better Globe is a Kenyan forestry company that has been in operation since 2006. It utilizes crowd-funding as its financing model. A donation package costs 53 Euros. The company has been able to give over 1,400,000 Euros in returns since starting.
7. Index Funds
Index funds are ETFs or mutual funds that are structured to follow stipulated rules so that the system can track a specified basket of basal investments. The rules may involve the tracking of prominent indexes such as the Dow Jones Industrial Average or S&P 500.
Implementation rules may be followed instead. These include large block trading, flexible/patient trading, tracking error minimization, or tax management. Index fund rules may feature sustainable or social criteria. The rules of constructing this fund are clear on what type of corporations/companies qualify for it.
Equity index funds feature groups of stocks bearing similarities in value, size, geographical location of companies, or profitability. Each stock group may include corporations/companies from the Frontier Market Countries, the US, Non-US Developed, and emerging markets.
Countries that are frontier markets are more advanced than the least developing countries. The emerging markets are countries that have the features of developed markets, but do not qualify based on certain standards.
These geographical markets may have additional index funds that comprise indexes of companies following rules based on size, value, growth, profitability, investment capital, and/or real estate. The indexes may also follow rules based on fixed income and commodities.
When companies meet the specific index parameters, they are bought and retained within the index fund. On the other hand, when these companies move outside of those parameters, they are sold. The three indexing methods are enhanced indexing, synthetic indexing, and traditional indexing.
Investing in Index Funds
An index fund can be described as an investment fund that makes use of a rules-based system. The merit attributed to the system is that it does not need much management time. Investors are not expected to spend much time analyzing stock portfolios.
In matters of tracking, a number of index funds depend on computer models that require a form of passive management (little or no human input). This is related to the selection of securities to buy or sell. Such mode of operation makes management fees cheaper and taxes lower. One merit of index funds is that it is a low-cost venture.
If it is a long-term investment, then the risks will be lower. However, index funds are known as good short-term ventures.
Apart from the above investment windows, there are other passive ways you can earn money or invest. They are listed below:
- Blog + Youtube = Ads
- Renting a room
- Writing a book/e-books
- Making your own website/drop shipping
- Create courses
- SaaS (software as a service)
- Trading/day trading
i. Blog + Youtube = Ads
Monetizing your blog or Youtube account by enabling ads can fetch you good money. Advertising can also help you reach potential customers and influence them to take an action. When people visit your blog pages or view your videos, you are already making money on the go!
If you have not considered this stream of income, maybe you should think about it right now. It can be a little difficult or may take some time to set up, if you do not own a blog or a Youtube account yet. However, you will be smiling to the bank in the long run.
Ways you can make money from ads displayed on your blog include pay-per-click ads, text links, pop-ups, paid reviews, CPM ad networks, and/or your personal ads. For Youtube, see the options below:
- Video Ads
TrueView ads, non-skippable ads, and bumper ads.
- Non-Video Ads
Overlay ads, display ads, cards and sponsored cards.
You can sign up for Google AdSense for free to get ads displayed on your website and start earning. Youtube pays you per 1000 views, although earnings may vary depending on various factors.
Affiliate marketing is all about getting paid (commissions) by an online retailer for traffic or sales generated from your referrals. It involves recommending a product or service to your followers, contacts, website visitors or email list using an affiliate link.
This can be a good way to earn money without doing much. You only need to find your niche, join an affiliate program, promote, and track your results. All these can be either automated or require little or no effort and cost. Try programs offered by Amazon, eBay, Rakuten, and so on. Affiliate marketing can earn you money for a long duration.
iii. Renting a Room
With services like AirBnB, this can only get better. AirBnB is an online service that makes it easy to rent rooms, apartments, or even an entire house out to others. They help you handle bookings and payments from the comfort of your mobile phone.
You can even rent a place for long-term use and rent it for short-term tenancy to others, provided you have obtained permission from the owner of the property. This is risky because property is not yours.
iv. Writing a Book/E-books
When it comes to writing a book or e-book in order to earn passive income, one thing should come to your mind ― self-publishing. You can decide to sell your books on e-commerce sites like Amazon. It may be a tedious process of writing, self-publishing, and promoting, but the hard work will surely pay off later once your book starts gaining recognition and hitting more online sales. All you would have to do by then is to sit back and relax (or earn some money while sleeping).
For e-book ideas, your blog posts might be good enough for publication in such format, provided they have related themes. Self-publishing does not cost thousands of dollars and you can be rest assured that it is for the long-term. In fact, it is a low-risk venture.
v. Making Your Website/Drop Shipping
One of the most popular means of earning passive income is through the ownership of a website with content (posts). It keeps making money for you over a long period of time, as long as it has been monetized and there is good flow of traffic. This can yield high returns if handled well enough.
In drop shipping, you are the retailer who does not keep goods in stock. What you do is to relay orders to the product manufacturer/wholesaler or another retailer. You require little effort in doing this and at very low costs.
vi. Create Courses
Learn how to create courses online. When you are able to do so, the knowledge can be instrumental in creating a passive income stream for yourself. You are the tutor, therefore you can determine your level of engagement (scheduling and streaming online). No knowledge is lost, so this will serve you for a long time. If you are lucky, the number of students may be more than you anticipated — leading to high earnings.
vii. SaaS (Software As a Service)
With the help of freelancers and virtual assistants, you could make this a reality. It can cost you a lot, but may yield high returns in the long run. When the mobile application or software is ready, just hire people to manage it for you and the rest is history. It is a high risk venture because there is no guarantee that your software will be in high demand, regardless of all the money you spent to create it.
viii. Trading/Day Trading
If you want to take up day trading, you can decide not to spend time monitoring the markets. Leave the cryptocurrency/options/stock trading technicalities to an automated system, a trusted broker, or even invest through copy trading. Passive trading is risky because you are not monitoring the process.