Passive Income. The term seems to take centre stage in any conversation pertaining to investments – a seemingly necessary medium to reach the all – important end-goal of financial freedom. And why not? The word passive itself is enough to explain the appeal. The term is defined as earnings an individual derives from a rental property, limited partnership or any enterprise he or she is not directly involved in. Investopedia points out that the more colloquially accepted definition refers to any income earned regularly with little or no effort on the part of the person receiving it. We take a look at few ways in which working professionals can begin this journey from almost any budget/earning point and enter the whole new arena of making money while you sleep:
Here’s one that doesn’t necessarily come to mind when one speaks of passive income.
With the advent of crowdfunding taking flight rapidly over the last several years, the ability to fund viable businesses has become increasingly popular – with barriers to entry relatively low (budget wise) due to the number of participants in these campaigns. As with any investment, there are risks involved with peer-to-peer or P2P lending. That being said, this medium has proven to be lucrative in terms of its returns, with interest rates on loans depending largely on the borrower’s credit rating. This medium has proven to return anywhere from 5% to 12% in interest. There is also the advantage of investors maintaining minimal participation during the whole process.
Real Estate Investment Trusts (REITs)
Before one balks at the term real estate due to fears of high investment outlay, REITs are companies that offer highly liquid investment opportunities within the industry.
REITs invest in a wide variety of companies that build, own and manage commercial real estate, giving one the chance to own small portions of all sorts of real estate that makes money. One of the main advantages from this form of investing is that one obtains a diversified portfolio across a large number of properties together with the appropriate professional management necessary for them to rise in value. There is a reduced concern for factors such as a drop in the local economy and the rental market – a big problem for most individual real estate investors.
Capitalisation Weighted Stock Exchange Index
To put this into the local context, we will take the example of the Straits Times Index (STI), a type of market index with individual components (the top 30 biggest companies) that are weighted to their total market value.
Investing in the STI is great way to get started in low-risk and relatively low capital outlay investments. This one is included in our passive investment list due to one’s minimal involvement in the process – for one, all one needs to start is a brokerage account or by signing-up to a monthly savings plan. It also allows one to invest at a fraction of the cost than owning each stock individually. Apart from the obvious diversification advantage, this form of investing also allows non-financial savvy members of the public to participate without the need for lengthy research or incurring the usual costs involved with professional financial advice.
The above list should allow any fresh investor looking for passive income a foot in the door. It is important to always keep in mind that investing is usually for the long haul, a means to an end goal – be it to build one’s retirement nest or for a list of other varying reasons.