Extra income never hurts! Who wouldn’t want to have extra money every month to save, invest, or use for pleasure? The best income is the income that comes from income generating assets.
Instead of working 9 to 5 every day to earn your living, investing in the best incoming generating assets can help break that cycle. What are the best income generating assets, and how can you start investing in them? Read on! We’ll quickly bring you up to speed below.
Quicklook: Best Income Generating Assets
- Real Estate Crowdfunding
- Certificates of Deposit (CDs)
- Dividend Paying Stocks
- Building an Online Business
- P2P (Peer-to-Peer) Lending
- Rental Properties
8 Best Income Generating Assets
There are a wide range of income generating assets, it can be overwhelming where to begin. We’ve done the hard work for you, and narrowed our list down to the top 8 best incoming generating assets.
Real Estate Crowdfunding
Real estate crowdfunding is becoming increasingly more popular in today’s modern world. What is real estate crowdfunding? Real estate crowdfunding is essentially when an investor can become a shareholder of a specific property, not a landlord. It provides you with the benefits of owning real estate without any of the headache. Various companies are well known and respected for real estate crowdfunding, such as Realty Mogul.
How to Invest: Real estate crowdfunding is for accredited investors. If you are an accredited investor, you can sign up directly on the company’s website. Once logged in, a portfolio of deals will be available. You can read the summary sheets for each deal and select the deal(s) that are most aligned with your goals and risk tolerance.
Average Return: There is not a one size fits all return. Some real estate crowdfunding deals are more conseratitive and provide a 3-4% annual return. Other deals can potentially provide you with a 12-15% annual return. It all depends on the location, price point, and the property type.
Risk Exposure: Real estate crowdfunding does come with risk – just like investing in the stock market. A reputable company, like a reputable mutual fund, will have a history of success. In general, real estate is less risky than investing in individual stocks.
General Cost of Investment: The average cost of investment is entirely dependent on the type of deal you’re investing in. Some deals have a $5,000 minimum investment, whereas other deals have a $100,000 minimum investment.
- Adds diversification to your overall portfolio
- You can feel/touch your investment
- People will always need a place to live, which reduces the overall risk profile of this investment type
- The investment is not nearly as liquid as stocks
- You are not in charge of the mechanics of the deal, or the price point of the project
- The minimum investment can be a steep hill to climb depending on the deal
Certificates of Deposit (CDs)
Certificates of deposit, also known as CD’s, are another asset class that can generate income. You can invest in a CD at your local bank or credit union. In general, CD’s are considered very safe investments, and are a common option for those in retirement.
How to Invest: Investing in a CD is easy! You can invest in a CD at your local bank or credit union in just a few moments.
Average Return: The average return of a CD is not high, and commonly under 0.50%.
Risk Exposure: The risk exposure is absolutely minimal on a CD, which is why the return is also as low as it is.
General Cost of Investment: A standard CD typically does not have a minimum deposit amount, and if it does, it’s very low.
- It’s very safe
- Investing in a CD is easy, and can be done in a few moments at the bank
- The rate of return is typically higher than a traditional savings account
- CD’s aren’t highly liquid
- The rate of return is minimal, which poses the risk of opportunity cost
- Inflation may grow at a faster rate than the return you’re given on your CD
Bonds are another asset class that generate income. There are various types of bonds, including government bonds and business bonds. Bonds help a government fund major projects – such as invest in a school, build a bridge, or put in major infrastructure. A bond also helps a company raise capital without diluting ownership in the company.
How to Invest: Like the real estate market, there is a bond market. However, unlike a stock, bonds aren’t typically traded publicly. You’d have to work with a broker to buy/sell a bond.
Average Return: All bonds have different rates of returns, but on average, you can expect a 5-6% return.
Risk Exposure: Each bond has a rating through the bond rating scale. A bond that is rated AAA would be the lowest risk, whereas a bond rated CCC will have the highest risk.
General Cost of Investment: Most bonds have a face value of $1,000. Additionally, some brokerages may have a minimum investment amount.
- The rate of return a bond provides is typically higher than inflation
- Bonds have a transparent rating system, which can help you reduce your overall risk
- Bonds can be backed by the government
- Bonds still pose the risk of opportunity cost, meaning another asset class can generate a greater rate of return
- A bond is not as liquid as a stock
- A larger investment is typically required. At minimum, you should expect to invest at least $1,000 in a bond
Dividend Paying Stocks
Another common asset class that helps produce income is a dividend paying stock. Owning a dividend paying stock is a great way to replace income in retirement, and/or help grow your investment account through a dividend reinvestment program.
How to Invest: Investing in a dividend stock is easy! All you’ll need is a brokerage account, or a financial advisor.
Average Return: On average, a good dividend stock will provide a dividend of 2.5 – 5%.
Risk Exposure: Dividend stocks do provide risk, which must be taken into consideration. Not only is a company not forced to pay a dividend, you also face the risk of the stock depreciating in value. For example, if your dividend paid a 5% rate of return, but the stock price declined by 12%, your asset is down 7%.
General Cost of Investment: Believe it or not, there isn’t a minimum investment amount. As long as you own a share of a dividend paying stock, you’ll receive a dividend. In fact, some companies and brokerages also allow you to own partial shares, and you’ll receive a partial dividend.
- You can receive a dividend, and the stock can appreciate in value – which compounds your return!
- There is no investment minimum
- Dividend stocks are liquid
- A company can refuse to pay a dividend if they are experiencing a rough financial time
- As an investor, you face the risk of the stock depreciating in value
- A stock that pays a dividend may not appreciate as quickly as a high growth stock
REITS, or real estate investment trusts, are another way an investor can invest in real estate without owning the property. Owning a REIT means you own shares of a company that invests in real estate that produces income. However, as an investor in a REIT, you personally do not own the real estate, nor do you need to deal with anything that goes wrong with the property.
How to Invest: There are numerous ways an investor can invest in a REIT. You can purchase a publicly traded REIT, ETF, mutual fund, or work with a broker on purchasing a privately held REIT.
Average Return: A REIT typically has an average rate of return of 6-10%.
Risk Exposure: Investing in a REIT does come with a risk. As interest rates rise, demand for REITs decline, which reduces its value.
General Cost of Investment: A privately held REIT can have an investment minimum of $25,000+. A publicly traded REIT may have a minimum investment of $1,000 – $3,000.
- This is a completely different asset class and can help diversify your portfolio
- REITs invest in physical assets
- If you want to invest in real estate, investing in a REIT is one of the most liquid ways to do so
- The REITs value can change drastically as interest rates change
- REITS are best suited for long term investments
- The dividend a REIT pays is typically taxed at a higher tax rate than a standard dividend from a stock
Building an Online Business
Building an online business is another way you can generate income. Online businesses are becoming more popular considering the ease of setting up a website. If you have a passion, service, or product to sell, you can start an online business today!
How to Invest: There is not a blueprint to investing in, or creating, your own online business. Each online business has its own investment journey. For example, if you provide online sales coaching advice, your investment was the years of sales experience and training you went through. If your online business is centered around selling custom wallets, your investment would be the machinery and material needed, or tools needed, to produce the wallets.
Average Return: Owning a business provides unlimited upside potential. Considering the vast majority of online businesses are privately held, estimating a true rate of return is impossible. A major factor that will influence how much money you return via your online business is how hard you’re willing to work.
Risk Exposure: Some online businesses are started with minimal risk. Other online businesses are started after someone has quit a high-paying job to venture off and do something on their own. The risk exposure, like the average return, varies by circumstance.
General Cost of Investment: The general cost of investment also varies by circumstance. Some expenses that would need to be factored into the equation no matter what type of online business you are doing include: the cost to become a registered business, the cost to build a website, the business insurance you may need to carry, and the equipment you may need to purchase to successfully run your business.
- You can be your own boss
- Being able to sell your business at some point in the future for a great multiple
- You control how big your business gets, and how hard your willing to work
- There is no income guarantee
- Some online businesses come with great risk
- Running an online business can also come with a great deal of complexity
P2P (Peer-to-Peer) Lending
Peer-to-peer lending is when an individual can secure a loan directly from another individual. Instead of going to a bank for a loan, you go to a peer-to-peer network that connects borrowers with investors.
How to Invest: If you want to be a peer-to-peer lender, you can visit a peer-to-peer lending site and go through their application process. There are certain requirements you must meet before you are approved.
Average Return: Lending in the peer-to-peer network is risky as these loans are unsecured. To make this attractive for investors, the rate of return is on the higher end, typically around 10%.
Risk Exposure: There is immense risk exposure with peer-to-peer lending.
General Cost of Investment: Each peer-to-peer lending site will have its own minimum investment requirement. Typically, the minimum investment is a few thousand dollars.
- The potential upside is high
- The lending process is very straightforward
- The biggest disadvantage is how risky this option is
- Peer-to-peer lending does not have insurance or any government protection
- There are various peer-to-peer laws that you must be aware of
Investing in rental properties is a tried and true way of producing income from an asset. This classic investment strategy has stood the test of time, and continues to attract people to it – and for good reason. Owning numerous rental properties provides great upside!
How to Invest: If you want to invest in rental properties, you can either purchase the rental property home in cash, or finance it via a mortgage.
Average Return: Your net operating margin on a rental property should be low double digits if you purchased a good property in the right area.
Risk Exposure: Owning a rental property does come with risk, but there are various ways you as the property owner can reduce your risk. Doing credit checks on your potential tenants, actively checking in on your home, and collecting a security deposit all help to reduce your risk exposure.
General Cost of Investment: The cost of a duplex in Los Angeles is less than the cost of duplex in Ohio. Your real estate market will dictate what the average cost of investing in a rental property would be.
- People will always need a place to live, so you shouldn’t have problems renting your home in the right area
- You not only receive a monthly rent check, your property will also appreciate over time
- There are various tax benefits and write-offs you can use as a landlord
- Owning a rental property is a great passive income generating asset
- Tenants could be a nightmare and damage your home or not pay rent
- The eviction process is time consuming
- The housing market may crash, and you may lose a lot of money
What Is an Income Generating Asset?
An income generating asset is an asset that produces income and comes in all shapes and sizes. For example, an asset could be a stock, bond, rental property, online business, etc.
The goal behind the asset is to not only to appreciate in value, but also provide consistent income payments to the owner.
How Do Income Generating Assets Work?
Each income generating asset has its own unique mechanics. The one commonality is the fact that the owner of an income producing asset wants to get paid.
The payment interval is typically monthly, quarterly, or yearly.
What to Consider With Investing in Income Generating Assets
The main variable you must consider with an income generating asset is the risk to reward ratio. For example, you wouldn’t want to own an asset that is highly risky, or provides many headaches, for a low rate of return.
You want to maximize your time, energy, and the rate of return you receive. Each income generating asset has its own risk to reward ratio.
Additionally, you’ll want to compare the work to return ratio. For example, owning a rental property can be a lot of work, whereas owning a REIT is hands off.
The average return on an income generating asset has quite the range. A CD may provide you with a 0.50% rate of return, whereas peer-to-peer lending may provide you with a 15% rate of return.
At a minimum, you’ll want to make sure the rate of return is greater than the inflation rate. Beyond that, the risk to reward ratio takes priority over just looking at the rate of return.
Following the above bullet, each income generating asset has its own rate of return, and its own risk exposure. If you want a higher rate of return, expect to take on more risk.
If you want a modest rate of return, you can do so with low risk – for example, investing in a AAA bond has low risk and still provides a decent return.
The upfront investment is another variable that needs to be taken into account. Each income generating asset may have its own unique upfront investment.
Some income generating assets, such as real estate crowdfunding deals may have an upfront investment above and beyond what you’re comfortable paying. Other income generating assets, such as a dividend stock, have a minimal upfront investment.
Be mindful of the time value of money, and how long your cash will be tied up for each investment.
Pros and Cons of the Investment
Before making your investment decision, carefully review the pros and cons of the investment. If you want a liquid investment, be mindful of the best income generating assets that are also liquid.
If you do not have a need for cash in the short or long term, perhaps invest in a less liquid income generating asset that has less risk exposure. Each investment has its own pros and cons, and may vary by individual.
Start Producing Extra Income!
Extra income is always nice to have! Especially when it comes passively! If you have money to invest, and you’re looking at ways to increase your income, consider investing in an income generating asset.
Income generating assets not only provide you with consistent income payments, the asset class can also appreciate overtime. There are a wide range of income generating assets you can invest in. Which one is right for you?
Answering that question is best left for a financial advisor. Financial advisors will help you isolate which investment options are best suited for you, and will help find investments that are aligned with your risk tolerance and goals.
Frequently Asked Questions
The most profitable income generating asset on this list is peer-to-peer lending, however, that also comes with a great deal of risk!
Peer-to-peer lending has the highest returns, but the risk exposure may be above and beyond what you’re willing to accept. Real estate crowdfunding also provides high returns, and the risk exposure tends to be less than peer-to-peer lending.
There are a wide range of assets that produce income. Such assets include; a CD, a dividend paying stock, owning an online business, owning a rental property, owning bonds, or investing in real estate crowdfunding.