Everyone loves the idea of generating a passive income. The concept of ‘letting your money work for you’ has been banded around by personal finance experts as the crucial component in achieving financial freedom. However, actually being able to create a reliable stream of passive income is more complex than it seems – as it requires extensive research and an in-depth understanding of the financial markets.
With that in mind, this article will discuss whether investing is a reliable stream of passive income. We’ll discuss the intricacies of passive investing and how doing so can make you a reliable income before highlighting some of the most popular passive investment opportunities this year.
How Does Investing for Passive Income Work?
First thing’s first – how does investing actually create a passive income stream? As defined by NerdWallet, passive income is money that is generated from investments, properties, or side hustles. The key differentiator in this type of investing is that it is passive – meaning that income streams do not rely on active daily commitments. For example, creating your own business would not be a passive income stream, as it requires dedication and a hands-on approach.
However, there are ways to create income that require little to no effort to sustain. That’s where passive income investing comes in, which is the process of investing your money to produce a regular cash flow. Thanks to the digitisation of the financial markets over the past few decades, there are more ways than ever to invest and earn a passive income – yet that doesn’t mean it’s a sure-fire thing!
An elementary example of passive income investing would be simply holding your money in a bank account. Although this doesn’t feel like ‘investing’, you still earn a small passive income through the interest accrued on your savings. However, it goes without saying that bank account yields aren’t enough to sustain a person’s lifestyle – so it’s wise to consider alternative approaches.
Reliable Passive Income Investing – Popular Examples
Now that you understand what passive income is, let’s look at some popular examples. Presented below are three of the most widely-used methods for people to generate a consistent passive income stream, all with varying degrees of risk and reward:
1. Peer-to-peer (P2P) loans
According to Forbes, passive income should be earned without putting in considerable time and energy. Due to this, P2P lending has emerged as one of the most popular ways to generate a reliable cash flow. Put simply, P2P lending allows lenders and borrowers to connect with one another without needing a financial intermediary such as a bank. As lenders will be lending directly to other individuals or entities, the interest rates offered are much higher than you’d get with traditional banking services.
Investors can get involved in the P2P market by using an online P2P platform that connects lenders and borrowers together. These platforms tend to offer a vast array of loans and returns, ensuring there’s an option for every risk appetite. For example, here at Lendermarket, we’ve delivered an average of 12-15% annual investment returns since May 2019!
2. Dividend Stocks
Another popular way people can earn a reliable passive income stream is by investing in dividend stocks. These stocks distribute a percentage of their profits back to shareholders as a ‘reward’ for investing in the company’s equity. Different industries will offer different yields, although specific sectors (such as the mining sector) contain companies offering annual yields of 8% or more!
Payment schedules may also vary from company to company, with some making quarterly payments, whilst others may make bi-annual or annual payments. Finally, although there’s always the chance that a company could reduce (or remove) dividends during challenging financial periods, there’s also scope to improve them too!
3. Real Estate Investing
Finally, we have real estate investing. This involves purchasing rent-producing properties that provide a steady stream of passive income. Ultimately, this method does tend to be pretty hands-off, as once the property has been bought and tenants move in, it’s simply a case of maintaining the property over the longer term.
Alternatively, the rise of Airbnb has offered scope to achieve rental income in another way. By purchasing a property and hosting it on Airbnb, property owners can generate passive income over the short term. However, this approach may not be as reliable as sourcing a long-term tenant due to seasonality and other factors.
Can Investing Create a Reliable Source of Passive Income?
Taking everything we’ve mentioned above into account, can investing create a reliable source of passive income? The first thing to note is that there’s no investment in the world with a 100% success rate, so any move that you make will always have an element of risk. However, the key to passive income investing is mitigating this risk and finding an approach that suits your personality and investment goals.
Although the three sources of passive income we have mentioned above tend to be the most popular, there are others out there, such as investing in bonds or placing your capital in real-estate investment trusts (REITs). Either way, it’s wise to diversify your investments across more than one source of passive income – as this will ensure that if one of your investments suffers a setback, the other may be able to counteract the adverse effects somewhat!
To summarise, this article has explored the concept of passive investing and whether it can produce a reliable stream of passive income. Although nothing is certain in the financial markets, there are now more opportunities than ever for investors to generate a consistent cash flow and embark on the path to financial freedom.
At Lendermarket, our P2P loans provide an ideal way for investors to generate passive income. With hundreds of loan listings to choose from, featuring a range of terms and interest rates, there’s sure to be an option that suits every investors’ needs and goals.