Top Passive Income Investments in 2021

December 18, 2020
December 18, 2020 disrupt

Top Passive Income Investments in 202111 min read

If you’re looking to create a financially free lifestyle, one where you do not have to work 8+ hours every day, generating sufficient passive income investments should be at the top of your financial goal. Notably, once you have generated enough passive income investments to cover your living expenses, then and only then are you financially free.

This article will walk you through a few of the top passive income opportunities that can be utilized, even if you are a beginner to passive income!

Before digging into the top passive income investments, it’s important to understand that passive income investing does not mean that you do not need to do anything regarding your investments. Contrary to popular belief, it’s not as easy as picking an investment, contributing your capital, and never thinking or worrying about the investment again.

Instead, passive income investing simply means that you aren’t playing an active role in overseeing your passive income investments.

Below we will discuss the top passive income investments that you can create in 2021 to help you set your passive income strategy! Starting with our favorite- real estate syndications!

Passive Income Investments- Multifamily Real Estate Syndications

Multifamily apartment real estate syndications open up a whole new world for passive income investments. Specifically, multifamily syndications are a type of passive real estate investment where multiple investors put their money together to purchase real estate assets. In exchange for equity in the syndication, passive investors supply capital for the deal. A syndication sponsor commonly referred to as a general partner, will locate and structure the multifamily syndication deal, coordinate the financing, and ensure oversight and property management once the deal has closed. While it is true that any type of real estate can be used for a syndication deal, multifamily real estate syndications are currently the most popular. Multifamily real estate syndications are extremely attractive to many passive investors due to is consistent income and their characteristic of being a safe and lucrative passive income opportunity!

Syndications are better than other types of passive investment for various reasons. Syndications provide cash flow, equity, and appreciation. They allow investors to participate in larger deals that they otherwise would be unable to afford. Additionally, investors can be selective with the type of properties that they invest in, which is not possible with a blind fund or a Real Estate Investment Trust (REIT) (more on that later). Lastly, your capital is protected by real estate assets.

While it is true that, in general, real estate investment is one of the best forms of passive income investments due to its unique tax benefits, there are a lot of people who are either too busy or simply do not want to be a landlord. Even hiring a property management company does not make owning real estate a 100% passive investment. As an owner, you will still have to decide the property oversight and improvements you will have to pay for. However, investing in a real estate syndication allows investors to enjoy and reap the benefits of owning real estate without any of the responsibilities associated with managing it.

By investing in multifamily real estate syndications, you do not have to be an active landlord. Likewise, you don’t have to worry about obtaining financing for new acquisitions.  Your passive financial investment allows you to leverage other people’s time and experience in managing your asset. At the same time, you receive passive income distribution and can receive tax advantages from your investment, all while having access to large investments.

Passive Income Investments- Certificate of Deposit (CD) or Money Market

Certificates of deposit or money market account in the past would generate approximately 4%-yield or more. However, currently, these types of investments typically do not provide anything above 2%. In any event, one of the best things about CDs is that there is no income or net worth minimums to invest in them. However, keep in mind that CDs and money market accounts are not as attractive as other investments because they typically offer a meager return. In general, it takes a significant amount of capital to generate any sort of meaningful passive income. Nevertheless, at least you know your money is safe with a CD or money market fund, which is beneficial during a recession or a down market.

Passive Income Investments- Physical Real Estate

Owning real estate of any kind is favorable because it is a tangible asset that will not lose instant value overnight the way that investing in stocks can, which makes real estate one of the top passive income investments. However, keep in mind that owning real estate requires some sort of activity and is typically not a 100% passive income source unless you invest through multifamily real estate syndications.

Overall, real estate has tremendous tax benefits. Investors can utilize 1031 exchanges to avoid paying any capital gains tax when they purchase a like-kind property. Other significant tax benefits include depreciation deductions on the property and the assets within. Not to mention that investors can deduct operating expenses and improvements associated with maintaining the rental property. Purchasing real estate is an attractive option going into 2020 mainly because the interest rates are still at all-time lows amid the Coronavirus (COVID-19) pandemic.

The downside to owning physical real estate is that it is typically harder to generate high enough income in larger cities. For example, in cities such as San Francisco and New York City, the Cap Rates can be significantly lower in the 2 to 3% range. On the other hand, is less expensive secondary markets such as the Midwest and the South, the Cap Rates can reach 10%. However, still, the appreciation is typically lower.

Passive Income Investments- Annuities

Annuities are insurance products that investors can purchase to provide passive income for life in monthly distributions or payments. Annuity investments are not for everyone. Typically, they come with higher fees, which may cancel out any passive income generated. However, if you have a lower risk tolerance and are looking for a passive income stream, annuities could be a good fit for your portfolio.

Passive Income Investments- Real Estate Investment Trusts (REIT)

If you are not an accredited investor or you have reservations about investing directly in physical real estate, you can still take advantage of real estate investments by using what is called a real estate investment trust (REIT). Specifically, a REIT is a company that owns, finances, and operates income-generating real estate. Similar to real estate syndication, REITs pool together the capital of multiple investors. One of the significant differences between the REITs and a multifamily real estate syndication is that REITs are securities that are publicly traded on the major security exchanges. This means that investors purchase and sell them just like stocks.

REITs can be categorized as equity REITs, mortgage REITs, or Hybrid REITs.

Equity REITs are the most widely known kinds of REITs. They primarily focus on acquiring, managing, and developing residential investment properties.

Home mortgage REITs are not as well-known as equity REITs; however, these funds finance cash to real estate investors or invest in existing home mortgage loans on properties. This is an alternative to directly purchasing residential or commercial properties.

Hybrid REITs are exactly what the name suggests. It is a combination of equity and mortgage REITs. Their profits originate from both rental and also the interest rate profits

Overall, REITs are a form of real estate crowdsourcing, which allows individuals to purchase a percent of a real estate project which they would otherwise be unable to afford on their own. There are different platforms available for crowdsourcing based upon whether you are categorized by the Securities and Exchange Commission (SEC) as an accredited or non-accredited investor.

Passive Income Investments- Dividend Investing

One of the best forms of passive income investments is dividend-paying stocks. Dividend stocks are companies that pay out regular dividends to their investors. These are typically paid by well-established companies with a positive track record. For example, if you own 20 shares in a company, and the company pays two dollars in annual dividend, you will receive $40 per year in dividend earnings from the company. The majority of companies pay dividends in cash to the shareholders’ brokerage account. However, some companies may pay dividends in the form of new shares of stocks in the company. Typically, dividends are usually paid out quarterly; however, some companies pay monthly or semiannually. The company’s Board of Directors will approve each debited in general stocks that pay dividends provide a stable and growing passive income stream. Examples of companies that pay dividends include Apple, CVS, Bed Bath & Beyond, PepsiCo, and Exxon.

Passive Income Investments- Create Your Own Products

If you’re a creative person, you can produce a product to generate passive income. You can create an e-course for sites such as Udemy, write an e-book to sell on Kindle, sell stock photos, license music, create an app, or even create an affiliate network blog to generate passive income for years to come. While these types of investments typically require some upfront investment and time to create, once the product is complete, the work is done, and you can generate income for years to come.

Passive Income Investments- Stock Market

If you’re not interested in investing in dividend-paying stocks or just don’t have time to learn about investing in the stock market in general, there are still ways to invest in the stock market through what is called a robot-advisor.

A robotic financial advisor is a computer system that automatically picks out stocks for you. You will take 10-15 minutes to answer a few questions and set up your account, and the system will automatically pick investments for you. This is an automatic way to invest in the stock market without much time and effort.

Passive Income Investments- Peer-to-Peer Lending (P2P)

PSP lending is a multi-billion-dollar business with full regulation.P2P lending is the act of loaning money to borrowers and companies, who typically don’t qualify for traditional loans or have already been rejected for traditional loans. As the lender, you can choose the borrowers and can spread your investments between several borrowers to help mitigate your risk.

Peer-to-peer lending is pretty straightforward. An investor lends money to an individual or business, and at the loan’s maturity, the investor gets paid back principal and interest on the loan.

The median return on PSP lending is typically better than any money market fund available today.

The premise behind peer-to-peer lending is to help borrowers who have been denied by traditional banks get approved for loans at potentially lower rates.

With a diversified portfolio, investors can potentially generate annual returns of up to 7%. The biggest challenge with P2P lending is people and businesses do default on their loans, which never sits well with investors.

Over the last couple of years, the P2P industry returns have shrunk due to more regulation and competition in the niche.  In any event, PSP investing is still an option for passive income investments.

Passive Income Investments- Fixed Income Bonds

Amid the Coronavirus (COVID-19) pandemic, investing in bonds creates an excellent defense allocation to an investment portfolio. The main concern that most people have with bonds is that the return is traditionally not as high as investing in stocks. There are various types of bonds that investors can invest in, so it’s best to do your research before investing in one. However, in general, bonds are the preferred investment to decrease the volatility of your portfolio.

Passive Income Investments- Private Equity Investing  

If you are lucky enough to pick the right investment, private equity investing can be quick lucrative. For example, if you stumble upon investing in the next Google or Amazon, you can generate a passive income that will far exceed any other types of investments on this list. However, getting this type of investment is tough, mainly because most private companies fail, and you need to be well-connected to gain access to the best investments. Additionally, private equity investing is probably one of the least liquid forms of investing on this list. There is usually a 3 to 10-year lock-up period on your investment. Although you should keep in mind that your investment may generate some type of passive income distribution during your lock-up period.

Final Thoughts

Overall, these are the top passive income investments to pick from going into 2021. While each method comes with its own pros and cons, multifamily real estate syndications stand out as we enter the new year. This is mainly due to its truly passive nature and ability to generate substantial income. In any event, no matter which method you choose, make sure that you do your research to protect your investment.

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