by Perry Jones
Cash is king!
This aphorism from real estate investing perfectly describes the little known method the rich actually use to accumulate millions of dollars. This report reveals 20 sources of passive income. Put any or all of these sources into place and sit back and watch the dollars roll on with no (or very little) further effort on your part.
If you truly want to get rich and live a life of luxury, then you must master the ability of generating cash flow from passive income sources. Without this ability, your income will be limited to traditional ways of making money, such as working. Working will never free you from having to work. You must do something different than working in order to obtain the income you need to live the lifestyle you desire. Passive income is the key.
Before you begin any investment plan, the first rule is to consult with a qualified investment advisor. By talking over your plan and considering possibilities you may not have considered, you will protect your capital to the greatest degree and help protect it from potential loss whiule multiplying your return.
This article will not consider the cost of entry to any investment nor will we look at rates of return. These will fluctuate - possibly every year or even over the course of a year- depending on the economy, conditions set by the SEC and other regulatory bodies and the IRS. This article will consider only the 20 possible sources of passive income; you will need to conduct further research to determine if any investment is appropriate for you.
1. ETF's - Exchange Traded Funds - This is a fund that tracks the performance of an index such as the Dow Jones or Standard and Poor 500, a basket of assets or a commodity. Trading in the same manner as a stock, its price will vary according to the days trading demands. Benefits of owning an ETF include the ability to buy short, buy on margin and to buy as little as one share. Expense ratios are often lower than mutual funds. A common ETF is called a spider - SPDR - and tracks the S&P 500 index. Look for the symbol SPY to research or to purchase.
2. REIT - Real Estate Investment Trust - One of my favorite investments because you own a portion of the real estate (or mortgages) the trust invests in. These also trade like a stock on the exchanges. An Equity REIT buys ownership (equity) in properties while a Mortgage REIT buys the mortgages on properties. Two key advantages to owning an REIT are the tax advantages and the liquidity of the security - you trade it just like a stock.
3. Canadian Oil and Gas Trust - This is an organization that invests in oil and/or gas production and possibly mining in Canada. Several of these are now trading on the American (US) exchanges. Purchase is the same as purchasing a stock in any other company. Tax advantages are similar to those of an REIT and a big advantage - the one I like the most - is that some of these trusts pay ridiculously high dividends - and they pay monthly! My advice: do your research, find a Canadian Oil and Gas Trust you like and then invest as much as you can.
4. MLP - Master Limited Partnership - Want a limited partnership that you can sell or trade as easily as a stock? Enter the Master Limited Partnership. These hybrid organizations feature the limited liability of a partnership while enabling you to trade the partnership units - investment units - just as you would a stock. What could be better? A MLP offers distributable cash flow as well as income and these terms must be mastered and understood before a reasoned decision can be made regarding the purchase of an MLP for your investment portfolio.
5. Annuities - Who has not heard of an annuity? But do you know how they work? Let's keep this simple: an annuity is nothing more than a contract you sign with an insurance company that guarantees to pay you a certain set amount of income over a period of time. You pay for an annuity upon signing and then the insurance company repays you the amount of your investment plus the "profits" (we'll keep this simple and not use the technical term) over a period of several (or many) years. These are generally considered safe stable investments appropriate for a conservative portfolio.
6. TIPS - Treasury Inflation-Protected Securities - Offered by the U.S Treasury, these are securities that are indexed to the rate of inflation meaning your dividend will increase as the rate of inflation increases. A TIPS pays interest every six months and pays the principal upon maturity. Also a conservative investment, you may want to consider these if you are looking to preserve and protect capital from the ravages of inflation while providing a consistent and dependable income, but your money may not grow at the rate you would prefer - but then we aren't looking at capital appreciation anyway.
7. Dividend Paying Stocks - Finally we get to what is perhaps the most familiar method of passive income. Anyone who knows anything about Wall Street knows that companies pay dividends to people who own their stock. Right? Well, most of the time , if it is a well known and established company. Many newer and smaller companies will use their income to grow the company instead of paying dividends and any company that incurs financial trouble may stop paying dividends. So if you are going to buy stock to acquire the income make sure the company has a track record of paying dividends. The best known American companies - commonly referred to as the "Blue Chips" are also the companies that traditionally have paid the best dividends. As with all other investments, research is necessary to capture the best dividends and target those companies with the best potential in future years.
8. Covered Calls - This is a passive investment instrument that is often considered risky. But it is not. A covered call is selling the option to buy stock that you own. You do not sell the stock, you only sell the option to buy that stock at a future price and time. The person buying the covered call buys the option at the price you agree upon - actually at which the market agrees upon - and you just set back and forget it. Well, not quite. The person who has bought the option has the right to buy your stock at any time between the time you sold the option and the expiration of that option. Writing (selling) a covered call is the only options investment that is considered safe enough by the IRS to be included in a 401K or other retirement plans. But you must do your homework and thoroughly understand the world of options before using this method.
9. Real Estate - Everyone knows what real estate is and everyone knows - or at least is intuitively aware - that big money can be made from real estate. Real estate provides tax advantages as well as the opportunity to highly leverage your investment - leverage being a factor that is limited or absent in many other investments. Many real estate advisors and gurus insist that the one house at a time or the flipper strategy or fixer upper or wholesale method or other flavor of the month is the absolute best way to make money in real estate. Generally speaking, avoid all that. Making big money - meaning massive income - in real estate is possible with highly leveraged deals which are a certainty only in commercial property. Multiple family properties, office buildings, retail facilities and warehouses would all constitute commercial property. Of these, the best strategy is to invest in multiple family properties. The bigger, the better. This requires knowledge and education more than it requires capital. Capital can always be acquired through your network, but knowledge is the one ingredient that will make this passive investment method work. And, with a big property, the income from that one property may be all you need to secure your retirement - today!
10. Business Ownership - No, this isn't what you think. Owning a small business for most people is worse than working 9 to 5. In your own small business you get caught up in the details, trying to make the business go, searching for a market, dealing with customers; it quickly becomes more than a full-time job. That's OK if that's what you love to do. But, what we mean here is starting a business or franchise with the short term goal of handing it off to someone to run. The faster you can do this the better. If you can do it from the very beginning so much the better - the more time you free for yourself, the more time you will have to enjoy and/or create more passive income sources. A book that will help you is
The E-Myth Revisited 
by Michael Gerber, another is
The 4-Hour Workweek 
by Timothy Ferris. Both of these books will help you structure your business ownership in a way that frees you from actually running the business yourself - margaritas on the beach anybody?
All of these sources require work to set up, but once established, they can be structured to run hands free. The two books mentioned in item 10 above will help you structure your passive income sources to be truly hands free income.
11. Private Lending - Private lending has been around since people have been around. Essentially private lending is nothing more than lending out some of your excess cash to a trustworthy person who needs it. This has not always been easy or fruitful for the person who has had money they wanted to invest. As a result, several online services are now available that will accept your money and distribute it under your direction to those you feel are qualified; search for person to person lending on the major search engines to identify organizations you can use. The primary benefit of private lending is that the interest rates are often much higher than you would obtain by parking your money in a CD or bank.
12. Tax Liens and Notes - A primary benefit of tax liens is the higher interest rate you receive on your investment plus the fact that your principal is backed by real estate. Please note that you will almost never receive the property from investing in tax deeds, liens or notes; the primary benefit is the favorable interest rate and the security resulting from a real estate backed transaction. Avoid organizations that suggest you will be receiving the property the tax instrument is against. Another benefit of this type of passive income is that you can invest online from almost any state in the country - be sure to review Texas tax deeds, interest can be as high as 50% annually in some cases.
13. Bonds - Ok, you know about bonds - they are a conservative investment for old people and people afraid of the stock market right? Wrong. A bond can provide a secure and stable source of income for anyone. By definition, a bond is a debt issued by an authorized organization - often a corporation, municipality or utility. A bond sells for the issue price, matures (is paid back to you) at the principal (face amount or nominal price) and in between you collect interest that is called the coupon rate. Bonds are often purchased in the form of mutual fund bond funds. Some of these can be very lucrative with a yield exceeding that of equity funds but these are often hard to find. But they are there!
14. Mutual Funds (Income Funds) - As we are only considering sources of passive income, we are only going to look at income mutual funds. These may be called "growth and income" funds or "income" funds or "value" funds. Nearly every mutual fund family will have their own set of income or growth and income funds. Morningstar and other services provide third party ratings that you can use to identify the safest and highest paying income funds. Invest wisely and always consult a qualified investment advisor before investing. Mutual funds are also required to send you a prospectus (a formal disclosure of the funds objectives and operating guidelines) for your review before you can invest. Review the prospectus carefully and consult with your financial advisor for terminology you may not understand.
15. T-Bills, T-Bonds & T-Notes - Treasury Bills, Treasury Bonds and Treasury Notes - Considered to be the safest of all investments because they are issued by the United States Treasury Department, these vehicles are also among the lowest yielding. But you sacrifice yield for security whenever you invest. T-Bills, Bonds and Notes are most often purchased through your bank, broker or they may be purchased directly from the US Treasury Department through their Treasury Direct online service. Although you will not receive a high rate of return, the security of your investment cannot be any higher than it is with these investments.
16. Unit Investment Trust - A Unit Investment Trust is one of three different types of investment companies, the others being a closed end fund and the familiar mutual fund. UIT's offer securities in the form of "units" that represent a unit of their investment portfolio. This portfolio is often an unmanaged portfolio consisting of stocks and bonds. Units are usually sold in amounts of $1,000 and investors or "unit holders" receive dividends from the units they hold. A unique feature of a UIT is its termination date. Unlike most other corporations and investment company organizations, which exist in perpetuity, a UIT has a defined termination date which is set upon inception. When this date arrives the UIT is terminated and the assets held are sold. The proceeds from this sale are then distributed to the unit holders.
17. Preferred Stock - A Preferred Stock is a security issued by a corporation that usually features a specific dividend rate. Preferred stock usually does not have voting rights except sometimes in extraordinary events. Preferred stock also receives priority over common stock holders when dividends are distributed - preferred stock holders must be paid first. And preferred stock holders also receive preference if the company is ever dissolved. Your rate of return with preferred stock may not be high, but the security of your investment is higher than with more risky investments.
18. Corporate Backed Trust Securities (CABCO) or Asset-Backed Securities - Also known as Corporate Asset-Backed Securities, these investments are issued by corporations and are based on a pool of underlying assets. The cash flow from these assets provide the dividend payments made to the holders of the security. The asset pool can consist of almost any type of asset which provides a cash flow. Usually sold initially to a market maker type organization such as an investment bank, these securities may be resold to the general public by the broker. Contact your broker for more information on these types of investments.
19. Music Publishing - You don't know about music publishing? The artist may get the glory (and often the money) but the publisher Always gets the money. If you own the rights to a song or sheet music you are the publisher and you get paid whenever that song is played or performed in public. Although the current rate is only 8 cents (US) per "performance" think of all the radio stations, bars and clubs in the country where your song may be being played right now. Yes, bars and restaurants must pay you whenever your song is played in their establishment. You don't have to worry about going around to each bar, hotel lobby or elevator or restaurant (More places!) in the country to collect your eight cents - this is handled by any one (or some combination) of just three organizations which pretty much manage all music throughout the world - ASCAP, BMI and for the internet SoundExchange. Yes, you do need to register with these organizations so they know where to send your checks, but this can be a very lucrative source of passive income.
20. Copyrights, Patents and Licenses - If you are an author you get paid every time a book of yours is sold. Ok, this is obvious, but you can also republish public domain material under a new copyright if you change it by at least 20% or add at least 20% more material to it. The easy part (some would say not easy) is the writing of the book itself. The hard part is getting other people to buy it, that involves marketing which is beyond the scope of this article, but if you can get a bestseller on your hands, the royalties (payments you receive from being the copyright holder) received can be very high.
A patent is an innovation (process) or invention (thing). You get paid when the item represented by the patent is used or sold by some other organization or the public. The patent protects your right to exclusive ownership of that process or invention for a certain amount of time.
A license is also possible to sell to the market. What if you know a particular process or procedure that no one else does? Can you sell this knowledge? Yes, you can. And the way to do it is to license an organization to use your knowledge in the form of a process or procedure. Check out inventright.com for a guide on how to do this.
Bonus
21. Movie & Other Obscure Investments - We live in a dynamic world and there will always be investment vehicles being conceived for a need. Also, more obscure investments are available but generally are unknown outside of their particular industry. Movie investments are one of these. Movies often need financiers ready to fund the production of the movie project. When the movie is released to the public and begins to make money the financiers receive their capital and return on investment. This can be a good way to make a lot of money if you back a blockbuster or a good way to lose a lot of money - look at how many movies do poorly. Do not invest in this vehicle unless you are an industry insider.
Other obscure investments include exploration financing, water rights, coal leases, limited partnerships, commercials and commercial funding (yes, tv commercials and infomercials), receivables financing, sports team ownership, etc, etc, etc. If you have an interest in investing in any of these areas you need to find someone with excellent knowledge of the field and with a good track in investing in that industry. Consult with them intensely allowing them to guide your investment decisions. Generally, the best policy is to invest only in those areas where you are familiar and never, never invest more than you can afford to lose.
"Income Deposit Security" - also known as "enhanced income security" or "income participating security," this form of security is a hybrid combining a bond with a stock. These hybrids are rare - very rare, but, at present, are almost immune to fluctuations in the economy. And, they boast high yields. You may want to ask your advisor about them.
Bonus 2
Private Equity Funds and Hedge Funds
For consistency, private equity funds and hedge funds are, perhaps, the highest yielding of any of these investments.
A private equity fund invests in investments which are "private" - not available to the general public. These may include IPOs (Initial Public Offerings), PPMs (Private Placement Memorandums), BDCs (Business Development Companies/Corporations), CDBs (Community Development Banks), business trusts (like American Express (Surprise, surprise - it's not (or wasn't) a corporation), etc. Over 2012, the top 20 private equity funds have realized yields of about 7%
per month. Now you know how the rich get richer.
A hedge fund invests in any investment vehicle the fund manager decides is worthy to invest in in the hope of ensuring an "absolute" return. An absolute return is different than a relative return which is what you see about or hear about when you watch the financial news or the Dow Jones. An absolute return means you have to receive a return above and beyond your initial investment - if you invested a million dollars, your absolute return is based on that million dollars. If you invested in stocks, any gain over the previous day is a relative return, even if you lost 90% of your investment the day before that.
Both private equity funds and hedge funds are usually structured as limited partnerships. This permits a pass-through income arrangement with taxes assessed only against the individual's income. A limited partnership also protects liability to the limited partner to the extent of their investment - they can't lose any more than the cost of their investment - corporations, corporation officers and general partners can lose more based on their degree of obligation.
Summary
Many of these passive income sources require that you be a sophisticated or "accredited investor." An "accredited investor" - on an individual basis - is anyone who has received at least $200,000 in income in each of the previous 2 years and expects the same or more this year AND has at least 1 million dollars in net assets.
Passive income investing is the key to securing income. Income is cash flow. Cash flow is king. You cannot invest future income or a projected return or an eventual equity position; you can only invest the cash you have on hand today. Likewise, you cannot pay bills or buy groceries or pay the mortgage or tax man with anything other than cash or credit. A projected return or equity position will not pay todays bills or put food on the table. Capital appreciation is great - for tomorrow. I prefer cash in hand today. The more cash flow you have coming in now, the greater that tomorrow will be. Guaranteed!
The information presented in this and in all articles and in this blog are for educational and informational purposes only. No advice is given or implied. Always seek the advice or counsel of a financial or tax accountant or legal advisor before making any decisions regarding the investment of your money.
