How to Choose the Perfect Passive Income Investment

You’ve probably heard about passive income. Many people are enticed with it as soon as they start a career. You work hard on your job or your business to ensure a steady flow of income. You constantly find ways to gain more, whether by taking an extra job or cutting your budget to a bare minimum in order to save up.

With passive income investment, it is possible to continue growing your wealth with less effort, the effort you can use for other important things. That’s what makes it attractive to many. But passive income involves investment, and all investment needs due diligence.

What is Passive Income Investment?

There are three common type of income according to the U.S. Internal Revenue Service – active income, passive income, and portfolio income. Passive income, as the name suggests, is a substantial amount of money that regularly comes in even without exerting too much effort on acquiring them.

Passive income investments, on the other hand, can help you generate regular monthly income from a venture. It may require considerable effort at the beginning to establish a strong foundation but once everything settles down, it will require less from you.

Passive income investment helps you grow your finance while you focus your efforts on other important things like your job or your business or your personal life.

Here are some investments you may want to consider.

4 Common Passive Income Investment

 

Certificates of Deposit (CDs)

Certificate of Deposit or CD is a bank agreement that allows you to deposit money in a fixed period of time (3 months, 6 months, 1 year, 10 years, etc.) The longer the period, the higher the interest you can gain.

Pros:

- You can earn a higher interest with a certificate of deposit than you can with a checking account.

- The Federal Deposit Insurance Corporation secure CDs for up to $250,000.

- You earn fixed returns.

- No minimum income or net worth required to invest.

Cons:

- You have to pay a penalty if you decide to withdraw your funds earlier than the designated period.

- The interest is fixed and does not increase with inflation.
 

Physical Real Estate

Considerably the most effortless way to earn passive income is through investing on properties you can rent out.

You search and purchase a property (does not have to be brand new). Do some repairs as needed. Make sure it offers a good living condition. Then look for a potential tenant.

You can also hire a property manager that can handle all these tasks for you. As long as you set a right price for the rental fee, you can secure a stable flow of income without much effort. Take into consideration the taxes, maintenance fee, mortgages, and other fees you have to pay.

Pros:

- Government rewards rental property owners through tax benefits. The income you earn from the rental fee is not considered as self-employment tasks so it's subjected to lower taxes.

- Property value goes up over time which you can take advantage of.

- The process is pretty simple.

Cons:

- Buying a property require a large sum of money as investment.

- If you’re not mindful enough, your expenses might spring up with all the maintenance you have to do over time.

- Most properties have low liquidity, meaning you can’t sell them without losing a little of its value.
 

Peer-to-Peer Lending (P2P)

Peer-to-peer (P2P) lending also known as margin lending is a method of lending money to individuals or businesses without the assistance of an official financial institution like a bank.

There are several P2P platforms especially online that can connect you to potential borrowers. Different interest rates and repayment terms are available depending on several factors but mainly the level of risk. Typically, “higher risk” borrowers are subjected to higher interests.

Pros:

- Higher interest on your investments means you can earn up to double your usual income.

- Most P2P lending companies do not have a minimum deposit or investment. You can start your investment at a lower cost.

- Borrowers have a portfolio that determines the amount they can borrow. As a lender, you have a say on who can borrow your investment.

- Most companies also offer cushions, like reimbursements in case a borrower does not repay the loan.

Cons:

- Unlike other investments, P2P lending is not officially and financially regulated by the government.

- Sometimes you don't have the option to exit early and if you do, you have to pay a charge fee.

- You have to put up your financial profile. Not everyone is a fan of publishing their financial background.
 

Dividend Investing

With dividend investing you purchase stocks from companies that issue dividends. You become a shareholder in a company. You can collect these dividends as a passive income usually on a quarterly or yearly basis.

Most dividend stocks investors go for stocks with rising dividends or those high yield dividend stocks since these offer more income. To protect your finances, choose a credible business that has a long-term record of profitability, growth, and stability.

Pros:

- Businesses pay shareholders real money in real time.

- You can use your dividend earnings to purchase additional stocks, which can earn its own regular dividend payout.

Cons:

- If the profit of a business goes down, the dividends are most like to go down as well.

- Dividend payments are subjected to higher tax.

- Picking stocks can be quite difficult. But you can always hire a stocks specialist to help you.

How to Choose the Perfect Investment For You?

Investment can be complicated especially for first-timers. Some people back out before even trying since they get too intimidated. Investment requires money (to begin with), careful planning, excellent decision-making skills and responsibility.

Each investment has their own perks and downsides, the pros and cons. Start by acknowledging your ability and capability to venture and take on these risks. Analyze the risks that come with any potential investment and see if it’s within your risk tolerance.

Check out my blog post on the 5 Things Every First Time Investor Should Know for more information on how you can successfully start investing.

Bonus tip: Start investing early. Investing early means earning passive income early. This way you also have more time to continuously grow your finance over time.

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