Wednesday, September 30, 2009

Passive Income Sources

I found this really good article on Ezine which I thought I should share with everyone. It basically describes some of the sources of passive income that anyone can get. Here is the article attached below:


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 10 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 Four Hour Workweek by Timothy Ferris. Both of these books will help you structure your business ownership in a way that frees you of actually running the business yourself - margaritas on the beach anybody?

As this article is already so long, we will create a Part 2. Passive income source number 11 is Private Lending - a relatively new income source and we will also look at a few others you may not be familiar with.

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.

Perry Jones,
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  1. Excellent summary of all of these investment methods. It's a great resource for people who are looking to make use of their money and make it work for them. Specially that last bit of advice about the small business owners, is excellent. Not knowingly, i did realize that i needed to get away from it and hand it over to someone who can get involved and for myself to make better use of my time than to be engrossed in the daily grind. Sometimes, when you see something that you can relate to, it all becomes clear. great work! looking forward to reading the two books prescribed :-)

  2. Thanks for visiting this site. Like I said, I found this article online and attached it here so that people can learn more about passive income sources. It is indeed great that you found it useful.


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