Multiply My Money is all about teaching people how to generate enough income that they are able to live financially comfortable lives and achieve their long-term dreams. By making wise financial decisions, you could retire early, get out of debt, and build multigenerational wealth that you can pass onto your children. You can make your financial dreams a reality by generating passive income streams that pour money into your bank account on a regular basis.
The Difference Between Active and Passive Income
Active income is the income that you work for on a daily basis. This is the income produced by your full-time job that covers all of your bills and living expenses. Most people stretch their active income to the limit and do not understand why they are unable to get ahead financially. The truth is your job will not make you rich. Active income has limits. Since you have to work to produce it, there are only so many hours in a day that you can actively produce income. If you ever want to become a millionaire, then you need to develop passive income streams. Passive income is limitless because it is recurring and does not require the same time commitment or energy expenditure as active income. Passive income does require some work on the front end but it pays off in a residual income stream on the back end.
Best Ways To Generate Passive Income Streams
1. Invest In Dividend Stocks
Dividend income is a great way of generating passive income without forking over a ton of cash. Dividend stocks are a favorite of income investors. I love receiving a dividend from a stock because the company is basically paying me just to hold its shares. A good dividend will help to boost your total investment returns allowing you to build wealth faster. High yielding dividend stocks have outperformed non-dividend paying stocks historically. Dividend stocks help to mitigate your losses during bear markets as well.
What is a dividend anyway?
A dividend is a distribution of cash paid regularly by a company to its shareholders. Dividends are part of the profits paid out to you. Most companies typically pay out a dividend on a quarterly basis. This means that you will effectively receive a dividend payment every 90 days. (There are exceptions however. Walt Disney (DIS) pays a dividend on a semiannual basis). Investors in dividend stocks have the option of receiving payments in cash or reinvested back in the stock to purchase additional shares. For the purpose of generating passive income, we will elect to receive the dividend in cash.
A good dividend stock is a company that:
- has a long term track record of paying dividends
- generates lots of free cash flow
- has a yield of 3 percent.
I like companies that have 10 straight years of more of consecutive dividend payments. I also look for the ratio of dividend paid to cash flow (dividend paid/cash flow) to be below 50%. You can also use dividend paid/earnings per share. Finally, I need the yield on my dividend stocks to be competitive with the yield on Treasuries. A 3% yield is the threshold for me. While Microsoft (MSFT) and Apple (AAPL) are both great companies and pay dividends; neither would qualify as a dividend stock because of their low yields of 1.3% and 1.4% respectively.
The best sectors to locate dividend stocks in are financial, consumer staple, limited partnerships, and energy. In these sectors, you will find great dividend stocks like Target (TGT), JPMorgan Chase (JPM), Pepsi Co. (PEP), and 3M Company (MMM). These companies are yielding between 3% and 5%.
2. Invest In Rental Properties
Buying rental properties is another way of creating passive income streams. You can purchase auctioned properties, foreclosed properties, or tax sales and rent them out to generate income. You can also buy a fixer upper and renovate the property to rent it to tenants. Rental properties allow investors to reap the rewards of property appreciation as well. Purchasing real estate is capital intensive to start but can generate lots of free cash flow in rent payments for years.
Real Estate Investing For Regular Investors
For investors without a ton of cash, there are several crowdfunding real estate investor platforms. Fundrise allows anyone to start investing in real estate offerings with just $500. You can participate in a commercial office building investment, fund the construction of an apartment complex, or buy a multi-family dwelling unit. Fundrise is for long term investors. As units are rented out, you receive your income payments.
Patch of Land is another crowdfunding real estate investing site but the minimum investment is $5,000. There are some offerings however that may require less than the $5k minimum. Patch of Land is a peer-to-peer lending platform for ordinary investors to invest in both residential and commercial properties. The investments on Patch of Land are short-term running from 6 to 24 months.
Real Estate Investing For Accredited Investors
Those with deep pockets have access to even more real estate investment portals. Sites like iintoo allow accredited investors to participate in commercial real estate offerings for as little as $25,000. Iintoo is a social platform in which you can personally connect with other accredited investors as well. Accredited investors have an income of $200,000 or more per year or a net worth of $1 million dollars.
ArborCrowd allows accredited investors the opportunity to invest in the types of deals that are usually only available to institutional investors. Arborcrowd screens over 500 deals a year but only funds 7. The company is very selective about the deals provided to investors. The minimum investment for accredited investors is $25,000.
The average internal rate of return on crowdfunded real estate investments is in the teens (13-19%).
Real Estate Investment Trusts
Another way to invest in real estate is by purchasing real estate investment trusts (REIT). In a real estate investment trust, investors pool their money together to invest in income producing real estate properties. Real estate investment trusts have been around since 1960 and offer an easy way to invest in commercial property. The advantage of investing in REIT’is is that they have to pay out 90% of their taxable income in the form of a dividend to investors. This provision is why real estate investment trusts are such cash cows. A good example of a high yielding REIT is Brookfield Infrastructure Partners (BIP), which currently yields over 5%, An investor can start buying stock in a REIT for just $20 or $30 since it is based on the share price of the REIT.
3. Invest In Peer To Peer Lending
You can become an investor who finances the dreams of others by becoming a lender on a peer-to-peer site like Prosper. A few years ago, I became an investor on Prosper. I used $2,000 and divided it up amongst several different investment opportunities. Some of the investments were low risk, a few moderate, and one high risk investment. My investments paid off with a 14% annual return for years. I kept reinvesting my earnings in new loans and was rewarded with a nice passive income stream. I had to close my account down when Prosper lending became illegal in the state of Maryland. For investors who live in states where Prosper is legal, it can help to generate some serious income.
Lending Club is also available for peer-to-peer investing. Lending Club has a $1,000 deposit minimum for investors. Investors can invest in pieces of loan requests by contributing as little as $25. You can build a pool of diversified loans spreading out the risks that you take. A $1,000 investment can invest in 40 different loans. You will receive principal and interest payments on a monthly basis. You can either reinvest the funds or withdraw them. Loans have 36 or 60-month terms at origination. Withdrawing the funds on a monthly basis will create a nice passive income stream.
Lending Club recently became available in my state. I will be taking a few thousand dollars and funding a traditional investment account soon. I am hoping to generate passive income streams similar to Prosper.
By adding these passive income streams to your investment portfolio, you will be on the path to retirement in no time!