One way the wealthy think differently about money is that they (mostly) don’t go out and work for it. Their money works for them.
Investing for passive income doesn’t just serve your long-term financial goals. Your investments can earn you income right now.
You can earn passive income from many sources, but they all share one thing in common: they require money, work, or both to create. You invest this upfront, and then you get to reap the benefits with minimal ongoing effort.
Though the upfront energy, time and effort required is precisely why so few people earn passive income. They lose interest when they realise how much upfront investment it requires of them.
If you’re not afraid of investing a little time or money, read on. You can pick and choose a combination of the best passive income sources to fuel your adventures for the rest of your life.
1. Dividend-Paying Stocks & Funds
One of the simplest and most common forms of passive income is dividends from stocks (shares), managed funds, or exchange-traded funds (ETFs). You buy a share, and every six months or so that share pays you a dividend indefinitely.
Some stocks pay higher dividend yields than others, of course. One stock may pay an annual yield of one percent of its share price, while another pays a yield of five percent. The yields can go up or down or cease altogether, as the fortunes of the company change.
One way to spread the risk in your stock portfolio is to consider buying ETFs that own a wide range of dividend-paying stocks, so you don’t over-invest in any one company.
The other classic “paper asset,” bonds typically pay out interest payments until they mature, and you get your initial money back.
If you’re new to the concept of bonds, they’re essentially a loan from you to a borrower, which you can sell on the secondary market to another investor at any time.
Bonds come in two fundamental forms: government bonds and corporate bonds.
In recent years, bonds haven’t paid out the same high returns that they did in years gone by. In an environment of consistently low interest rates, many investors have a hard time getting excited about bonds.
Still, bonds have historically played an important role in overall portfolios. Because they tend to be lower-risk, lower-return investments, many investors gradually buy more bonds as they approach retirement as a strategy to reduce risk through their asset allocation.
3. Rental Properties
Rental properties are a great source of passive income. They generate ongoing income without you having to kill the golden goose and sell off any assets.
Real estate has also driven many Kiwis’ net worth higher over time, as the properties have appreciated in value and tenants’ help to pay off the mortgage for you.
Rents usually also adjust for inflation, so you don’t have to worry about inflation diminishing your returns.
Landlords can reduce the main risks of rental properties through professional property management and careful planning, though there’s still always a risk of the property market slumping or crashing.
Despite the advantages, rental properties aren’t a good fit for everybody. They require skill and knowledge to invest profitably, which is precisely why so many new rental investors end up losing money.
Rental properties also require many thousands of dollars of cash upfront in the form of a down payment, which makes diversification a challenge at first.
Real estate is also notoriously illiquid. It costs a great deal of money and time to cash out your equity by selling.
4. Listed Property
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. A REIT is a type of managed fund, as REITs pool the funds of numerous investors.
In NZ, the term listed property commonly refers to REITs listed on the NZ sharemarket. That means everyone can buy a little piece of them and own a slice of the real estate that those companies hold. Listed REITs are professionally managed, publicly traded companies that manage their businesses intending to maximise shareholder value. In NZ, the REITs available invest almost entirely in commercial property, such as:
Industrial – distribution hubs, factories, and warehouses
Offices – buildings that house corporate and government offices
Retail – shopping malls and large format retail stores
If you want a fast and easy way to diversify your portfolio and add real estate, listed property is a simple first step.
Because they trade on stock exchanges, they tend to move more in line with stock markets than other real estate investments, limiting their upside as a diversification strategy.
A property syndicate typically raises money from multiple individual investors to buy property. Returns are shared among the investors. Syndicates can invest in commercial, industrial, residential, or agricultural property, and in existing buildings or new development projects. Some syndicated offers invest in farming projects or forestry rather than property. Syndicates might be offered under different legal structures, including companies (or ‘equity’), where the form of the investment is company shares. Syndicates often have a minimum investment size, which is typically around $50,000.
To lure in investors, syndicates are typically advertised with a forecast percentage return. Some syndicates pay this as a distribution or dividend on a regular basis. Generally, we’d suggest most Kiwi’s are best to avoid this sort of investment, as the NZ financial watchdog, the Financial Markets Authority (FMA), explains so well:
“Property syndicates are often advertised as providing regular income, with attractive returns quoted. However, syndicate structures can be complex, there are risks to be aware of, returns are only estimates, and you may struggle to get your money out.”
6. Term Deposits and Savings Accounts
Technically, term deposits and savings accounts all qualify as sources of passive income. But, as they haven’t kept up with levels of inflation over recent years, anyone investing in this way is usually losing money in real terms.
A royalty will keep on paying out as long as people keep buying the creative work.
In the art and entertainment world, book writers often receive royalties, as do musicians. Photographers and graphic artists can receive royalty income if their images sell through stock photography websites.
Royalties don’t come only from artistic works, though. Inventors and patent holders can earn royalties when other companies use their patented products or designs. There are two ways to get started with this sort of income:
Create something that can generate royalty income, or
Buy an existing royalty, commonly done through an online royalty exchange. It should go without saying that plenty of homework is required before investing!
8. Peer to Peer Lending (“P2P”)
Peer to peer lending offers a higher interest rate alternative to leaving money in term deposits and savings accounts, but it’s not without its risks. In a nutshell, you use an online peer-to-peer lending platform to lend out your money to borrowers. The platform provider will charge some sort of fee or collect some of the interest.
The loans might be on three to five-year terms and can be either secured or unsecured against an asset.
Like anything, there are risks here, and many financial gurus think the debts on these sorts of platforms would be the first to fold should the NZ economy take a sustained turn for the worst.
9. Private Debt
Private debt is similar to P2P lending, but without the lender as the middleman. Instead, you directly lend money to another person or company.
Ideally, this is someone you know and trust implicitly, because if they don’t pay you back, you might not have many options at your disposal.
If you go down this track, do it properly, and get a legally-drafted and binding loan agreement. Even if you’re lending to family, this’ll give you peace of mind should anything happen, including that the person you’ve leant to became seriously ill or died!
The risk directly correlates with how well you know the borrower, your confidence in their experience, and what they’re borrowing funds for.
10. Business Income
Creating a business might allow you to leverage other people’s time and money to create your own passive income engine.
Plenty of people consider themselves business owners and investors but can more accurately be described as “owning a job”. There’s certainly nothing wrong with that, though it’d be pushing it to describe this as passively generated income, the opposite is true!
For a business to fall into the passive category, it needs to be capable of running with minimal or no involvement from the owner which might include hiring someone else to run it for you.
If this might suit you, you can:
Explore some potential hobbies you could grow into a money-making business, and build your own empire that endures even after you bow out, or
Buy an existing business.
11. Literal Income-Generating Machines
One of the most overlooked areas of passive income is actual income-producing machines, such as small vending machines, arcade games, bar games, and so on. Even a laundromat might fall into this category.
The hard part of this strategy is finding locations that agree to let you install your machines. From there, you simply service them occasionally to keep them running and periodically stop by to collect your coins. (Again, admittedly this is not 100 percent passive). This task is one you can delegate to employees relatively easily.
The Bottom Line: Passive NZ Investments That Earn You Monthly Income
Investing doesn’t have to revolve around tucking money away so you’ll never see the proceeds until sometime in the distant future. With some of the choices above, you may just develop a passion for financial independence and plan your escape from the 9-to-5 lifestyle.
Of course, the list above is far from complete, and with a little initiative, you can probably identify a few more ideas too!