One sure way of achieving financial freedom is by building passive income to supplement and expand your current cash flow. People have different reasons for pursuing financial freedom, but the majority are looking to have time freedom and not having to work for a living.
When you have a self-sustaining cash flow from your passive income, it means that you do not have to work to earn money. You have time freedom, in that, you can choose what to work on, when, and where, without sweating over unpaid bills or worrying over the next paycheck.
While you may have different reasons for chasing financial freedom, one of the most reliable ways to get there is through passive income. There are many passive income ideas, but this article will discuss the most solid ones, which are doable for the average investor with practical ways of getting started.
One of the main deterrents in the journey towards financial freedom is not having enough time and money to accelerate the process. However, with enough dedication, you should find the time to learn the best ways and places to invest your money and gain passive income.
The following passive income ideas are a great way to start your journey towards financial freedom, and if you do it right, you will create a stable passive income flow in less time and with less effort.
Real Estate Crowdfunding
Real estate is viewed as one of the best passive income sources, and for good reasons too – steady income, financial security and less time and effort involved in managing portfolios.
However, the big real estate projects that offer huge returns have, for some time, been out of reach for the small investors, until crowdfunding offered a way in.
Real estate crowdfunding involves developers pooling small sums of money from many investors, as opposed to having only a few accredited investors fund the real estate project. By pooling money from many investors, crowdfunding offers small investors the chance to own property that is, otherwise, out of their financial reach.
Even better, the whole process is flexible, easy, and fast, as it is done online via crowdfunding platforms such as Realty Mogul.
Through real estate crowdfunding, an investor can invest as little as $1,000, and own part of the real estate, as opposed to the traditional method where a person had to have a net worth north of $1,000,000 to qualify as an accredited investor.
Real estate crowdfunding is an excellent opportunity for the investor looking to build passive real estate income. Passive income ideas involving real estate are highly sought-after because of the high returns investors get from a successful project.
Crowdfunding offers investors two main options of investing: debt investments and equity investments.
a. Equity Investments
If you decide to be an equity investor, it means that you own a stake in the real estate project, in short, you are a shareholder.
This translates to higher ROI’s, and with it, also comes high risk, compared to debt investing. Most real estate investors choose to be equity investors, as they would get from 18% – 25% annual returns.
Furthermore, there are no caps on equity investments, and as the project becomes more profitable, the returns increase as well.
Being an equity investor offers you a continued passive income as long as the real estate remains profitable.
On the other hand, if the real estate project is not profitable, you will receive zero returns.
Equity investments are long term, up to five to ten years, meaning the liquidity of your money is limited to the holding period. Therefore, if you are not willing to tie up your money in the project for the long term, you should then consider debt investments.
Equity investments have the highest returns and, also, the highest risk in case of property value depreciation.
b. Debt Investments
If you choose the option of being a debt investor, you are essentially lending out your money to the real estate developer. This is also called peer-to-real estate lending.
You get a fixed return, which is calculated based on the amount of money you have put in, and also based on the developer’s mortgage loan interest rates.
With debt investments, you are likely to know who much returns you’ll get and when you receive the payments – usually monthly or quarterly.
The real estate developers secure the mortgage loans on their own capacity, and therefore the investors are not liable. In case the developer defaults on the loan, the investors can get their money through a foreclosure action.
Additionally, debt investments do not tie up your money for long as the holding period is about six months to two years. A property pay-out date is usually set, where investors receive the principal amount of their investments.
Debt investments offer less risk, more liquidity, and steady returns. On the other hand, the returns are limited as they are calculated based on the interest rate of the developer’s mortgage loan.
You will make passive income as an equity investor and also as a debt investor. As the real estate crowdfunding market continues to expand, stakeholders are generating more passive income ideas from the real estate business.
You must, however, conduct proper due diligence before selecting a real estate crowdfunding platform.
Make sure the platform has been operational long enough and has earned investors trust and credibility.
The ideal platform operates as a broker-dealer and conducts vigorous background checks by collecting crucial documentation before allowing a deal. A good crowdfunding platform also has excellent customer service.
Some of the notable crowdfunding platforms include , Fundrise, Roofstock, PeerStreet, Realty Mogul, Patch of land , CrowdStreet, Fund That Flip, 1031 Crowdfunding , Arbor Crowd , Real Crowd , Carlton Crowdfund , ShareStates , Roofstock One , and Zeus Crowdfunding.
Below, Moneybyramey analyzes three of the popular platforms in the market today.
Fundrise is one of the most popular real estate crowdfunding platforms in the market today as it allows non-credited investors to invest in big real estate projects. According to Fundrise, the platform has attracted more than 500, 000 investors and made north of $2 billion in real estate investments.
The platform is authorized by the Securities Exchange Commission (SEC) which increases its credibility in the market. Fundrise is different from other crowdfunding platforms, in that, investors do not choose the projects to invest in. Instead, Fundrise pools investors’ money and invests in real estate projects that are more likely to offer medium and long-term-returns.
Fundrise, which was started in 2012, has four investment plans for its investors. These plans have both standard and plus options and also include eREITS and eFunds.
These investment plans are:
a. The Starter Portfolio
b. Supplemental Income Portfolio
c. Balanced Investing
d. Long-term Growth Portfolio.
Even though investors cannot choose the projects to invest in, Fundrise allows them to choose an investment plan, and the platform makes investments that are more relevant to the investor’s investment plans and more likely to give the investors maximum returns.
You can start investing in Fundrise with an initial investment of $500 and have the chance to invest in real estate projects that could grow your money exponentially. The platform charges around 1.0% in management fees and advisory fees.
For investors seeking to own single-family properties in the U.S, Roofstock is the best platform to utilize. Roofstock is essentially a property market, in that, you have the opportunity to choose which property to invest in from the hundreds of listed properties on the platform.
However, Roofstock does not pool investor’s money, meaning that an investor has to buy the property on his/her own, although Roofstock does offer financing that allows an investor to purchase property with a down payment of 20%. By using Roofstock, investors are assured that the property is properly vetted by the Roofstock’s team besides benefitting from the well-structured process of buying and renting out the property on the platform.
Furthermore, most of the homes listed on the platform already have existing tenants, which means that you as the investor will have a ready source of passive income, upon property purchase. Roofstock also lists well-vetted property managers that it recommends to the investors to help in managing the property if the investor chooses to.
Additionally, the platform assists the investors through the complicated process of purchasing property, by assigning a Transaction Coordinator to help the investor complete the purchase with much ease.
Roofstock is the go-to platform for investors seeking to invest in U.S based residential property. It charges 0.5% in setup fees and you can make an equity investment or buy a property and have direct ownership.
Since Roofstock does not pool investors’ funds, you will be required to have a substantial amount of money that will allow you to buy a property through the platform. However, the company owns a subsidiary platform called Roofstock One which gives investors more flexibility in terms of property purchase.
PeerStreet brings together investors and borrowers who are looking to invest in real estate. The borrowers are seeking for real estate loans from the investors. Real estate loans on PeerStreet are high-risk, and they require an investor with a high appetite for risk and more money to invest. As such, only accredited investors are allowed on the platform.
Essentially, investors on PeerStreet make debt investments because they invest in the real estate loan, and not the actual real estate. As the loans are secured by an asset, the investor is assured of getting back the principal amount, should a borrower default on a loan.
The platform allows investors to diversify and chose the type of loans they want to lend to. Most of the loans on the PeerStreet are for residential and single-family real estate. The minimum investment is $1000 and the platform is available in 50 states. PeerStreet charges 0.25% – 1.0% in setup fees. The loans are mostly short-term, running from 6months to 2years.
Peer-to-Peer (P2P) Lending
Peer-to-peer lending allows normal investors to lend money to regular borrowers who need money, without involving a financial institution. It is also referred to as, social lending, person-to-person lending and also crowdlending. P2P lending is an excellent way for an investor to make passive money, by choosing the borrowers to lend to, and, thereby, earning interest when they start to repay the loans.
As an investor, you have a large pool of borrowers that you can choose to lend to, depending on their profiles. All this happens online on a P2P lending platform such as Prosper, LendingClub or Upstart that serves as the medium through which borrowers and investors connect. Such companies are also called marketplace lenders or per-to-peer lenders.
One of the main benefits of the P2P lending platforms to you as an investor, is that it allows you to diversify your loan portfolio. This means that you can lend different amounts of money to many borrowers and, in so doing, spread your risk, if one of them defaults on the loan. In case one of the borrowers on your portfolio defaults for different reasons, you will have other borrowers making payments, and hence covering you from total losses.
P2P lending is mostly utilized for personal loans and small business loans, and as an investor, through risk profiling, you have the upper hand on whom you choose to loan to.
The interest rates on P2P loans are determined by the profile of the borrower which includes factors such as credit score, level of income, sources of income, place of work, borrower’s repayments history and other financial aspects of the borrower.
Hence, a borrower with a solid profile will get loans at a low interest rate, while one with a weaker profile will get a higher interest rate on loans.
As an investor, P2P lending will certainly give you more returns as opposed to other types of investments such as savings or CD accounts. Additionally, you get to build a wide network with other investors that may lead you to more investment opportunities
More so, you share in the social good that comes with lending directly to peers, while also making a profit in the process.
Investors and borrowers alike, are charged a certain percentage by the peer-to-peer lending companies. For investors, the marketplace lenders will deduct a percentage of the loan payment before sending the payments to the investors. Most P2P lending platforms take 1% from each payment amount.
Peer-to-peer lending is an excellent platform to make passive income. P2P lending is one of the favorite passive income ideas for the investors with the passion of enabling other people and businesses move to the next level through loans with favorable interest rates.
Once an investor has learnt the ropes of risk profiling and knowing how to pick well-grounded borrowers, there is no cap on the amount of money one can make through P2P lending.
Real estate crowdfunding and peer-to-peer lending are getting more popular by the day as more investors utilize the two platforms to build passive income. The two platforms have been around since 2008, but most investors are only beginning to utilize the platforms fully.
All you need as a new investor to get in the game is to have a basic understanding of how crowdfunding and P2P lending works, and of course have some money to invest to get you up and running.
Once you start generating passive income and you build on it, you will have a steady cash flow of passive income within a couple of years.
You will also interact with like-minded investors whom you can trade skills and investment perspectives, and possibly find new ideas of passive income.
This is in addition to other passive income ideas, such as dividend paying stocks and high-yield savings accounts.
Other passive income ideas include, affiliate marketing, creating and selling online courses, display ads, renting out your home on Airbnb and building and starting blogs.
Moneybyramey.com will discuss in depth, these and many more passive income ideas in subsequent posts.