Welcome to a new week. You will agree with me that this month has moved quickly.
Today, as follow up to last week’s article, we would be discussing passive income – what it means and the various types of passive income available (I believe the list inexhaustive and evolving).
Passive income can be described as money earned and maintained through means that require minimal effort. Some people also describe it as “making money even when you are asleep”.
It is essential to note that effort is required in any venture and that the emphasis is on amount of energy or time required to set up this investment vehicle.
Passive unlike one’s personal income (salary from paid employment or business) does not involve your active involvement or participation.
It is an important method for generating extra cash flow as well as increasing one’s stream of income. It is also another strategy for wealth building especially in times of economic downturn or uncertainty.
However, it is not a guaranteed way of becoming wealthy overnight; but it assures one of steady income over a period of time.
Below are the various ways of building passive income:
- Rental Income: Whilst the “buy or rent your residential property” argument rages on, one thing that is not in doubt is that real estate can be a good source of income.
The emphasis here is real estate for commercial purposes whether residential or not.
Apart from rental income, land and properties especially those in good locations more often than not tend to appreciate in value over time; thereby boosting the net worth of their owners.
Although many landlords home and abroad have had to experience delayed income or even defaults due to the COVID 19 pandemic, we can all agree that 2020 was indeed a peculiar year which should not discourage future investments.
- Stock Market: The stock market is one of the most popular types of passive income especially growth and dividend paying shares.
For growth shares, the emphasis is capital appreciation whilst for the dividend paying shares, the aim is the guaranteed income provided by earned dividend. Since dividend is paid per share, the more shares you own the higher your dividend.
For many high net worth individuals, their dividend income tends to be a sizeable portion of their passive income.
The major cons with investing in the stock market are knowing which share(s) to invest in and time of entry.
- Government Securities: A government security is a bond or any other of debt obligation such as Treasury Bills and Savings Bonds issued by a government (in this case, The Nigerian Government); with a promise to repay at the maturity of the security.
Interest (coupon) is paid at periodic intervals in the case of bonds whilst bills are discounted instruments.
They are deemed to be low risk and as such, a safe source of passive income because they are guaranteed by government. Most of the investors tend to hold these instruments till maturity.
Although yields on government securities were low in 2020, there is an expectation that they will be higher given the need for the Federal Government to borrow heavily to fund this year’s budget in the face of low oil prices.
- Angel Investing: Angel investors are typically family and friends of business owners who provide funds either at the start up stage of a business venture or working capital during the early years of the business.
They tend to be high net worth individuals mainly because the funds required are medium to long term in nature and are usually not more than 10% of their investment portfolio. In other words, angel investing requires that you have excess funds available.
Angel investing is a risky venture but tends to attract higher rate of return than other conventional investment opportunities. In addition, not all startups become successful or have huge pay outs or returns.
(For more on angel investing, you can check the article of October 19, 2020)
- Peer to Peer lending: This is a form of lending usually facilitated by a third party – an investment club for an example.
The lender earns interest income which is typically higher than what is obtainable in conventional settings. Such loans are typically unsecured and as such, there is a high risk of default.
Agritech platforms such as Farmcrowdy and Thriveagric are modified forms of P2P lending as they attempt to fund farmers by leveraging on funds collected from willing investors. Recent defaults notwithstanding, these platforms are still a source of passive income.
- Knowledge Products: Knowledge or information products such as video or audio products, blogs and eBooks are also popular ways of earning passive income. The passive income is earned from subsequent use of the content.
Apart from the income earned from the sale of the products, advertising income can be made from such content.
Knowledge products, however require expertise, active engagement and more energy than the other products mentioned above.
You will note that no mention has been made of side hustles (or businesses) as they cannot be deemed to be passive as the active involvement of the business owner is required.
Please let us remember the COVID 19 virus is rampaging even as our children return to school. It is also important that we remember that the vaccines are currently unavailable in Nigeria.
As such, we must continue to take personal responsibility for ensuring our safety and those of our family members.
Keep washing your hands, maintain social distancing and wear your face masks in public.
I wish us all a wonderful week ahead.