Imagine waking up in the morning and going about your daily routine: making a cup of coffee, catching up on the latest news and checking your bank account. Now imagine that when you check your bank account, you see a deposit and it isn’t from your typical full-time job. What a feeling knowing money is coming in, yet you didn’t have to lift a finger to earn it.
What is passive income?
Passive income, as defined by Investopedia, is “earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved.” This would include portfolio income, like the money you earn on dividends and interest.
There are many ways to make passive income, but in this article, I will discuss how investing in mutual fund portfolios and real estate can help you earn additional income while helping spread out risk within your entire investment portfolio.
Investing in mutual funds to generate passive income
Mutual funds pool money from several investors and invest it in stocks, bonds, and short-term debts. Mutual funds help investors stay diversified and not too heavily weighted in one individual company. Some funds are known for investing in companies that pay regular dividends. Dividends can be either reinvested – purchase more shares of the mutual fund – or sent to the investor’s bank account to be used to supplement income. Depending on the mutual fund, the dividends can be sent monthly or quarterly and can vary.
If you need additional income to help towards your monthly cash flow, having dividends sent to your bank account may be the right option for you. If you do not need the monthly income and cash on hand, reinvesting can still provide passive income as it increases your portfolio over time if the fund increases.
Mutual funds that hold municipal bonds can be beneficial to investors for several reasons:
- They allow the investor to earn dividends.
- They can offer some investors tax advantages.
- They enable you to give back to your community by helping fund local projects, such as schools, roads, bridges, and hospitals funded by state/local governments in the form of municipal bonds.
Depending on the type of bond, earnings can be exempt from federal and/or state/local taxation. For investors who are in a higher tax bracket and are looking for ways to save on taxes, municipal bonds may be a solution. Earning dividend income and lessening their tax bill means more money in the investor’s pocket.
Investing in real estate properties to generate passive income
Real estate investments are another way to diversify your portfolio and make passive income. With a real estate investment, you own and operate income-producing real estate but not with sole intention of reselling for a profit. Investors can purchase real estate and rent it out to a tenant for a price that is higher than the investor’s mortgage. This provides additional income while simultaneously paying down the mortgage.
Keep in mind, managing a rental property can require a lot of your time, which means it will become less of a “passive” form of income. A potential solution is to utilize a trustworthy property management company.
Investing in real estate investment trusts (REITs) to generate passive income
If you want to invest in real estate but do not have the desire or means to purchase a property to rent out, an alternative is to invest in real estate sector funds or real estate investment trusts (REITs). Both options add real estate exposure to your portfolio and can provide additional income.
If you are looking for additional ways to earn passive income, mutual funds, real estate properties and REITs are all effective and popular ways to add to your cash flow or investment portfolios.
The options mentioned in this article should not be received as direct investment advice. Please seek the advice of a trusted investment professional to ensure any investment is tailored to your unique financial situation.
Specific-sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws, and interest rates all present potential risks to real estate investments. Municipal bonds may subject investors to the Alternative Minimum Tax (AMT). Municipal bonds are usually exempt from state and local taxes, though discount bonds may be subject to capital gains tax.
Jason Egge is a registered Representative with Securities America, Inc. Securities offered through Securities America, Inc., member FINRA/SIPC. Bankers Trust, BTC Financial Services, a division of Bankers Trust, and Securities America are separate companies. Not FDIC Insured. No Bank Guarantees. May Lose Value. Not a Deposit. Not Insured by Any Government Agency
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