What Is Passive Income? 3 Passive Income Sources To Build Your Wealth
Updated: Nov 2, 2019
Whether you dream of leaving the workforce early or building up your retirement fund, there are many ways that a passive income can help make it a reality.
Building wealth through passive income doesn't mean that you can sit on the beach all day and watch your profits roll in, but it can definitely help you reach your retirement goals a lot sooner — as long as you educate yourself thoroughly on the options.
This week we're discussing the three most effective passive income sources, and how you can bolster your rainy day fund.
What is passive income?
The IRS defines passive income as income received from royalties or stock dividends, such as a silent partner in a business, or income from rental properties. Put simply; it's any regular earnings that do not come from an employer or contractor.
There are many different ways that you create a passive income, but we're going to take a look at three ways in particular; dividend stocks, REITs (Real Estate Investment Trust), and rental property.
Dividend stocks are paid to shareholders out of a companies profit. If you own dividend-yielding stocks, you typically receive quarterly cash dividends from the company — also known as passive income. The amount you receive depends on how many shares you own.
Owning dividend-yielding stocks is one of the most passive ways to earn money, as once the initial investment is made, you simply wait to be paid. Stocks are one of the most popular passive income sources, but they're also one of the riskiest. Before you buy stocks in a company, it's crucial that you research it thoroughly and have a good understanding of its financial statements and business practices. It's also vital that you diversify your investment portfolio, and don't rely on one company alone for your returns.
REIT is an acronym for “real estate investment trust” — which describes companies that own and manage various real estate interests. Like other stocks, you can purchase REITs on the stock market and earn dividends from their profit; however REITs also have a promising reputation for increasing their dividends year on year, often making them more profitable than other types of stocks.
If you're thinking about investing in a REIT, it's crucial that you take the time to research potential opportunities — it's very easy to lose money if you're not an experienced investor. Another potential drawback of REITs is that the IRS defines their distributions as ordinary income, and taxes them as such.
Investing in rental property is one of the most effective ways to earn a passive income, and much more affordable than most people think. As one of the only investment opportunities that allow you to put a small percentage of the value of the asset down, but still benefit from the full amount of appreciation, single-family rental homes are an excellent source of passive income.
Unlike the other passive income methods already mentioned, owning rental income doesn't mean simply purchasing a property and waiting for the profits to roll in. Rental units require maintenance and upkeep, as well as effective tenant management. On the other hand, they also provide tax benefits that other passive income sources don't, such as the ability to depreciate your property and reduce your tax burden.
If you're considering investing in a rental property, it's important that you have the time and resources to manage it, as well as an in depth understanding of your local real estate market.
All information and materials in this article are for educational purposes only. Opinions expressed in this article are based on information considered reliable, but The Daily Money Show cannot guarantee the accuracy of the information nor should it be relied upon. The information discussed in this article should not be used as a recommendation to buy or sell securities nor should it be taken as investment advice. The Daily Money Show is not a Registered Investment Advisor or Broker Dealer. The Daily Money Show is not an accounting firm and does not give tax advice regarding any security or real estate transaction. You may want to consult with an accountant, attorney, real estate agent or financial advisor before proceeding with any transaction regarding securities or real estate.