Yahoo Finance 6 Ways the Rich Generate Passive Income
For ordinary people, a passive income stream can loosen up their budget and provide security in case of job loss. But the rich tend to spread their eggs into many more baskets, with money pouring in from several active channels that don’t require much hands-on maintenance.
“Diversifying their investments across asset classes such as stocks, bonds, real estate, and enterprises is a common way for wealthy people to generate passive income,” said Michael Callahan of The Callahan Law Firm in Houston. “This enables them to benefit from multiple passive income streams and reduces the risk associated with relying on a single passive income source.”
So where do the wealthy find these multi-pronged fountains of money? How do they set them up and how do they keep them running? Well, when it comes to making money, the alternative to labor is capital, and the easiest way to make a large fortune is to start with a small one.
In short, the rich have the cash to purchase passive income streams that eventually make them richer. Here are the six most common ways they go about it.
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Invest In Real Estate and Outsource The Management
The life of a small-time landlord is anything but passive — but the wealthy don’t manage the real estate investments that have punched so many of their tickets to the upper crust.
Rich people will invest in real estate but won’t manage it. They invest in properties and then hire property management firms to handle every aspect of the business. If they decide to put the properties on a short-term rental platform, they rely on management firms to handle the operations.
“By acquiring rental properties, luxury apartments, or commercial real estate, wealthy individuals can earn a steady stream of rental income while benefiting from property appreciation over time,” remarked Erika Kullberg, an attorney, personal finance expert and founder of Erika.com.
There’s also another alternative — but you have to pay to play.
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They Get the Best of Both Worlds Through Real Estate Syndicates
According to Brian Davis, a real estate investor and founder of SparkRental, the wealthy have the means to participate in real estate syndication, which deals mostly with commercial properties. A truly passive income source that pays you in two ways, real estate syndicates typically have $50,000 minimum buy-ins and are, therefore, off the table for most.
“The syndicator finds a value-add deal, buys and renovates it, raises the rents — and therefore the valuation — and then refinances the property to return investors’ capital to them,” said Davis. “But the passive investors maintain their ownership interest in the property, and again keep collecting cash flow as the property keeps growing in value.”
There’s one more option for passive income in real estate for the rich.
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Renting Out Parking Spaces
“If you live downtown near a booming area, you can rent your driveway to a worker who doesn’t want to search for a spot,” said Scott Lieberman, founder of Touchdown Money. “Obviously, to do this, you need a home in a high-traffic area and space available.”
The super-rich can earn passive income from real estate through multiple options, with this being another. You can make easy money by listing parking spaces since they don’t require much maintenance.
They Invest in Dividend Paying Stocks
Dividend-paying stocks allow investors to generate income from their shares without having to sell any. “By holding shares in well-established companies that distribute a portion of their earnings to shareholders, these individuals can receive regular dividends without actively managing their investments,” Callahan said.
Unlike real estate syndication, anyone can buy dividend stocks — but only the wealthy have enough discretionary cash to turn that income stream into a river.
“They buy shares in companies with proven track records of paying regular dividends,” Kullberg noted. “This strategy earns them quarterly payouts from the companies whose shares they own.”
What stocks do the rich look for?
“Stocks with a high dividend yield, blue chips, and dividend aristocrats (companies that have increased their dividends for 25 consecutive years or more) are popular dividend-income vehicles. Besides paying steady income, if those stocks rise in price, the investor also reaps capital gains.” Kullberg said.
For example, if a stock that trades at $200 per share pays a 3% quarterly yield, a $20,000 investment would generate just $600 a year in dividend income. But if you can add a few zeros and bump that investment up to $2 million, you’d now have $60,000 a year in passive dividend income.
They Own and Invest in Businesses
Like landlords, the lives of small-business owners are often consumed by their money-making endeavors. But similarly, those with the means can farm out the legwork to managers while reaping the profits that the business generates — or simply invest as silent partners.
“Successful entrepreneurs and affluent individuals frequently generate passive income through business ownership and investments,” said Callahan. “They may own shares in private companies or invest in ventures, allowing them to earn profits or dividends without participating in day-to-day operations.”
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Venture Capital and Private Equity Investments
“The rich can generate passive income by investing in private equity and venture capital,” Kullberg said. “Through this arrangement, an investor may contribute to (or back) a startup.”
If an entrepreneur has an innovative idea but has trouble with funding, the investor will provide the necessary capital to help get the business off the ground. In return, the investor will likely receive a major stake in the company.
“If the venture grows, the investor can eventually recoup many times over their original investment,” Kullberg elaborated.
They Own, but Don’t Operate, Franchise Locations
It’s entirely possible to make millions working as a franchisee who owns a location of an established chain, but it requires long hours and hard work — unless you have the means to hire people to oversee the daily operations.
“A good number of my clients chose to invest in gas station franchises,” said Raymond Quisumbing, MBA, a registered financial planner. “From one franchise to several branches, having an established system and delegating tasks to capable managers can make this business a near-passive investment.”
They Collect Revenue From Intellectual Property Rights
Everyone has heard stories of actors collecting royalty checks for years or even decades after starring in a show. But the rich don’t have to go to acting school. They can buy that kind of revenue stream by investing in intellectual property rights.
“Through intellectual property such as patents, copyrights, and trademarks, the wealthy may generate passive income,” Callahan said. “Licensing agreements and royalties from books, music and films can generate passive income.”
This can also be extended to platforms like Amazon, where you can invest in launching self-published books that will collect royalties for years to come.
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Bond Ladders
Regular people may not have the cash to start a bond ladder passive income stream. “Investing in multiple bonds that mature at different times lets you choose to buy a new bond of the same time length or go for a longer-term bond as they mature,” Lieberman said.
Since regular people can’t leave their funds tied up for an extended period, they’re not able to benefit from passive income streams like this.
High-Yield CDs
“High-yield savings accounts are for everyone, but high-yield CDs are only available to people who can go without large sums of money,” stated Lieberman. “If you can invest multiple thousands at once, you’ll return a sizable amount when the CD matures.”
The super-rich can also earn passive income through secure sources since they have the capital required to earn a significant return on the original investment.
Martin Dasko contributed to the reporting for this article.
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