Having owned nearly 20 rental properties once upon a time, I can tell you firsthand that being a landlord is not passive. It’s a side hustle, and it requires work.
Work to find properties, to arrange financing, to apply for permits, to hassle with city inspectors, with contractors, with renters, with property managers. At best, rental income is semi-passive.
In fact, I got so fed up with tenants calling me to complain about clogged toilets that I sold every rental property.
Explore More: Passive Income Expert — Here’s How I Make $27,000 Every Week
Check Out: Why Skipping a Financial Advisor Could Be Your Biggest Money Mistake
Today I only invest passively, and I collect truly passive income. As a busy professional, how can you too earn “set it and forget it” passive income? Here are five ways to get started.
I know a lot of real estate investors. And I occasionally lend them money, in the form of private notes.
A “note” is simply the legal contract between a borrower and a lender. For example, I lent an investor money at 10% annual interest, due in quarterly payments, and the loan can be cancelled by either party with three months’ notice. We signed a note to formalize the agreement and she’s been paying me like clockwork for the last seven years.
I don’t have to do anything. The money just arrives in my bank account every quarter.
Just make sure you have 100% confidence that the borrower can and will pay you back. Lend to people you know and trust.
Alternatively, you can lend money to strangers through online crowdfunding platforms. For real estate-secured loans, explore Groundfloor as an established option — I myself have invested five figures through it over the years. For unsecured personal loans, check out Prosper.
For You: I Made $10,000 Using One of Dave Ramsey’s Best Passive Income Ideas
Rather than lending individual notes, you can invest in a debt fund that owns many loans.
For example, 7e Investments offers a debt fund specializing in non-performing mortgage notes. They pay 8 to 10% annual interest, distributed monthly. I know the owner, Chris Seveney, because the passive real estate investment club that I manage has looked into their debt fund.
In my last conversation with Chris, he told me that they buy mortgages at a deep discount, at an average cost of around $195,000. Meanwhile, those loans are secured by an average property value of around $500,000. That makes for powerful security against losses. And sure enough, 7e Investments has never missed a distribution payment to investors.
Still, Seveney prides himself on getting the overwhelming majority of defaulting homeowners back on a payment plan — keeping them in their homes and avoiding foreclosure.
You can also invest in funds that own real estate directly, rather than loans secured against it.
For instance, my investment club recently invested in a land fund. The operator buys mid-range land parcels of 20 to 200 acres, and does what’s called a “minor subdivision.” He splits the parcels into two to five lots, which doesn’t require zoning approval (in the jurisdictions where he operates).
He then sells the lots to homeowners looking to build a new home, farmers, outdoor recreation enthusiasts, or whoever else makes up the ideal buyer profile for that specific land. For years now, he’s earned a fund-level return in the 30 to 35% range, and pays his passive investors a 16% distribution.
Other equity funds might own apartment buildings, or retail space or industrial real estate, or something else entirely. Passive investors enjoy the cash flow from the rents, the appreciation in property value, and the full tax benefits of ownership — without the headaches of becoming a landlord. Best of all, they get instant diversification, owning many properties under a single fund.
Investors have several options to go in on investment properties with other people.
If you personally know and trust a real estate investor, you can go in on a joint venture with them as a silent partner. Just understand that the partner who actively manages the asset will likely demand a greater profit split to compensate for their labor.
Alternatively, you can buy fractional ownership through real estate crowdfunding platforms like Arrived and Ark7. Both let you buy shares in a rental property for $100 per share, and Ark7 also features a secondary market where you can sell shares.
All of these strategies let you enjoy the cash flow, appreciation and tax benefits generated by the property you own — no matter how small your share.
Prefer paper assets? You can buy shares in high-yield stocks or funds from the comfort of your brokerage account.
While the S&P 500 currently pays a less-than-impressive dividend yield of just 1.28% per GuruFocus, you can find individual stocks and funds that pay far more. Dividend tracking platform SureDividend points out that some high-yield stocks pay as much as 18.5%.
Stocks, unlike real estate, come with the two-sided coin of liquidity and volatility. Investors can buy and sell stocks instantly at no cost, so they don’t have to make a long-term commitment. But that same liquidity creates volatility; prices gyrate fast and hard precisely because they’re so fast and cheap to transact.
Consider dipping your toe in the water by spreading small amounts across a handful of the investments outlined above. As you get more comfortable, you can scale up your passive income streams and eventually create enough passive income to cover your living expenses. When that happens, you reach financial independence, and your day job becomes optional.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: 5 Lucrative ‘Set It and Forget It’ Passive Income Streams for Busy People
