Want to know the secret to building wealth?
The answer is pretty simple — invest in assets that generate income.
What you're doing with income-producing assets is making your money work for you, which earns you more money in the long run. This is really useful because there is only so much time you can exchange for income, especially if you have a busy schedule, to begin with.
Another handy characteristic that income-producing assets have is that you don't need to be an experienced investor to get started with them. With enough research, planning, and some money, anyone can get started at any time.
Whether you are fresh out of college or are approaching retirement, there are opportunities to start building wealth today. That is why, in this post, we bring you our list of the top 10 income-producing assets. But, before we begin…
What are income-producing assets?
An income-producing asset is an asset you buy with the expectation that it will generate income for you in the future. These assets are attractive because of their ability to generate consistent, stable income over time.
It's pretty rare to find investments that are entirely passive, though, and income-producing assets often require medium to low levels of involvement. As a result, the potential returns you'll get from the assets you buy will vary depending on the investment you choose.
It's also worth mentioning that there's risk involved with income-producing assets, so you need, so it's important to go about income-producing assets with a strategy in place. The key to seeing considerable returns and avoiding as much risk as possible when using income-producing assets is to diversify — in other words, avoiding putting all your eggs in one basket.
Diversification works because it protects your income. If one investment fails, a few others may perform well — and considering economies can be unpredictable, it's even more important to have multiple income streams.
Top 10 income-producing assets
There are several types of income-generating assets — each of these will have its own pros and cons, which are important to keep in mind as you consider which will be the best for you. As you review this income-producing assets list, try and consider the cost of entry, potential returns, level of involvement, and feasibility of each investment opportunity.
Finding the right combination of assets to achieve your financial goals will be up to you, but by doing your research you can help ensure you are prepared to make smart investment decisions. Here are some of the most common income-producing assets to be aware of:
#1 Certificates of deposits (CDs)
Certificates of Deposits (CDs) are considered time deposits — you can think of them as savings accounts, but they do have noticeable differences.
Basically, you invest a set amount of money and earn income through interest given over time. The main difference between CDs and savings accounts is that CDs will require set amounts of time before investors can access the funds without penalty.
Due to the required time frame, CDs will often have higher interest rates when compared to savings accounts (For example, you may be able to find a five to seven-year CD with interest rates up to 2.5%).
While the timeframe may be longer than expected, one of the great things about investing in CDs is that there aren't income minimums to invest. This makes CDS one of the more accessible types of assets to invest in.
#2 Private equity investing
Private equity investing consists of investing in private companies, many of which are in the early stages of development.
While private equity investing can offer amazing profits, there are also quite a few things you need to consider — the most obvious being that it will take research on your part to identify the right companies to invest in. It's not uncommon for private companies to fail in their first few years, so you'll need to consider that as you look for businesses to invest in.
Like certificates of deposits, there's also a lockup period for private equity investing. Lockup periods can range anywhere from six months to 10 years, depending on the company at hand — as you look into private equity investing, you should also make sure you consider how a lockup period could potentially impact your finances.
#3 Savings accounts
Savings accounts are one of the most straightforward assets that generate passive income — opening a savings account at your local bank will allow you to earn revenue from the interest your own money accrues over time.
Depending on the type of account and interest rate, the potential income will vary. Typically, you can expect between 0.01% to 0.30% back on any amount you put into a savings account.
While low-interest rates may result in lower returns (compared to other income-generating assets), savings accounts do offer the benefit of liquidity: you'll often be able to access these funds on short notice.
There are also high-yield savings accounts, which differ slightly from traditional savings accounts because of their high-interest rates. However, they are often only found at online banks, which leads to some downsides —you may only be able to add money to the account through online transfers, and any support issues will often have to be dealt with online or over the phone rather than in person.
Stocks refer to investments in business equity — they allow you to generate income through several means, most of which are dividends. More importantly, dividends are rewarded over time and don't require a significant amount of capital to benefit from.
It's important to know the difference between investing in individual stocks and investing in mutual funds, though.
Individual stocks represent the opportunity to buy single shares in a company to test out the industry. On the other hand, investing in mutual funds involves investing in different stocks across several companies.
Because mutual funds are more diverse than individual stocks, they provide less risk — however, individual stocks can potentially yield more income. If you're interested in investing in stocks, be sure to familiarize yourself with the stock market and get a better idea of the types of companies you may want to invest in.
#5 Real estate assets
Several real estate investing strategies can generate consistent revenue; however, one of the most common is investing in rental properties.
This consists of purchasing a home or multi-unit property and marketing it to tenants to earn rental income over time.
Rental properties offer the opportunity to generate steady rental income over long periods of time. By hiring the right property manager, you can ensure your rental property runs smoothly without a high level of involvement on your behalf.
Additionally, real estate investing can provide the opportunity to expand your portfolio more rapidly when compared to other investment opportunities — for example, you could purchase a single-family home to begin renting out, and then you could use the income generated from this property to purchase another rental property, thus adding another income-generating asset and expanding your investment portfolio.
There are a few different types of real estate to consider, ranging from a single-family home to an apartment complex. The property type is based on the number of units available, and depending on your investing goals, some may seem better than others (for example, it is common for first-time investors to opt for duplexes, triplexes, or quads and live in a unit while renting the others).
However, larger properties (those with more units) typically mean two things: larger amounts of capital required to get started and increased levels of involvement.
#6 Peer-to-peer lending
Peer-to-peer lending replaces the role of banks and helps denied borrowers receive a loan at lower rates than large-scale financial institutions.
Peer-to-peer lending has now become both a multi-million dollar business and a viable income-generating asset. According to leading peer-to-peer lenders, investors have the opportunity to make five to seven percent in annual returns.
However, as with most income-generating assets, peer-to-peer lending has moderate risk as some borrowers are known to break their contract obligations.
#7 Real estate investment trusts (REITs)
Real estate investment trusts are companies that invest in a portfolio of properties.
They are known for generating long-term, consistent revenue — some of the largest real estate companies in the world are REITs. They often own tens of millions of rentable square feet.
REITs concentrate on rental real estate, similar to what we discussed above. They focus on properties that generate income because tax laws encourage them to distribute most of their net earnings to their investors. As such, REITs will usually stay away from raw land or long-term development projects. In most cases, they seek to buy real estate that either currently has, or will soon have, tenants.
Farmland is among the best income-generating assets for several reasons — for one, farmland does not experience the same level of volatility, unlike many investment types.
Farmland also has a low correlation with the stock market because it provides a necessary resource: food. For this reason, the demand for farmland has been relatively consistent throughout history.
Investors interested in benefiting from this asset can take one of two approaches: they can either buy land directly and lease it to a farming company (which will require research to ensure the land is in the right place and that it has a consistent renter) or they can invest in a REIT (or crowdsourcing platform) that focuses on farming and farmland.
Keep in mind that you'll want to research these companies before you invest in them, as there may be fees associated that could undermine your income potential.
#9 Syndicated mortgages
A syndicated mortgage is a real estate-secured loan that is owned by multiple parties.
For example, a group of 10 people might pool $50,000 each and create a $500,000 loan. As with other mortgage loans, the lender(s) profit through fees and interest payments.
Mortgage syndicates are often managed by an administrator, who makes decisions on behalf of the group. Investors’ voting powers are generally based on how much capital they contributed to the deal.
Though syndicated mortgages have grown in popularity as investors seek property-backed income-producing assets, there is some controversy about them — retail buyers are often led to believe that they’re low-risk deals, but depending on the opportunity, syndicated mortgages might be in second or third position, thus reducing security. The risk profile of a syndicated mortgage should be assessed on a case-by-case basis.
#10 Dividend stocks
Dividend stocks are publicly-traded companies that regularly distribute their profits and earnings to investors.
Most dividend stocks pay quarterly. However, there are also hundreds of publicly traded companies that do so on a monthly basis.
Dividend-oriented buyers often use a strategy known as “dividend growth investing” — this concept involves acquiring stocks that not only pay dividends but that have a long history of raising their payments.
The ability to regularly raise dividend payments can be indicative of financial health. It’s also a way to increase your passive income without having to invest more.
Dividends are not a guaranteed success, though — it's possible for a company to reduce or even cease dividend payments. They can also depreciate in price, just like any stock.
Which are the best assets to invest in?
As you familiarize yourself with the various income-generating assets on the market, you may be questioning which options are actually the best assets to invest in.
The answer will depend on several factors, including initial capital, timeframe, preferred level of involvement, and risk tolerance.
There will often be tradeoffs when selecting an income-generating asset to invest in — for example, while higher interest rates represent the opportunity to grow your money through a CD, there may be a period of time where you cannot access those funds.
On the other hand, individual stocks can yield great results when managed correctly, but they involve more risk. Therefore, with any investment decision, it is important to weigh the pros and cons of each opportunity to ensure you get the results you are looking for.
Among the top income-generating assets, you may notice a trend: many opportunities will depend on the regulation of interest rates or your ability to predict stocks and business performance.
No matter where you are in life, you can start building wealth by investing in income-producing assets.
There are numerous examples of income-generating assets that investors can choose from to yield profitable returns — with enough dedication and by choosing the right income-producing assets, anyone can get closer to their goal of financial freedom.