First thing first, there is no such thing as a free lunch. If anyone tells you that you can make a fortune from a few hundred or even a few thousand pounds with little time or effort involved, it’s a scam. There is a reason why few people earn big money and consider themselves to be ‘wealthy’. Making money is not easy, and almost always involves considerable time, effort, talent, ingenuity and dogged persistence. However, in saying that, there are plenty of ways that you can invest any capital you do have and stand a good chance of earning attractive passive returns. We are not talking about fortunes here, but risk-weighted returns potentially far more attractive than the income you can earn by keeping your money in a savings account.
So let’s take a look at some passive income ideas that can realistically be achieved. First off, let’s define what passive income really is. Passive income is income received on a regular basis with little effort required to maintain it.
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Build a Business to Maturity
There is no business that will provide you with passive income in the short term. Once you’ve put in the blood, sweat and tears to build a business to the point of maturity, you might be able to hand the reigns of day-to-day management over and receive a passive income from it. But to get to that position requires a great deal of hard work. And it also involves a significant degree of risk to start and build a business to that point. Nonetheless, it is certainly possible. One description of entrepreneurs is that they are people who are willing to do today what others are not in order to be able to live tomorrow in a way that others aren’t able to. By putting in the effort to create a successful business, you can achieve a passive income either from the business itself in the future, through its eventual sale or by investing it in some of the following ideas.
Income Producing Investments
It is of course important to bear in mind that inevitably the more attractive the returns on a passive investment, the higher the level of risk that you may lose all or some of your principal capital. It is also important to understand that you need a significant chunk of principal capital to invest before you will be able to live off of its returns, as well as absorb occasional losses. Even if you make stellar returns, if they are based on principal capital of several thousand pounds, or even a few hundred thousand pounds, while they will provide you with welcome passive income, they most likely won’t be enough to comfortably retire on.
So, in order to make real passive income from investments you can live off, you will need to start with a significant chunk of change. How much that is depends on what you consider enough to live from and how much risk you are ready to take. A good rule of thumb is that the lower the risk level the lower the returns. We’ll look at a few options here with a gradually increasing level or risk to return levels.
If you invest in financial markets via equities and funds, a relatively low risk portfolio would be expected to provide an average of 5% a year in return on investment (ROI). This will fluctuate depending on the general health of financial markets and you won’t be able to rely on a steady 5% ROI year in and year out, though over a 10-20-year period you could expect it to even out around that level.
Peer-to-peer lending has grown in popularity in recent years and can provide realistic returns of 7% to 10% per annum. There are now a number of well-established platforms to choose from and using more than one offsets the risk of the platform itself running into problems. Peer-to-peer lending is an alternative to bank loans and the risk is that the individuals or business you provide a loan to could default. However, you do not, or would be best advised not to, provide the whole loan, simply a small part along with other investors. The contribution to a single loan can be as little as £20 or £50. So a £50,000 investment can be spread between a thousand or more loans, mitigating the risk of a certain percentage of those turning bad. There is a risk involved but by spreading your investment capital between multiple loans and P2P lending platforms this can be reduced to an acceptable level compared to the potential returns.
The only real difference between crowdfunding and angel investing is the size of the investment made. An angel investor would typically be expected to invest at least a few thousand pounds in a business, as well as often, though not necessarily, acting as an advisor to the business. Because the investment is usually bigger for an angel investor, their exposure to the success of the business will generally be higher. On the upside, an angel investor will generally have more influence in terms of how the business is run, as a significant shareholder.
Crowdfunding tends to group large numbers of investors to raise the capital a business is seeking, usually via online platforms. Again, an investor can split relatively small amounts of capital between multiple businesses to alleviate risk levels. Crowdfunding or angel investing can be considered high risk as many new businesses don’t succeed, going out of business within months or a few years. Fewer still grow into business of scale. However, one investment in a company that does make it big could easily outweigh losses from investments in subsequently unsuccessful or very mildly successful businesses.
The trick to angel or crowdfunding investment is having the skill to spot the businesses with real potential. Even the private equity funds get plenty of investment decisions wrong, but their model is based on getting a few right that make them a lot of money. This is certainly a high risk to potentially high reward strategy for investing for a passive income.