Passive income: It’s the best income

Passive income

Passive Income is the best income

Why is passive income the best income? Well first let’s break down what passive income is.  Passive income is earnings derived from equity investments such as rental properties, dividends, enterprises, or limited partnerships that you are not directly involved with.

Basically you give someone money and they give you a small amount of money back for an indefinite amount of time. The time could be forever provided the equity in your investment doesn’t go to $0. Passive income can be derived from numerous sources, the majority of which are available to everyone with minimal efforts.

What are some common sources of passive income?

Passive income can come in many varieties. I’ll touch on a few of the most common ones (in my opinion).

  1. Guaranteed investment Certificates – GICs! You’ve seen the acronym at every bank you’ve visited and maybe didn’t look too much into them. They’re probably the safest form of passive income. Being the safest they also come with the least amount of return.  Most banks have GICs that range from 1-2% depending on the period you’re required to invest your money for.  GICs essentially are a slightly better savings account with a downside; you can’t easily access your money and if you take it out early you’re penalized.

GICs are readily available through all banks and most if not all brokerages. Your return is guaranteed and so is your equity. After a period of time you’ll be able to move that equity to another investment.

  1. Bonds – Bonds are similar to loans in the sense that when you purchase a bond, your money is given to an institution (known as the bond issuer, this would be a government or a corporation) and they will hold on to that money for a set period (referred to as the term). Over the term the issuer will pay the owner of the bond (that’s you!) an agreed upon interest rate.  Then over a set period of time the term expires or “matures” (unlike me) the issuer will pay the owner face value for the bond, essentially returning your original investment.Bonds, like GICs, are available at probably every financial institution you can find. Bonds unlike GICs are not guaranteed, otherwise they’d probably be called GICs. They do usually have a slightly better return, but not much because they’re usually backed by the government or a large corporation that probably has strong financials. They can however lose money if the issuer defaults or you sell the bond back before the maturity date. In my opinion Bonds are certainly the superior passive income investment over GICs, but there’s so many better ones that are just as common. Like this next one
  2. Dividend investments – Dividend investments refers to stocks that pay dividends. The best dividend investments are with blue chip stocks. These companies usually have valuations in the billions and have been around for decades. The ones with a long history of increasing their dividend payouts are the best.  You’ll get somewhere between 3-4% in dividends to help your passive income and you’ll also get the increase in value from the stock which could be anything but typically with blue chips you’ll see a nice appreciation close to the average market.

Stocks are as readily available as any of the previous passive income investments mentioned. You can do it all online through your bank or discount brokerage. You can even do it over the phone if you’re a fossil.

  1. Real Estate – Real estate is mostly a passive investment and can become even more passive if you hire someone to manage your properties. Management will eat into your profits but also reduces your requirements to source tenants, maintain the grounds and much more. Real estate has multiple sources of passive income which make it one of the best investments in my opinion.

    Real estate is not quite as simple and readily available as the previous types of passive income but it’s not difficult to obtain. Sure it has a larger barrier of entry as it will require a much larger initial payment for the down payment but anyone who qualifies for a mortgage can get involved. If you qualify for the mortgage all you need to do is start talking to some real estate agents and crunching numbers to ensure you’re making a great purchase.  You can read about my first income property and my second one here. As always, if you have any questions on purchasing an income property you can always comment below or contact me.

So why is Passive Income the best type of income?

Passive income in my opinion is the best source of income because it continually pays you for your previous work. For everyone 25 dollars you invest in passive income investments like the previously mentioned dividend stocks you’re essentially paying yourself 1 dollar a year for infinity (assuming 4% withdrawal rates are maintainable over this time as they have been). Now there’s always a chance that the stocks will fail and you won’t be able to maintain this withdrawal rate, but that’s why you diversify your income and have multiple passive income streams to support yourself through retirement.

 

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