Free Lunch Investing #6: Simple investing strategies to start generating passive income
The cost of living is increasing massively but our salaries stay the same: that's why so many people want to increase their total income. Discover these simple investing strategies for passive income.
Howdy financial wizards! This month, were going to discover more about real estate investment trusts (REITs) and how different investing strategies can yield passive income. If you have any suggestions of topics you would like me to tackle, let me know!
Real estate investment trusts (REITs)
Real estate investment trusts (or REITs) is an investing term you might have heard before, but it’s not as popular like stocks or bonds. However, it can be a versatile asset to have in your portfolio based on your investment strategy.
Investing in real estate is a popular idea, but actually buying apartment complex is a tedious process. There’s ways to benefit from real estate without launching a real estate company: you can invest in companies doing that and still earn rental income.
You can choose on specific sectors of properties like shopping centers, hospitals and even hotels and resorts. However, the grass isn’t always greener on the other side. Let’s see the pros and cons of REITs.
Pros
The high yield dividends of REITs is the biggest advantage. The real estate investment trusts are required to pay out 90% of taxable income to shareholders, which are often much higher than average stocks.
It’s also a great way to diversified your portfolio. Not everyone can start buying pieces of commercial real estate and start generating passive income, until you start buying REITs.
And because of its liquidity, it’s also way quicker than traditional real estate investment because you just have to click a button to buy or sell, compared to long and dull transaction processes.
Cons
Because they are not considered qualified dividends by the IRS, you’re taxed at a higher rate than most dividends. This is something to take into account, especially if you don’t have a tax-efficient investment strategy (stay tune for this in future editions of Free Lunch Investing!).
These trusts are greatly influenced by raising interest rates, which can lower their prices. On top of that, specific type of REITs such as hotels are performing badly in economic downfall such as recessions.
3 investing strategies to generate passive income
Ahhh passive income. Generating money when you’re sleeping is the entrepreneur ultimate dream, am I right?
Over the last 5 years, searches related to passive income grew by 120%. With inflation, we’re trying to find new ways of increasing our income, whether as a side-hustle, starting your own business, and even investing.
However, working intensely on projects is more considered active income because you have to put the energy to get the money. That’s why investing is considered a great opportunity to generate passive income, because once your holdings are bought, they generate money on a regular basis. You make money when you sleep, and you don’t need spend time to increase the money made.
I’m going to show you three ways of generating passive income with investing. You will understand what is it, the pros and cons, and how to get started.
Dividend investing
Dividend investing is probably the most known method used to generate passive income. It’s also quite easy to understand.
Some companies on the stock market start generating profits, and they take a portion of these profits to distribute to investors under the form of monthly but mostly quarterly dividends.
The dividend yield will differ from companies to companies and fluctuate from year to year.
Pros & Cons
A big pro of dividend investing is that it can be part of your whole investing strategy seamlessly. On my end, I have a few blue chips stock and one of them (ATD | Alimentation Couche-Tard) is giving me a pretty interesting yield.
Another perk is that you can reinvested these dividends back into the company, which is part of a DRIP (dividend reinvesting plan). This is a great way to leverage compound interest and retire earlier.
However, we have a similar issue than REITs with withdrawals of these gains highly taxed with 15%.
How to get started
To get started, you can focus on a dividend ETF, or research individual companies with interesting dividend yields. However, you need to understand that a high yield doesn’t mean that it’s a better choice: a higher yield might be less sustainable for the company in the long run to be regular with their dividends, especially based on the market cap of the company.
Peer-to-peer (P2P) lending
Peer-to-peer (P2P) lending is a lowkey way to generate passive income. Basically, you’re lending (or borrowing money) to another investor, without having to go through a financial institution.
P2P websites exist to connect borrowers to investors but the process is automatic and handled by the websites. By handling the loan, it’s possible for investors to earn monthly fixed payments.
Pros & Cons
P2P Lending is easy to get started and doesn’t require much. That’s why it’s often see as a low hanging fruit of passive income. It’s a big market of 83 Billions and growing.
However, it’s definitely riskier than a saving account because borrowers can default on their loans. Defaults on P2P loans are much more common than banks, with some in excess of 10%. It’s also crucial to choose the right P2P lending website, with some high fees on transactions.
It also requires capital upfront, so it’s not a viable option for all investors.
How to get started
To get started, all you need is to open an account on a P2P lending website. Then, you’ll review loan options and understand loan risks. After picking a loan you would like to fund and transfer funds from your bank.
I recommend goPeer based on reviews on the web and currently leader on P2P lending platform for Canadians. You can check your earning directly on the platform.
You can lend money from $1,000 to $25,000, there’s a starting fee but afterward, you can start making monthly passive income.
REITs (Real estate trust funds)
Well, you already know about that one since you read the first part of this newsletter but let’s rewind a little bit.
Pros & Cons
Similar to dividend investing, REITs gives away high-yield dividends and are fairly accessible compared to traditional real estate investing.
However, there’s taxes issues and these funds are vastly influenced by interest rates.
How to get started
You can start with investing in REITs on your friendly neighborhood brokerage platform. It might be a good idea to invest in a REITs ETF to stay diversified or simply select a specific ticker than you researched prior to buying.
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Financial software of the month:
I decided the remove the section of financial software of the month. I prefer to suggest software I really believe in instead of always trying to one to fill the gap every month.
If you have any software you would like me to try and give my honest review, please let me know.
That’s all for this month folks! If you learned something, please share with your friends that are interested in investing and personal finances.
Note that I am not an investment professional, and this is not investment advice.