One of the best ways to build wealth over the long term is by investing in income-generating assets. Many investors can create multiple streams of income from a variety of diversified investments instead of relying on single income sources.
With enough time and effort, it may be possible to earn enough money from income-generating assets to begin working part time, or even take an early retirement.
Key takeaways
- Income-generating assets can offer reliable, recurring cash flow without an investor having to be actively involved in managing the asset.
- Common income-generating assets include rental real estate, dividend-paying stocks, and private lending.
- By reinvesting money earned from income-producing assets, an investor may eventually be able to stop working full time.
What is an income-generating asset?
Income-generating assets, also known as income-producing assets, generate consistent cash flow and return on investment over time.
Some assets that generate income may require significant time to manage, such as fixing and flipping homes. Other income-generating assets can almost run on autopilot, including dividends from stocks and bonds and net income from a rental property managed by a property manager.
16 assets that generate income
There are a variety of assets with the potential to generate steady, recurring income. In this list, we’ll begin with some of the most popular, then explore lesser-known income-generating assets:
1. Rental real estate
Over 72% of single-unit rental properties are owned by individuals, according to Pew Research, making rental real estate a popular option for income-generating assets. Investors who buy and hold rental property have the opportunity to profit from recurring rental income, along with potential gains from appreciation when the property is sold or refinanced.
2. Dividend-paying stocks
Dividend Aristocrats are companies in the S&P 500 that have a history of consistently paying dividends to shareholders and annually increasing the amount of dividends paid out. Some companies that have a multiyear history of increasing dividend payouts to shareholders include 3M, health-care company AbbVie Inc., Caterpillar Inc., The Coca-Cola Company, PepsiCo Inc., and Realty Income Corp.
3. Real estate investment trusts
Real estate investment trusts (REITs) are companies that invest in a wide variety of real estate assets. Shares of publicly traded REITs, such as Prologis and Equity Residential, can be bought and sold using online stock trading platforms. Accredited investors also have opportunities to invest in private REIT offerings, such as Roofstock One. By law, REITs are required to distribute the majority of their net income to shareholders, making them a good option for investors looking for income-generating assets to consider.
4. Bonds
Bonds and bond index funds are examples of income-generating assets that can be bought and sold online. Bonds like Treasury bills don’t pay a high interest rate, but there is virtually no risk of losing capital invested because Treasury bills are backed by the U.S. government. Investors willing to accept more risk in exchange for a slightly higher yield may wish to consider bond index funds that own investment-grade corporate bonds or high-yield bond funds.
5. Short-term vacation rentals
Rather than renting a home to a tenant in the long term, some investors prefer to own short-term rentals (STRs). STRs can generate a higher level of gross rental income, but operating expenses are larger, as well. According to the STR data analytics company AirDNA, the average revenue earned per night jumped 30% year over year (as of January 2022).
6. Real estate crowdfunding
Real estate crowdfunding companies are places where investors can pool their money to purchase shares of large residential and commercial projects, such as built-to-rent (BTR) new home developments, shopping centers, and apartment buildings. Investors receive regular distributions of any net income and a percentage of the gain when the property is eventually sold.
7. Farmland
Investors looking for real estate that generates a bond-like return may wish to give agricultural and farmland a closer look. Land for raising crops or livestock is purchased by groups of investors, then leased out in the long term. Farmland is typically less volatile and has a lower correlation to the stock market (similar to single-family rentals) and may generate consistent investment returns.
8. Private equity investing
The Blackstone Group is the largest private equity firm in the world, but investors don’t need to be billionaires or have a family office to invest capital in private equity. One way to invest private money in real estate to generate recurring income is by forming a limited liability company (LLC). Members of an LLC may pool money together to purchase a rental property and share any profits or provide a loan to the LLC to purchase property and receive a monthly principal and interest payment.
9. Peer-to-peer lending
Peer-to-peer (P2P) lending, sometimes known as private lending or private money lending, is an option for investors willing to accept more risk to generate income. With P2P lending, investors lend money to borrowers who have been turned down by banks or need short-term loans fast. Private loans are normally backed by real property and other assets of the borrower, and terms and conditions of the loan may be negotiated to meet the needs of both the borrower and the lender.
10. Savings accounts
Savings accounts are options for risk-averse investors. While interest rates are currently low, funds invested in a savings account are very liquid because they can be withdrawn at any time. The risk of losing capital is minimal as well, because deposits made in an financial institution insured by the Federal Deposit Insurance Corporation (FDIC) are insured for up to $250,000.
11. Certificates of Deposit
Certificates of deposit (CDs) are additional low-risk options insured by the government to generate income. Interest rates on CDs are slightly higher than savings accounts, but money deposited in a CD is also less liquid. Deposit commitments for CDs typically range from 3 months to 5 years, and investors who take out money before the end of the term will be charged an early withdrawal penalty.
12. Money market accounts
Money market accounts are also FDIC-insured and pay slightly higher interest rates than savings accounts, similar to CDs. However, unlike CDs, money market accounts can be closed at any time without incurring a penalty, making funds extremely liquid. Funds held in a money market can usually be withdrawn with a check or debit card, although there may be a limit to the number of withdrawals within a specified time period.
13. Annuities
Annuities are popular options for investors nearing retirement age. A lump sum investment, or a series of payments over time, are made to an insurance company. In exchange, the insurance company makes regular income payments at a guaranteed interest rate to the investor immediately or at an agreed-upon future point in time.
14. Royalties
Buying royalties to earn income from music and book sales, images and artwork, or patents and copyrights are another way to generate recurring income. Each time a product is used, an investor receives a percentage of the customer payment. Other examples of royalties include oil and natural gas trusts and the purchasing and re-leasing of mineral rights to tracts of land.
15. Buying or building a business
Some investors start bricks-and-mortar or online businesses or purchase existing businesses with the hope of generating income. Some of the ways to invest in a business include purchasing a franchise, contributing capital to an existing business as a silent partner, or building an online business to earn money by selling e-books, education and training services, or affiliate marketing.
16. Cryptocurrency DeFi
Decentralized finance (DeFi) is a relatively new way to generate income from cryptocurrency. Instead of depositing cash with a bank or engaging in P2P lending, investors use crypto, such as Bitcoin, Ethereum, or stablecoins, whose values track the U.S. dollar to generate yield and “rewards” via a decentralized exchange. However, it’s possible for a DeFi exchange to be hacked or simply disappear, and the returns from DeFi investments are often paid in other cryptocurrencies, which may be subject to dramatic fluctuations in value.
How to get started with income-producing assets
Capital to invest in income-producing assets can come from money saved by working a full-time day job, funds set aside in a retirement account, or cash raised from business partners. By reinvesting money received from income-producing assets in additional income-producing assets, investors can gradually build a diverse investment portfolio that generates regular recurring income to move one step closer to financial freedom and early retirement.
