5 Passive Income Ideas for Investors Who Want to Build Long-Term Wealth
Passive income has become a financial buzzword in recent years and for a good reason. Building wealth through passive income streams using a self-directed individual retirement account (IRA) can provide financial security, freedom, and flexibility. Whether you are looking to grow your retirement for the future or are simply looking for an investment that isn’t as demanding and active, there are countless passive income ideas that can help you achieve your financial goals.
What is Passive Income and What it is Not?
Passive income is a form of income that does not require active participation in order to generate returns. This means that passive income can be generated from investments, rental properties, and other sources without having to actively manage them. As opposed to active earnings which usually requires an exchange of labor for money, passive income often requires no more than an initial investment or effort. Passive income is not is a way to make money fast without any effort. It still takes work, mostly on the front end, but having a passive income stream is a great way to earn extra money and protect yourself if you lose your primary source of income.
Passive investing is also a great approach for those looking to build wealth over the long term because passive investors can benefit from market growth while avoiding the costs and risks associated with trying to beat the market through active investing. Below are a few suggestions of passive investment opportunities.
Invest in a Private Fund
A private fund can be a good investment for building wealth long-term because of the many benefits it offers that can help you achieve your financial goals. Private funds are typically managed by experienced investment professionals who have a deep understanding of the market and can identify profitable investment opportunities that may not be available to individual investors.
Advantages of investing in a private fund:
- Portfolio Diversification – Private funds invest in a variety of asset classes (ex. real estate or private equity). This leads to reduced risk and increased returns over the long term.
- Long-term investment horizon – They can hold investments for several years or more. This can minimize the impact of short-term market volatility and provide consistent returns over time.
- Potential for higher returns – Private funds often have higher minimum investment requirements and may have more stringent regulations compared to traditional investment vehicles (such as mutual funds or exchange-traded funds). This can result in higher returns for investors willing to commit to the fund over the long term.
- Excellent for retirement savings – Private funds are great for those with a high-risk tolerance and are willing to commit their capital to a professional management team with a proven track record of success.
Invest in Private Lending
Private lending is the relationship between borrowers with individual lenders, cutting out the traditional banking intermediaries.
Advantages of investing in a private lending:
- Portfolio Diversification – As mentioned above, private lending can also offer variety to your investment portfolio.
- Mitigate Risk – As a self-directed IRA lender, you can position yourself in a place of safety by offering secured real estate loans.
- Accessible to anyone with a self-directed IRA– Private lending is an attractive option for individuals who may not have access to traditional investment options or who want to diversify their portfolio beyond stocks and bonds to alternative investments.
- Easy for small investors – Since the terms of the private loan are decided upon between the borrower and self-directed IRA lender, they can be done with small dollar IRAs, making it easier for individual investors to get started with a relatively lower initial investment. Small investors can often get the funds they need even if they do not qualify for a loan through a traditional lender.
Invest in Storage Space
Like many real estate investments, self-storage facilities provide a steady cash flow through rental income, with little to no barriers to entry and few recurring costs for upkeep.
Advantages of investing in storage space:
- Steady Demand – Investors can count on a steady stream of rental income, regardless of economic conditions.
- Low maintenance costs – Compared to other types of commercial properties, such as office buildings or retail spaces, storage spaces need few repairs. This is because tenants are responsible for maintaining their own storage units.
- High occupancy rates – Investors can expect a low vacancy rate and a steady stream of rental income, particularly in areas with high population density or limited space for storage.
- Hedge against inflation – Storage rental rates can be increased over time to keep up with rising costs and inflation.
- Scalability – Investors can scale their investment in self-storage facilities by purchasing multiple facilities or expanding existing facilities. This can help investors build wealth over time by increasing their cash flow and asset base.
Invest in a Real Estate Investment Trust (REIT)
REITs generate rental income from a diversified portfolio of properties, such as residential, commercial, and industrial properties, distributing a large portion of their income to shareholders in the form of dividends, which provides a steady cash flow to investors. REITs are professionally managed by experienced real estate professionals, who are responsible for acquiring, managing, and disposing of properties in the portfolio, which help provide comfort to you knowing that you are minimizing risk with a more secure investment opportunity.
As with many of the other investments mentioned in this article, REITs have the potential for capital appreciation over the long term, as the value of the properties in the portfolio increases over time.
Invest in a Carwash
Compared to many others, a carwash is a pretty unique investment that also has relatively low overhead costs. The primary expenses are the equipment, utilities, and employee salaries, which can be managed efficiently to maximize profits. For example, the carwash owner can install energy-efficient equipment to reduce utility bills or use automation to minimize the need for additional employees.
Advantages of investing in a carwash:
- Significant revenue – Add-on services such as waxing, detailing, or engine cleaning, can generate revenue and further increase profitability while reducing overhead costs.
- Steady revenue – In some areas, there may be few carwash options, providing an opportunity for investors to fill a gap in the market. This is particularly true in areas with a growing population or a high concentration of vehicles. A carwash that offers high-quality services, competitive pricing, and a convenient location can quickly gain a loyal customer base and achieve a competitive advantage over other carwash businesses in the area.
- Recession-resistant – Car owners will continue to require regular maintenance and cleaning services for their vehicles regardless of the economic conditions. In fact, during economic downturns, people may even be more inclined to keep their existing cars clean and well-maintained, rather than purchasing new ones. This means that a carwash business can provide investors with a steady stream of revenue and minimize the impact of economic fluctuations on the business.
Ready to Grow Your Retirement?
While it’s important to understand the risks and limitations of passive investing, many investors have found success and achieved their financial goals using their self-directed IRA to passively invest their retirement funds – and these are only a few examples! Using your retirement account to invest in alternative assets like real estate, private entities, and promissory notes can be a great passive income strategy and way to diversify your portfolio. To learn more about how to use a self-directed IRA to invest in one or all of these passive investments, schedule your free consultation with an IRA Specialist today.