Investing in assets is a common path to wealth. Investors can choose from various income-generating assets. While many choices create flexibility, they can also overwhelm many investors. Some investors fear picking the wrong asset and watching their portfolios drop. Other investors don’t want to miss out on tremendous opportunities. We will cover the top income-generating assets and what to consider before getting started.
What is an Income Generating Asset?
Income-generating assets pay you cash for holding onto them. Some investors buy enough of these assets, so the cash flow exceeds living expenses. Investors can use the cash flow to cover living expenses instead of selling their shares. If you don’t need the funds to cover living expenses, you can reinvest them back into the assets. Income-generating assets still benefit from appreciation. Their value can rise over time, and some assets provide higher cash payouts each year.
Some Things You Should Consider Before Choosing Assets to Invest In
An asset that works well for one investor may not be the right fit for another investor. We have highlighted some asset allocation factors to consider before you put your hard-earned dollars into income-generating assets. These considerations will help you create an investment strategy that caters to your risk tolerance.
1. Risks Involved for Each Asset
Some assets come with more risks than others. Under certain conditions, assets can significantly depreciate or stop producing cash flow. Every investor incurs risk, but you should know an investment’s weaknesses.
Interest rates are rising, and this trend affects assets differently. Higher interest rates cause real estate to depreciate. Fewer people will take out mortgages, forcing sellers to meet buyers at lower prices. Landlords can still generate cash flow from their rentals as people will need a place to live. When real estate prices increase, landlords can simultaneously raise the rent.
Risk analysis expands when we discuss specific assets instead of investment groups. For example, a multifamily property in Miami will respond differently from a single-family rental property in Nebraska. We can stretch this conversation to include stocks, bonds, crypto, and other income-generating assets. Know the risks before you jump into an investment.
2. Potential Return of the Assets
After assessing risks, investors should consider the potential rewards. Some assets provide a high-risk, high reward setup. Investors can balance these assets with conservative investments that are less likely to depreciate significantly under unfavorable circumstances. Some investments offer asymmetrical risk/return opportunities.
You may find a high-risk asset with minimal upside. It doesn’t make sense to incur a great risk for a low potential payoff. On the other hand, you may encounter an investment with minimal risk and great potential. These assets offer favorable asymmetry.
The potential return of an asset depends on how you determine fair value and future opportunities. Of course, each person will have a different assessment, leading to various opinions. Valuation ratios, revenue growth, profit margins, location, and historical data are some inputs you can use to assess fair value and future opportunities.
3. Time and Energy Commitment
Some investments are relatively passive. You buy the asset, ignore it, and see what happens. These assets continue to provide cash flow without any maintenance. Other investments require substantial time and energy. These investments can feel like full-time jobs, and you may need to hire people to oversee these assets.
Investments requiring more time and energy may not get as much demand. This reduced demand can create attractive opportunities for people with the bandwidth to manage the extra work. Buying an asset that requires time and energy will limit your ability to take on future investments. Each investor has limits and level of willingness to pursue time-consuming opportunities. Therefore you should assess if active vs. passive investing, and which one is better for you.
4. Minimum Investment Required
What does it take to start a position? Multifamily properties have expensive down payments and high mortgages. Some investors put everything they have into a single multifamily complex. This risky strategy leads to zero portfolio diversification. Buying single-family homes helps incoming real estate investors spread risk, but this portfolio requires several down payments.
Stocks and crypto are far better for beginners. You can own fractional shares and crypto, meaning you can get started in any position with as little as $1. Real estate investment trusts make properties more accessible to investors. These assets give you exposure to many properties and trade on stock exchanges. Some funds will require a $1,000 – $5,000 investment, but you can pay any amount you desire to get started with fractional holdings.
Income Generating Assets to Add to Your Portfolio
The best income-generating portfolios don’t rely on a single asset. Putting your holdings into a single investment class is risky and limits your protections. We’ll cover several investments that can provide cash flow and mitigate risk.
Stocks and Equities
The stock market provides many opportunities for higher returns, and positions are easy to enter and exit. Some day traders enter and leave the same positions within a day. While many people associate stocks and equities with long-term gains, you can generate cash flow from these assets. Dividend investing is the most popular way to generate income. Dividend stocks offer monthly or quarterly dividends. Some people reinvest the dividends, while others use these payouts to cover living expenses.
Dividend-paying companies strive to increase their dividend each year. This structure helps shareholders earn more cash flow each year than the previous year. Some companies have the flexibility to raise their dividend by more than 10% each year, helping you steadily outpace inflation.
Investors can also generate cash flow from non-dividend stocks. If you own 100 shares of a company with options, you can sell covered calls to generate additional income. Selling covered calls require more work than dividend investing and come with some risks. However, it’s a valuable investment vehicle for investors seeking extra cash.
Bonds
Bonds have a low potential payoff, but they also have a lower risk level. Government bonds are the least risky bonds. You can get higher yields with corporate bonds, which carry some risk. Review a company’s financials to determine if it can afford the bond payments. You can exit out of a bond position similar to a stock position. Investors seeking a tax shelter can consider municipal bonds. These bonds have low rates, but you won’t owe federal taxes on this income. Some municipal bonds aren’t subject to state taxes.
Certificates Of Deposit
CDs are low-risk investments that provide low returns. A certificate of deposit is a savings account deposit that you can’t touch for a set amount of time. Once this timeframe expires, you can take out your money. The bank will pay you interest as long as you do not touch the money. Banks may charge an early withdrawal fee if you take out the money early. Check the terms of a certificate of deposit before putting your money away. Only put money into a CD if you can afford to live without it for the entire term.
Cryptocurrency
Some cryptocurrencies have generated mind-boggling returns. Bitcoin reached $1 in 2011 and has soared since that milestone. The cryptocurrency touched $67,000 per coin in October 2021, representing a generational return on investment. Surprisingly, some altcoins have faired even better. Cryptocurrencies have some cash flow potential with options, proof-of-stake, dividends, and other income streams.
