For most people, passive income sources can help cushion their budget and provide security if they lose their job, but the wealthy tend to diversify their money in more areas, with money coming in through multiple active channels that require less manual maintenance.
“Diversifying investments across asset classes such as stocks, bonds, real estate and companies is a common way for wealthy individuals to earn passive income,” says Michael Callahan of the Callahan Law Firm in Houston. “This allows them to benefit from multiple passive income sources and reduces the risks associated with relying on a single passive income source.”
So where do the wealthy find these multifaceted fountains of gold? How do they establish them, and how do they maintain them? When it comes to making money, the alternative to labor is capital, and the easiest way to build a big fortune is to start small.
That means the rich have the cash to purchase passive income streams that will ultimately make them even wealthier, and here are the six most common ways they do it.
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Invest in real estate and outsource management
While the lives of small landlords are by no means passive, the wealthy have no control over the real estate investments that propelled many of them into the upper class.
Wealthy people invest in real estate but don't manage it. They invest in real estate and then hire a property management company to manage every aspect of the business. If they decide to put their property on a short-term rental platform, they hire a management company to run it.
“Buying rental properties, luxury apartments, and commercial real estate allows affluent individuals to earn steady rental income while also benefiting from rising property values over time,” says Erika Kullberg, attorney, personal finance expert, and founder of Erika.com.
There are other options, but you have to pay to play them.
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Enjoy the best of both worlds through real estate syndication
According to Brian Davis, a real estate investor and founder of SparkRental, the wealthy have the means to join real estate syndicates, which primarily deal with commercial real estate. Real estate syndications are truly a passive income stream that earns you money in two ways, but they typically require a minimum participation fee of $50,000, making them out of reach for most people.
“The syndicator finds a property that adds value, purchases it, renovates it, increases the rent and valuation, and then refinances the property to get the investor's capital back,” Davis says. “But the passive investor keeps ownership of the property and continues to reap cash flows again as the property value continues to rise.”
For the wealthy, real estate is another option for earning passive income.
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Parking space rental
“If you live near a downtown area, you can rent out your driveway to workers who don't want to look for space,” says Scott Lieberman, founder of Touchdown Money. “Of course, to do this, you need to have a home in a high-traffic area and have the space available.”
There are many ways the ultra-wealthy can make passive income from real estate, and this is one of them. Parking lots require very little maintenance, so listing one can be an easy way to make money.
Invest in dividend stocks
Dividend-paying stocks allow investors to earn income from their shares without having to sell them. “By owning shares in established companies that distribute a portion of their profits to shareholders, investors can receive regular dividends without having to actively manage their investment,” Callahan said.
Unlike real estate syndications, anyone can buy dividend stocks, but only the wealthy have enough discretionary cash to turn that income stream into a river.
“They buy stocks in companies with a proven track record of paying regular dividends,” Kullberg points out. “This strategy allows them to receive quarterly dividends from the companies whose stock they own.”
What are the stocks that the wealthy are paying attention to?
“High dividend yield stocks, blue chip stocks and Dividend Aristocrats (companies that have increased their dividends for more than 25 consecutive years) are popular investments for dividend income. Not only do they provide a steady income, but investors can also realize capital gains if these stocks appreciate in value,” Kullberg said.
For example, if a stock trading at $200 per share pays a 3% yield quarterly, a $20,000 investment will only earn you $600 in dividend income per year. But if you can add some zeros and increase your investment to $2 million, you'll earn $60,000 in passive dividend income per year.
They own and invest in businesses
Like landlords, small business owners often make a living by trying to make money, but similarly, those with deep pockets can enjoy the profits the business generates while outsourcing the administrative tasks to a business owner, or simply invest as an anonymous partner.
“Successful entrepreneurs and wealthy individuals often generate passive income through owning or investing in businesses,” Callahan says. “They own shares in private companies or invest in startups, allowing them to earn profits or dividends without being involved in the day-to-day operations.”
Try this: 10 Value Stocks That Could Be the Next Apple or Amazon
Venture Capital and Private Equity Investments
“Wealthy individuals can earn passive income by investing in private equity and venture capital,” Kullberg said. “Through this structure, investors may be able to contribute (or support) emerging companies.”
When an entrepreneur has an innovative idea but is having trouble raising capital, an investor provides the capital needed to get the business off the ground, and in return, the investor will likely receive a large stake in the company.
“As the venture grows, investors may ultimately recoup many times their initial investment,” Kullberg explained.
Owns but does not operate franchised stores
It's entirely possible to make millions working as a franchisee owning locations for an established chain, but it requires long hours and hard work unless you can afford to hire someone to oversee the day-to-day operations.
“Many of my clients have chosen to invest in gas station franchises,” says Raymond Quisumbing, MBA, a registered financial planner. “From a single franchise to multiple branches, having an established system and delegating work to competent managers makes this business an almost passive investment.”
Revenue from intellectual property rights
We've all heard the stories of actors receiving royalty checks for years, even decades, after starring in a show, but the wealthy don't need to go to drama school to buy that kind of income stream. Investing in intellectual property can help.
“Intellectual property such as patents, copyrights and trademarks can potentially generate passive income for the wealthy,” Callahan said. “Licensing agreements and royalties from books, music and movies can also generate passive income.”
This can also be extended to platforms like Amazon, allowing you to invest in the launch of a self-published book that will allow you to collect royalties for years to come.
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Bond Ladder
The average person may not have the cash to start a passive income stream through bond laddering. “By investing in multiple bonds with different maturity dates, you can choose to either buy a new bond with the same maturity date or buy a longer-term bond when it matures,” Lieberman said.
Ordinary people cannot keep their funds tied up for long periods of time and therefore cannot benefit from such passive income sources.
High Yield CDs
“While high-yield savings accounts are available to anyone, high-yield CDs are only available to people who can get by without a lot of money,” Lieberman said. “If you can invest a few thousand dollars at once, you can get a substantial amount back when the CD matures.”
The ultra-wealthy have the capital necessary to earn large returns on their initial investments and can also earn passive income through secure income streams.
Martin Dasko contributed to this article.
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This article originally appeared on GOBankingRates.com: 6 Ways the Wealthy Earn Passive Income
