There are three core types of income: active income or earned income, portfolio income and passive income. Passive income is income generated from business or trade. It has been a fairly lightly used term in recent years. Usually, it has been used in defining money being earned regularly but not exclusively with little participation or less effort from the earner.
Here are three 2020 passive income ideas for you:
1. Business – Be a Silent Partner
Investing as a silent partner in a business is a source of passive income. The participation of a silent partner in the business partnership is limited to providing capital to the business. Generally, a silent partner is not involved in the daily operations of the business. The liability is typically limited to the invested value in the partnership.
For example, you do not have the full knowledge about a certain business in an industry, as a silent partner you can still invest in the business because you will only have little involvement in the business. When you invest your money to fund a business, you can earn a return on the amount of money you have invested when the business makes a profit. The return will depend on how well the business does and the agreement you have with the other partners in the business.
2. Peer to peer lending
Peer to peer (P2P) lending pools money from investors and lends them to the borrowers. The gains are based on the interest paid by the borrower. Its percentage of return depends on the P2P platform that you are using and the amount of money you have invested. The return may range from 6% to 30%. But the loan is unsecured, so there is a risk to face default.
For example, when you invest in a P2P lending platform, you have the choices to which products or loans you would like to put your money. You can diversify your portfolio by lending smaller amounts to different products or loans in order to lower the risk but this means the return will be lesser. You also have to pay attention to the amount of payment you receive.
3. Real Estate
One of the oldest forms of passive income is through rental income. Investing in rental properties is an effective way of earning passive income.
For the past decades, many renters were not given the chance of home ownership because they could not qualify for a mortgage. They could either failed to have the money for the down payment and closing costs or they lacked acceptable credit. The mortgage standard kept people in rentals. This is the situation where investors in real estate get the advantage. Tenants pay high rents for the properties and the single-family residential investors enjoy the returns.
For example, let’s say you will buy a turnkey property for $94,000. You take out a 30-bank loan for a $94,000 rental property. Suppose you put a 20% down payment which gives you equity of $18,800 and a mortgage of $75,200. Also, you have to pay for the closing costs which could be 3% of the purchase price. Since it is a turnkey property, you don’t have to pay for any remodeling expenses. So your total out-of-pocket expense will be $21,620. Let’s say the loan has a 5% interest rate, so your monthly mortgage payment will be $404. When the monthly rental income is $950 per month and your monthly expense for the property is $140.00; a year later, your total net income will be $4,884. So your cash on cash return will be 22.60%.
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