The Short Answer
Successful entrepreneurs and investors often leverage cash flow generating assets to build multiple income streams and diversify their portfolios. Despite the misconception that managing such assets requires extensive expertise, strategic planning and research allow investors to benefit from them effectively. Assets that generate a solid cash flow are not only accessible but can also serve as an efficient wealth-building strategy.
10 of the most successful and common income generating assets are:
- Rental Property and Rental Income
- Real Estate Investment Trusts (REITs)
- Real Estate Debt Funds
- Dividend Paying Stocks
- Income ETFs
- High-Yield Savings Accounts
- Index Funds
- Bonds
- Real Estate Crowdfunding
- Business Ownership and Income
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List Of Assets That Generate Cash Flow
Successful entrepreneurs typically use income generating assets to curate multiple income streams and diversify their portfolio. The income generating assets below don’t require extensive experience, which means that investors who have planned and researched strategically can still benefit from these. Building wealth through assets that generate cash flow is an accessible and effective method for investors. Let’s take a look at 10 of the most useful assets that generate cash flow.
1. Rental Property and Rental Income
One of the most successful ways to generate cash flow is through rental properties that can produce a rental income. In fact, according to Pew Research, over 72% of single-unit rental properties are owned by individuals. Investors typically purchase a property that is located in a high-demand area with a favorable rental market. To be successful, rental rates on these properties need to be competitive based on the features of the property, and aligned with the market conditions. As such, it’s vital that rental property investors conduct research on comparable properties in the same area.
Rental properties need to be adequately maintained in order to appeal to tenants and retain good tenants. Investors who don’t wish to manage the property themselves can hire a property management company or individual. While this is an extra cost, it allows investors the chance to hand over the day to day operations to someone else, while they focus on other things. Rent collection platforms are another way of handling the management of a rental property, by automating rental income and ensuring that rent is collected on time.
Rental real estate forms one of the most popular income generating assets as it offers investors the opportunity to earn rental income over a long period of time, and this passive income is an ideal way to generate cash flow. Investors can budget according to the rental income they will be receiving, to pay off the cost of managing and maintaining the property, and in many cases, help with the mortgage on the property.
2. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) give people the opportunity to invest in a wide range of assets. There are both publicly traded REITs and private REITs. Shares of public traded REITs can be invested in using online stock trading platforms, whereas private REITs offer accredited investors the chance to invest using private platforms that have different offerings than public ones. Investors who don’t have extensive experience in real estate can use REITs as a way to diversify their portfolio into a variety of areas, and create a balanced portfolio.
When evaluating REITs, investors should consider factors such as property types (residential, commercial, industrial), geographical diversification, occupancy rates, and dividend yields. The laws surrounding REITs are in favor of investors, with the majority of their net income being paid out to investors. So, those who invest in REITs can reap the rewards of income producing assets that don’t require a lot of work.
REITs require very little capital to get started, with a minimum of $500-$1000 to open a brokerage account to start investing. Investors who choose to REITs as their cash flow generating asset should make sure to get to grips with the fundamentals of the real estate market, and keep tabs on the market shifts so that they can make informed investment decisions.
3. Real Estate Debts Funds
Real estate debt funds offer an investment avenue for financing real estate projects, often specializing in specific niches like residential construction loans for multifamily apartment buildings. These funds gather capital from multiple investors to provide short-term loans ranging from 90 days to 18 months, using the property itself as collateral.
For investors who are looking for an opportunity with steady returns that allows for diversification and passive investing, real estate debt funds are a good solution. New Silver’s Income Fund, for instance, provides a great opportunity for accredited investors to earn over 14% annually, with quarterly payouts.
Real estate debt funds serve as a valuable investment avenue for individuals seeking returns from real estate ventures without having to be actively involved. These funds offer a means to diversify a real estate portfolio and generate consistent income without the need for hands-on management. Investors benefit from recurring interest payments made by borrowers on their loans, ensuring a reliable source of income.
4. Dividend Paying Stocks
Dividend paying stocks are attractive to investors because they provide regular income in the form of dividend distributions. Investors can purchase shares of dividend-paying companies and become partial owners of these businesses, which means they receive a portion of the company’s profits which are distributed regularly as dividends.
Investors are attracted to this method because they can generate a passive income and this means a regular cash flow that doesn’t require too much time or energy. Companies that consistently pay dividends are typically in a strong position financially, and therefore have a higher commitment to their shareholders, which bodes well for long-term investing.
5. Income ETFs
Income ETFs (Exchange-Traded Funds) serve as valuable income producing assets for generating cash flow due to their focus on income-producing securities. Income ETFs differ from traditional ETFs in that they don’t track a specific index, but instead they are designed to be income-producing investment vehicles for investors who need a consistent stream of income in the form of dividends, interest payments, or distributions.
Income ETFs hold a diverse range of income producing assets like dividend paying stocks, bonds, REITs, and more. Investors can therefore spread their risk across various income generating assets. Investors are paid out at regular intervals, depending on the structure of the ETF. For example, ETFs providing dividend yields may pay out on a quarterly basis, while interest payments could be paid monthly.
Investors can choose an ETF that provides an income that aligns with their financial needs, whether that be monthly, quarterly or annually. Income ETFs also allow for reinvestment options which means that investors can reinvest their dividends into the fund and use it to purchase more shares. The idea behind this is to increase cash flow over the long term.
6. High-Yield Savings Accounts
A high-yield savings account offers a secure and steady stream of income, with significantly higher interest rates than a traditional savings account. High-yield savings accounts often have rates several times higher than the national average, and can therefore provide investors with great returns on their cash. One of the biggest benefits of using a high-yield savings account as an asset for cash flow, is that investors can access their funds quickly and without penalties.
High-yield savings accounts provide regular interest payments, and these are typically a reliable option as these accounts are often held with reputable financial institutions. They can also offer automatic savings, which means that investors can set up recurring transfers from their cheque account to their savings account, and maximize their cash flow over time. High-yield savings accounts are a low risk option for investors who are looking for stability and security in their cash flow asset.
7. Index Funds
One of the most famous examples of successful cash flow generation from index funds is none other than Warren Buffet. Buffet has said that investing in index funds is more affordable and simply better than investing in hedge funds, for example. Index funds are passively managed, and typically track the market, which means they can provide fairly reliable dividend payments.
The main advantages of investing in index funds to generate cash flow are that it’s easy, the fees associated with it are not high, portfolio diversification can easily be done, and the process is simple. However, it’s essential for investors to conduct thorough research and consult with financial professionals to select index funds that align with their investment objectives, risk tolerance, and cash flow requirements.
8. Bonds
Bonds function as a cash flow asset by providing investors with a way to lend money to the bond issuer, in exchange for interest payments that are regularly made, along with full repayment of the bond once it reaches maturity. For example, an investor who buys a government bond would essentially be lending the government money, in exchange they would receive interest payments at intervals along the way to the end of the bond period (maturity) where they will receive their full principal amount back.
While they are a useful cash flow asset, bonds are also used by investors to preserve their capital, which works well with low risk bonds, as the principal amount can retain its value over time, while providing interest payments regularly. Bonds can also be used to save for the future and diversify portfolios by creating a cross-correlation between income producing assets.
9. Real Estate Crowdfunding
Investing in crowdfunding projects is an easy way for investors who don’t want a hands-on experience, to gain access to fractional ownership of real estate. This means that, by investing in projects on crowdfunding platforms, investors can generate proportional rental income and potential property appreciation, without having to purchase a property, rent it out and manage it.
Real estate crowdfunding works through reliable platforms, where people submit their projects and investors pool funds to finance each project. It requires due diligence and thorough research, along with a risk assessment on each project, to determine whether the investment opportunity is worth investing in.
The minimum investment often begins with as little as a few hundred dollars. The funds are usually held in a REIT (Real Estate Investment Trust) or something similar, which acts as a holding company where the funds can accumulate. These REITs are private, not publicly traded, and they will often pay regular earnings to investors in the form of dividends. Investors can also get a lump-sum at the conclusion of the property deal or project.
10. Business Ownership & Business Income
Business ownership can be a powerful tool for generating cash flow because this channel can generate income through various methods. Direct ownership of a business provides profits from the business itself, while equity investments in publicly traded companies can also offer investors a way to earn an income from dividends. Alternatively, business owners can earn an income from the sale of business assets, or through capital appreciation over time or even royalty income from intellectual property rights.
Business owners can choose to take their income, or reinvest it into the business and create expansion opportunities, acquire new assets or invest in further research and development, which can vastly improve their cash flow in the future. Ultimately, business ownership is a versatile way that investors can generate income, with the potential to build long-term wealth.
How To Evaluate Cash Flow Generating Assets
Choosing the right income generating assets can be daunting, but there are a few considerations that will get you on track to making the right decision for your financial situation:
Potential Returns And Annual Yield
Consider the potential returns and the annual yield of the asset, which includes evaluating the asset’s historical performance and projected future returns. Compare this with other asset classes and use this to determine which aligns best with your financial needs. Pay attention to dividend yields, rental income, interest rates and profit distributions specifically, when you’re assessing the overall returns and annual yield from each asset.
Risk And Volatility
It’s important to consider your appetite for risk, and how this compares with the risk involved with each asset. Look at the impact of market fluctuations, economic shifts and credit, when determining the risk that each asset poses. Once you’ve closely explored the likelihood of any interruptions in your income or any losses that could occur, you can make a more informed decision as to the overall risk of the investment. For those who are risk averse, for example, a volatile ETF would not be a good place to invest.
Liquidity And Accessibility
Another consideration to bear in mind when choosing the right cash flow generating asset, is how liquid your investment will be and how easy it will be to access funds if you need them. In some cases there are lock-up periods, redemption restrictions, and transaction costs associated with accessing your capital early or liquidating. Make sure that the cash flow asset provides enough liquidity and accessibility to meet your cash flow needs, particularly in the event of unexpected expenses.
Diversification And Portfolio Allocation
The best way to spread risk across your portfolio is to diversify, which means investing in different asset classes, industries, and geographic regions. Learn more about how easy it is to diversify with each cash flow asset, and consider adjusting how much you are willing to invest in the asset, in relation to your investment objectives, timeline and risk tolerance.
Tax Considerations
It’s crucial to understand the tax implications associated with different cash flow assets, including income taxes, capital gains taxes, and dividend taxes. These can have a major impact on your investment, either in the short or long term, and potentially lead to receiving a lower income. Make sure to look at each cash flow asset’s associated tax deductions, credits and any exemptions that may be offered.