Passive income is the ultimate hands-off investment tool to save for retirement early in life.
Every investor loves passive income because passive income investments require very little work, so it’s almost like you’re retired already.
While many of us are familiar with several traditional passive income investments, many alternative investments to passive income have opened up in the past few years. In fact, by signing up for a self-directed IRA, you can invest your retirement account in many of these investments, like crypto, that traditional IRA custodians prohibit.
We’d love to discuss 15 ideas for creating passive income streams in 2022 and beyond in this article.
What Is Passive Income?
Passive income refers to income you earn without actively participating in a business or related activities. For instance, if you own and run a business, you likely play a role in daily operations and actively earn an income. If however, you invested in a business but have no operational role, any income earned becomes passive.
With that said, not all passive income investments are truly passive. For example, many investments like real estate and venture capital require extensive upfront research and even some ongoing management.
Passive income is similar to a compound interest account, except that passive income can be generated from multiple sources of revenue outside of interest.
However, these instruments often make up secondary income streams and require very little work relative to a primary occupation unless investing is your primary occupation.
If you’re looking for a way to round out your portfolio while taking advantage of the flexibility offered by an SDIRA, here are 15 ideas for passive income worth considering.
1. Rental Properties
Rental properties are the most straightforward passive income investment because they offer investors a fixed monthly income generated from rents. Further, real estate is a great way to build dividends on your investment through built-up equity, and there are several ways to invest with very little money down.
SDIRAs can be used to invest in real estate, and the income generated could go straight into your retirement account. However, even with an SDIRA, all real estate purchases need to be strictly for investment, not occupational purposes.
The great thing about rental property investing is that the money earned from one property can be used to buy another property and eventually grow your retirement account significantly over time.
2. Crypto Staking
Not to be confused with crypto mining, crypto staking is a way to validate crypto transactions on blockchain networks. Participants typically use their own coins to validate transactions and prevent fraud. Users engaged in crypto staking receive a “reward” for their participation, adding more coins to their account.
Generally, investors who want to utilize crypto staking must establish an LLC and transfer their IRA funds to an account held by the LLC. Then, a crypto account is opened by the LLC, allowing the owner to fund their crypto wallet and participate in the coin validation process.
With that said, crypto staking is a new and exciting way to earn money on your existing crypto investments, similar to a savings account or dividend investment.
3. Dividend Stocks
Dividend stocks are stocks that pay out dividends to stakeholders regularly. Depending on the issuing company, these payments are based on a company’s revenue and may be paid annually, bi-annually, or quarterly.
It’s important to note that not all dividends are considered passive income. Instead, dividends are considered passive SDIRA income if they are “qualified.” A dividend must be issued by an American company or an eligible foreign company to be qualified. The IRS also sets ownership requirements that indicate how long you must own the stock before it becomes qualified.
Dividends earned can then be used to purchase additional stock or to invest in SDIRA opportunities.
4. P2P Lending
Peer-to-peer (P2P) lending is an alternative financing option that allows individuals to lend money directly to others looking for a loan. P2P loans often offer flexible terms, fewer fees, and less stringent qualifications for borrowers. As a result, P2P loans can offer big returns that can be used to bolster retirement funds. Returns can also be reinvested to issue larger loans.
5. LLC Investments
If you want to maintain checkbook control of your SDIRA or take advantage of many of the passive income opportunities on this page, you’ll need to establish an LLC. But you can also use your SDIRA to invest in LLCs. To earn passive income through an LLC, you must invest in but not actively play a role in the organization. As such, LLC investments can give you the opportunity to back a new or existing company that you think will grow.
6. Venture Capital
Like LLCs, Venture Capital funds allow SDIRA holders to invest in a growing business. For example, when you invest in a venture capital (VC) fund, your money is pooled together with other investors to back a new or startup business. In exchange, you get a stake in the organization.
Peter Thiel famously used money from his Roth IRA to invest in a startup and shield all of his massive stock gains from taxes. Investing in high-growth startups with venture capital can help you avoid self-directed IRA withdrawal rules for taxes.
7. Natural Energy
Oil and gas are popular alternative investment opportunities for SDIRA holders looking to diversify their portfolios. SDIRA funds can be used in several ways, including investments in mineral rights, land exploration, and gas refineries or drilling companies. SDIRA funds can also be used to invest in alternative energy sources, such as solar, wind, and geothermal energy to earn passive income on growth in these industries using the same mechanisms above.
8. Equipment Financing
As the name suggests, equipment financing is an agreement between an SDIRA owner and a business owner who needs to finance an equipment purchase. If you choose this form of passive income, you use SDIRA funds to buy the equipment, and the business owner repays your loan based on the lending agreement. As part of the agreement, you can determine the loan terms, including interest payments and the repayment period. Once repaid, the funds and any interest earned will return to your SDIRA account.
Exchange-traded funds are a collection of different investment vehicles, like stocks, bonds, and commodities, generally within a single sector or region. They are typically considered cost-effective and offer an easy way for quick diversification. Some top-performing EFTs include the SPDR S&P 500 ETF Trust, the Vanguard Russell 2000 ETF (VTWO), and Invesco QQQ.
10. Factoring Investments
Factoring refers to an arrangement by which a business sells its accounts receivable to an investor. In doing so, business owners gain quick access to cash that would otherwise be unavailable until their customers pay in full. For example, if you choose to invest in factoring, you’ll purchase a company’s invoices at a discounted rate and then collect payment from customers. The difference between the discounted invoice rate and the funds collected represents your profit.
11. Mortgage Notes
Investing in mortgage notes allows you to earn a passive profit from real estate without actually purchasing a property. In this case, you purchase the mortgage note and act as the bank or creditor, receiving payment from the property owner. Payments are typically monthly and include the principal payment and interest as determined by your lending agreement.
12. Non-Real Estate Notes
SDIRA holders can also invest in notes that are secured by other types of property, such as equipment, vehicles, boats, etc. Similar to mortgage note investments, you purchase the note, and as the asset owner repays the debt, you gain a profit through the agreed-upon interest rate.
13. Real Estate Investment Trust
More commonly known as REITs, real estate investment trusts allow you to invest in various types of income-earning property without purchasing or having a direct stake in the property. REITs, which are traded on the stock market, can be used to invest in several industries, including hotels, medical centers, warehouses, apartment or condo complexes, and shopping centers.
Funds from a self-directed IRA often are used to invest in agriculture. Though some agricultural investments are tied to stock market success, interest in a farm or land is not. That can make it another great way to round out your portfolio.
Several opportunities are available, including investments in farmland and operating farms, with profits dependent on variables like the farm’s revenue and land value.
15. Bond Ladders
Bond ladders are a collection of bonds with different maturities. When bonds are “laddered” correctly, they can create a predictable passive income stream with relatively low risk. Once a bond matures, you can roll the principal into another bond, extending your ladder.
If you’re looking for a way to build wealth and shore up your retirement without actively participating in a business or venture, investing in passive income is a great strategy.
Unfortunately, IRA regulations limit your ability to invest in passive sources. Starting a self-directed IRA can give you access to alternative assets, making it easier to build your retirement to suit your needs. Contact a Horizon Trust financial expert today to learn how to get started.