Tips on What to Do in Between Investments
Achieving financial freedom does not mean that you stop working. While passive investing requires less work than active investing, you may still need to spend your free time researching new investments or starting your next income opportunity. Because of this, there are plenty of activities you can work on between investments that can help you increase your wealth.
Being Financially Independent Still Involves Work
As an investor, your goal is to become financially independent. When you reach this stage of affluence, you get to choose how you spend your time. In most cases, wealthy individuals spend a lot of time going to seminars, visiting real estate meetups and networking with other affluent investors. The difference is that you will not have to work for money anymore. Instead, you get to pursue your passion projects.
After each investment, many passive investors spend time researching their next investment. They may spend time expanding their company or serving as an angel investor. Depending on how you earn your passive income, you may want to spend your free time writing books or creating online courses.
Focus on Building Your Passive Income
In general, passive investing involves a buy-and-hold strategy. You purchase an investment with the expectation that you will hold it over the long run before you sell it. Index investing is one of the most popular examples of this investment style.
Because you do not have to spend time buying and selling your investments, you can use your time for other productive activities. Whether your goal is to retire early or develop intergenerational wealth, there are other techniques you can use. The following ideas can help you create new sources of passive income when you are in between different investments.
Create a Book or Online Course
Over the years, you have learned a lot about your career field, hobbies and investment choices. Most likely, those experiences have helped you learn interesting information that other people want to learn as well. All of that information can be packaged into an online course or book.
The beauty of this technique is that you can keep earning money for years after you make the course. In addition, published books and courses help you become a thought leader in your field. Eventually, those activities could lead to speaking events or new opportunities as well. At the very least, these books and courses will help you bring in a consistent revenue stream.
Buy a Rental Property
While renting an apartment building or home requires a bit of work, it can bring in a significant amount of revenue as well. For example, Michael Blank added $40,000 to his net worth for the year with a 12-unit complex. The initial purchase price of the building was just $530,000, and Blank expects annual returns of 15 percent per year for all of the building’s investors.
Other than renting a unit to tenants, you can also buy a property to rent on Airbnb. While the average host made just $924 per month in 2019, this figure is mostly based on people who are only renting out a spare room on the side. If you are renting out your second home or multiple units, your Airbnb earnings can quickly increase.
Once you sell your real estate property, you will be able to realize any gains your investment has made over the years. While your tenants or Airbnb guests were paying your mortgage and expenses, your unit increased in value. After you sell the property, you can put those funds into your other investments.
Unless you hire a property management team, managing a rental unit will take time and effort. If you want an easier option, you can try buying real estate investment trusts (REITs). When you buy a REIT, you are essentially buying a share in a portfolio of properties. You can generally invest in these properties individually or through a mutual fund.
Historically, REITs have performed about as well as mid-cap stocks. From 1990 to 2010, the FTSE NAREIT Equity REIT Index had an average annual return of 9.9 percent. During the same time period, mid-cap stocks had a return of 10.38 percent. Meanwhile, commodities returned just 4.5 percent per year.
Recently, REITs have performed even better. From March 2013 to March 2016, REITs had an average annual return of 11.21 percent. You can also select between different types of REITs. For example, you can buy retail, healthcare, office, mortgage or residential REITs.
Try Peer-to-Peer Lending
During your free time, you can also focus on wealth building through peer-to-peer lending. This lending style is when individuals make loans to borrowers through a third-party institution like LendingClub or Prosper. Basically, you get to take on the role of the bank. This means that you get to earn interest from loan payments just like a bank does.
Like bank loans, peer-to-peer loans also involve risk. If the borrower does not repay the loan, you will lose your investment. You can reduce this risk by lending to multiple people and diversifying your portfolio. At companies like Prosper, you are not required to fund the entire loan amount. Instead, you can do your research to find multiple qualified borrowers. Then, you can invest and start earning interest from your investments.
Become a Better Investor
As you wait for your next investment to appear, you can also become better at making passive investments and wealth building. To start with, you should determine your motivation. Are you interested in capital preservation, financial security or building your net worth? Do you need a steady income stream or appreciation? What is your risk tolerance?
You also need to become talented at screening deals. To find the right fund or company, you have to figure out your investment window, risk tolerance and need for cash flow. You will need to consider the company’s experience, industry knowledge and geographic market. In addition, you should look at the potential return on the investment, management fees, private placement memorandums (PPMs) and exit strategies. A defined exit strategy is important because you need to have a way to withdraw your initial investment and profits. In addition, you should see if the investment has a PPM. If it does not, then the investment is probably a scam.
Once you find a decent investment, you need to review the company’s financial statements and how they plan to use the funds. Ideally, the company should clearly detail all of its funding sources, management compensation and projected income. Because every investment has risks, you should clearly understand the market, industry, legal, management and company risks involved in your investment.
If you want to earn a profit, you have to do your due diligence. In general, managers are happy to help you with any questions that you may have. If the management team is unresponsive to your questions, you should be extremely cautious.
Once you decide to invest, you need to be fully committed. Most passive and private investments are for the long run. If you plan on withdrawing your money within five to seven years, you should choose a different investment type.
You should also be prepared to walk away from a prospective investment. Many investments sound good initially, but the financial statements do not make sense. If you want to continue wealth building, you have to do your research and be ready to move on when an investment turns out to be a lemon.
How to Spend Your Time If You Are Truly Finished With Working
What if you truly are a passive investor and have no other investments left to make? In that case, you can start enjoying an entirely different style of living. As a passive investor, you can spend your days relaxing on a Caribbean beach or hiking the Camino in Spain. Passive investing allows you to take control of your time and your future.
While most people imagine wealthy investors driving a Ferrari and sipping margaritas on a private yacht, this is generally not the case. Once you are done building your wealth, you will quickly realize that upgrading your vehicle from a Lexus to a Ferrari will not make you any happier. Instead, savvy investors spend their money on financial goals that make their families happier. They focus on activities like traveling and taking time off instead of just buying a more expensive car or a fourth house.
Once you make so much money that you never have to work again, you will also realize that vacations are only fun for part of your time. You have to have something interesting to do. Even world-famous investors like Warren Buffett spend most of their time learning and exploring new topics. Each day, Buffett spends five to six hours reading five newspapers and hundreds of pages of corporate reports. Bill Gates is said to read an average of 50 books per year.
Like Buffett and Gates, some investors decide that they love running a business and keep working, but they do work on their own terms. Other people pursue passion projects like starting a charity, writing a book or learning a language. The magic of being a passive investor is that you get to determine how your time is spent. Rather than waste your day in an office, you can devote your time to activities that bring you happiness instead.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.