The Best Sources of Passive Income

What is the best passive income source?  There seems to be no general answer.  Everyone has a subjective opinion about which thing is the best.  We should agree on the standard.  The rich, the poor, and the average have different standards in making a judgment.  So, let’s agree on a standard based on a few selected categories:  safety, profitability, and liquidity.

Discovering the Best Source of Passive Income

Safety consideration involves stability of the investment and the income.  Your invested money might be exposed to volatility, economic uncertainty, and social instability. The question is, “Will my investment endure all these? “.  If so, your investment  is a safe one.

Meanwhile, profitability is always the thing that captures our mind.  We tend to think that anything profitable is good.  It’s true.  But, is it safe?  Is it liquid?  Of course, everyone would prefer whatever is profitable.  When we think of profitability, the highest earner is always the best earner.  What we are talking here is not about the best earner.  It’s about the best passive income.

The Role of Liquidity in the Best Passive Income

Liquidity is another important factor we should consider.  Assuming that our investment is really safe and its profit is very high, what can you do with it now?  If you need to realize your money for the very purpose why you have invested, can you cash it out immediately?  Without liquidity, our earnings are just theoretical.  It’s like dreaming that you were rich.  Liquidity does not only concern the ease of withdrawal.  It also concerns the ease of investing.

So, these are the three categories we should consider to recognize the best passive income.  Now, let’s agree on three kinds of portfolios.  These are:  business, stocks, and real estate.

Source of Passive Income #1: Business

Business is a general concept of complex economic activity for future personal benefits.  It is the combination of labor and capital.  It means that a businessman invests and works for profit.  In other words, it is the combination of active and passive income.

In terms of safety, business is a little risky.  It is vulnerable to industry slowdown.  Businesses depend on the law of supply and demand.  When the demand for their products is high, the price of the products increases, and so does the supply.  As time goes by, such high demand will cause the supply to increase further.  And when the supply is too much, it will cause the price to decrease.  As a result, businesses become more volatile and their future becomes uncertain.  However, businesses will also become more flexible.

ince this type of investment is not purely passive, the active role of a businessman helps control the situation.  Thus, the dual nature of business regulates the cycle.  On this consideration, business is good, but it is not definitely the best passive income in terms of safety.

Source of Passive Income #2: Stocks

For stocks, it’s a different story.  Safety is a big concern here.  Undeniably, stocks are risky investment.  Investors’ income in stocks is purely passive.  So, the income depends on the changing market condition, not on the systematic effort of the investor.

Source of Passive Income #3: Real Estate

In real estate, investment is very safe when the amount of exposure is very little.  It is very risky when it’s big.  However, land is the safest investment.  What makes the real estate investment riskier is the cost of construction.  Building materials are subject to a change in the business climate.  But if we only depend on land to earn passive income by leasing it out, passive income will not fluctuate much.  On top of that, house and lots and buildings depreciate overtime.  Thus, safety in this type of investment depends on the kind of real estate.

Understanding Passive Income Sources

When it comes to profitability, business profit is attractive.  Some businesses take time to earn passive income.  Sometimes, their earnings are negative especially when they have just started their operations.  They have to introduce their products and position themselves in the market.  As soon as the consumers patronize their products, they start earning passive income.  On the contrary, some other businesses start very nicely.  During the introduction period, they are selling like hot cakes.

Consequently, they expand much earlier. But as time goes by, consumers would become sick and tired of their products and services.  So, some of these businesses trim their passive income.  Nevertheless, the good about business is its flexibility to cope up.  In business, the security of income is strong.

Another advantage of business in terms of profitability is its cash flow.  Passive income in business doesn’t have to occur periodically as in bonds and in treasury notes.  Every day, money just comes in.

Can Stocks Be a Good Source of Profit?

Meanwhile, profits in stocks can be extremely high.  Since the nature of stocks is speculative, risk appetite pushes up the value of stocks quickly.  However, risk aversion and profit taking in the daily trading pulls down the value in the same span of time.  Risk in stock market depends on investors.  Speculators get their passive income from the price fluctuation while conservative traders or investors earn passive income from dividends.

So, we can’t single out the risky nature of stocks.  If we measure the ratio between the effort we exert and the income we get, stock investing will be the most ideal.  We should always remember that passive income is an income earned with less energy.  If stock investing has this character, it will be considered the best passive income.

How About Earning Passive Income Through Real Estate?

What about the profits in real estate?   There is no question that you can earn passive income in real estate with less energy.  The question is whether or not the percentage income is enough compared to the capital.  We know that we can earn big in real estate simply because the capital is also big.  But keep in mind that you must pay real estate tax in proportion to the capital.

Every year, you should pay capital gains tax.  This is also the reason why land owners do not only depend on leasing out their land.  They develop the land and maximize the profit potential.  In terms of the amount of passive income, real estate could be the best passive income.  But again, don’t forget the ROI.

An Overall of the Different Passive Income Sources

Regarding the issue on liquidity, business is less liquid.  It doesn’t mean never.  But it takes time to start a business, it takes time to earn, and it also takes time to stop.  Such processes are predictable though.  Still, it depends on the business.  Retail industry is a little liquid; manufacturing, not.

Stocks are the most liquid among the three given types of investments.  You could get in and out of the market any time you want.   In addition, you could choose from among the many companies available to you.  If you want to invest in stocks, earn money, and withdraw, these will only take a few days.  You can cash out your investment anytime and anywhere.

Can Real Estate Investments be Considered the Best Passive Income?

Ironically, real estate is indeed not liquid.  In business, the process of liquidity is predictable.  In real estate, it’s not.  Even a small house and lot takes time to be sold.  Sometimes, it’s never.  So, it also takes time to invest, earn and cash out here.  Liquidity will never be a big issue if it doesn’t compromise productivity.

For example, there is a great opportunity to divert you investment to another industry.  By the time you cash out your real estate asset, the opportunity will have gone. In the same way, you will have been hit hard in the worst case scenario.  In short, you’re stuck.

So, which is the best passive income among them?

Is it business, stock, or real estate?  Considering the three categories we base on, stock is still the best passive income.  It’s the most liquid, and it has the highest profit potential.  It is purely passive, too.  Although stock is not that safe, it’s the only investment that keeps more that one of the three important categories to base upon when we decide which to invest.  Therefore, if you want to have the best passive income, invest in stocks anytime.