If you want to achieve financial goals the best way to do that is to create passive income streams. In this post, I will outline the best passive income ideas in 2021 that are available for Europeans.
Passive income is money you earn in a way that requires little effort to maintain. Almost all ideas may take a little work to get started, but in the end, they could make you money while you sleep which is wonderful.
Some types of passive income make more sense for some and less for others. The choice depends mostly on your financial goals, the money you can invest, and the time available to launch an additional source of income. However, there is a category that suits everyone.
Let’s see what options are available today:
Peer-to-Peer Lending (P2P)
First on the list of the best passive income ideas in 2021 is P2P lending (it is just first, not best). P2P lending is a relatively new area in the world of investing. It has its beginnings in 2005 and began to gain in popularity in late 2014. However, today I think it’s gaining more popularity in Europe than in America.
Understanding P2P Lending
It is also known as “crowd lending”, As the word itself says, what the platform does is connect investors with borrowers.
These are relatively new platforms that are quite risky. Loan yields are approved according to the risk of the borrower. There are four participants in this, and the way it works is as follows: the borrower seeks credit from the credit institution (loan originator) which then sells the shares to us as creditors, and the p2p platforms are the intermediaries through which this is done.
To make it even simpler I made a painting for you:
P2P Lending Risk
The risks associated with the p2p platform are the risk that the debtor becomes insolvent and does not repay the loan (in many cases there is a buyback guarantee) from the credit institution which then repays the principal and interest. The biggest risk is the failure of the platform or credit institutions, which usually makes this type of investment quite risky. However, you can lower your risk investing in different platforms and diversify between different loan originators as well as borrowers.
P2P Lending Return
It largely depends on the platform you choose, as there are riskier platforms that offer higher returns and vice versa. If you decide to invest in this asset class, a 9% to 15% annual return on investment can be expected.
Real Estate Crowdfunding
Real-estate crowdfunding or property crowdfunding is a way of raising money from investors to execute a certain real estate project and make money through the sale of completed property or through. Real-estate crowdfunding came on the list of best passive income ideas in 2021 since it is actually one of the newest investment vehicles out there. It started to be more popular in 2014.
Real-estate crowdfunding has allowed the average investor to put a portion of their portfolio into real estate without having to invest in real estate investment trusts (REIT). Therefore, an investor who is not willing to buy whole real estate has two options now.
Real Estate Crowdfunding Risk
What may be unattractive to the average investor is the liquidity of such an investment, where it takes some time to get the money invested. Usually, the investment takes 3 to 5 years. However, many platforms introduced secondary markets recently where you can sell your portion of the project to other investors.
Real Estate Crowdfunding Return
Real estate crowdfunding has two ways investors can earn returns: income, and equity appreciation. But, it’s important to know that returns are not guaranteed, and it doesn’t have to return in the exact amount that was first agreed upon. The reason for this is the unknown of the exact return that will be realized from the rent or sale of the property. Returns average from 5 to 7% on most platforms.
When you purchase an individual stock, you are actually purchasing a small piece of the company. Why these investments are still the best passive income ideas in 2021? Well, you get a right to dividend yield as well as the sales of stocks. So, investors who buy stocks in companies want a dividend yield or think that the stocks will rise in price.
Purchasing individual stocks have become easily accessible through apps where they can be purchased in a few clicks. But how much are we able to choose good stocks that will give us a satisfactory return?
It is important to emphasize that the average investment fund, which deals with daily investment, fails to beat the SP500 index, which is a kind of benchmark for them. Therefore, you need to think carefully about whether you want to make this investment or it would be easier to invest in SP500 or a similar index fund.
Individual Stocks Return
In short, investing in individual stocks brings you two ways to earn a return: dividend yield and appreciation of stocks.
The average dividend yield depends on industry and economy, but a yield between 2% and 6% is considered good.
Regarding stock appreciation, the yield varies greatly, but let’s say you manage to achieve a return as a market average, then you would get 10% before inflation.
Individual Stocks Risk
Investing in individual stocks is considered high risk, as the market and the value of the stocks are not correlated in the short run. Therefore, people can make a mistake and invest at the wrong time, and also sell at the wrong time thus making a loss.
In my case, I would not engage in buying individual stocks if I do not have at least 2 years of experience in stock picking. What you can do is invest a small portion of your portfolio that you can lose before you start investing serious money. Likewise, most platforms have a free account with which you can test your stock-picking skills.
Certificate of Deposit (CD)
A certificate of deposit is a saving account in which you can put a fixed amount of money for a fixed amount of time. In exchange, the bank pays you interest. When the agreed time has elapsed, the bank returns the interest and principal.
Certificate of deposits is assumed lower opportunity to grow, but it is low-risk, guaranteed rate of return.
Certificate of Deposit Return
Return for this type of investment is relatively low. The yield, therefore, varies from 0.1% to 1.5% depending on whether you choose an online or brick-and-mortar shop. Online banks offer slightly higher interest rates. Also, the yield varies according to the term of the deposit where a higher interest rate is obtained over a longer period.
Certificate of Deposit Risk
Since it has a guaranteed rate of return and the deposit is insured by deposit protection institutions, the risk is almost zero.
Creating Your business
One way to generate passive income is to create your own business that will generate passive income in the future. There are plenty of products that can be created in your business that could generate passive income. You can write your own eBook, create a blog, start a podcast, create a course to make a passive income stream.
Creating Your business Return
Starting your own business and creating your own product can achieve the highest return on investment. The more effort you put in the higher the return will be.
Creating Your business Risk
It is quite risky to start your own business. It can happen that you invest significant funds and time for nothing. However, there are businesses that require little or even no capital. If you choose that kind of business, the only risk is losing your time.
Private Investing in Real Estate
For many investors, this is one of their favorite investments. Investing in real estate is simple and easy to do. It is a tangible asset that has no large variations in price. You can either buy real estate in your country or in another country. It depends on whether you want the property near your home to have more control over it or you are comfortable not having it under your eye.
This is a suitable instrument for investors who can set aside a larger amount of money, want to diversify in real estate and they want insurance against inflation.
Real Estate Return
With real estate, everything is in location. Therefore, if you buy real estate in the tourist and student area, you can expect yields as high as 10%. However, yields can be very small and amount to 2% in saturated places.
Moreover, if you consider buying real estate for renting you should look for buying a property based on rental income and not so much for appreciation. By this, I mean that properties located in more expensive cities tend to be bought just for sale and therefore cannot acquire high yields from renting.
You can look for rental yields on the site called Global Property Guide, where you can find other interesting information such as transaction costs and brief explanations for every country.
Real Estate Risk
The risks that arise when renting real estate are as follows: vacancy risk, damage/maintenance risk, and decreased rents.
A good vacancy rate is below 5%. Damage/maintenance risk is like a lottery. Sometimes you can get the best tenants who will clean and repair while they live on your property. On the contrary, tenants can be uncomfortable and messy.
Also, decreased rents can happen under certain circumstances. For example, if there is a drop in the standard of the property, change in rental market conditions, or a decrease in services provided.
Investing in an index is one of the simpler and recommended methods you should use. Index funds are portfolios of securities (stocks or bonds) intended to replicate a certain part of the market. Investing in index funds is considered one of the best passive strategies in the long run. Moreover, they are low-cost, low-risk, and well-diversified. The reason for low cost is that they are passively managed and therefore there is no great human cost.
Index Funds Risk
Markets can be volatile, so it is not recommended to invest in these assets for short periods. Additionally, as you will have a portfolio of all stocks that outperform, you will also have all stocks that underperform.
Index Funds Return
Returns depend on the choice of fund, but if you choose a fund that, say, follows the market average of SP500, you can expect 10% per annum fewer fund costs (which are usually below 1% for a passively managed index fund)
Bonds are considered safe and conservative investments. They are a popular investment if you want a predictable stream of income. They contribute to the stability of your portfolio.
If you are investing in bonds that you should be aware of interest rate risk. In short, rising interest rates will result in falling bond prices. However, lower bond prices mean higher yields on available bonds. Another risk associated with bonds is inflation. While inflation rises, interest rates rise and therefore bond prices fall. Before buying bonds you should also consider credit, reinvestment, and liquidity risk.
If you look long-term, average returns have been between 5% and 6%. However, it widely depends on market conditions, Nowadays, much stimulus has been pumped into the economy and we can expect higher inflation in the future as well as rising interest rates.
Best passive income ideas in 2021 – Conclusion
The list of best passive income ideas in 2021 consists of all quality passive income streams. However, this is just a brief explanation of each. When you decide which ones you want to invest in, be sure to study them in more detail.
I also encourage you to read the article why intelligent investor needs passive income.
To sum up, passive income is very important to have a better financial life, and the sooner you build it, the more financial prosperity you will have.