15 Income Producing Assets to Invest In
The key to building wealth is to own several different types of income producing assets. If you ever want to achieve financial freedom, you better start accumulating assets. The best assets to buy are the ones that make you money now.
Disclaimer: Sharon Winsmith is not a financial advisor and is not engaged in the business of providing financial investment advice. The information contained on this page includes details regarding Sharon Winsmith’s personal investments. Nothing contained on this page or elsewhere on this website constitutes investment advice. We encourage you to do your own independent research and consult with your personal advisors before making any investment decisions.
Read more to understand what you need to know before buying assets and learn about 15 types of assets you can start investing in today.
What is an Asset?
Before you start buying assets, you need to make sure you know how to recognize what is an asset and what isn’t. The distinction might seem obvious at first glance; however, it isn’t always as straightforward as it may seem.
In basic terms, an asset is anything that makes you money. The opposite of an asset is a liability.
A liability is debt or something you are required to pay for in exchange for a past transaction (such as a mortgage taken out when you buy a home). In some cases, it may be necessary or beneficial to take on a liability to finance the purchase of an asset.
Some assets cost you money to maintain them. For example, there are expenses associated with owning a rental property like property taxes and utilities. If there is a cost associated with owning the asset, those expenses should be offset by current cash flow generated by the asset itself. That means you would want to make sure those assets are income producing assets.
Assets don’t have to be bought from someone else. You can actually create them yourself. The cheapest way to build up a portfolio of assets might be to come up with creative ways to make your assets from scratch.
This article for example was written by yours truly with the hope that it will make me money. Therefore, this is an asset I created from nothing other than my own knowledge and research on the subject matter.
What Are Income Producing Assets?
Income producing assets are simply assets that generate income today. I like to think of assets as always falling into one of these three categories:
1. Income producing assets: Assets that generate cash flow immediately or shortly after I buy the asset
2. Non-income producing assets: Assets that I buy and hold for long-term gain potential and do not provide current cash flow
3. Mistaken assets: Things people buy that they call an asset that are really liabilities (for example your home, which is not an asset)
How Assets Generate Income
Assets can produce income in a few different ways.
→ Current Cash Flow (Income Producing Assets)
I am a big fan of cash flowing investments. Cash flowing investments are investments that produce current cash flow. They should start putting money in your pocket as soon as you buy them or shortly thereafter.
This means that the asset kicks off a steady stream of recurring income throughout the period during which you own the asset. The income may be consistent where you receive the same amount each month or year or may change drastically.
A good example of assets that produce consistent, recurring money are rental properties. The tenant pays you rent each month in exchange for living in your rental property. The amount of rent due over the course of the year is usually set at the time the lease is signed or renewed. Therefore, you know how much money to expect.
In other cases, the amount you receive may fluctuate based on a number of different factors. Think of a business where the amount you earn changes each month based on total revenues and expenses for that period. How much money you make may largely be the result of factors completely outside your control. In these situations, you will want to be more careful as the income and expenses might be a little less predictable and reliable.
Here are some common examples of assets that are cash flowing investments:
- Rental properties
- Investment funds (these are typically limited to accredited investors only)
These assets are income producing assets and are usually good types of investments to add to your portfolio.
→ Appreciate in Value (Non-Income Producing Assets)
Assets can also make you money by appreciating in value over time even though they are not cash flowing. Let’s say you buy something for $100 and in 5 years it is worth $500. That asset made you $400 just by going up in price.
This appreciation in value creates additional income to you when you sell the asset in the future. However, the price of the asset will go up and down over time and you do not usually recognize the gain until you actually sell the asset itself. Accordingly, these assets are typically not as preferable as income producing assets because you have to sell the asset in order to benefit from the appreciation.
Another disadvantage of owning non-income producing assets is that you have to pay tax when you sell the asset. That means that in order to lock in the benefit of the increase in price, you have to sell and pay tax on the gain. The tax will reduce the overall return you get on the investment.
There are some strategies you can use to reduce or eliminate the tax due on these types of assets. It might be a good idea to get a good tax advisor on your side to help you navigate the tax rules here.
These are some examples of assets that are not cash flowing assets:
- Stocks (other than dividend paying stocks)
- A vacation home that you do not rent (this is actually another liability)
- Cryptocurrency (but see below how you can turn crypto into an income producing asset in some cases)
→ Current Cash Flow + Appreciate in Value
The best types of assets offer current cash flow and the ability to achieve appreciation in value over time. These assets provide you the ability to profit from both the cash flow the investment generates throughout the period you own the assets plus gain when you sell the asset in the future.
Most income producing assets also have the added benefit of the potential for an increase in value. So most if not all of the income producing assets we discuss in this article can also appreciate in value if you are lucky.
Take a typical rental property for example. The rental property should be making you money while you own the home through recurring rental payments from tenants. But you can also sell the property several years down the line and hopefully make a gain.
Why are Income Generating Assets Good?
There are a number of different advantages to owning income generating assets. These are some of the main reasons I always prefer to buy income producing assets as opposed to assets that don’t produce current cash flow.
→ Ability to reinvest profits sooner
I would much rather have cash in my pocket today than at some undefined point in the future. When I have the cash in my hand, I can do whatever I want with it. In this case, I want to reinvest that cash in other income producing assets.
The key to building wealth is to take advantage of the miracle of compounding. Compounding is the process where you make money on the profits from an asset that are reinvested back into the investment. This means I generate more and more earnings over time and my investment returns are magnified.
Compounding is a function of time. The sooner I reinvest my profits, the sooner I start making money on those profits, and on the profits those profits generate, and so on and so on. So the sooner I can start compounding, the more I am going to make over my lifetime. If I have to wait 10 years to cash out an investment by selling the asset, that is 10 years of compounding I lost.
→ Reduce risk and speculation
The longer the time until you recognize an economic benefit, the greater the risk. This is because a longer time horizon presents more opportunity for things to intervene that decrease or eliminate any future gain or earning potential.
The price of an asset changes all the time. Some days it will go up, and some days it will go down. There is never a fool-proof way to predict which way the price will go at any given time.
That means my hope that an investment will increase in value several years down the line is speculative at best. I also have no clue as to when the price will hit the level I want before I can sell and cash in on the gain.
No matter what type of investment you make, there is always a risk that the value will go down and not up. History has shown there will always be economic downturns and in some cases, those downturns have drastically reduced the value of an investment.
I would much rather have a scenario where I am getting profits from an investment today than several years down the line when who knows what the world will look like then.
→ Ability to diversify
You never want to put all your eggs into one basket. If you can take cash out of one investment, you can then reinvest that cash into another uncorrelated investment. This can allow you to buy several different types of income producing assets.
Owning different types of assets should decrease your risk exposure from one investment potentially going bad.
→ Pay for expenses
We noted before that some assets incur costs. If there are going to be expenses associated with making an investment, you want to be able to offset the costs with income from the asset itself. The last thing you want is to incur costs today for something you are not going to profit from until several years down the line.
→ Tax benefits
We mentioned above that owning non-income producing assets may create certain adverse tax impacts. On the other hand, there can be tax benefits to owning certain types of income producing assets. This is usually because you can offset the income the asset generates with any expenses you incur.
If I own a business there are going to be a number of different costs that I have to pay to run the business. These expenses are almost always tax deductible which means I should be able to significantly reduce the net income of my business that is subject to tax.
On the other hand, this is not typically the case with non-income producing assets. For example, if you pay a financial advisor to manage your stock investments (which you should never do), those fees are not tax deductible. Those fees are also not deductible when I cash in on the stocks and sell them in the future.
This also means I am paying fees every year without receiving any income (assuming the stocks do not pay dividends). I usually try to avoid situations where an investment requires cash outlays that are not fully offset by cash inflows.
What to Consider When Buying Income Generating Assets?
There are a number of factors you should assess before deciding which income producing assets you should buy. This is not a comprehensive list of all of the indicators and calculations you should make before making an investment. Rather this is just a list of the key points I look at before deciding if this investment might be a good opportunity for me.
Watch out for extraordinary high metrics. These are usually highly risky or in some cases, a scam. I have seen investments listed with cash-on-cash returns or total returns that are impossible due to the nature of the underlying investment. Just because something is listed as having a high return doesn’t mean you will actually realize that return.
You have to do your own due diligence and analysis to see what reasonable expectations should be before investing. This will require you to really study the industry or area and compare multiple different types of investment offerings within the same asset class. Do your work before you invest!
→ Total return
The most important thing to know before making an investment is what is the expected return. If I am going to invest $10k to buy a new asset, I need to know what returns that $10k is going to make.
Here we are talking about the total return, which takes into account all profits throughout the time you own the asset. This is different from the annual return which would tell me how much I am expected to make each year. If I invest $100k in an investment with a total expected return of 10%, that means when all is said and done, I should get back $110k.
The expected rate of return should always exceed the rate of inflation. Inflation is usually around 2% in the U.S.; however, in some cases it has been substantially higher. This is why having your money in a savings account is almost always a bad idea because they don’t pay interest above 1% or 2%. This means you are guaranteed to lose money because your return (whatever low interest rate the bank is offering) is not going to exceed the rate of inflation.
You may see total return referred to by a number of different titles, such as total return on investment or ROI. In this case, I am just concerned about the total money I am going to make from buying this asset.
There are more complicated variations of this formula that take into account the time value of money and other components. At a basic level, this is a good formula for looking at an investment’s total return.
Total Return = Profits/Gain on Investment/Amount I Originally Paid
Returns are usually a reflection of the relative risk you are taking on from making the investment. Therefore, don’t just always pick the investments with the highest returns. This could result in you taking on too much risk. After all, you may never receive a penny from that investment. You need to learn how to reach a balance between returns and risk and only make those investments that make sense for you.
→ Cash-on-cash return
Cash-on-cash return is my favorite metric because it shows me how much cash I can expect to receive each year. The cash-on-cash return is a measure of how much money you can expect to generate on an annual basis as a function of the amount you invest. A cash-on-cash return of 5% on a $100k investment means I can expect to get $5k a year while I own the asset.
I always prefer investments with high cash-on-cash returns, particularly for non-real estate investments. I am willing to stomach a lower cash-on-cash return for real estate investments because I pay little to no tax on the cash I receive which means the actual after-tax return will be higher than the cash-on-cash percentage reflects.
Cash-on-Cash Return = Annual Cash Received/Total Cash Invested
Be careful though because, just like investments with high returns, high cash-on-cash returns may also be extremely risky in some cases.
Investment returns should always be assessed on an after-tax basis. You want to always analyze investments in the sense of actual cash that will be put in your pocket. If I have to write a check to Uncle Sam for tax due on income I received from an investment, that is going to reduce my net profits.
An investment with a higher return might not be as good as an investment with a lower return if the lower return investment comes with tax advantages. Real estate investments are generally the most tax preferred type of investment you can make. That means I would be willing to make an investment in real estate that has a lower pre-tax total return than other types of investments.
→ Risk of investment
Total return on an investment in an asset should be analyzed in light of the amount of risk you are taking on by buying the asset. Some investments are just riskier than others. There are a number of different factors to take into account when analyzing the amount of risk involved with investing in something, including:
- Likelihood of achieving returns: what is the likelihood the investment will be profitable and achieve its stated returns (an investment could have a 300% total expected return but there might be a high chance I could lose all my money and never reach that target)
- Track record: is this an investment in a proven asset or industry or is this a new type of investment (crypto is relatively new and has a shorter track record than investments in large public companies that have been around for many years)
- Legal liability: what is the likelihood I could be sued as an owner of the asset if something goes wrong (rental properties and businesses are exposed to more legal liability than investments in the stock market)
- Debt: the more debt used to finance the purchase of an asset, the higher the risk (but use of debt is usually a good thing here if you know what you are doing)
- Collateral: is the debt secured by collateral (rental properties are collateral on mortgages)
- Liquidity: how quickly you can sell the asset to a willing buyer (stocks are liquid but businesses and real estate properties are not)
You always want to diversify your investments. This means diversifying by buying several different assets and by accumulating different types of assets.
You never want a situation where 100% of your profits come from one business or property. If you are making money from one of your investments, consider avoiding a situation where all of those profits are reinvested back into that same asset.
Accumulating different types of investments is also a good idea. Well advised high net worth individuals usually have investments in all of the major asset classes (real estate, stock market, crypto, businesses). It is a good idea to always make sure your income is coming from many different uncorrelated investments.
I always double check the allocation of my investments across the different asset classes before I buy a new asset. This is a good way to make sure you are diversified.
→ Quality of management team
If the investment is passive in nature or there will be a team involved in running the day-to-day operations, you always want to assess the quality of the management team. This may be a team that is marketing the investment to you hoping you will invest your money (like an investment fund), or individuals you will hire after you buy the asset. In any event, before I spend any money I always spend a significant amount of time doing due diligence on whoever is responsible for the performance of whatever I am investing in.
→ Amount of my time required
Total return should always be assessed in light of the amount of time required. When I look at the total expected return from an investment, I always first analyze this by taking into account how much of my personal time will be required to manage the investment.
If I am fully passive and don’t have to lift a finger to make money from an investment, I will be willing to make investments in assets that generate lower total returns than if I have to be involved. On the other hand, if I am going to be active in the management of the investment, the total return has to be a lot higher. The total return that I require to make an investment is 100% a function of my time required.
Before you start investing, it is a good idea to develop benchmarks of what total returns you are willing to accept for different types of investments. This can help you filter through opportunities and weed out any that don’t meet your parameters. The benchmarks that I personally use for my investments:
- Real estate investments where I am fully passive – total return > 10%
- Non-real estate investments where I am fully passive – total return > 20%
- Investments where I am partially active (less than 10 hours a week) – total return >30%
- Investments where I am active (more than 10 hours a week) – total return > 50%
I don’t automatically make any investment that satisfies those metrics. Rather I eliminate any potential investments that come across my desk that do not satisfy these criteria.
Just because these benchmarks work for me, doesn’t mean they make sense for you. If you have a lot more money than I do, your total return requirements are probably going to be a lot higher. If you are not an accredited investor, you will probably not have access to passive investments that generate total returns in that range (at least not any investments that aren’t scams or super risky). This may mean you need to lower your expectations until you can reach accredited investor status.
15 Income Producing Assets to Invest In
Below is a list of examples of income generating assets that might make sense for you.
1. Rental Real Estate Properties
Rental properties generate rental income which is cash in your pocket each month. The rental income you earn can offset any expenses or mortgage payments you have to make on the property. If you set this up properly, you have a tenant cover all expenses and pay off the mortgage on the property over time.
There are many different types of rental real estate properties, including single family homes, multi-family homes, large apartment buildings, commercial real estate or office buildings, and self storage facilities.
Real estate investments are also great from a tax standpoint.
There are all different types of businesses that you can buy. If you don’t want to shell out the cash to buy a business, consider starting one yourself. A good business should provide a steady stream of cash flow.
3. Lease of Equipment or Property
You might be surprised to know that there are people who make a business out of buying equipment and then leasing that equipment out to people who need to use it. This can be done with any type of equipment you own. However, equipment that is more expensive, large in size, or difficult to maintain is usually the best type to lease out.
Uhaul is probably the best example of this type of business. Their whole business model is built around owning a large fleet of moving vans that customers can rent to move to a new home. There are a lot of other smaller companies and individuals that also lease out vans and trailers. You can do this even if you only own 1 truck.
If you own property or equipment that you don’t use all of the time, consider seeing if there is a way to make a little extra money by renting it out. An easy idea might be to rent out your car when you aren’t using it through websites like Turo. You can also list your home on AirBnB or Vrbo while you are away on vacation.
Royalties are payments you receive from someone for the right to use intellectual property you own. Intellectual property, or IP, includes things like patents, inventions, or other non-tangible things you have created.
If you write a book, you can get royalties for every copy that is bought. If you are a musician, you can get royalties for creating music. Photographers can earn a fee every time their photo is downloaded or replicated. Anything you can create or invent can be sold to the public in exchange for royalties.
Investments in the stock market typically do not qualify as income producing assets because you do not make money until you sell the shares (at hopefully a higher price than you paid for them). However, there are ways to earn cash flow from investing in the stock market.
Some stocks pay dividends which mean you can get periodic distributions from the company throughout the year.
There are also more sophisticated ways to make cash by writing calls or puts. However, this can get complicated and requires a great deal of experience. This is definitely not something a beginner should try as you can really get yourself in a lot of trouble if you do not know what you are doing. There is no cap on the amount of money you can lose by doing these types of strategies.
6. Tax Liens
Tax liens are liens that the government puts on your property when the owner is delinquent on their property taxes. When a homeowner does not pay their property taxes on time, interest will accrue on the unpaid balance.
In some states, you can purchase tax liens from the local municipality. Once you own the tax lien, you are entitled to receive the interest that the homeowner must pay on the unpaid tax balances. The interest rate varies by state but is usually quite high. In some rare cases, you can even end up owning the property if the homeowner never pays the tax and interest due.
If you are interested in investing in tax liens, a good starting point would be to read the book The 16% Solution by Joel S. Moskowitz.
7. Investment Funds
If you do not want to be involved in the day-to-day management of an investment, you may be able to invest passively through a fund. This can allow you to invest in large assets that provide higher returns by pooling your money with other investors.
Investment funds can be created to invest in any type of asset. The most common are real estate syndications where several investors will invest in a fund that acquires and manages large residential or commercial real estate properties. There are also investment funds that invest in businesses of all stages of growth, like venture capital funds or private equity funds.
8. High Yield Lending
If you loan money to someone, you should always charge interest on the amount you loaned. Interest is the cost of borrowing money. If you have extra cash on hand, an idea might be to loan the money to someone who can use it. Interest is usually paid monthly and can provide a predictable stream of cash flow throughout the term of the loan.
However, be careful here because the interest rate is tied to the risk you are taking on by lending the money. Therefore, the higher the rate, the more risk you are taking on by lending the money. Even though you might want to make more money by getting a higher interest rate, you don’t want a situation where you don’t get your money back.
9. Online Courses
Similar to an online course, if you have something to share that you think people will want to hear, you might consider starting a podcast. Podcasters typically make money by having sponsors for their show or paid affiliate arrangements. The most popular podcasts platforms are Apple Podcasts and Spotify.
Crypto is not itself an income producing asset. However, there can be ways to put that Bitcoin to use and make a little extra cash. Some crypto exchanges, like Coinbase, let you earn interest on your crypto by lending it out through the platform. You still own the underlying crypto itself and can still benefit from any price increases.
However, the interest rates are usually low and can change drastically from day-to-day. Therefore, this might not be a big money maker but could be a way to make a little extra cash on investments you know you plan to hold for a long time.
12. Raw Land
If you own raw land, you can actually lease out the right to use the land for various purposes in exchange for rental income. Some examples of the types of leases I have seen are:
- Rights to build cell phone towers
- Farmland or cattle grazing
- Mobile home park
- Billboards or other forms of advertisement
If you find yourself inheriting a piece of property in the boonies from a great aunt, don’t just automatically assume that land is worthless!
13. Software as a Service (SaaS)
Software is the future. Every business is investing tons of money into creating software that can increase efficiencies in business operations. In the next few years, we will see software replace a substantial portion of the labor force.
Software as a service, or SaaS, is an application that provides a service to customers online. Some examples of SaaS that you may recognize are DropBox or Salesforce. Fees are usually done with a subscription-based model where customers pay a monthly charge to use the software.
If you can find a way to create a SaaS platform that will automate or provide services to your audience, it might prove to be a very lucrative investment.
14. YouTube Channel
I work with a number of clients who make a significant amount of money from having a YouTube channel. From artists and musicians to doctors and lawyers, if you are good on camera it might be a good idea to try creating a YouTube Channel. The creators get advertisement money from those YouTube ads that always play during videos.
15. Affiliate Revenue
Anyone with a laptop can earn affiliate revenue if they can build a loyal audience. Good ways to do this are through blogs, websites, email newsletters, or social media accounts.
You just embed your affiliate link into any product recommendations. Anytime someone clicks your affiliate link to buy a product, you will receive a small commission. These commissions can really add up over time as your audience grows.
One of the largest affiliate programs is Amazon Associates. The commission rates Amazon pays vary depending on the type of product. I use affiliate links for most products I recommend on my website.
6 Income Producing Assets I Don’t Own
Just because an asset produces cash flow, doesn’t automatically mean it is a good investment. There are some income producing assets that I do not like and never buy myself.
A bond is a loan from the investor (owner of the bond) to the borrower. The borrower of a bond can be a company or governmental agency.
Bonds historically have average returns that are too low for me to ever invest. That doesn’t mean it might not make sense for some investors to own bonds, particularly those who are more risk averse.
An annuity is a type of insurance contract where you will get paid out a fixed stream of income at some point in the future. You basically buy a future income stream. I hate annuities for a number of reasons.
In my mind, an annuity is not an investment. You are just paying someone money now that they will pay you back when you retire. They were created on the idea that I can’t take care of myself and plan for how much money I will need in retirement.
The main reasons I hate annuities are:
- They make no sense
- You don’t start receiving any money until you are close to retirement age
- They earn little to no interest
- You have no control over how the cash is invested
- They carry high fees
This might be an unpopular opinion, but I don’t like REITs. REITs stand for real estate investment trusts. They are a special type of entity for tax purposes that invests in real estate assets. Some REITs are publicly traded and can be bought and held in most brokerage accounts.
REITs are required to comply with certain requirements (like the requirement that they distribute 90% of their income each year) that prevents them from reinvesting profits in a way that can maximize growth. There are also some tax disadvantages to investing in REITs.
In my view, there are better ways to invest in real estate than through a REIT.
4. Savings Account
As I mentioned before, savings accounts are terrible investments. I would hardly even call them an investment at all.
Banks rarely pay interest above 1% or 2% on money held in a savings account. With inflation typically around 2% or higher, that means you are guaranteed to lose money if you keep money in a savings account. An investment that you know is going to lose money, with no upside potential, is the worst type of investment you can make.
5. Certificate of Deposit (CD)
A certificate of deposit is a savings account that holds a certain sum of money for a period of time in exchange for interest. You can buy a CD at most banks. In essence, you are making a loan to the bank and you step into the shoes of the lender.
Similar to savings accounts, CDs also typically pay low interest rates. This is why I always stay away from these types of investments. CDs are largely outdated and rarely used these days by anyone under the age of 90 years old.
6. Low Yield Lending
Loans that pay low interest rates are really just savings accounts or CDs that carry more risk. If for some reason you want to tie up your money in an asset that pays a low amount of interest, I would much rather lend my money to a bank (through a CD or savings account) or governmental agency (by buying a bond).
A loan with a low interest rate that is not to a bank or governmental agency is the worst type of investment you can make as you are:
- Taking on risk you will never get your money back
- Aren’t compensated for the risk you are taking on because the interest rate is low
- Has no upside potential
It is not necessarily bad to own non-income producing assets. There may be situations where making these types of investments is a good idea for you. I personally own many different types of non-income producing assets myself.
However, what is important is that you find ways to add some income producing assets to your portfolio of investments. The key to building wealth is accumulating a portfolio of many different types of income producing assets.
Are you interested in investing in Bitcoin but not sure you want to go out and buy crypto yourself? Well now investors looking to take advantage of the cryptocurrency boom can do so by buying a...
You graduate college, get a job, start to save a little money, and eventually buy a home, right? Wrong! This is the single biggest mistake I see young people make with their finances. If you are...
We all know how important it is to have some sort of budget in place to make sure we have enough money to pay for all of our costs. However, not everyone takes into account all of the right budget...