Time is money. Time is sacred. Only 24 hours a day. That is all we get. No one in this world has more time in a day. No matter if you go by age, profession, religion, skin colour or where you live. No one. Time is the greatest equalizer because a single person cannot have more of it. It can never be recreated or reused. It exists once, and then it is gone. In addition, that is exactly why passive income is so important – because time is worth more than money.

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Unlike money, which can be earned, saved, spent, invested, wasted and lost, we cannot add a single minute to our clock. We cannot expect dividends for seconds or hours from the bank, or reinvest the time we have spent on other activities. Considering the fact that most of the free world has to work for its own living and consumes most of its time for this purpose, this precious asset has to be nurtured and enjoyed.

Passive income is probably one of the most significant and central ways in which the rich get richer. It is how they make the most of their earning potential that is available to them in a day. If you have ever heard of the words “make money while you sleep”, never before have had they applied as they do to passive income. With passive income, you make money while you sleep. You also make money during the day when you are awake. It works automatically and repeats itself over and over again.

However, creating a passive income stream works anything but automatically. It is not an easy task. It requires a tremendous amount of effort and time. In the beginning, unfortunately, you will only be able to generate a very small return. This means frustration and a huge learning curve. However, it is one of the most fruitful and rewarding investments of your time that you could possibly invest in.

Passive income may not be the answer to all your immediate problems, but it is the path to success and certainly the foundation for prosperity and happiness. When you are not only concerned about making enough money to pay your bills and you also no longer have to live pay check to pay check, a mental clarity and an emotional release sets in. You become free from the shackles of a life-depriving 9-to-5 job and begin to live a more fulfilling life.

When you have the time to choose whether you go to work or prefer to spend precious moments with your children or travel the world, you are free. You are free in the truest sense of the word. So was it worth all the headaches and effort? Isn't it time to break the chains that have confined you to a less fulfilling life? I would think so. Moreover, I could imagine, if you are really serious about enjoying financial freedom, adopting the passive income machine.

Passive income - what is it anyway?

Before I dive into why passive income is so important, let us first describe what it actually is. Passive income is income that is earned automatically with little maintenance. Active income, on the other hand, can only be earned by directly committing your time to money. Whether it is an hourly wage job or a full-time job, the amount of money you earn is directly related to your time.

With active income, as soon as you are not working, unfortunately you cannot earn anything. If something were to happen to you and an injury, illness or other misfortune put you out of action for any reason; you lose your earning capacity. For example, if you were an athlete, and you were injured so badly that you could not continue your career; you would lose your ability to compete and would no longer earn money.

If you were working as a contractor, with no mobility and possibly even missing limbs, how could you work at all? If something happened to you, and you lost a leg or an arm, how could you continue to earn money? If your car broke down, and you had no money to fix the problem, how would you be able to broker houses or meet potential clients in some other capacity as an estate agent? It would certainly become far more difficult.

Most of the world lives by the credo of generating an active income. They earn it only based on working hours. The rich, however, work according to other standards. They convert the money they earn in physical time (or part of the active income) into passive income. They earn passive income from a range of sources such as property rentals, dividends, interest income, royalties, franchise fees, laundromats, and website ads and so on.

Do not get me wrong. Creating a passive income is a huge undertaking. It requires an enormous amount of time. During this time, you are not receiving any income. You are investing your time in the hope of earning a good income in the future. With active income, the money earned correlates directly with the time you spend working. Passive income, however, pays off long after you have finished working.

There are, of course, a number of ways to generate passive income, whether you want to make money online or simply earn passive income through more traditional means (such as property rental or even stock investment). There are several ways to generate these income streams. What is hard to understand at first is not only the importance of having a passive income in your life. You will also become addicted to looking for ways to generate additional income streams using this powerful financial method.

There are probably dozens of reasons why passive income is important in your life. This does not mean that you have to quit your white-collar job with the active income. If you could afford to get busy generating multiple passive incomes, you will obviously be much better off. However, many people simply cannot afford this. Due to debts and other financial obligations, it is simply not feasible for most to work without income for a certain period of time.

Five reasons why passive income is so important

Number 1 – Passive income gives you freedom.

All things considered, time is our greatest asset. In fact, time is far more valuable than money. While money can be earned multiple times and spent repeatedly, time can only be used once. After that, that time is gone forever. You can never relive that moment. This is why passive income is so important - because it gives you the freedom of time. When you are less shackled to service your monthly financial obligations, you will enjoy more free time.

This does not mean that you are completely free from all of life's obligations. It just means that you do not have to look tense at the end of each month to make ends meet. As long as you can ensure that your passive income exceeds your monthly expenses, you can spend your time as you please. With each new passive income stream, your income will eventually far exceed your expenses, and you will eventually gain true financial freedom.

When you have more free time because you are no longer dependent on active income, then you can arrange your working time as you like. You can choose what you would like to do, such as travelling around the world and becoming a digital nomad. You can choose to settle down and start a family. Likewise, you can look into creating additional sources of income for your passive income. The choice is yours. You have the freedom to choose because you have the freedom of time. These are the benefits of passive income.

Number 2 – Passive Income Reduces Your Stress and Anxiety

There is nothing worse than having the pressure of possibly not being able to pay your bills. It causes anxiety and an overall hopeless despair with regard to your future. The what-if scenarios begin to circle your mind like a hawk flying over its prey before it lunges for the killing blow. It affects you mentally, physically and spiritually. It strikes you emotionally and destroys your hopes and aspirations.

When we live in extreme fear of the future, it is hard to be present. It is hard to enjoy what we have in the here and now because we are so connected to these doomsday scenarios. We are so worried about impending financial collapse that it is difficult to break free from the shackles of this train of thought. It consumes you. It is hard to get away from it if you can only think about it.

Passive income helps alleviate all these worries. It helps reduce anxiety because you do not have to worry about losing your job or falling victim to downsizing. If you didn't have to worry so much about impending financial doom, you would not only feel better mentally and emotionally, but also more vital physically. You have more energy and are more motivated and able to achieve more because your passive income also helps to build that all-important financial momentum in life.

Number 3 – It allows you to do the things that you love!

We have passions that we very much want to pursue throughout our lives. Nevertheless, we always seem to put them off until later. Whether it is art, music or travel, we can let our imaginations run wild when passive income frees us from the debt that ties us to the never-ending cycle of payments and interest. It allows you to get off the proverbial hamster wheel by putting it above all the things that so-called "normal people" fear.

It also frees you from having to earn an active income by following your heart. If your passive income exceeds your expenses, get involved in a project that is close to your heart. Maybe you want to help out at a homeless shelter in town. Maybe you want to give piano lessons to your neighbour's son, even though he cannot pay you much for it. Whatever it is, you can do it because you do not have to worry about the pay check.

It does not matter what you are passionate about, you can do it. If you want to join a language course for a few weeks and study full time, you can do it. If you want to go camping with your children for a whole week, you can do it. You do not have to worry if you have to call in sick or take a day off. You are your own boss. It is the dream of those who wake up every day dreading their daily work routine, which totally bores them.

Number 4 – It gives you the opportunity to work and live from anywhere.

I do not know about you, but I have a deep passion for travel. If I were to classify the things in this world I love most as pastimes, this would be one of the top contenders. However, the problem with travel for most people is that it is temporary. It is a moment of bliss that comes and goes too quickly. But it's not about just taking a week or two off from work. After that, it is about really travelling the world with the ability to work (or not) from anywhere.

If you have passive income, then the whole world is open to you. You can travel to a city like Vancouver, Hong Kong, and Rome or just about anywhere else in the world, live and work. However, you do not have to stay in one place. After a few months, you can move on. In addition, why not, if you have the financial means?

Still, it is quite easy not to make passive income a priority once you are so busy with everyday life. Breaking away from it is difficult. But you just need to set a goal, focus and work towards it with daily hard action. It will give you a light at the end of the tunnel. It will take time, but you will get there eventually. Furthermore, it all depends on how much you want it and how important it is to you at the end of the day.

Number 5 – It provides you with a platform for financial stability and growth.

If your wealth is accumulating automatically, and you do not have to worry about possibly not being able to pay your bills at the end of the month, then you can think about how you will further strengthen your financial stability. Let your assets grow. It buys you the time to deal with things like taxes, stocks and other investments, among other things. This gives you the time and peace of mind to deal with the financial aspects better and, as a result, achieve your financial goals. It is easier to focus on your finances when other issues do not distract you. As problems arise in your life, financial and otherwise, you will be better prepared. Without the commitment to a job you dread every day, you can train your mind's eye for the things that will bring you more growth and prosperity over time.

No matter how you look at it, passive income has a lot of meaning. Many people do without it because they either do not understand it or do not believe that passive income can realize their aspirations and goals. Well, whatever the mind believes, the mind can achieve. This is as true of passive income as it is of anything else in life. Believe it wholeheartedly with your mind, and you will achieve it. As long as you do not give up.

Examples of Passive Income Methods

In this section of the guide, I will introduce you to some methods that can earn you passive income.

Passive income from dividend stocks

What are dividends anyway?

In order for you to understand the benefits of dividend income, you must first understand what a dividend is. A dividend is simply a payment that a company makes to its shareholders from its annual profits. Let us say your friend runs a business, and you are an investor. Your friend's company earns USD 100 in net income this year. Your friend decides to pay each of his shareholders 1 euro of the profit. In this case, he gives you USD 1 of his income. This is a dividend.

It is important to understand that not all companies pay a dividend. It is also worth noting that each company can decide for itself how much it will pay out in total each year. Furthermore, it can increase or even decrease the amount to be paid out if the company sees fit.

Each company also decides how often to pay a dividend. The majority of listed companies pay quarterly, four times a year. Some pay monthly, some pay semi-annually and some pay annually. Some companies that do not pay a dividend may even pay a one-off special dividend to shareholders.

To cut a long story short:

  • Not all companies pay dividends.
  • Each company decides how much it is willing to pay.
  • Each company decides how often to pay the dividend.

The power of dividend income

Now we get to the good stuff - the earning power of dividends. There are two reasons why dividends are so attractive. Let us say you own 10 shares in a company that pays a dividend of USD 0.10 once a year. When the dividend is paid, you receive USD 1 (10 shares x USD 0.10 dividend per share = USD 1 dividend income). What you do with this euro is up to you. But at the end of the day, you have two options:

  1. You can withdraw the money.
  2. You can reinvest the dividend.

If you take the money out, you can spend it as you wish. It is called additional income (called passive income by many people) for you. As long as the company pays this dividend, you will continue to receive USD 1 every year.

If, on the other hand, you reinvest the dividend, the real magic begins.

Let us say the share is trading at USD 10 per stock, and you reinvest your dividend income of USD 1 to buy more shares. You started with 10 shares, but after the first year's dividend, you now have 10.1 shares. To keep it simple, let us just assume that the share price stays at USD 10, and you get the same dividend of USD 0.10 every year. How many shares do you have after 20 years? After 20 years, you have 122.019 shares. In addition, you have not invested any more of your own money. You have used the dividend to buy more shares. What is particularly exciting, however, is the additional income you receive with the help of the dividend.

At the beginning, you only earn one euro, but as you bought more shares each year, the dividend payout increased. After 20 years, you earn a total of USD 22.02 in dividends. If you had taken the money 20 years ago, you would have made only USD 20 in dividends (USD 1 per year for 20 years). But because you reinvested the dividend and bought more shares, you received a slightly higher dividend every year.

This is the advantage of reinvesting your dividend income. They allow you to buy more shares without having to put money out of your own pocket into the share. In the real world, companies naturally increase their dividends, and you can invest more of your own money to really accelerate the growth rate. We know the numbers above are kept low and may not seem very exciting or appealing. But we wanted to keep things simple, so you can understand them better.

Putting the power of dividend income to work for you

Before you run off to invest in dividend stocks, we have a word of caution for you.

We already know what you are thinking: if you can find the stocks that pay you the highest dividend each quarter, you will get a "boost" in dividend income!

But in the same way, you can just NOT generate any additional positive effects from your dividend income. You will burn your money if you go this route. Why? For two reasons:

  1. Firstly, if you focus only on yield, you will be missing out on important information. As the dividend rises, the yield rises, but as the share price falls, the yield also rises. Therefore, a share with a low price may have a great dividend, even if this is not the case in reality. The lower share price could even mean that the company is in trouble.
  2. Secondly, remember that companies can cut a dividend at any time. If you see a company paying a high dividend and the industry it is in has tight margins, you may want to do some more research for more clues. If a company cuts its dividend, you can expect the share price to fall, as many investors who only own the shares because of the high dividend will flee the stock. If there is less demand for the share, the price will fall sharply.

So how can you use dividend income to your advantage while minimizing the risks of not burning through your capital? The answer is to research and invest in high quality companies. There are many companies that have paid a dividend every year for 25 years. This means that there are many good companies you can invest in to get a (solid) dividend.

For this, I have created the right guide for you. Click here to go to the "Dividend Investment Guide"!

Passive income from ETFs

How investors make money with ETFs

Making money with ETFs is essentially the same as making money by investing in mutual funds, as they work almost identically. As with mutual funds, it depends on how your ETF makes money, as well as the type of investments it holds.

The ETF itself is something of a trust fund - it can invest in stocks, bonds, commodities like gold or silver, preferred stocks or a well-known index like the DAX (German Market Index) or the S&P 500. What does that mean for you as an investor?

Basically, it comes down to this: How you make money with an ETF over time depends on the underlying positions of that ETF.

So if you own a stock ETF that focuses on high dividend stocks, you hope to make money with a combination of capital gains (an increase in the price of the stocks your ETF owns) and the dividends paid out by those stocks. If you own a bond ETF, you also want to make money from interest income.

If you own a real estate ETF, you hope to make money on your investment from the underlying rents, capital gains from property sales and service income generated by the flats, hotels, office buildings or other real estate owned by the REITs.

The same keys to making money with mutual funds also apply to ETF investments

From an academic perspective, there are three keys you can use to increase your returns over time. These three keys apply when you are trying to make money with ETFs:

  1. Do not invest in ETFs you do not understand: There are some crazy ETFs in the world - some use super leverage and short stocks, some only invest in Third World countries, and others that focus heavily on certain sectors or industries. As Warren Buffett likes to say, the first rule of making money is to never lose money. The second rule is, do not forget rule #1. You should know exactly underlying positions of every ETF you are involved in and why you are invested in it.
  2. Keep your ETF fees low: Generally, this is not a big problem, as ETFs tend to be more than affordable. This is one of the reasons why they are often preferred by investors who cannot afford individually managed accounts. That means a financial planner, a financial advisor or a do-it-yourself investor can build a portfolio of relatively diversified holdings. In addition, he can even use ETFs that focus on individual sectors or industries, which can be purchased for an expense ratio of about 0.50% per year.
  3. Invest for the long term: ETFs should first and foremost accurately reflect their underlying positions, apart from structural issues or market events. That is, if you hold an equity exchange-traded fund, you may be subject to quite large fluctuations in market value in a given year. You will see periods like 2007-2009 when your ETF shares drop 20%, 30%, 50% or more on paper. If this makes you uncomfortable, do not invest in these securities. While there is no guarantee that the future will look exactly like the past, historically time has eliminated most of this volatility and investors have been well rewarded as a result.

Remember that with ETFs, as with any other investment, you will not solve all your problems. They are just a tool. Nothing more, nothing less.

Passive income from real estate

In the real estate market, the best way to earn passive income is to invest in turnkey rental properties that are ready for rent and managed by property management companies. In theory, this process is relatively simple.

You either do your own research on properties or commission someone to look for a suitable property for you. Preferably, the property you are looking for should be in good condition and in a good location. After buying the property, you have the necessary repairs carried out on the property to enhance its value. Finally, you hire a management company to take care of the administrative tasks, such as collecting the rental income, documenting and carrying out the maintenance and repairs, and transferring your income to your bank account.

If you use turnkey real estate properties, most of this is already done. All you need to do is buy the property. Let the professionals manage it and collect your monthly passive income, while your tenants help you build your wealth.

Generally, you can profit twice

If you have multiple sources of income, you earn your money in two ways. The most obvious is the source of income that comes from rental income. As long as the amount collected exceeds the amount paid for mortgages, taxes, insurance, maintenance, repairs and property management services, you will earn a good income from renting property every month.

The other way you can benefit is to increase the value of a turnkey rental property and reduce the amount of equity you invest. You can either take out low interest loans and exchange them for your invested equity, or sell one of your properties outright if you own another that continues to provide you with a good passive income stream.

Invest outside your region

By buying rental properties all over the country, not just in your own region, you can increase your passive income even further. By hiring others to manage, maintain and repair the property, you do not have to be in the same location and can manage your passive property from virtually anywhere. Furthermore, this allows you to seek out the rental markets that come with the lowest costs, such as low property or business taxes.

Ideal locations are those with relatively high per capita incomes in communities with strong local economies, low unemployment rates and tenant markets. Empty properties cost money. Filling them with responsible and well-employed long-term tenants will ensure your long-term success, and your continued passive income. Look for markets with job growth or those that will soon be home to a large new factory or business, as this can create more demand for housing. The result is an increase in property value and a stable pool of potential tenants.

Avoid bottomless pits!

To get passive income from real estate, you need to do a lot of homework up front, so you do not end up buying a bottomless pit. A bottomless pit uses up all your potential rental income and costs even more with constant repairs, only making it harder to maintain your rental units. You can avoid it by doing your homework and making money when you buy.

This means visiting the property, checking its tax history and making sure the local market is robust and has long-term potential. The local property market is beneficial for landlords and property owners. If you find it difficult to rent out your units and have to pay high taxes in the respective areas where rental income is limited, then you have made a bad business decision. Moreover, you will find it difficult to earn a passive income from your property investment. But as long as the market is good, you can make money.

One way to avoid potential bottomless pits is to use the experience of a professional. Companies that specialize in turnkey investment properties know exactly what is required to achieve a positive cash flow and eliminate or minimize risks.

Do you have a strategy for generating passive income from real estate investments?

Successful investments require planning. Whether you are buying stocks, bonds or real estate, a good plan will help you avoid mistakes. If you are buying property as an investment, there are several known issues that you should consider before buying.

Cash flow

When it comes to cash flow, not all properties are created equal. If you crunch the numbers on your expenses, expected income and profits for a property in a less maintained neighbourhood, your return is good. However, as with any investment, a high return comes with increased risk. On the other hand, a property in a superior neighbourhood with good public schools is less risky and will offer a higher appreciation over time, even if the monthly profit is lower.

Good tenants, bad tenants

Of course, you want the best tenants you can find. If you have chosen a property in a more affluent and stable neighbourhood, your tenants are more likely to be responsible for your property as well as more reliable in paying rent. Properties in areas with lower income rates are more likely to attract tenants who miss rent payments or damage your property. With such an investment, there is a higher risk than normal. You end up facing high renovation costs and lower income.

Vacancy rates

Investing in a property with a high vacancy rate is not really an investment. Yes, the value of a property may increase in the long run, but is it enough to cover your expenses as an owner? It is better to invest in a property that attracts stable and responsible tenants.

Condition of the property

Before buying a property, an inspection by a professional and independent home inspector is essential. Even if your potential purchase has just undergone a nice renovation, you need to find out if the wiring and plumbing are up to code. In most areas, it is illegal to rent out a property with rapid defects. An inspector can estimate the remaining life of the roof, heating and hot water systems, and find defects in the structure, such as dry rot in the attic.

Managing the property

If you do not live nearby and do not really enjoy maintenance work, you'll probably want to hire a property manager to oversee your investment. Do some research on a potential management company. You should look at the number and type of properties the company manages. If the number of properties to be managed exceeds 250, your property is probably not getting enough attention.

To invest in land for residential properties is also a part of real estate investing. More about land investing, you will find here!

REITs

Real estate has been around since our ancestors lived in caves. Therefore, we are not surprised that Wall Street has found a way to turn real estate into a publicly traded security.

A real estate investment trust (REIT) is formed when a company is created to use investors' money to buy, operate and sell real estate properties. REITs are bought and sold on the major stock exchanges like any other securities. To maintain its status as a REIT, this company must distribute 90% of its taxable profits in the form of dividends. In this way, REITs avoid paying corporate income tax, whereas a regular company is taxed on its profits, which then affects the income it could distribute to its shareholders.

Similar to regular dividend stocks, REITs are suitable for stock market investors who expect regular income, both they also offer the opportunity for appreciation. REITs allow investors to invest in non-residential properties such as shopping centres (about a quarter of all REITs specialize in these), healthcare facilities, mortgages or office buildings. Compared to the previous types of real estate investments, REITS are also very liquid.

Do you want to learn more about REITs Investing? Here you will learn how it works!

Real estate funds

Real estate funds invest mainly in REITs and real estate companies. They offer the opportunity to acquire a diversified portfolio of real estate with relatively small capital. Depending on their strategy and diversification objectives, they offer investors a much broader choice of assets than buying individual REIT shares. Furthermore, they have the means to reduce transaction costs and commissions.

Just like REITs, these funds are quite liquid. Another key benefit for retail investors is the analytical and research information provided by the fund on the assets purchased and the management's assessment of the profitability and performance of specific real estate investments and their asset class.

Passive income from Airbnb rentals

Since its inception in 2008, millions of people have signed up on Airbnb.com to seek accommodation for a short-term stay. This has changed the game for both the hotel industry and property owners. Property owners and investors have discovered a completely new market for themselves. No more leases, no more unpaid rent or expensive renovations once a tenant has moved out. If you have a house or property that is just sitting there waiting for the next little family to move in for twelve months, you are doing something wrong. By using Airbnb's short-term rental platform, guests are encouraged to stay in a constant place from days to weeks.

Did I mention that you could make money with Airbnb? Prices of USD 40 / night on Airbnb versus USD 1,000 per month for a long-term rental contract... all ROI junkies know that this is an excellent opportunity.

Airbnb connects travellers with hosts. When you make money on Airbnb, you are what is known as an Airbnb host. Wondering what it entails?

Take a look at the appendix of this guide. There you will find the little guide called "How to start a profitable Airbnb business!".

Passive income from P2P lending

Why is P2P a good source of passive income?

Easy interest

In the long run, compound interest has a dramatic effect on your invested capital (through which both interest and principal are reinvested). Einstein called it the eighth wonder of the world! When investing in the stock markets, you often have to pay a trading fee to reinvest your dividends. This can affect your ongoing returns. However, with P2P lending, there are usually no transaction fees for buying new loans.

Lower volatile income

An investment in peer-to-peer lending has been far less volatile than an investment in the stock market in recent years. Traditional income investors have to weigh the pros and cons of equities (higher yield, higher volatility) against bonds (lower yield, lower volatility). With a diversified portfolio of P2P loans, you have the potential to get the best of both worlds.

Can be sold quickly if necessary

If you need access to your capital, you can often sell your investments in peer-to-peer lending quite quickly. Platforms usually have a secondary market or offer short loan terms to provide investors with adequate liquidity.

P2P loans also help borrowers

Peer-to-peer lending is not only beneficial for investors. It also helps borrowers by paying lower interest rates than compared to traditional bank loans. So not only does your investment create an ongoing income stream, it also helps others.

What factors should be considered when choosing a P2P platform for a passive income stream?
Fully automated lending

Many people who have got involved with peer-to-peer lending have been unsatisfied with bank savings. The initial enthusiasm of P2P lending and the interest rates offered showed that people often need to put a little more manual effort into managing the investment. However, if you are not careful, you can spend several hours a week managing your investments or selecting individual loans. Depending on the amount invested, it can become almost like a full-time job. If you want to earn a truly passive income, you need to check which platforms are most suitable for automatic investment. Do you trust the robot with your investment capital?

Regular payments

The P2P lending ecosystem is very diverse, and you can find all kinds of lending arrangements.

Some platforms offer a "bullet loan" where loan interest accumulates and is not due until the end of the term. In reality, unexpected things often happen: principal and interest payments are overdue, refinancing arrangements fall away and repayment has to be extended or even defaults. If you want to draw on regular income and rely on your investments, the bullet loan may be less desirable as repayment is less predictable. On the other hand, there are platforms that offer shorter-term loans with regular repayments. These can lead to a less volatile monthly return, ideal for passive income.

High yield

This may seem obvious, but it is important to look for a high return.

To create a basic scenario: Imagine you want to build a passive income of USD 800 per month, and you have two possible investments. The first offers a current income of 5% and the second a continuous income of 12%. You need to put USD 192,000 into the first investment to reach your passive income goals. However, you only need to put USD 80,000 into the higher paying investment to achieve the same ongoing income (this has been calculated at 800 x 12 months / return).

Lower risks

Although high returns are important, it is equally important not to chase the high returns at the expense of too much risk. Warren Buffett, perhaps the most respected investor in the world, has two important rules for investing. The first is "Never lose money". The second rule is "Don't forget rule number 1".

When choosing a P2P lending platform for long-term passive income, it is therefore important to investigate the risks of the listed investments and the company behind the financial platform itself. Once you start investing, most investment experts agree that diversification is the best way to reduce risk while achieving a high return. For this reason, look for a platform that allows for easy diversification across a variety of different investments.

Investments in start-ups

What is a start-up?

The world is much more purposeful today than it was at the turn of the century. You do not have to leave the house to buy groceries or run from the curb to the street to hail a taxi. There is an app for that.

No more paper towels? Then just place your Amazon Prime order.

Need to get to the airport at 4am? Call an Uber taxi.

In the last few decades, start-ups have turned centuries-old industries upside down, solved big problems at the push of a button and made big profits with their products and services - if they were successful, too. So have the lucky investors who took a risky bet on a young company that happened to come up with an idea that worked.

A start-up is traditionally defined as a newly founded private company (< 5 - 10 years) that can scale very quickly. Most start-ups begin as very small businesses. As they develop their initial idea, they look to venture capitalists and angel investors for additional funding as they grow their business.

What is start-up investing anyway?

Start-up investors essentially buy a part of the start-up with their investment. They use their money to take a stake in the equity of the start-up in question: A part of the ownership of the start-up and the rights to potential future profits.

In this way, investors form a partnership with the start-ups they invest in. If the company makes profits, investors earn a return based on the amount of their share of the equity. If the start-up fails, the investors lose the money they invested.

Liquidity refers to how easy it is to convert a security into cash. The shares of a well-traded public company (Coca-Cola, for example) can be traded almost instantly on the stock market and are therefore very liquid. The equity of a start-up or private company is relatively illiquid because it is harder to sell.

Business angels benefit from their investments as soon as they sell some or all of their ownership in the company during an IPO or acquisition. A liquidity event is an opportunity to convert money tied up in equity into cash. A well-known example is an initial public offering (IPO) - the first sale of shares by a privately held company to the public - often referred to as "going public".

During a successful IPO, the price per share increases dramatically from its pre-sale value. It increases the value of the respective investor's holdings and gives shareholders the opportunity to trade their shares on the financial markets if they wish to liquidate.

An asset is an object with economic value that belongs to an individual, a corporation or the government and is expected to provide future benefits to the owner. Assets usually generate future cash flow, reduce costs or improve revenue.

Assets are divided into asset classes - groups of securities (property rights) that have common characteristics, behave similarly in the market and are subject to the same laws and regulations. Start-up equity, for example, is considered an asset class with a high risk and a high return. This means that investing in a start-up is very risky, as many start-ups do not return investors' money and the seed capital is relatively difficult to sell before the company goes public. However, this increased risk and illiquidity comes with the potential for a very high return if the company's growth is successful.

Some start-ups will allow investors to sell their shares before the IPO. This is called a secondary sale of shares.

However, many start-ups will issue a right of first refusal. Investors who want to sell shares before a company goes public must first submit their offer to sell to the start-up or its early stage investors (This is also called a tender offer). Most start-ups also restrict secondary sales of ordinary shares or shares held by the founders and employees.

Example

In 2014, a former Uber employee found a buyer for his currently vested shares at a price of USD 200 / share. However, Uber refused to approve the transfer.

The employee had two options: Sell your shares to Uber for 135 USD / share, or hold them. He decided to hold them.

Uber had introduced a right of first refusal and amended their articles of association to restrict unauthorized secondary sales of shares. The buyback programme helps Uber to cash in shares issued to early investors and employees at a reduced price, and then sell them to later investors at a large profit.

Summary and conclusion

As we have learned, passive income can give us more time to do other things. In my opinion, it is very important to look for other sources of income, especially passive ones. I am also always working on this, because I want to have more time for my family, and I have been dreaming of studying archaeology and history since I was a child. This is exactly where passive income can help. It can make my dreams come true, and your dreams can also come true through passive income. Now you have been introduced to a wide range of options already, offline as well as online. You should, if you do not already have a passive income source, choose a first one. Focus on this one until you have mastered it perfectly or are generating good income. After that, choose a second and third one.

It is also important to generate passive income from several sources in order not to be dependent on one. Go your own way and realize your dreams.

I wish you much success!

Your Alexander Kelm

About Alexander Kelm

Alexander Kelm is a passionate value investor and runs the website Wall St. Nerd. Here, the passionate value investor writes in-depth articles on the topic of Value Investing. Value Investing involves analyzing a company's fundamentals and can be characterized by an intense focus on a stock's price, its intrinsic value and the relationship between the two.

Alexander Kelm offers online courses on stock investing.

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