Investing for income is NOT what your typical stockbroker knows how to do! Investing for income is a way to take your future into your own hands, not depend on the whims of the market and the possibilities of government or pension failure. Do you have friends or family who lost everything in the tech crash? To Enron? To similar stock market fakery-failures? To get-rich-quick schemes? To buying a bad house in a boom market, only to lose everything when the market ticked south?
The scenarios mentioned above all have one thing in common – the investment was for GROWTH, not INCOME. The idea when buying a stock like Enron at 25$/share, then selling it at 200$/share is that all your money is made at the END of the transaction – and if you’re not among the lucky few that got to sell at 200$/share, then you can and will lose not only your profit, but your capital as well. The same situation applies to those who “flip” houses for a quick profit – when the market is rising steadily, flipping can net a solid, even phenomenal income! However, many people have their investment lives so leveraged that even “failure to grow” (not necessarily even “lower market prices”) can cause the whole business to collapse on itself.
Investing for income is a different paradigm – investing for income is a way to ensure that your investments put money in your pocket on a periodic basis. In fact, that is Rule Zero of income investing – if an investment does not generate cash flow, it is not an income investment. Stocks which provide a quarterly dividend are an example of income investments, as are bonds which pay interest periodically. Rental property is the other type of income investment that anyone can participate in – other, more involved types of income investing sometimes require special skills, fame, or both.
Dividend paying stocks are the low-budget investor’s dream, because they require the least amount of money up front. Often, all you need to have to buy a share of investment stock is the price of one share! In fact, some companies have programs called DRIPS (Dividend Re-Investment Programs) which allow you to buy fractional shares of the company. Imagine being able to buy 50$ of your favorite stock every 3 months, no matter what the share price is! If the stock is selling for 25$/share, you are buying 2 shares per quarter, while if it is selling for 150$/share, you’re only buying 1/3rd of a share. The dividends from a DRIP program are re-invested in shares of the company stock – this is income which you cannot see, which is inconvenient to access, and which grows exponentially over time. By putting a minimal amount into a reliable company’s DRIP program every quarter, you can end up with a fortune after a period of time has passed – for example, I’ve put $50 dollars per quarter into one of my drips, for the past 8 years (An insurance company.) At this point, every quarter not only do I buy 50$ worth of company stock, but my stock itself buys another 45$ worth of stock! These programs are one of the most convenient ways to participate in the miracle of compound interest.
Bonds are another way to earn money periodically – in fact, some investors end up with a portfolio consisting solely of municipal bonds, because their dividends are tax-advantaged. In some cities, municipal bonds are effectively tax free! Bonds come in two forms – in the first, coupon bonds, the bond is purchased for its face value, and interest is paid periodically based on the face value. For example, a 10,000$ bond paying 5%/year will pay the bond-holder 250$ every 6 months. At the end of the bond’s term (anywhere from one to twenty years) the bond issuer repays the bond purchaser the bond’s face value. The second type of bond is the zero-coupon bond, where a bond is bought for substantially less than its face value, yet is repaid according to that face value. This type of bond income is over a much longer term than the first.
Rental property is the third type of income investment that is easy for anyone to participate in – the most commonly rented property is, of course, real estate. Houses, apartments, condominiums, even hotels – all of these are owned by someone, but usually they are not owned by the person who lives there! Buying a condominium in a stable or growing community where real estate prices have yet to skyrocket can be a great source of passive income. For example, a $200,000 fixed rate mortgage might have a monthly payment as low as $1500, but in some areas, the same size residence might rent for as much as $2000. Multi-unit apartment buildings are a great way to spread some of your risk – depending on your situation, even a two month vacancy for your single unit rental can wipe out a substantial amount of profit, or even put your income into the negative! This risk is greatly minimized when the investment is, for example, an 8 unit apartment house, or a row of townhomes. Vitally, make sure that your investment is able to make you money from day one, unless you are absolutely sure you can make up the difference out of pocket, and have a strong feeling that the area will grow and prosper. My brother-in-law bought a rental house in an out of the way town, with a mortgage higher than the area rent, and it was only after 3 years of feeding the property $240 per month – on months it stayed rented – that he decided to sell at a loss to be rid of the constant drain on his family’s finances.
All of these types of income investing have one thing in common – there is not much chance of “getting rich quick!” You are not going to end up a millionaire overnight from these types of investment, and shouldn’t expect to – and you should be very wary of anyone who claims otherwise.
These types of investment have something else in common though – there is the statistical certainty of “getting rich slow!” Patience is rewarded with fortune; time passed equals dollars earned. You WILL end up a millionaire over time if you remember to invest steadily and continually. Never spend your principle. Never get into deals where you’re losing money instead of gaining. Always make sure you believe in the companies you’re investing in, and understand what it is they do and how they do it. Invest in the most expensive property you can afford, in the best area of town – imagine buying property next to the White House, before the White House was built, or along the beachfront in communities like San Diego.
Remember, get rich slow – patience is a virtue, and a sure path to future prosperity.