How to Generate Passive Income?

How to generate passive income?

That’s the big question which we are going to deal in this post.

There are lot's of ways to generate a good passive income. Interest in FDs, investing in mutual funds, buying a house property. And then after question is what will you get in return?

You can get a fixed amount of interest in FDs, you can get a monthly rental from house property, you get either dividend income or maybe additional units in mutual funds investment. There are different types of re-investment plans, growth plans, etc. So mutual funds can also give you a good push for your passive income.

But in this post we are going to discuss most about REIT. If you have heard about REITs, if not then let me tell you. REITs are Real Estate Investment Trusts. If you are investing in it, you can generate a good passive income. Don't negatively look at REITs. People don't understand it, they find it difficult.

Let me tell you the concept of REITs. Assume I have excess money and I want to invest in real estate. If investing directly in real estate, then ticket size will be 1crore, 2crores (if going for good investment). 

What happens is that I will search for various places every Sunday. Then I will finalize a property, its stamp duty, municipal value, etc. It will take lots of effort. Then I will take that property, then I will find a person or tenant for rent. Then checking if he is paying on time or not destroying my house. And after all these headaches I get the rental income.

By the way, someone said rental income is passive income. But used so much brain to find a house, buy it, finding a broker/tenant. After doing all these you get passive income. Keep this in mind.

Coming to my 1st point. Passive income is not an income that comes with 0 effort. It comes with comparatively lower efforts. So after doing so much then you are getting rental income.

Why do all these if you want rental income?  What is the simple way out? 

The answers is investment in REITs, maybe the better option. 

In REITs you don't get rental income. You get income like dividends. What is it?  I’ll tell. There's a company 'A' that has invested in 5 IT parks and there are many tenants in IT parks. Who are they? IT companies.

What are IT companies doing? 

They are taking every tower/office space of IT park. IT companies would be giving rent to the comapny 'A' who owns this IT park.

The company A owns an IT park, there are many offices in IT park. There come tenants, who give rents. And since I have purchased shares/invested in this company (We shouldn’t say shares, it’s to simplify for you), I will get benefit from it. In the way of dividend, nature of capital, appreciation.

Now just replace the word shares with REITs. I haven't purchased shares but REITs of this co. 

What happens in REITs? 

Tenants who give rental income, a chunk/part of which is passed on to me. But they don't say we are giving you rental income, they say we are paying you dividends.

What’s the advantage of REITs? 

Is my investment in shares? 

No. My investment is in real estate.

Am I investing directly in real estate? 

No. I am investing indirectly in real estate.

Through what? 

Through REITs.

Finding tenant, regular payment, that’s not my headache. This is the investment avenue less talked about. That’s why I emphasized more on REITs. A very important thing- ticket size of REITs is way low. The ticket size of REITs will be around 50,000.

And if you want to invest in real estate, will you be able to buy a flat at 50,000? No.

Will you be able to buy a shop at 50,000? No.

You will have to invest lacs and crores of rupees then you will get real estate investment. Here you are investing in real estate with barely 50-60k. Even if you are sleeping, there are IT companies who are paying rent. You are going to get a chunk out of it like a dividend. This is passive income.

I hope the REIT point is clear. Others can be investing in shares, investing in bonds, where you will get interest income. Or in an area which people fascinate- Futures & Options. People believe that if Futures & Options is set, then daily by doing call/short, it will be easy.

Every day they want to do Futures & Options, earn money, here is passive income. It’s not like that. For trading also you need to work hard, do research. If you trade in futures and options without proper knowledge, you will have no future and be left with no option. 

Better have good knowledge about the future and options then only start trading in it to get a passive source of income.

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