5 Factors To Consider When Investing For Passive Income

From the “Rich Dad, Poor Dad” by Robert Kiyosaki, I learnt that to be financially free, I need to generate sufficient income to cover the monthly expenses of my lifestyle. And it is not just income, but passive income so that I can still survive without having to work. And to generate passive income, Robert Kiyosaki and his Rich Dad advise that we should let money work hard for us.

There are many ways to generate passive income. We can generate passive income by investing into stocks and bonds, mutual funds, real estate, commodities and also investing in businesses. Robert Kiyosaki in particularly love using real estate to generate passive income.

What best work for Robert Kiyosaki might not be the best for you. Before deciding which is the best passive income generating investment methods for you, here are 5 major factors which you might want to consider:

1) What is the initial cash outlay?

Obviously, the first question is what is the initial cash outlay, if any, for your investment instruments.
Is it a one-time cash outlay? Or is it a recurring investing scheme, where you need to continue to invest more money into this instrument to maintain generating the level of passive income that you need?

How long do you need to maintain this recurring investment? Is the recurring investment amount constant or will it increase or decrease or even fluctuate over time? Does the fluctuation depend on other factors?

Is there any other fees like maintenance charges or yearly renewal charges?

2) What is the real net rate of return?

What is the rate of return of your investments? Is it a net rate of return?

What is the return frequency? 2% per year? 2% in 5 years? 2% in 10 years?

What are some of the major factors which can affect the rate of return?

Can the return be compounded upon the themselves?

3) What are the risks involved?

What is the risk exposure of your investment instruments? Is it classified as high risk, medium risk or low risk.
Could you lose your initial investment and/or your earnings if you are not vigilant?

One point to note is your own risk profile and your financial goals. Usually the return are higher as the risk level goes up. So if your financial objective is to aggressively building up your wealth quickly, you might opt to go for high risk investment in view of the higher return.

The bottom line however, is to be fully aware of the risk involved and then make a judgement call based on the risk and reward involved.

4) Is the return easily accessible?

Can you get hold of the earning generated when you need it?

Or is the earning generated only accessible in certain frequency or period? Monthly? Quarterly? Year? Only at the first month of the year? Only at the 1st week of the month?

How is the earning returned to you? Via physical checks? Fund transfer? What is the lead time for delivery?

Is there any other fees involved? Like fund transfer charges, withdrawal charges?

5) Are your investments truly passive?

Do your investments require constant monitoring? Do you need to constantly watch the markets in order to avoid losing potential earning and/or capital sum? Do you need continuous effort to manage and/or maintain your investments?

For example, if you have real estate, you might need some effort/time or money to maintain it. I remembered that Robert Kiyosaki had to deal with toilet problems in his first few real estate investments.

All these questions will hopefully help you to determine the viability of your investment instruments to generate enough passive income to fund your lifestyle which you want.