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12 best income generating assets for passive income UK – Updated September 2022
Income-generating assets help you to beat inflation and build wealth over time.
It's also a way for you to generate passive or semi-passive income.
Today we are going to explore different examples of income-generating assets, why they matter and how to get started.
I write today's blog post from personal experience of having invested in 11 of 12 of the assets mentioned in the past or present.
Table of Contents
What is an income-generating asset?
An asset is a source of future economic benefit.
They exist to help those who are future-minded achieve their goals.
In even simpler terms, assets exist to put money in your pocket today and tomorrow.
An income-generating asset (or income-producing asset) helps you generate cashflow and over time, a Return On Investment (ROI).
But the type of income-generating asset that you invest in matters.
The Pareto Principle (80/20 rule) or the law of the vital few states that, for many events, roughly 80% of the effects come from 20% of the causes.
For example, in business, we know that roughly 80% of the sales come from 20% of clients.
80% of the income from football games comes from 20% of the super fans.
You see this in churches – 80% of the donations come from 20% of the attendees.
I see this even with this blog. 80% of the traffic comes from 20% of the blog posts.
What we are looking at with the 80/20 rule is somewhat a law of nature.
It applies to most things but not everything.
Imagine what would happen if we used our knowledge of this principle to commit our resources to the 20%.
Think about that for a moment.
How is the 80/20 rule working in your life right now?
Bringing this back to our topic of today.
I’d argue that 80% of your passive income will come from 20% of your income generating assets.
The question then becomes, which of the income generating assets could be your 20%?
Here is an even more important implication of the 80/20 rule:
If 80% of your passive income does come from 20% of your income-generating assets, then it follows mathematically that:
64% of the passive income comes from 4% of the income-producing assets.
51% of the passive income comes from 0.8% of the income-producing assets.
In simple terms, circa 50% of your passive income comes from circa 1% of your income generating assets.
Note: For Maths buffs, 64% comes from 80% x 80%. 51% comes from 80% x 80% x 80%. 4% comes from 20% x 20%. 0.8% comes from 20% x 20% x 20%. The 80/20 rule is fractal. It applies to a population of 1,000,000 as it would to a population of 10.
Why Invest In Income Generating Assets?
Before we dive into examples of these assets, let us first state more plainly why we even need them at all:
i) Regular Cash Flow
Income-generating assets exist to provide cash flow and help you do the heavy lifting in your finances.
Particularly during challenging economic times such as recessions or the cost of living crisis.
If you think about it, most rich people you know do two things:
(A) They delegate to people,
(B) And they delegate to things.
For (A), they simply let other people do the activities that aren’t necessarily value adding to them.
E.g. Cleaning, mowing the lawn, food shopping, etc.
And then for (B), they delegate the task of making money to things such as assets.
They know that assets will more reliably create wealth over time than labour.
For you and me given our limited resources, it means that we have to be very particular about what assets we invest in to do our heavy lifting.
In my mind, I see something like this:
The 3 assets I’ve highlighted above essentially play the role of doing the heavy lifting and protecting you from life’s challenges aka expenses.
These income generating assets could be considered your “Generals”, with the goal of protecting you (the key asset).
In everyday life, if these assets do their work well, then you’ll live a life of bliss.
Well, most of the time.
ii) Achieve Financial Independence
Income-generating assets are critical if your goal is to achieve Financial Independence.
This is because they’ll get you to financial independence quicker and best of all, keep you there.
In case you’re new to this idea, what you need is for the income from your assets to exceed your expenses.
Although this might seem like an impossible task compared to where you are today, it is possible with a plan and much action over time.
Optimising your life for freedom and independence begins by first choosing it in your mind as a goal.
iii) Increase Net Worth
Income-generating assets help you strengthen your financial position and increase your net worth.
This is a particular case in point re the 80/20 rule.
You’ll find that most people with high net worths usually have a big portion of it tied to properties, for example.
The more income-generating your assets are, the better the quality of your net worth.
iv) Life Design
Income-generating assets help you bend time to your advantage.
You can literally create the type of lifestyle you want and go against the grain of the masses.
Do you want to live 6 months in Europe and another 6 months in Africa? or Asia?
Or do you want to work 3 days a week and have 4 days off to do life how you want?
Income-producing assets make that a possibility.
v) Generational Wealth
When I walk down certain posh streets in London, I often look at the beautiful properties and the people coming out of them.
The one question I always ask myself is – How on earth did they buy that property?
Even though I’d like to believe they worked really hard to get there, the truth is that the majority of such people inherited:
- Either the properties, or
- The money to buy the properties
I haven’t had the priviledge of inheriting anything yet, which in many ways is a huge motivation for me to find a way to break through.
This might be your situation too as I’m well aware that only a handful of people really inherit anything from their parents as legacy has stopped being an important word.
Investing in income generating assets is one way to change the game not just for yourself, but for those that will follow you.
I see this in my life today as a dad.
It’s not just the assets that will get passed on to my sons, more importantly it is the knowledge of how to create wealth.
Now that we know why this is important, let us dive in and explore the 12 best income-generating assets for passive income today.
More importantly, I’d like you to understand exactly how they work to do the heavy lifting for you.
12 Best Income Generating Assets
It is worth making clear that whilst these income-producing assets have a passive element to them, they’re not all 100% passive.
1. Property Investing
This involves investing in physical units of property usually in a variety of locations (chosen based on an investment case).
There are a variety of strategies for investing in physical property units. Four popular ones are:
- Buy-to-Let – standard investment in single units with lettings to a family, couple, etc.
- House of Multiple Occupancy (HMO) – Letting to multiple people in often self-contained rooms.
- Buy cheap £60k properties – This is aimed at helping you generate around £500 per month passive income.
- Rent-To-Rent strategy – Here you make money from property that you don't own.
Property investing has huge appeal because many people feel they understand it.
But the bigger power of property is in the power of leverage.
Let me explain this with an example:
Property Price: £200,000 (e.g. in the Midlands)
Your deposit: £50,000 (25% of the price. Bank lends you 75%)
Monthly Rental Profits: £500 per month (after costs)
Return On Investment (ROI): 12% i.e. (£500 x 12) / £50,000.
I've kept this example really simple just to illustrate the ROI number.
In this example, you've been able to achieve a 12% ROI by investing £50,000.
i.e. ROI is based on the cash you put in rather than the price of the property.
You were only able to do this because of the bank's mortgage lending of £150,000, which gave you access to a £200k property.
This bank lending amplified the power of your deposit, hence why it's called leverage.
Note though that property investing has costs to consider.
These include mortgage interest, taxes, voids, maintenance, insurance, agency fees, stamp duty, legal fees.
If you take the time to understand how this really works and how to mitigate your risks (e.g. via insurance and outsourcing), then this asset class could be a winner.
In fact, if you get it right, you’ll be looking at significant wealth creation over time potentially.
The actual income generating asset: Physical units of property
Passive income from: Recurring rental income and wealth through property capital appreciation.
My personal thoughts: It’s an important asset class for portfolio diversification and great for generating cash flow.
It has served me well (thanks to leverage) but I’ve also felt pain.
Rental income is more guaranteed than dividend income, although with risks, illiquidity, and costs naturally.
How to get involved: Invest savings built up over time as a deposit, or free up equity from an existing property.
Alternatively, a joint venture with someone else and pool funds.
The goal here is to use as much bank lending as you can get to finance the purchase.
Recommended: Learn how to invest in property from those who have done it over at Financial Joy Academy
Get access to detailed masterclasses on property investing for all the above strategies and also join us live in our property mastermind.
2. Short-term Rentals
Here you’re typically using your home and renting a room out, or you’re using an entire property.
Depending on where you live, this could be a very good way to make passive income.
What’s particularly interesting about this is that short-term rentals are usually more profitable than long-term lets, and often at low risk.
You do have the burden of maintenance, which can be outsourced, making this a worthy investment to explore.
The actual income generating asset: Your home or property unit.
Passive income from: Rental income.
My personal thoughts: This is a no brainer if you have a spare room. It turns your possibly mortgaged home into a true asset.
How to get involved: Use existing space and explore platforms such as Airbnb.
Or you can learn the Rent-To-Rent Strategy of making passive income from property without ever owning the property.
3. Basic Boring Businesses
Here we are talking about everyday businesses that we interact with in our day-to-day lives.
Whether it’s a coffee shop, dry cleaning business, franchises, ice cream joint, you’re essentially investing in something that follows a similar pattern to our other assets.
Similar to investing in public listed companies (directly or via funds), you’re also investing in a business but this time doing it alone or via a joint venture.
The goal ultimately is to get other people (helped by technology) running your business for you.
See 50 Best Side Hustle Ideas where we explore a number of these businesses in detail.
The actual income generating asset: A boring but real business that you have the majority of the equity in and likely control (>50% ownership).
Passive income from: Dividends paid out of Retained Earnings.
My personal thoughts: The rules are set up for business owners to do better than employees over time.
See how by watching this video.
Do whatever you can to own a good business, although remember that when you invest through the stock market, you immediately become a business owner.
How to get involved: You can either create a business from scratch or buy one! Watch our guide:
You can even start a business with no money.
4. Index Funds and ETFs
With index funds and Exchange Traded Funds (ETFs), you’re investing through the stock market via a passive investing strategy.
This is the strategy I recommend if you want to create long term wealth over time.
The index fund or ETF has one primary role of tracking an index (list of companies) as accurately as possible, in order to generate the return of that index.
It works via partial or full replication of the index, with the latter as the preferred.
The secondary role of the index fund or ETF is to give you diversification by reducing the specific risk tied to companies.
One notable difference between index funds and ETFs is that the latter is traded on a stock exchange like a stock.
The actual income-generating asset: Underlying companies on the index.
Passive income from: Dividends paid, which if reinvested compound over time.
You also get capital gains from price changes over time.
My personal thoughts: If you aren’t already investing in these, get onto them today!
But only do it if you have goals set, and you understand your time horizon and attitude to risk.
Another subtle point to make is that it is the fastest way for you to become a business owner. Potentially the owner of thousands of businesses.
How to get involved: Before you act, you must first learn practically and understand.
Check out our Super Simple Investing course.
Then look up innovators such as ‘Vanguard’ who have made things very easy for you and me. Other providers exist also such as ‘iShares’.
You can also open accounts with the likes of ‘The Share Centre’ or ‘Hargreaves Lansdown’.
Whatever you do, don’t rush into it. It will matter for your future wealth to fully understand what you’re doing.
NEW: We recently made a video on our YouTube Channel about Index Funds vs ETFs:
Related post: Index Fund Investing and The Simple Path to Wealth
5. Peer-to-Peer Lending
So far, we’ve talked mostly about investing in equity-related assets of some sort or another.
With P2P, what you’re really doing is lending money for a return.
That money is then invested in various assets (such as property development projects) that carry some risk (very important to note this).
The actual income-generating asset: A debtor balance on your balance sheet.
Passive income from: Fixed interest over a specific term.
My personal thoughts: This sits somewhere between leaving money in cash and investing in individual stocks in terms of risk.
As it is not equity investing, you don’t expect to lose your principal technically.
However, it is worth mentioning that a number of companies in this space have gone bust in the last couple of years.
So do you research very well before investing.
How to get involved: Feel free to read our Peer-to-peer lending guide.
6. Real Estate Investment Trusts (REITs)
This is a way of investing in property but without the hassle of owning a physical unit or dealing with tenants.
In a way, a REIT is similar to an ETF because it can be traded on a stock exchange.
The REIT is a company that you invest in, and it then invests, owns, and manages property assets.
In the same that you become a business owner via investing in Index Funds and ETFs, you’re also a landlord automatically by investing in REITs.
Some of the UK's largest property companies are REITs, for example, ‘British Land’ and ‘Land Securities’.
The actual income-generating asset: A company on the stock exchange.
Passive income from: Dividends. REITs have to distribute >90% of their earnings to shareholders.
My personal thoughts: REITs take on a lot of debt because they have to pay out over 90% of their earnings.
This is worth keeping an eye on in relation to the Net Asset Value (NAV).
You should also watch out for the fees charged by REITs as they tend to be higher than fees charged for normal stocks or funds.
How to get involved: Open a dealing account and get started.
First, watch this complete guide first:
In the old world, websites existed mainly to give basic information about a business.
Today though, websites fulfill a totally different function and are themselves the business for most companies.
Most of us now make our purchases online as consumers and this trend won’t change anytime soon.
As an investor, you can invest in either creating a website with value or buying an existing one.
Starting a money making blog, for example, has become a major thing thanks to low start-up costs and ease of technology acquisition.
You know something is pretty serious when you can find a readily available market for it.
Websites such as Flippa, Empire Flippers and FE International exist to help you buy or sell a website.
Note that it is not just creating a website that matters. It is really more about the business of the website.
The website is merely a vehicle that delivers value (i.e. does the business).
The actual income generating asset: The website and related intellectual property, trademark, customer lists.
Passive income from: Ad revenue, recurring affiliate income, memberships, proprietary digital products etc.
You then have the option of selling your website one day if it is profitable. Typical multiples are for 3 times EBITDA.
My personal thoughts: This is something anyone can do with little money and with potential for high returns over time.
Although you can benefit from the effects of compounding with a blog, compared to Index Funds & ETFs, running a website requires your time commitment in one way or another.
There is also a learning curve but one that benefits you more in the growing digital world.
Finally, do it not just for money.
Do it because you will truly do the work to add value to others.
How to get involved: Follow this link to create your blog cheaply or google some of the companies above and see what’s for sale.
In conclusion, although the choice of income-generating assets you make matters, the key is to get investing in something without the overwhelm.
Even with £100 a month, you can get involved with most asset classes above from equities to property investing.
You can become a business owner even with that amount of money.
With access to the knowledge you now have, put aside the hype around you and make sure you ask the hard questions.
Your future wealth and potentially that of others you love has everything to do with the decisions you make.
Here is a masterclass on how to buy and sell websites.
8. Dividend Paying Stocks
When you invest in stocks, you typically invest mainly for capital or income.
Dividend-paying stocks focus on mainly paying you income by way of dividend income.
Given the focus is on paying you a regular income, typically quarterly, you shouldn't invest in these for capital appreciation.
The actual income generating asset: Dividend-paying stocks.
Google “Dividend Aristocrats” and get a full list of companies that have paid dividends consistently year after year.
If you're in the UK, Google “Dividend Aristocrats UK” for an equivalent list of companies.
Passive income from: profits of companies in the stock market paid out as dividends to shareholders.
e.g a 4% dividend yield means that if you have £1,000 invested, you'd receive £40 a year as dividend income.
If you have £100,000 invested, your annual dividend income would be £4,000.
My personal thoughts: This is a credible way to build cash flow and wealth.
It takes time though to see your income become substantial.
The more you invest, the more your income grows. You don't have the benefit of leverage as you do with property investing.
How to get involved: Start with Dividend Aristocrats as mentioned before.
9. Fixed Term Deposit Savings
If you're risk-averse or simply don't want to lose your capital, then this might be for you.
With interest rates now rising globally, this is an option to explore, although the returns are still below inflation.
With this option, you're locking away your savings for a fixed return each month.
The actual income generating asset: Your money is saved with banks and they pay you a return for a fixed term.
Passive income from: Interest income that you generate.
My personal thoughts: This is a good option but you need to compare your returns to inflation to see if it makes sense for you.
How to get involved: Google “fixed term deposit rates uk”.
You can currently get rates of up to 3.5% as of the time of writing.
10. Inflation-Linked Bonds
This is similar to putting your money in a savings account, except you're instead lending your money to either a government or company for a return.
This is one of the least risky investments you can make.
The actual income generating asset: Your m
Passive income from: Coupon payments you get from investing in bonds. These are like interest payments.
My personal thoughts: Invest in bonds if you're risk averse.
Given inflation is rising, you should explore the option of investing in inflation-linked bonds.
These can act as a hedge against inflation.
In the UK, you see these referred to as “Inflation-linked gilts” and it is linked to the Retail Price Index (RPI).
Note though that the downside of inflation-linked bonds is that their value fluctuates with the rise or fall of interest rates.
How to get involved: You can start by investing in a government bond index.
This is similar to investing in index funds or ETFs but rather than equities, these are focused on bonds.
Vanguard, for example, has a UK Government Bond Index Fund.
They also offer various other bond products e.g. longer-term corporate bonds, etc.
Check your investment platform provider to see what's on offer if this is something you want to explore.
11. Venture Capital Trusts (VCTs)
This is a way of investing in small, early-stage, or unquoted companies and getting tax benefits and dividends as a result.
The VCT itself is a listed company (typically on the London Stock Exchange) and usually holds between 20 and 70 investments.
VCTs offer tax benefits to encourage investment into high-risk companies in the UK.
These benefits include:
- A 30% income tax rebate on investments of up to £200,000 per year. But you need to hold the shares for at least 5 years.
- Tax-free dividends
- No Capital Gains Tax (CGT) when you sell your VCT shares.
The actual income-generating asset: Shares in a VCT, which holds unquoted companies.
Passive income from: Dividends paid quarterly typically.
My personal thoughts: VCTs are good to invest in if you invest in a quality VCT but they're also illiquid.
They are typically targeted at the mass affluent. i.e. people with at least £20k per year available to invest.
For example, Octopus Titan VCT has been known to perform well over time and pay a good dividend.
The above is not a personal recommendation and I should mention that I worked for Octopus years ago and know the company well.
There are many other VCT providers that do well and many that also perform poorly.
A lot of the poor-performing ones and in it for the management and admin fees (typically around 2.5% and 1% per year respectively).
You want to avoid these.
So stick to those that have historically done well and paid a regular dividend.
How to get involved: Do a lot of research.
Speak to a financial adviser if you need to and don't rush into this.
Get a hold of the financial accounts and prospectus of any VCT you're interested in and get to understand the numbers.
Take a look at their portfolio companies, their performance (e.g. Net Asset Value), and history of dividend payments.
12. Cryptocurrency DeFi
This is a fairly new way to make money from cryptocurrency.
However, this comes with a massive risk warning!
Instead of leaving your money in a bank, investors who want high returns use their crypto e.g. Bitcoins, Ethreum, and other stablecoins generate yield on a decentralised exchange.
The high returns from these Decentralised Finance (DeFi) investments are usually in other cryptocurrencies.
The actual income-generating asset: Cryptocurrencies
Passive income from: Interest payments for lending crypto.
My personal thoughts: A lot of people have made a lot of money from this and also lost a lot of money.
A close friend of mine lost all his money when Crypto collapsed in 2022 via a popular DeFi platform that went into administration.
I haven't personally explored this way of making money and won't be doing it anytime soon.
How to get involved: I'd suggest exploring the many other options I mentioned above before this option.
Keep an eye on DeFi as a learning opportunity whilst you invest in other income-generating assets.
Conclusion on Income Generating Assets
Income-generating assets can seem daunting to get started with especially as a beginner.
However, my experience of these assets is that the time you put into learning about them practically pays off over time.
1: Decide how much you want to generate from income-generating assets.
2: Set yourself a specific goal e.g. Invest in one income-generating asset every 2 years.
3: Start with just one asset and actually focus on making it a reality over a period of at least 6 – 12 months.
This will involve saving money, learning, researching, and so on.
Once you get past the hurdle of investing in your first income-generating asset, it gets easier for your second one.
Finally, I invite you to learn directly from me and others who are already investors in income-generating assets at Financial Joy Academy.
You'll have a lot of success in investing in these assets by learning from others actually doing it. Speak soon!
If you're already an investor in income-generating assets, drop me a comment below, and please share what you're currently invested in and how it's going for you.
Happy investing! 😀
Frequently Asked Questions on Income Generating Assets
1. What is asset generated income?
Asset generated income is income that you generate from owning or having access to assets.
This is also known as income-producing assets or income-generating assets.
The goal with such assets is for them to provide you with recurring cashflow on a monthly basis.
Each asset generated income varies in how much work is required on an ongoing basis.
Some assets like dividend-paying stocks require little to no ongoing work.
Whereas, others like investing in physical property usually require ongoing work to maintain them.
2. What is the best asset to make money?
The best asset to make money if you don't want to do any work is to invest in dividend-paying stocks.
It does take some time to build up your income-generating stock portfolio for the dividends to be substantial.
If you're happy to do some work, then investing in physical property using leverage to increase your returns is great.
Note that this will require some capital to start investing in property.
However, the fact that a bank gives you a mortgage, typically for 75% of the purchase, helps to increase your cash flow and Return On Invest.
3. What are some good assets to start with?
The best income-generating assets to start with are:
- Dividends paying stocks
- Index funds and ETFs
- Fixed term deposits
- Inflation-linked bonds
- Property investing using leverage
- Financial Joy Academy – Learn to invest in assets and grow wealth
- Get coaching with me to implement these strategies
- How to Start Building Passive Income for Financial Independence
What income-generating assets have you invested in for some passive income?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.