Monthly Income Investments for 2022
There comes a time in all our lives when we need monthly income from our investments.
But times have changed. We can no longer assume that we will retire with a generous pension that meets our financial needs.
Growth within managed pension schemes has failed to keep pace with a rising cost of living, and yields to traditional monthly income investments are weak and unreliable.
So what should we do? How do we ensure we will have enough income each month to survive, let alone thrive?
In this article you’ll find 3 of the best investments that pay monthly income that are accessible, and generating yields north of 8 per cent (8%) in 2022. I hope you find the information useful.
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The Wrong Tools for the Job
The tools that our parents relied on for their retirement income are no longer effective in today’s economy. For most of us, if we are to retire comfortably we must seek out a much better rate of return.
With the cost of housing, utilities, groceries, transport, lifestyle choices and medical care rising rapidly, annuities, dividend stocks and bonds alone simply no longer cut the mustard!
Finding New Solutions
With the old guard of investing strategies no longer bearing sufficient fruit, the solution to the growing disconnect between investment returns and the cost of living must be found further afield.
The solution itself is pretty simple. We must retire with more money, and we must then reinvest our built-up wealth for a much better rate of interest income…
…easier said than done, right? Well, I said the solution was simple, not easy!
As the need for better and more effective wealth creation, preservation, and income-generating strategies continues to grow apace, appetite for alternatives investments – especially investments that generate monthly income – are in extremely high demand.
So, what are the options available in 2021? Well, there are plenty to choose from if you know where to look. Here are my top 3 investments for monthly income for 2022 and beyond
1. Physical Real Estate
We all know that real estate is one of the very best long-term investments you can make.
Well-located and well cared for properties always appreciate in value (given enough time), and with good tenants they can generate dependable monthly income in abundance.
But what is the best way to invest specifically for monthly income? Well, there are lots of entry points. Here are my recommendations.
What Type of Real Estate to Buy in 2022
There are lots of ways to make money in real estate. Wholesaling, house flipping, new builds to name but a few.
But if you are seeking an investment that pays monthly income, one way to do that is to own income-producing property such as residential single family homes, apartments, condos, or commercial real estate such as warehousing, industrial units or retail.
Your goal here should be to own a stake in the physical property. If you are aiming to uncouple your investment returns from the volatility and unpredictability of financial markets, then publicly listed real estate investment trusts REITs should be avoided.
How to Invest
With direct ownership of income producing property as your goal, you can ‘do it yourself, or for a more passive approach you can turnkey rental .
For even more hands-off investment, you can invest in a syndicate as a limited partner, or try out real estate crowdfunding through an online platform.
All of these investment options can deliver monthly income, whilst giving you a physical stake in a property that is not wrapped up in a publicly listed or traded entity.
If you are investing in a turnkey property for the monthly rental income, you will pay a premium to a turnkey investment provider who will do all of the work for you.
That will include sourcing the property, doing any rehab work and finding and vetting a suitable tenant.
Buying turnkey sounds great in principle, and there are some great providers out there. But remember that the turnkey seller works on a very simple margin formula; Sale Price – (Purchase Price + Rehab) = Profit.
This means they have a clear financial incentive to have you pay as much as possible for the property while keeping costs (including renovations) as low as possible. This can (and does) result in poor quality rehab and poorly vetted tenants.
Make sure to do your due diligence on the seller. Read reviews. Speak to their existing investors. If you are buying from out of State, try and make the trip over to view the house(s) yourself. If you can’t travel, pay for a qualified building inspector to view the property on your behalf.
Take everything the seller tells you with a pinch of salt until you can verify all of the information independently.
This includes market rents, market trends in the area, property values and the condition of the property.
A good local Realtor can help you with most of that.
Real Estate Syndicates
Another way to utilize real estate to generate monthly income, is to invest in a syndicate. A syndicate is simply a group of investors that pool their cash to buy buildings that they cannot afford on their own. The Sponsor is responsible for sourcing, assessing, and closing on a suitable property (usually large multifamily apartment buildings). They are also responsible for the business plan to improve the value and rents, as well as raising equity from passive investors who are called limited partners.
The Sponsor should also be an investor in the syndicate. Typically, they will invest between 5% and 20% of the required equity. This is important because it ensures they have some skin in the game. Be wary of Sponsors that do not put in any real cash. Some will say they are investing, but in reality they just roll the fees they charge to limited partners into the syndicate as their capital contribution.
Rental income and capital gains are shared out between the Sponsor and the limited partners. Usually, the limited partner will have a preferred return, meaning they get all the income up to certain point, after which monthly income is shared out between them and the Sponsor.
Real Estate Crowdfunding
Crowdfunding is a way to own part of a property that pays income on an monthly basis with a relatively small investment.
This is similar in concept to a syndicate, but the amount of money required to invest is much lower, so this is a great option if you have limited funds available, or just want to try it out with limited exposure first time around.
There are a ton of websites offering crowdfunding investments. I will add a list in the resources section at the end of this article.
What are the Risks?
Despite being known as perhaps the safest long-term investment, investing in real estate is not without risk.
Debt Can Be Risky
In order to extract maximum value from a rental property, you would have to get a mortgage loan to reduce your cash input and amplify your returns.
But debt is risky. You will have to make loan payments regardless of whether your receive rents. So a big repair bill, or a bad tenants can wipe out a years cashflow in an instant.
This also goes for syndicates, where the GP will invariably source a large loan for the majority of the purchase price and renovation work.
Syndication and crowdfunding investments are not risk free either. More often than not the Sponsor will have a plan to add value and increase rents. These are often big development projects and can easily run over budget. This can result in capital calls for limited partners or worse, a total failure of the project.
Consider Your Level of Involvement
The most important thing to bear in mind is that direct ownership of real estate is not a passive investment. Properties (and people) require management.
Even if you hire a property manager to look after your asset, you will still need to put some time and effort into oversight.
If you are at the stage of life where you need monthly income from your investments, you probably don’t want to be answering the phone at 2am for a burst sewer pipe.
Be sure to put some serious thought into how you invest, and to what extent.
If you are prepared to be very hands-on, then direct ownership of real estate offers the best opportunity for income and growth. If you want a truly passive investment, then a syndication, crowdfunding, fund or REIT might be more appropriate.
What Return on Investment Can I Expect?
Real estate is a great investment for monthly income. Returns vary from one property to the next, but a good rental property should deliver a capitalization rate of at least 10 per cent (10%). Syndicates and crowdfunding investments are known to generate yields of between 6 per cent (6%) and 10 per cent (10%).
Regardless of how you invest, as an owner (or part-owner) of real estate, you will also have some exposure to appreciation and depreciation. This makes real estate attractive and risky in equal measure. But if you invest sensibly in good properties, with good partners, and invest for the long-term, real estate usually pays better than most!
2. Real Estate Notes and Private Lending
If real estate seems too ‘hands-on’ for you, you might try being the bank instead. After all, the bank always wins, right?
Fortunately, being the bank is easy. You can invest in real estate notes, or be a private lender. Both are great ways to capture dependable monthly income from real estate without the hassle of owning property.
There are two parts to every note investment; a promissory note and a lien.
A note is simply a contract between a borrower and a lender. It stipulates the amount of the debt and terms of repayment, including (as a bare minimum) the interest rate, term and repayment schedule.
You will also have a corresponding lien recorded against the title to a piece of property in the County records. The lien acts as security for your investment, allowing you to foreclose the loan if the borrower fails to keep up payments.
All being well, the borrower makes their monthly payments to the lender as per the terms of the note. This makes notes a great way to invest for passive monthly income.
Related: Note Investing 101 – Everything You Need to Know About Real Estate Mortgage Note Investing
What Type of Mortgage Note to Buy in 2021
If you are going to include notes as part of your monthly income strategy, there are a few things you should know.
Performing Notes for Monthly Income
Broadly speaking, there are two types of notes; performing and non-performing. As an income investor, you should buy performing notes. A note is considered performing when the borrower is up to date on payments. A note is considered non-performing if the borrower is in default and no monthly payments are being made.
Non-performing notes can be very lucrative investments due to the discount on purchase price, but they take a lot of time, energy, knowledge and resources to turn into a profit. As such, non-performing notes are not really suitable if you are looking for immediate monthly income from your investments.
Related: Performing Mortgage Notes – Everything You Need to Know
Interest Only vs Amortized Notes
Notes can be interest only, or amortized over a number of years. Monthly payments on an interest only note are 100% interest (profit), and capital is paid back as a balloon payment at maturity of the loan.
The monthly payments you receive on amortized loans consist of both interest and a return of some capital. The ratio of interest to capital changes as time goes on. The important thing to note is that not all of your monthly income is profit. If you spend it all you will be left with nothing when the loan term ends. You will see a breakdown of monthly payments in the amortization schedule that comes with your note.
Both amortized and interest only notes generate income on a monthly basis. Provided the borrower keeps up on their payments, both are a good investment option for monthly income.
Investing in Partials
As well as buying notes outright, you can also invest in partials. You are buying a partial when you buy some of the monthly payments due on a note. If a note has 60 payments due of $500, the lender might sell you 12 payments ($6,000 in total monthly income) for a lesser amount, say $5,000. This means you make a profit of $1,000 on your $5,000 investment over 1 year.
Partials can a be a great way to invest in notes for the monthly income the produce, with relatively little capital outlay.
How to Invest in Real Estate Notes
There are lots of ways to invest in notes. You can try and buy direct from banks, you can buy notes from a note broker, or you can buy direct from other investors. The secondary market for mortgage notes in the US is huge and there are a number of online platforms where buyers and sellers can connect and trade notes.
Note brokers buy loans in bulk and sell them on to smaller investors. In many cases they will buy non-performing notes at deep discounts to face value, modify the loan with the existing borrower and sell it on to an investor seeking monthly income.
As with any service provider or seller, there are good and bad note brokers. Make sure you do your due diligence. Ask for referrals and look for reviews from other investors. You will find a list of not brokers in the resources section at the end of this article.
Online Note Trading Platforms
If you are prepared to do the learning, and figure out how to invest in notes without help, you can buy from a number of online note trading exchange platforms. Sellers can list their notes for sale, and buyers can bid for them. As with all the other monthly income investment options in this article, I will add a list of these options in the resources section at the end of this article.
If notes are a more hands-off investment than direct real estate, then note funds might be the next level of passive investing. Much as they sound, note funds are pooled funds of investor money that invest in notes. There are funds that invest in performing notes, non-performing notes and REO (real estate owned), or a mixture of all of these.
There are a few good notes funds out there to choose from, many of which pay out income to investors monthly. Remember, a fund is only as good as the fund manager, so do your due diligence and check them out before investing.
Private Lending for Monthly Income
Another way to invest in notes for monthly income is to venture into the world of private lending. This involves loaning money to real estate investors for their investment projects. These notes are secured against property with a lien just the same as any other note investment. But with private lending, you have the added advantage of being able to negotiate your own note terms direct with the borrower, and do more due diligence before investing.
Knowing your borrower is hugely advantageous for private lenders. Not only do you get to negotiate your own terms, you also have a direct line of communication and an existing relationship, which can be very useful if things go wrong.
I have been working with private lenders since 2012, and I use private money loans to fund acquisitions for our affordable housing programs. You can learn more about our own Private Lending Program for passive income investors here.
What are the Risks?
Whilst being the bank is likely less risky (and definitely more passive) than direct ownership of real estate, there are stills risks. Your borrower could default, or fail to pay property taxes. At some point you could be left owning a property you don’t want after going through a lengthy and costly legal process, or lose your investment entirely to a tax sale.
As a private lender or note investor, most of your risk sits with the borrower and the real estate, so do your due diligence on both. If you are originating private money loans, make sure you understand the value of the real estate, the veracity of the contractors quote if there is any rehab to be done, and make sure that the property has clear title and get a lenders title insurance policy.
Also make sure you do your due diligence on the borrower. This is where private lending can have the edge over note investing. You will have a chance to get to know and understand your borrower before you invest. you can check out their track record, pull their credit file, and make sure you are comfortable working with them long-term.
The most important thing to keep in mind is that returns to any investment are closely correlated with risk. The interest rate on a note is compensation for the amount of risk the lender is taking. Don’t be tempted by notes with high rates of interest promising huge returns without doing your due diligence. If the interest rate or return on investment is high, it is likely for a very good reason!
What Return on Investment Can I Expect?
Your monthly income return will vary depending on how you invest. If you choose to buy good quality performing notes, you can expect returns anywhere from 8% and up. Notes that carry more risk tend to pay higher return, either through a discount at the point of purchase, or a higher rate of interest, often both.
Private lenders typically provide interest only loans to real estate investors. Rates for private money range from 8% to 12%, depending on the risk involved with the borrower and the project.
Related: 20 Places You Can Buy Mortgage Notes Online in 2021
3. P2P Lending – Unsecured Lending for Monthly Income
Another option to consider adding to your portfolio is peer to peer lending. This is in essence a similar type of investment to the real estate mortgage notes discussed in the previous section of this article. The difference being that P2P loans are unsecured, and so carry and extra layer of risk.
How to Invest in P2P Lending for Monthly Income
You can choose to invest in whole loans with a single borrower, or you can invest in a small part of a loan alongside other investors by buying a note. Either way, P2P loans will make a good addition to your monthly investment income portfolio.
Online platforms provide the point of entry for P2P Lending. There are plenty to choose from, and I will add a list at the end of this article.
Borrowers fill out a loan application on a P2P lending website, providing basic information such as loan amount and purpose of the loan. They will also consent to a search of their credit file. Investors can then access that information and select which loans they want to invest in.
The platform handles all the admin such as underwriting, closing, distributing loans to borrowers, and collecting monthly payments. Monthly distributions are then made to investors, and the platform will usually deduct a management fee of around 1 per cent (1%).
What are the Risks?
Whilst P2P returns certainly look attractive, unsecured lending is not without risk. Investors are entirely reliant on borrowers to fulfil their commitments to repay. A a default on the part of the borrower could result in a 100% loss for the investor.
Also, P2P investments are not FDIC insured. That means you will not be reimbursed if the borrower defaults or the platform fails. That said, in most cases platforms have agreements in place for other institutions to take over their loan portfolio if they do collapse.
Finally, personal loans are amortized. So, much as with amortized real estate notes, your investment will deplete to zero by the end of the term. If you spend all the payments you receive during the term of the loan, your entire investment will have been spent.
What Return on Investment Can I Expect?
Rates for borrowers on P2P sites vary from 6 per cent (6%) to a whopping 36 per cent (36%). Little wonder then that it is possible to generate double digit returns investing in these types of loans.
A well-balanced portfolio of higher risk loans with higher interest rates and better returns, combined with a selection of loans to lower-risk borrowers should deliver annualized returns in the region of 10 per cent (10%) to 12 per cent (12%).
Related: The Ultimate List of 24 Monthly Income Investments
Well, there you have it. 3 investments that pay monthly income that are accessible, and which produce more than 8 yields in excess of 8% is 2021.
If you want to maximize the monthly income potential of your existing retirement account or investment portfolio, first make sure you are using the best type of investing vehicle. A self-directed IRA or 401(k) will give you the freedom to make your own investment decisions, as well as invest in a wide range of alternatives to the stock market.
Finally, be sure to diversify your investments. Hold a range of assets to reduce the impact of a failure in any single investment.
Real Estate Investing Resources
Turnkey Rental Providers
Real Estate Syndicators
Real Estate Crowdfunding Sites
Note Investing Resources
Private Lending Investments
American Note Capital
P2P Lending Resources
P2P Lending Websites