Assets that produce income

An asset that produces income?

Australians looking for passive cash flow will find reliable income from a range of assets. We call these ‘cash flow assets’.

A cash flow asset is an investment that generates a steady and secure income stream over time. While these assets aren’t get-rich-quick avenues, they’ll suit the patient investor with a long-term view. Steady passive income—alongside their primary source of cash flow—is the goal.

Take real estate, for example.

A large number of Australians focus on property because of its cash flow positive attributes (particularly commercial real estate assets because the rental income is typically very high). Cash flow positive assets generate more income than their expenses (i.e. interest on debt, outgoings, etc) and so provide a net positive return each month (you’ll know it better as ‘profit’).

How to invest in cash flow assets?

If you’re looking for an asset that will produce income for you, you’ll need a strategy.

To start, identify a high-yielding cash flow asset that aligns with your financial goals.

When exploring cash flow assets in Australia, consider the asset’s potential to generate consistent income and its long-term viability and relevance. Real estate, for example, can be a lucrative option if you choose properties in relevant areas with stable tenants (the lease agreement will often underpin the performance of your chosen asset).

But it doesn’t end there, with passive income investments and cash flow assets also including peer-to-peer lending—where someone will earn interest income on a loan they’ve provided—or business investments. These assets can diversify your portfolio and reduce risk.

Ultimately, building wealth with cash flow assets involves selecting investments that offer reliable returns and align with your financial objectives. The aim is to produce a steady stream of income that contributes to your financial independence.

Examples of cash flow assets

Luckily, there are some excellent options for investors looking for passive income from cash flow assets. We’ll start with our most preferred: real estate.

Commercial real estate

From commercial real estate, it’s possible for investors to earn significant cash flow from rental income. Commercial properties are occupied by businesses, whose every intention is to ensure their premises provides them with excellent income earning potential. That’s why, for a commercial landlord, a renowned tenant with a proven track record can considerably pay-off in the long run.

What’s a good return for commercial real estate? Unlike residential real estate, which offers yields of approximately 1 per cent to 3 per cent, commercial real estate investment can generate a yield anywhere between 5 per cent and 8 per cent (and sometimes far higher for a well-chosen asset and a well-thought out strategy).

Because cash flow is not typically high on residential assets, homeowners can be left with mortgage stress, with mortgage repayments sometimes far higher than the income the property generates. That said, residential real estate offers many benefits for tax-effective investing, such as large capital growth and debt recycling opportunities.

Back to commercial…

Typically far more expensive than owning residential real estate, commercial property can be invested in with modest capital, thanks to avenues like unlisted property trusts and commercial property syndicates.

Dividend-paying stocks

Another popular asset option for investors seeking cash flow is dividend stocks, which pay out a portion of the company’s earnings to shareholders regularly. Depending on both the company’s performance throughout the year, and their dividend strategy (which will influence the amount paid to investors each month, quarter or year), investors have the ability to earn excellent cash flow from this popular asset.

Stocks are accessible for almost every investor with at least a few hundred dollars to spare. But whether it is a smart investment for you is another story. Stocks can be volatile and dividend payments are often at the scrutiny of the company directors. You of course have little to no control over the dividends paid by a company.

High-yield savings accounts

Popular as one of the safer investment options, given its liquidity and typical stability of the bank it is issued by, high-yielding accounts—like term deposits and savings accounts—can provide investors with steady cash flow. While the interest rates may not match those of real estate or even dividends, there are plenty of good reasons why investors would choose this option for a cash flow asset. Low risk and reasonable future certainty are two of those reasons.

Income ETFs

ETFs (or Exchange-Traded Funds) allow investors to partake in a range of investment options with one investment. It’s a cash flow asset that can be tailored to your liking (as long as the chosen ETF provider has these options), whether high-yield is your preference (perhaps with a higher risk component) or low yields with a more steady and secure outlook for your funds.

ETFs will typically invest in multiple stock markets around the world, bonds, real estate (commercial and residential) and other investments.

Royalties

Earning royalties from things like books, music and other creative works is not merely an investment of your capital but more so of your time. These avenues can create significant cash flow for those majorly committed to their craft. But the obvious downside is the time consumption and incredible risk should one commit their entire energy into such an “investment”. The rewards are likely more of self-fulfilment rather than steady, lasting cash flow.

Which cash flow asset should I invest in?

There is no one-size-fits-all approach to investing. Every investor should consider their own financial situation, their willingness to part with their capital and their own unique appetite for risk.

There are plenty of more options than those listed above. The important thing to remember is that inflation can deteriorate the worth of your cash. Which is why many will invest in cash flow assets and the like, to protect themselves from the deteriorating value of currency.

If chosen carefully, high-quality investments—while they will always carry an element of risk—can safeguard your capital.