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What are Passive Assets in Accounting?
Accounting and bookkeeping

What are Passive Assets in Accounting?

It’s an investor’s ultimate dream to generate passive income in their sleep. Passive assets allow businesses to do just that. If you’re looking for a hands-off approach to producing an income for long-term goals, this is where you’ll find it. 

Discover what passive assets are, the different ways in which you can earn passive income, and how a passive investment strategy can help your business grow.

What is a Passive Asset?  

A passive asset is any asset that produces – or is held for the production of – passive income. Passive income doesn’t require too much ongoing effort. After identifying and establishing your passive income stream, it won’t need your everyday attention. However, it may still require some work now and then. 

In the initial stages of creating passive income ideas, you will need to invest time, money, and resources into your project. While passive assets won’t require your constant attention after this, they will need a degree of regular monitoring and maintenance to keep things on track. 

How Does It Work?

There are three main ways that businesses can generate passive income. These include the following: 

  • Investing. This involves using the money you already have to create more money. 
  • Asset building. This is when you acquire an asset that will earn money passively over time. 
  • Asset sharing. This involves renting out or selling assets that already belong to you. 

Passive Assets Examples

1. Investing

Dividend Stocks

To receive regular payouts of company profits through dividend stock, you must tie up thousands to hundreds of thousands of cash to earn a significant income. However, there are risks of not being able to pay out high-yielding dividends. 

Domain Name Investing 

This involves purchasing inexpensive domain names and reselling them at a profit. It’s important to use common terms to ensure a chance of getting the domain sold. If not, you may end up losing your initial investment. 

Peer-to-Peer Lending 

In this scenario, you act as a lender to third parties through ready-made platforms such as Prosper. This will allow you to earn a fixed income as the initial loan amount is paid back. 

Real Estate Investments

Owning a rental property is an excellent source of passive income. However, it can be money and time-consuming. Some great alternative sources include real estate crowdfunding platforms or real estate investment trusts (REITs).

2. Asset Building 

Digital Products 

The digital product route allows you to spend time building a digital product first – whether it is an ebook, mobile app, or NFT – and then step back and let the product sell again and again online.

Affiliate Marketing 

When someone purchases using a referral code or clicking a link that you published on a video, website, or podcast, it allows you to gain a flat rate commission or percentage of their purchase. 

Custom Designed Products 

By creating and uploading an original design to print-on-demand websites, you can generate a passive income whenever someone purchases a mug, t-shirt, or any other physical product embellished with your design. 

3. Asset Sharing 

Land Rental 

If you have extra space on your property that you are not using, such as your garage, backyard, or carport, you can profit by renting it out. 

Home Rental 

Use your house to generate passive income by renting out spare bedrooms or renting out your house to movie productions when you’re out of town. 

Transportation Rental 

There are many transportation rental companies like Turo, Getaround, or Spinlister that help you rent out your vehicles to gain passive income. They even have insurance policies to protect you and your renters. 

Grow Your Business with QuickBooks

Passive Assets Management 

Passive assets management is a long-term strategy for generating an income through mutual and exchange-traded funds (ETFs) so that a business’s fund portfolio mirrors the market index. This is the opposite of active asset management, which aims to beat the market index. 

Passive management can also be referred to as passive asset allocation, passive investing, or passive investment strategy. 

To be a passive investor, you must buy mutual funds such as index funds or ETFs. Some investments use money from investors to buy an array of assets. The investor will typically receive any returns.

Passive Investing Strategies

Passive investing is low risk because it allows businesses to invest in a mix of asset classes and industries and not an individual stock. The passive assets allocation strategy helps you to diversify. So, even if one investment goes wrong, it won’t affect your whole portfolio. Here are two common investment strategies investors use: 

Index Funds 

Index funds track the rise and fall of the chosen companies or assets within the index. You may only purchase and sell index funds at a set price after the market has closed and when the index fund’s net asset value has been announced. 

ETFs 

ETFs cut out the middleman. Instead of letting the money you invest go to mutual fund companies, you can buy the fund from other investors by selling their shares. You can also trade ETFs during market hours like you would with stock

Active vs. Passive Assets

As mentioned before, passive assets are assets that produce income for your business passively.

In contrast to this, active assets are assets that are needed for daily business operations. They quickly flow in and out of business, while passive assets typically stay within the company for more extended periods. 

Active asset management, or active investing, is an investment strategy that aims to outperform the market through actively managed funds and ETFs. This asset management typically requires constant attention instead of passive investment, which only requires occasional monitoring. 

Active investing possesses advantages such as flexibility in volatile markets, expanded trading options, and tax-loss harvesting.

On the other hand, passive investing gives businesses benefits such as higher average returns, lower costs, decreased risks, and increased transparency. 

Read our separate article about the differences between active and passive assets to better understand how these assets can help your business and which is best for you. 

Improve Your Business With QuickBooks Software! 

Do you feel better informed about passive assets and how they can help your business? Access more worthwhile and informative articles from the QuickBooks Resource Centre to improve the performance of your small business. QuickBooks also provides a range of useful accounting software to enhance your business's financial wellbeing further.