What Kind of Asset Results in the Creation of Passive Income

Jan 10, 2023

If you need to use an asset that you don’t own, you can always lease or borrow it from somebody who owns it. In consideration, you pay a price for the ‘use’ to the owner.

But if you take the asset from the owner without their knowledge or will or don’t pay adequate consideration for the use and cause a loss to the owner in the process, it’s called ‘stealing’. It is not considered appropriate for the general establishment of society.

Some of the common examples where one can enjoy the use of somebody else’s assets are as under:

(1)  When you borrow capital from someone for your end use, what you pay as consideration is called interest or dividend.

(2)  When you borrow someone’s immovable or movable property, what you pay as consideration is called a lease, rent, hire charges etc.

(3)  When you borrow someone’s intellectual property, what you pay as consideration is called a royalty, licensing fee or brand fee etc.

The arrangement is based on mutually agreed terms and conditions. If the user of the asset violates any of such stipulations of the owner, the arrangement may get affected. The user of the asset has the responsibility of maintaining and protecting the condition of the asset.

This whole arrangement results in passive income for the owner of the asset as there is very little investment of active labour required. The mere ownership of the asset and the arrangement to lease/lend results in a regular stream of income for the owner.

So, if you are contemplating generating passive income what you need to do is create assets which are valuable to others in terms of utility. Though there would be a one-time outlay of labour, capital etc in the creation of the asset it will generate periodic cashflows over the life of the asset. The cashflows which are predictable and certain are valued more.

Even your business is an ‘asset’ which generates regular cashflows. The only difference is that an active contribution of your time and labour is required. So, you should look at your business also as a source of cashflow and not just something that keeps you ‘busy’.

I always say that the main function of any promoter is treasury management. He is ideally responsible for generating multiple streams of cashflows by the creation of valuable assets. Hence, one should really focus on creating an appropriate mix of such valuable assets and periodic cashflows.

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