How to Buy Assets That Generate Income

If you’re approaching retirement, that anticipated time when you can live off investments or at least work fewer hours own your schedule, you’re probably transitioning to income investing.

You may be wondering how to buy assets that generate income. The way you buy income generating assets depends on the type of asset you’re buying.

For example, if you’re buying high yielding dividend stocks, the steps are completely different than if you want to buy real estate rental properties.

Buying assets that generate income is a process that begins with evaluation based on capital, risk assessment, and investment goals.

This post will address these and more criteria for selecting and buying income producing assets. Over 15 years ago, I wondered how to buy alternative income generating assets after we saw how low the income was from most stock and bond investments as we headed into early retirement.

Since asking that question, we have been living off income generating assets we either bought or created for about a decade now after many lessons, a major recession, and a giant bear market along the way.

So, let’s start with how to identify which income generating assets meet your lifestyle and financial goals. After you clarify this, knowing just how to buy the income producing assets you want to buy will be clearer.

Clarify Investment Goals

The first criteria in selecting income producing assets is to define your investment goals.


The amount of income you want will guide you to the best income producing asset. Some simple math demonstrates this.

For example, if you have decided to allocate one million dollars to an income producing investment, and your desired income is $5,000 a month before fees and taxes, you’d need a 6% yield from that investment.

In my post How Much Do I Need to Invest to Make $10,000 a Month I have more examples of the income generated from investments of various types.

Wealth Building

If you want to increase net worth, this adds a second goal to your income investments. Mainstream investment thinking leans toward having different investments for income vs wealth building, but more experienced investors aim for both simply because they can.

The biggest determining factor for capital gains is based on the price at which you purchase an income producing (or any other) asset.

If you buy quality assets at low valuations, you’re likely to be able to sell them for a higher price thereby creating wealth.

This seems so obvious, but this core principle often gets lost somewhere between the emotions and analysis of investing. More steps for defining your income investment goals are in my post How to Create a Wealth Plan here.

Allocate Capital (Savings) for Income Generating Assets

The next criteria is deciding, from a big picture perspective, how much capital to allocate toward income generating assets vs assets that you want to result in capital gains.

The amount of capital (savings) you want to invest in income generating assets will determine which types and how many different assets you have enough money to buy.

Using Capital for Both Income and Wealth Building

When you have a goal of both income generation and building wealth from capital gains, the same capital can be used for both goals. This can make more efficient use of your capital.

To illustrate this concept better, here are some examples of this.

  • Buying real estate rental properties that are selling below market value due to an estate situation
  • Buying dividend stocks after a bear market when they are near the lower end of historical valuations
  • Buying bonds when interest rates near high valuations based on history

Using Capital for Both Income or Wealth Building

On the other hand, if you plan to buy some assets that generate income, and other assets that for capital gains, investment capital will be allocated for each goal separately. Here are some examples of this investing method:

  • Passive long term buy and hold stock index based investing
  • Investments based on a standard asset allocation model based on your age and risk profile
  • Investments made without regard to historical valuations

Neither method is right or wrong. They both have advantages and disadvantages.

You can see how deciding if you want to focus on income or wealth generation is important because it will affect when and much of your investment savings, you’ll allocate toward buying income generating assets.

Traditional Vs Alternative Income Investments

There are many traditional income generating assets, such as dividend stocks and bonds, and there are many alternative income generating assets.

Alternative income assets run a broad spectrum ranging from slightly alternative MLP’s, REITs, closed end funds and baby bonds to more alternative assets like oil partnerships and real estate partnerships.

Many investors only want to own traditional income generating assets while other investors have sworn off stocks and bonds forever. Other investors are most comfortable owning a combination of traditional and alternative income generating assets.

Define Risk

The next criteria is defining how much risk you’re willing to take from an income investment.

It’s easy to feel like a victim of the stock market or the economy, but you can choose how much risk is acceptable and invest accordingly. As investors, we sometimes forget we can choose investment risk.

Risk from Stock Investments

Here’s a simple example of estimating investment risk to see if it is aligned within your acceptable risk level.

If you’re invested in a stock fund based on the S&P 500, you can look and see how much the S&P 500 has declined in any one down cycle.

For example, in the bear market that began in 2007, S&P 500 stocks dropped 56.8% from top to bottom between October 9, 2007 to March 9, 2009. (1.) Click here to for my post with exactly how to estimate your current stock market risk.

You can check or use similar past data for almost all traditional investments, even a diversified stock portfolio since major markets tend to move as a whole.

By doing some simple math to see how much investment risk you have at any time, you can stay invested as you are, increase risk or decrease risk. (Read my related post with 10 ways to reduce investment risk while building wealth. ) Aligning risk within your acceptable risk level when choosing income generating assets is a huge part of the process.

Alternative Asset Risk

It’s harder to know the risk for many alternative income assets, but it’s smart to estimate the risk from a worst case scenario basis, and then also a likelihood basis.

Slightly alternative income assets such as REITs and MLPs have much more data to evaluate risk than income investments like single real estate rentals or oil partnerships.


One of the riskiest things an investor can do is to have all their net worth tied up in one investment. Diversification into assets that move in opposite directions when the economy or other changes happen lowers investment risk.

The older you are, the more important it is to invest within your acceptable risk since there is less time to recover from investing mistakes.

Accredited Investor Vs Nonaccredited Investors

The next selection criteria relate to accredited investors vs nonaccredited investors. Many income producing assets are only available to accredited investors.

By knowing if you are an accredited investor, you will rule out investments for which you don’t qualify to own thereby saving time.

If you’re not sure if you are an accredited investor, you can click here to read my post and see.

Allocate Time to Manage Income Producing Assets

The next criteria to factor out which income producing assets you may want to buy is based on how much time you need to spend managing an income investment.

The more wealth you have the more you can delegate management of your assets, as a rule. Many retirees, however, enjoy the mental stimulation and challenge of finding, buying and managing income investments.

Based on your personality, you can decide if you want to buy passive income assets or investments that require more time.

Tax Consequences When Transitioning to Income Producing Assets

Taxes can be triggered if you need to move assets from a tax favored account to buy income producing assets that cannot be purchased with your existing account.

This is a common problem for investors who want to buy more alternative income producing assets. Also, buying income producing assets will affect your annual taxes.

The type of taxable income will vary based on the asset you purchase. Many income investments have lower tax rates, such as dividends. And many alternative income investments have tax benefits. This can be complex and is important so do some research and check with a CPA.

If you don’t have a CPA, hiring a CPA for a one hour consultation before buying income producing assets is worth the time and money.

Research Income Generating Assets

Once you have clarified each of the selection criteria above, you’ll have a good idea of what type of income producing assets you want to buy.

This will allow you to niche down on researching the top income producing assets that meet your income and wealth generation goals.

Risk decreases the more information you have on any asset you are considering buying. After you’ve thoroughly researched the income producing assets under consideration, the next step is to buy the assets.

Buying Income Generating Assets

Like all investments, there are three common ways to buy income producing assets.

  1. Through a brokerage account
  2. With financing
  3. Cash purchases

Buying Traditional Assets That Generate Income

With traditional income investments such as dividend stocks, bonds, closed end funds and baby bonds you simply open a brokerage account, if you don’t already have one, to buy the securities.

If you plan to sell covered calls to generate income from stocks, you’ll need to go through a simple approval process at your brokerage firm.

While you can buy the stocks without it, you can’t sell the call options until you have the approval. (You can read my post about selling covered calls here.) Otherwise, most traditional income assets are purchased with a simple online transaction in your brokerage account.

Buying Alternative Assets That Generate Income

The buying process for more alternative income investments will vary based on the type of asset you are buying.

For example, buying real estate rental properties or small business purchases will probably involve financing unless you have cash to use for the purchase.

Financing can take the form of owner financing, bank financing or even online borrowing.

The buying process can take a long time since it can take months to find potential properties, small businesses or other opportunities that meet your investment criteria.

Cash Purchases of Income Assets

Some investors pay cash to buy income generating assets. By avoiding financing costs, the monthly income will be higher.

Many proactive investors raise cash levels as assets become overvalued. This allows them to buy undervalued assets during a buyer’s market.

Buying Opportunities for Income Assets

Remember, if one of your investing goals is capital gains, most income generating assets will be cheaper if the economy has been in a recession or bear stock market recently.

This only happens once or twice a decade. Everyone hates investing at such times and many investors struggle financially, but this usually presents an opportune time for investors with cash to buy undervalued assets that will lead to wealth creation from capital gains as addressed earlier.

For more information on this, you can read my related post entitled What Percentage of Cash Should Be in My Portfolio?

Summary for Buying Income Producing Assets

You have 7 criteria for selecting income generating assets. The steps for buying income generating assets will depend on the investments you choose based on your own criteria.

The best place to start is with my Ultimate Wealth Plan. You can get it here now.

 Thanks for reading. If you enjoyed this post, please share it with others on your favorite social media.


Sources: (1.)

The information on this website is for education only and is not to be construed as personal financial advice.