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If you’re serious about reaching financial independence, creating a passive income stream has to be on your to-do list.
In the words of author H. W. Charles, the key is to work extremely hard for a short period, create abundant wealth, and then make more money through wise investments that generate passive income for life.
There are a few ways you can go about generating passive income — and one of the most interesting is to buy royalties.
Keep reading to learn what royalty investing entails, how it works, and why you should consider it on the road to financial freedom.
What Are Royalties?
Royalties are a popular type of alternative investment. When you invest in a royalty, you receive compensation for the ongoing use or ownership of a physical or intellectual asset — like a song or a product.
During a royalty negotiation, both parties agree to terms and lay them out in an official licensing agreement. The royalty rate that you receive is typically expressed either as a payment per unit or as a percentage of sales for a specific period — up to and including “in perpetuity.”
Property owners often decide to sell royalties because they need funding. For example, a songwriter, band, or record label may sell royalties to their music to fund a new personal or business-related project.
In another example, someone might sell a piece of intellectual property to turn an idea like a new invention into liquid capital. The person may have a great idea but lack the means to turn it into a viable product.
As a seasoned investor, you’d be wise to keep your eye out for royalty opportunities. If you come across a surefire money-maker, it could be worth providing funding, becoming a rightsholder, and potentially receiving royalty income payouts.
But as you can imagine, royalty investing isn’t for the faint of heart.
Next, let’s go over the different categories of royalties that you can find.
Types of Royalties
There are several types of royalties that you can invest in, including copyrighted works, natural resources, and businesses.
Copyright royalties can include items like books, works of art, and music.
For example, you might invest in a new or classic song from Eminem or Rihanna or a book from a leading author like John Grisham. Another option would be to buy the rights to a classic film like Trading Places starring Eddie Murphy — one of my faves!
Performance royalties are fees that users pay for the right to play someone else’s music in a public environment.
For example, bars and restaurants, streaming services like Spotify, and radio stations all commonly pay performance royalties to trending artists.
A mechanical royalty is a fee specifically for reproducing a musical composition. Mechanical royalties can apply to physical, digital, download-to-own, and streaming services.
Print music royalties
Musicians often sell their music in printed sheets to publishers for reproduction. In exchange, publishers pay print music royalties for the right to sell their material in physical or digital form.
Content producers pay synch royalties when using copyrighted music in audiovisual productions like movies, advertisements, and television shows.
Extractors often pay property owners for the right to take natural resources from their property.
For example, a property owner sitting on a lucrative piece of land might want to make money selling oil and gas royalty licenses to buyers for an agreed-upon period of time. In this case, an extractor would pay the owner for mineral royalty rights.
By securing mineral rights, you can legally remove, process, and profit from someone else’s raw materials.
Inventors commonly make their money by patenting products and then creating licensing agreements that allow other people to use their models.
As an investor, you can buy patent royalties and invest in intellectual property.
Business owners often pay companies a fee for the right to open a franchise under their name. This type of royalty is common in the fast-food industry — like McDonald’s and Chick-fil-A.
Why Should You Invest in Royalties?
Now that you have a better idea of what royalties are, let’s take a look at some of the reasons why you might want to invest in them.
Generate a recurring cash flow
Royalty streams can be an effective way to put steady money in your pocket without having to go through the trouble of producing something of value — like a song or book — or starting up a restaurant from scratch.
For example, you might structure a music royalty in a way that enables you to get a commission every time someone downloads a song or plays one in a bar. This strategy allows you to use other peoples’ hard work, ideas, and assets as a way to generate income for yourself.
Of course, if you’re a talented musician, you can also sell the rights to a new song you write and produce and receive steady payments for your work without having to play gigs every night.
Obtain higher-yield investments
Another great reason to invest in royalties is you can potentially generate much stronger returns on your investments.
For example, music catalogs often have royalty investments that promote yields of 10% or more.
Diversify your portfolio
Most investors start by putting money into the stock market and investing in equities, bonds, ETFs, and funds. But once you establish yourself as an investor and build a foundational portfolio, it’s a good idea to branch out and explore some different types of alternative assets.
Royalty assets provide a great way to diversify your portfolio and shield yourself from market volatility. They also give you exposure to different types of investments that can lead to stronger profits.
How to Buy Royalties
Investing in royalties may seem complicated at first. But truth be told, it actually has a surprisingly low barrier to entry.
Use the following steps to start investing in royalties and increasing your earnings.
Step 1: Make sure you are ready to take on risk
All investments carry some amount of risk, and royalties are far from an exception. So before you do anything, make sure you can afford to take on risk in your portfolio.
For example, music, art, and entertainment all carry valuation risk. In other words, you may overpay for someone else’s property. There’s also the threat of counterparty risk. That being the case, you must do your due diligence and ensure that the person selling an asset owns what they’re hawking.
Additional factors to consider include inflation, changing regulatory policies, and technological innovation — all of which can impact the value of an asset. There are simply no guarantees that your royalty interests will pan out.
This is especially important to consider when buying property like a patent or business. Just because something looks good on paper — or maybe you have even connected with it emotionally — doesn’t mean it will pan out and turn into a viable or secure source of revenue.
Step 2: Pick a type of royalty
Ready to move forward? The next step is to figure out what type of royalty you want to invest in.
My advice is to keep it simple. As with any investment, focus your resources and energy around something you understand.
For example, if you are looking for passive long-term growth and you have above-average knowledge of fine art, then investing in art and entertainment royalties could be the way to go.
If you’re a foodie and have some restaurant experience, you may want to franchise a fast-food business. If you’re a tech guru or inventor, you could invest in someone’s intellectual property.
Whatever you decide, figure out a direction that you’re comfortable with and excited about and proceed from there.
Step 3: Select an exchange
To buy royalties, you typically have to go through an online exchange.
Here are some of the top online marketplaces to check out if you’re interested in investing in this space.
Royalty Flow is primarily for buying and selling entertainment royalties. The site provides access to a full catalog of royalties from downloads, album sales, and streamlining sales.
Royalty Exchange is a leading royalty marketplace for buyers and sellers. Here you can buy royalties in music, film, books, oil, and pharmaceutical companies.
SongVest is another app that makes it easy to buy and sell royalties. This platform deals solely with music.
This is a great place to invest in new and old albums in a way that is convenient and secure.
Step 4: Research thoroughly
Once you have an idea of the type of royalty that you want to purchase, the next step is to hunker down and research the targeted asset.
For example, you might find a hit song that you think has long-term playability. But before you put money into it, you should do some market research and try to get a sense of how solid the artist is. During this process, it pays to look into the musician’s reputation, popularity, and customer base.
Try and get a sense of who would play the artist’s music and when. Does the artist have a solid following on social media?
Keep in mind that a song that is wildly popular one minute could easily disappear from the music charts the next minute, reducing its potential to generate revenue.
The main takeaway here is to treat a royalty like any serious investment. Avoid making emotional decisions and make sure the long-term potential looks promising before putting any money into it.
Frequently Asked Questions (FAQs)
What is a life of rights document?
A life of rights document gives you the right to collect royalties from an asset during the duration of the specified agreement. It’s one of the most critical pieces of documentation that you can collect when buying royalties — and something you should carefully scour before signing.
Are royalties a good investment?
It largely depends on the type of royalty you’re considering. Some royalties can be a great investment, while others can turn out to be complete disasters.
Personally, I prefer to invest in the stock market. But every investor has different goals and preferences.
Where can I buy royalties?
You can secure most royalties through an online marketplace like Royalty Flow or Royalty Exchange. These apps make the royalty-buying process easy and provide a wealth of insights to help you make informed decisions.
The Bottom Line
One of the secrets to making money is to always keep your ears and eyes open for new investment opportunities. Expanding into a different asset class like royalties can boost your income stream and help diversify your portfolio.
However, getting to the point where you can collect royalty payments isn’t easy, and you need to be aware of the risks that come with this type of investment.
Putting money into the music industry or film industry can lead to big gains, but it can also be pretty risky if you don’t know what you’re doing — especially if you invest a lot of money.
The good news is that you could make a small fortune if you play your cards right. But if you play the wrong hand, you could seriously set yourself back financially.
My two cents: Don’t consider royalty investing until you already have a well-rounded, six-figure stock portfolio built up, plus six months’ worth of expenses stashed away in cash.
At the end of the day, you need to remember that there are no shortcuts to prosperity. But if you are willing to hustle and make smart financial decisions, anything is possible.
Here’s to making the smartest decisions on your journey to financial freedom!