Recurring investment income is a reliable way to build wealth without constantly investing new money. One out-of-the-box option is buying royalties to earn passive income.
Royalties share some similarities with stock dividends and can help you diversify your investment portfolio.
If you want to learn how to buy royalties, here’s everything you need to know.
Table of Contents
- What Are Royalties?
- Types of Royalties
- How to Buy Royalties
- Why Invest in Royalties?
- Frequently Asked Questions
What Are Royalties?
Royalties are income earned from an alternative investment that doesn’t trade on the stock or bond market. It can be a physical income-producing asset or intellectual property.
Receiving a royalty is similar to earning a dividend from stocks. Depending on the agreement, royalty investors receive a portion of the revenue or a fixed commission for each transaction.
Several agencies track the usage of most royalty-eligible assets to determine the appropriate payout. These oversight bodies make investing in royalties easier and more accurate.
An example is the “Happy Birthday” song. Until recently, the royalty rights owner collected a licensing fee each time it was played on the radio or other broadcasting platforms. Today, the song is public domain and no longer earns royalties.
Another example is when authors receive a royalty each time somebody buys a new copy of their book. Investors can collect royalties by purchasing the book rights.
Types of Royalties
There are several different ways to collect royalties from income-producing assets. Most are for digital entertainment media since it’s easy to produce and popular with consumers. However, there are other options as well.
A copyright license is one of the most common royalty options available. These licenses are available for a wide variety of creative works.
It’s possible to purchase the copyright license for:
When you have a copyright license, you can collect a licensing fee each time the work is published or played.
Starting a business that grows into a franchise can help you earn royalty income. For example, Chick-fil-a, McDonald’s and Papa John’s earn royalties with their upfront and ongoing franchise fees.
If you can duplicate their success, even on an extremely small scale, you’ll have the opportunity to cash in on franchise royalties.
Launching a franchise requires plenty of capital. As a result, you may share revenue notes with small businesses on Mainvest. The minimum investment is $100 per offering, and you can collect royalties for up to five years.
Learn More: Mainvest Review: Invest in Local Businesses With as Little as $100
Mechanical royalties are music-related and allow songwriters and publishers to earn income when a song is streamed, digitally downloaded or published on a physical media like CD or vinyl record.
Songwriters and publishers can also earn income when the original song is reproduced in any way, such as a remix.
Mineral rights can help you earn income from commodities and real estate without having to mine, process or market the material. Most mineral royalties are for oil, gas and precious metals.
This can be an inflation-friendly investment idea as the value of raw materials can be relatively stable and boost your income potential.
Purchasing the rights to a patent lets you collect a licensing fee when the intellectual property is used in digital and physical products.
You can access this royalty type by patenting an invention or buying the rights from the current patent holder.
Artists, publishers and writers can receive performance royalties when their work broadcasts in public venues.
- Concert halls
- Satellite radios
- Streaming services
- Terrestrial radio (AM/FM)
- TV commercials and shows
- Video games
7. Print Music
Composers and musicians can earn revenue by publishing compositions in printed music sheets and songbooks.
For example, royalties are due when a church choir buys sheet music or a school band selects a concert piece.
Synchronization (sync) royalties allow songwriters and performers to split the royalty equally. Unlike other royalty types that pay out each time a song plays online or on the airwaves, this is an upfront one-time payment.
Instead of being a performance-based payout, you will receive a lump-sum payment when a client chooses to use your song in an ad, game, movie or show. As a result, your income potential is more predictable.
However, the downside is that if your song is a huge hit, you may lose money in the long run.
How to Buy Royalties
Buying royalties is more complex than buying dividend stocks, but it can help you earn consistent income. You can also get exposure to a tangible asset or intellectual idea.
1. Evaluate Your Risk Tolerance
Royalty investing isn’t risk-free and can require extensive research before committing money for an indefinite amount of time.
These assets can be volatile since you earn more royalties when your property is used more frequently. However, the income potential will dry up when the public moves onto something else.
One example is when a hit song no longer receives air time and most fans have purchased the track. Another scenario is a seasonal song or movie that may only be popular during Christmas.
You can look for evergreen investments that are more likely to earn monthly income, such as mineral rights or rights to a timeless work.
Another potential risk for intellectual property is becoming part of the public domain. Modern copyright laws typically protect assets for the artist’s lifespan plus 70 years after their death.
However, the copyright protection length ultimately depends on the original publishing date.
2. Choose a Type of Royalty
After identifying your risk tolerance, it’s time to pick which types of royalties to invest in. You may start with one and gradually expand into multiple niches as your experience level and portfolio balance needs grow.
Initially, consider an asset you understand. This way, you can easily understand the respective industry and the various ways to collect royalties from the investment.
One option can be exploring mineral rights if you’re a seasoned real estate investor. Of course, this idea is different from earning rental income or even farmland investing, but you already have an idea of how real estate works.
If you’re gravitating toward movies and songs, you will also need to compare the various royalty options because several different licensing agreements and parties are involved.
3. Pick an Exchange
Buying royalties through an exchange can save you time and offer more security than using different channels to look for investment opportunities.
Royalty Exchange typically presents three new opportunities each week. You can bid in auctions or make offers to potentially win the rights for movies, music and trademarks.
Most offerings close in fiat currency, but you might be able to purchase NFTs with cryptocurrency.
Investors with a large budget can participate in private syndicates. For instance, a recent offering was the music catalog from Dire Straits for nearly $3.4 million.
One downside of royalty investing is that you may need to invest over $10,000 or even more than $100,000 into a single offering. Thankfully, Songvest offers fractional music shares that reduce the minimum investment to $100 per share.
While you may not be the sole owner of the song or album, you can easily invest in multiple projects to diversify your portfolio risk. You will receive your royalty payments quarterly for single tracks and multi-song portfolios.
SoundExchange is ideal for music creators and publishers to earn royalties. The service allows creators to search an online catalog and claim their work to begin receiving digital royalty payments.
This isn’t the best platform for investors since there isn’t a dedicated marketplace like other exchanges. However, it’s easy for unregistered sound recording owners to utilize this service.
4. Do Your Research
Like any investment, performing your due diligence is necessary for adequate risk management. There are many investment options within each royalty type, and only some opportunities are profitable.
Make sure to consider the following factors as you compare royalty streams.
An asset may earn several different types of royalties. For instance, a song can earn performance, sync and mechanical fees.
Additionally, make sure you understand how frequently you will receive royalties.
The copyright term can play a factor if the asset is possibly entering the public domain. You should also determine how long it will take to recoup your original investment and the ease of selling future rights.
You will need to invest at least $10,000 for many offerings to obtain an ownership stake.
Fractional investing is relatively uncommon, which may make it difficult for you to take advantage of the earning potential that comes with royalties.
Does the artist or asset have a strong following? If so, the asset valuation can be higher, but you may also be more likely to earn consistent income.
Royalty income can be cyclical and potentially short-lived. For instance, a current Top 40 song can quickly turn into ancient history as other artists release new and more popular hits.
Determine if the potential annual income satisfies your investment goals and risk tolerance.
Many royalty exchanges provide detailed reports about the income history and asset performance to estimate your income and risk.
Why Invest in Royalties?
Royalty investments can be a good fit for your portfolio and help you earn residual income. These are a few of the top reasons to consider investing in royalties.
Generate Recurring Cash Flow
Passive income reduces the stress of having to earn more take-home pay from your day job or side hustles. In this instance, you can make money from other people’s innovations while you sleep.
Get Higher-Yield Investments
Royalty assets can be more volatile than short-term investments and stock market index funds, but your investment returns are usually higher.
According to Royalty Exchange, the typical offering has an average return of 10% or more. This potential return is higher than most traditional investments and dividend-earning stocks.
Higher yields can be worth the extra risk if you’re an aggressive investor because you can earn more significant returns earlier in your investing career.
As retirement approaches, it’s easier to transition to a conservative asset allocation to protect your nest egg.
Multiple income streams help you become less reliant on a particular investment type. The investment performance for these assets may have a low correlation to the stock market and other common investments.
Even allocating a small percentage of your total portfolio to this asset can help you earn recurring income.
A diversified portfolio can mean you’re more likely to make money in any market environment, which can offset unrealized investment losses due to reduced asset valuations.
Frequently Asked Questions
Are you still not sure that investing in royalties is the right option for you? These frequently asked questions can help.
Royalty income is a unique and often overlooked investment opportunity. It’s easy to assume that the original creator and publisher retain the rights for the life of the copyright or licensing term, but you can also cash in on this opportunity.
If you like alternative investments that can produce recurring income, dedicating a small portion of your portfolio can provide another way to earn an above-average yield if you have a more aggressive risk appetite.