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Typically seen as an unconventional investment in the past, royalties are swiftly becoming a valid source of cash flow when it comes to profiting from things like intellectual property, music, and unique products. You can invest in royalties as a way to diversify your portfolio, but knowing where to start can be tricky.
So how do you invest in royalties?
In this article, we’ll go in-depth to find out what royalties actually are to give you a better understanding of how you can use them as part of your investment strategy. Our guide will also introduce you to sources where you can actually purchase royalties in order to profit from them in the future. Finally, our list of alternative investment opportunities will give you a broader idea of how you can make your money work for you on multiple levels.
What are Royalties
In short, royalties are a payment received by the owner of a particular asset for use of that asset by another party. Many people have heard the story of J.K. Rowling’s claim to fame from a life of poverty through profiting off of her infamous young adult series. For every copy sold, she received a royalty determined by her contract.
Other examples of royalties include intellectual property. An inventor might come up with a product and sell the rights to it to a manufacturing firm that pays the inventor royalties whenever a product is sold. As long as the royalty source is generating income, the investor will receive money.
Most royalty investment strategies are considered long-term, rather than short-term, although there is a potential for this to happen. For instance, a product might be a one-hit wonder (such as the fidget spinner), where royalty income is high early on, but tapers off once the fad passes. However, most royalties earn money long-term since the product they invest in is typically viable for many years.
Types of Royalty Income Sources
We’ve mentioned a few royalty income sources above, but here’s a list of other common sources of this type of passive income:
- Mineral resources, such as oil and gas
- Trademarks
- Composers
- Publishers
- Movies
- TV shows
- Business funding
- Venture financing
- Books
- Photographs
In many ways, photographers have been taking advantage of royalties to profit from their artwork long before royalties gained ground in the public eye. A picture might be worth a thousand words, but to the right buyer, it could have actual monetary value as well. For instance, many weather stations will pay storm chasers for video and photographs of the storm and any resulting damage as a way to boost their news programs.
As you can see, royalties do have certain conditions that regulate them to specific industries or products, but that doesn’t mean you have to invest in a single product alone. The best royalty portfolio includes many products to minimize risk.
Royalty Trusts vs. Auction Sites
Most royalty investment opportunities fall into the category of trust or auction sites. In a royalty trust, publicly traded corporations acquire natural resources and allow investors to purchase shares. The profits are then distributed as dividends, but as long as the trust distributes 90% or more of the profits as dividends, the investors must pay taxes on their share. It is important to note that these corporations involved in royalty trusts do no mining or drilling of the resource themselves.
On the other hand, auction sites allow you to buy such things as music royalties. Rather than purchasing an entire share, you can also purchase a fractional share. The idea is the same as a royalty trust, namely to earn income, but the rules are a bit different when it comes to what opportunities are up for grabs.
What are the Benefits of Investing in Royalties
Here’s a list of the benefits you can enjoy from investing in royalties. While each individual opportunity has its own set of risks and benefits, savvy investors know that having your money be in the right place at the right time is the name of any investing game.
Unique Investments
Most of the royalties we’ve listed are unique in the aspect that they’re one-of-a-kind or have a limited supply, in contrast to the stock market where robo-advisors rely on algorithms to make investing decisions. Investments are also made based on the marketability of a product based on that unique factor, rather than a market or business trend.
In fact, many royalties qualify as micro-investing opportunities, where a small investment here or there could have the million-dollar get-rich-quick effect most investors are hoping to stumble upon. While this is not typical of most royalty investments, there is a remote possibility you could invest in the next big app, song, or product.
High Yield Potential
Knowing what royalties are and understanding how much you can make from them are two different things. Many investors receive a 7% rate of return on their investments, though many see better than that depending on the situation.
This is in contrast to the return you can expect on more traditional investments, such as CDs, stock dividends, or bonds. Really, these returns even beat out high-yield savings accounts as well as those cryptocurrency accounts that you can earn interest on as well.
Stable Investment
Because royalties are not publicly traded, they’re not susceptible to the same fluctuations in valuation as other traditional types of investment are. Royalties do rely on the market in the sense that products must move in order for royalty income to be made. However, unlike the real estate market, royalties are not subject to as much influence from interest rates and other external factors.
Alternative Investment
As one of the more popular alternative ways to invest, royalties are not necessarily connected to the performance of financial markets. This is what makes them stable, but it also gives them a certain reliability in terms of regulation.
Depending on which product or intellectual property piece you chose to invest in, the effects of inflation may or may not be felt in your royalty income. In the example of songs, your chosen tune could become more popular because people are watching their money and want to listen to music rather than see a movie, go to a concert, or otherwise spend money.
Resell Your Royalties
Royalties are not something you purchase and then you’re stuck with. Like stocks, they can be traded as the investor sees fit, especially when the popularity of that investment source increases. In fact, many investors can make a living off buying and selling royalties that increase in value and peak out.
Before you purchase a royalty in order to resell it, be sure to check the fine print. There may be fees and penalties associated with the resale process, depending on what you invested in and how you plan on selling it.
Type of Passive Income
Royalties are a type of passive income, which makes them best for those investors who don’t want a lot of management to deal with. After purchasing your royalty, you can sit back and watch it earn money as you go about your life. There are no prices to watch, unless you plan on approaching royalties with a buy low and sell high mentality.
For this reason, royalty investments may not be the best option for those who enjoy taking their investment strategy into their own hands. When it comes to your intuition vs. a robo-advisor, you might trust yourself more than an algorithm. At the same time, there are royalty investment opportunities that gain value simply because they enter the spotlight. Playing the field to your advantage could be more difficult than it looks.
How to Invest in Royalties
With the following websites, you’ll be able to peruse the available royalty investment opportunities.
Royalty Exchange
Just as the name suggests, investors can buy and sell royalties on the Royalty Exchange. This website connects investors and creators to increase the opportunities available to both in terms of investing. There are many asset packages available to provide risk mitigation, flexible portfolio development, and valuation support. Search listings for opportunities you prefer, such as music like Jay Z and Alicia Keys’ “Empire State of Mind.” This particular multi-platinum song closed recently for $190,500 with a term of 10 years. If that song is ever used within the next 10 years, the investor will receive royalties.
SongVest Records
If it’s music you like, SongVest has a platform dedicated to music-related royalties alone. In fact, the company is so passionate about the music-making industry that they created their own record label, entitled SongVest Records.
SongVest advertises itself as a peer-to-peer platform where artists and their audience meet. The fans, or SongVestors, fund music produced by their favorite artists and gain royalty income in exchange. This relationship allows you to directly participate in the industry by showing your support for your favorite talent.
The one caveat that makes SongVest different is that you also join in the marketing efforts. This can mean it’s not as passive an income source as other royalties, but you can invest as little as $50 to promote new talent. Ideally, if you were to back the right artist, you could jump on the popular train before it even leaves the station.
Cypress Growth Capital
Royalties can also include venture capital opportunities, such as those found on Cypress Growth Capital’s website. Launched just over 10 years ago, this platform brings together investors and business startups in order to provide royalty payments.
Venture capitalists fund businesses up to $5 million and receive royalties on the loan, all the way up until the loan is repaid. Once the payments stop, royalties cease. Cypress Growth Capital has over $100 million in capital under management at the moment, but they do put their partners under strict requirements to protect the interests of their present and future venture capitalists.
Other Royalty Opportunities
There are many other types of investment income you can earn from royalties, including oil and gas trusts, gold mining companies, and other types of alternative investing. As long as you are earning money from the sale or use of a particular object, idea, or creation, you are invested in royalties.
Royalties vs. Other Types of Investments
Royalties are just one of the many types of investments you can make today in order to increase your cash flow. When compared to the gambit of investing opportunities, royalties can decline over time as the object they benefit from depletes over time or becomes less popular. For many, royalties vary with each month, so it might not be easy to rely on a steady income source if that’s your goal.
Alternatively, you can invest in things like farmland, which continues to remain profitable. Mutual funds are another good source of investment income. If you’re someone who likes to read books, there are plenty on the subject of investing that you could check out. It is possible to invest with little money at all, on opportunities such as fractional shares, through investment apps as well.
Kings and Queens of Royalty Investments
Investing in royalties might seem risky for people who are used to typically investment opportunities, but they’re fast becoming a viable source of income. There are many different objects in which to invest to receive royalty payments, with more coming to the market each day.
We hope you’ve found this article on how to invest in royalties useful in learning more about investments and how they can benefit you. Royalties aren’t for everyone, but in some cases, you can increase the chances of living like a king or queen just by investing in the right royalties. All it takes is a small investment and a leap of faith.
