For investors looking to further diversify their portfolios beyond the stock market and establish lucrative new revenue streams, royalty investing can be an exciting and rewarding venture with many benefits.
Royalty rights tend to provide a very steady income, especially on a long-term basis. And in comparison to the bond market and other types of equity, royalty income is fairly immune to the usual risks and fluctuations that come with investing. A potential royalty investor also has lots of options as to the types of royalties they can purchase.
But before you dive into the wide, wonderful world of royalty investments, it’s important to get a handle on the basics. Here’s an overview of everything you need to know to get started on the right foot.
Table of Contents
- What Are Royalties?
- Investing in Royalties 101: Key Types to Consider
- Copyright royalties
- Performance royalties
- Other types of music royalties
- Mineral royalties
- Patent royalties
- Mechanical royalties
- Franchise royalties
- How to Buy Royalties and Get Royalty Income
- 1. Thoroughly assess the risks
- 2. Decide on a type of royalty investment
- 3. Find the right royalty exchange
- 4. Research assets before investing
- 5. Diversify your royalty portfolio
- 6. Continue researching new targets
- What Are the Best Reasons to Invest in Royalties?
- Steady passive income
- Tap into higher-yield investment options
- Diversify your portfolio effectively
- Royalty Investing FAQs
- Are royalties a good investment?
- What is the easiest way to buy royalties?
- What are the cons of royalty investment?
- How long do music royalties last?
- Are royalties taxable income?
What Are Royalties?
Royalties are among the more popular alternative investments out there. They are payments made to a person, company, or other entity in exchange for the use of an asset of value.
Royalty rates can vary greatly from one setup to another and are typically the result of negotiations between the property owner and the potential licensee. Once agreed upon, the terms of licensing agreements are binding.
Royalties can differ greatly as far as how they’re paid, as well. Some royalty payments cover a sales percentage spanning a specific period of time (including one that’s perpetually ongoing). Others are by-the-unit payments, as is occasionally the case with books or music albums.
Investing in Royalties 101: Key Types to Consider
Collectively speaking, royalty income ideas can cover a lot of ground. Some commonly known and sought-after examples include certain intellectual property, copyrighted music catalogs, and copyrighted books.
But those interested in royalty assets can also invest in private equity, oil and gas, invention patents, and more. Here’s a closer look at what’s out there.
These are among the most popular types of royalties and can cover options like music, books, art, and much more. There are also many different ways to seek royalty income via copyrighted material.
Investors can choose to invest in individual works — such as a particular song by a popular artist, a music album that’s really blowing up, or a brand-new novel by a hot author — or entire catalogs by particularly successful creators. It’s also possible to invest in proven classics — like movies and classic songs everyone knows.
Every time you hear a particular song played anywhere — whether that’s your favorite restaurant, the frozen food section at the supermarket, or a shop downtown — the individual or entity doing the playing must pay performance royalties to the artists and rights holders.
The same goes for radio stations and streaming services like Spotify, Tidal, and Apple Music.
Other types of music royalties
In addition to collecting revenue via streaming services, radio, and similar avenues, music rights holders also sometimes sell the rights to reproduce music in print. Think physical or digitized sheet music, guitar tabs, and similar options.
Synch royalties are also a thing. That’s when music appears as part of an audiovisual piece, such as a television advertisement, a movie, or an episode of a television show.
Although it may not be the first possibility to come to mind when a person thinks about investing in royalties, it’s definitely possible (and potentially lucrative) to invest in natural resources like oil and gas via options like mineral royalties, gas royalty trusts, and royalty interests.
Mineral rights allow someone to extract salable resources from another person’s land. For that reason, you’ll sometimes see property owners with valuable land assets sell royalty licenses to natural gas companies and other entities to generate extra income.
If you’ve ever wondered how professional inventors make money, patents are the answer. The inventor brainstorms a wonderful idea for a potentially successful product or technique, patents it, and then sells licenses to use what they came up with.
As a would-be investor, you can invest in intellectual property you believe in via patent royalties.
Mechanical royalties are similar to other music royalties in that they’re fees paid in exchange for the right to reproduce a song or other composition.
Situations where mechanical royalties would come into play include download-to-own interfaces, as well as situations where digital or physical album sales occur.
When brand owners decide to convert their businesses into franchises, they sell the rights to open additional semi-independent businesses under that same brand.
This happens frequently in certain industries, including retail and fast food, as with McDonald’s, Burger King, Target, 7-11, etc.
How to Buy Royalties and Get Royalty Income
Although even new investors usually have a solid understanding of the stock market, the idea of generating cash flow via an alternative investment like royalties can seem out of reach at first.
However, it’s much easier to sell royalties, buy royalties, and generate revenue that way than most people think. Here’s a step-by-step rundown that addresses how to get started.
1. Thoroughly assess the risks
All investment types — including dividend-paying stocks — come attached to some risk, and royalty investing isn’t an exception. That said, it’s important to make sure you truly understand what those risks are before you dive in and buy royalties.
Valuation risk is a factor that always comes with investing in music royalties and other types of entertainment royalties. The term refers to the possibility of overvaluing and overpaying for someone else’s creative property.
Taking care not to allow emotional attachments to creative material and intellectual property can help investors avoid falling victim to this.
Counterparty risk refers to the possibility of buying an asset from someone who doesn’t actually have the right to sell it in the first place. For this reason, prospective royalty investors should always double-check legal ownership before putting their money down.
Additional risks to consider
Many other factors can affect the price, value, or availability of royalty assets, as well. Examples include (but aren’t necessarily limited to) emerging technology, inflation, ever-changing industry policies, and more.
That said, always do thorough research before investing in music royalties or any other royalty assets. Double-check the current market value of a particular option before investing in royalties, and avoid developing emotional attachments to assets that may affect your ability to make wise decisions.
2. Decide on a type of royalty investment
Remember, opportunities to pursue royalty streams and earn more money go well beyond entertainment industry options, music royalties, etc. You can just as easily explore venture financing, natural gas royalty interest, and more.
The best move is generally not to overcomplicate the process. In other words, stick to what you know, especially in the beginning. And focus on areas you’re genuinely interested in.
For example, are you knowledgeable about publishing? Going into copyright investing might be a good initial investment decision. Or perhaps you’re a massive music lover or someone with hands-on record label experience. If so, definitely take a closer look at music industry options.
Meanwhile, technological innovation whizzes might want to look at intellectual property. Food lovers or those with restaurant experience can likewise explore franchise options. You get the picture.
There’s plenty of time to break into other ways to invest in royalties and further boost your royalty flow later on when you’re more experienced.
See Related: How to Invest in Private Equity
3. Find the right royalty exchange
Investing in royalties is similar to stock market investing and similar options in that it’s usually done via a dedicated exchange. A royalty exchange is an online marketplace where you can explore, purchase, and sell different royalty options.
Although which royalty exchange website is right for you depends largely on your needs and preferences, it’s important to fully vet your options.
Explore how each choice works to see whether you like the interface. Do comparative research to get a feel for how others interested in royalty income liked their experiences, as well.
Some popular royalty exchange options to consider include the following:
- Royalty Exchange: Marketed as the world’s largest royalty marketplace, Royalty Exchange operates similarly to stock market exchanges you may be familiar with. Potential buyers interested in a rights holder’s full or partial body of work bid on the royalty. The winner walks away with the ability to claim future royalty income.
- SongVest: Just as individual stocks can be sold and invested in as package deals, songs, albums, and other music-related assets can be bundled into IPOs — SongVest’s specialty. IPOs earn money for SongVest investors each time an associated song or composition is played, sold, or purchased.
- Royal: Royal investors who choose Royal as their exchange of choice receive tokens that correlate to a particular streaming revenue percentage for a piece of music. This system allows investors to collect a royalty stream alongside the artists making their favorite music.
- Cypress Growth Capital: Cypress Growth Capital is a solid royalty option to look at if you’re interested in business investing, technological innovations, small businesses, venture financing, and similar options.
Other online platform options, royalty trusts, and companies to look into if you’re exploring different ways of making money with royalty investment include Sabine Royalty Trust, BlackRock, KKR, Vox Royalty, and more. However, the above options may be the easiest to get the hang of for beginners.
4. Research assets before investing
Chances are you wouldn’t invest heavily in a particular stock without doing much research on it first. The same should be true of music investment and other opportunities to buy royalties.
For example, suppose you’re thinking about investing in a particular song that’s really been climbing the charts lately. Yes, you may hear the next big classic that people will be jamming out to for decades. However, songs can just as easily be red hot one minute, only to be completely forgotten the next.
Do your homework before putting your money down to better gauge the cash flow potential of your investment. Questions to ask yourself during this process might include:
- How solid is the artist’s fan base? Who listens to their music and why?
- What is the artist’s reputation like? Do they have a wide-reaching appeal, are they controversial, etc.?
- What are trusted experts saying about this artist, their music, and their future in the industry?
Again, don’t let the fact that you personally really love a song and want to believe in it distract you from the process of determining its true potential as a future royalty stream. Seasoned investors know how to set aside emotions in favor of smarter decision-making.
5. Diversify your royalty portfolio
Whether you’re purchasing stock shares via public markets or exploring various royalty opportunities, never put all of your eggs in just one basket. Markets fluctuate, and risks come and go, so flexible portfolio development is key — especially if you’re investing as part of a plan to become independent financially.
Always aim to maintain a balanced portfolio overall. Spread your money around, and consider speaking to a financial advisor to better understand your ongoing options.
See Related: Build a Socially Responsible IRA
6. Continue researching new targets
The more you invest, the more you’ll learn about the royalty market, and the more comfortable you’ll become chasing higher yields and pursuing new investments.
So, don’t simply sit on your current investments. Keep your royalty payments growing by researching new targets and reinvesting in solid options.
You should also keep an eye on old targets, as well, to better assess whether additional investment is a good idea. For example, if a decision to invest in a particular artist’s work or intellectual property turns out to be particularly smart, consider gradually putting more of your money into their catalog moving forward.
Keep educating yourself further on the royalty market, going royalty rates, interest rates, and other essential concepts, as well. The more you know, the better equipped you’ll be to make wise future investing decisions.
What Are the Best Reasons to Invest in Royalties?
Still not sure whether pursuing royalty income is right for you? Here’s a closer look at some of the biggest reasons other investors make royalties part of their future financial plans.
Steady passive income
Establishing and maintaining steady passive income streams is always a wise financial decision. However, not everyone can create something with the potential to produce royalties from the ground up themselves.
Choosing to pursue royalty investment allows you to leverage other people’s great ideas, hard work, and creativity to generate consistent income instead. It’s also a rewarding, interesting way to support work you believe in and participate in other industries that interest you.
Tap into higher-yield investment options
Although all suitable investments will come attached to some ongoing returns, royalty investments are very high-yield, comparatively speaking. For example, investing in a solid music catalog can generate returns as high as 10 percent.
Oil company royalties, intellectual property royalties, and more also typically bring in reliably high returns on one’s original investment.
See Related: Best Investments for Low-Income Earners
Diversify your portfolio effectively
If you’re a stock investor, you already understand how important diversification is for ongoing income stability. Not only would you not invest all of your money in one stock, but smart investors know to invest in a variety of stock types, as well — bonds, funds, ETFs, and more.
Learning to invest in royalty income and other alternative assets is a great way to keep building on your investment foundation. And the more you diversify, the better protected you’ll be against future potential market fluctuations, volatility, etc.
Royalty Investing FAQs
Are royalties a good investment?
When well-researched and wisely chosen, royalties can be a very good investment. They generate steady income, yield high returns on initial investment, and are relatively stable as compared to stocks, bonds, and similar options.
What is the easiest way to buy royalties?
Popular royalty options, including music and entertainment royalties, can be obtained via online marketplace exchanges. Options include (but are not limited to) Royalty Exchange, SongVest, and Royal.
What are the cons of royalty investment?
Like other investment types, there’s always risk involved in royalty investing. Factors like valuation can be variable and change drastically over time. Plus, there is no guarantee that a particular investment will succeed.
How long do music royalties last?
Royalties attached to music continue for as long as the songwriter lives, plus another 70 years. This is how you can have songwriters who live off of a single big hit for the entirety of their lives and then some. Their children may even be able to do the same in certain cases.
Are royalties taxable income?
All types of royalties — including those associated with natural resources, copyrights, and patents — are taxed as standard income. Therefore, all investors should expect to pay taxes on their earnings should they receive royalty income.
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Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.
Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.
Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.
When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.