- Why Invest in Royalties?
- Types of Royalties to Invest In
- Music Royalties
- Patent Royalties
- Oil and Gas Royalties (Mineral Rights)
- Royalty Trusts
- TV and Film Royalties
- Royalty Financing
- Book Royalties
- Trademark Royalties
- How To Invest in Royalties?
Royalties are legally-binding payments made through various types of agreements, paid by the licensee (the person or company who is licensing the property for a fee) to the licensor (the person or company with exclusive legal rights over that property).
This property is a form of ownership, usually some type of intellectual property. And the fee is typically a percentage of the gross or net revenue from the product using the intellectual property or through a fixed fee.
Why Invest in Royalties?
- Long-term Investment: Royalties can provide long-term returns on your investment dollars.
- High-yield Returns: While some returns are higher than others, royalties can provide a steady stream of income that yield high returns, year over year.
- Passive Income: Royalties are a great way to build up your passive income portfolio. You do the upfront work, whether investing in the intellectual property or create it yourself, then collect payments through the use of the IP, over and over again, on the backend.
- Asset: Royalties are intangible assets – meaning they are not physical in nature but are still very valuable. Putting money in your pocket rather than taking from it.
- Fairly Low-risk: While their is still risk, as with any investment, it’s on the low end considering the potential of average ROI for royalties.
There are many types of royalties from which you can generate royalty income – below is a list of the most common and creative types.
Types of Royalties to Invest In
1. Music Royalties
Music has many types of royalties – but they fall into four (4) main categories – mechanical, performance, synchronization, and print.
When you own the rights to a song, you can collect royalties in every way your song is being used.
Mechanical royalties are paid out every time some type of media (CD, vinyl, cassette tape, etc) with your recordings is sold.
Performance royalties are paid out whenever your song is played publicly. Every time it’s streamed on services like Spotify, played on the radio, in a restaurant or bar, etc.
Synchronization royalties are paid out when a song used as background music for a movie, TV show, or commercial.
Print royalties are paid out to songwriters and publishers based on sales of printed sheet music.
Note: Depending on the song and if you own 100% of it, music royalties can be one of the highest paying royalties with an annual ROI of roughly 12%.
2. Patent Royalties
Patent royalties are payments made by the licensee to the licensor to use the patent.
Through a patent licensing agreement, the licensee agrees to pay the licensor royalties, usually, a percentage of the gross sales from the product using the patent or through a fixed fee.
Tip: Rather than looking to own the patent 100%, try forming a partnership with the inventor/owner by finding a licensee for the idea – and in return, you collect a percentage from the royalties on the backend.
Can get risky if and when the invention faces obsolescence due to technological advances (when something new and better comes along). So make sure you know your industries’ average shelf life. Moore’s law says it’s roughly 2 years.
3. Oil and Gas Royalties (Mineral Rights)
Oil and gas royalties are one of the most tried and true royalty investments available, traditionally known for having lots of upsides and very little downside.
In 1982, the federal government passed a law establishing that royalty payments to landowners would be no less than 12.5% of the oil and gas sales from their leases.
Landowners receive two forms of compensation for leasing their minerals. One is called a ‘bonus’ which is typically a $200-500 per acre signing bonus. The other is royalties, that traditionally pays out 12.5% annually, but more recently around 18% – 25%.
Note: Generally, an oil or gas field will produce for up to 35 years on average.
4. Royalty Trusts
Investing in royalty trusts allow you to invest in and earn royalty income without actually having to do much upfront work.
Royalty trusts are publicly traded companies mainly focused on buying up and controlling oil, gas, or mining assets. The companies’ profits are then distributed out to their shareholders through dividends.
Much like Real Estate Investment Trust (REITs), royalty trusts allow you the opportunity to earn a return on investment without having to scout the land, have funds to purchase the land, find someone to lease the land to, negotiate royalties, etc.
Note: Trusts can be worthwhile to those who don’t have the experience, time, and/or funds to go in it alone.
5. TV & Film Royalties
Just like music, TV and film royalties are entertainment royalties that are creative works protected by copyright.
In the film and TV world, they use the term “residuals” instead of royalties – and residuals are paid out to the copyright owners whenever the film or show is replayed or sold through DVD, TV syndication, and newer media such as Netflix or Hulu streaming.
The copyright owners are usually anyone involved in the making of the film/TV production. Such as writers, directors, producers, and performers, etc.
This is a more risky investment as you would need to invest in the film pre-production – meaning you don’t know if you’ll see any return at all depending on how the film performs.
6. Royalty Financing
This type of investment comes down to how you prefer to invest your money. Are you looking for ownership over assets? Or just a healthy return on investment (ROI)?
Royalty financing is more like a loan, rather than investing in or owning an asset – where you collect a royalty (a percentage of the company’s monthly revenue) instead of owning a traditional equity stake in the company.
7. Book Royalties
A book royalty is when an author contracts’ with a book publisher to publish their work. And in return, the publisher pays the author a royalty percentage of every hardcover, softcover, eBook, and audiobook sold.
Book royalties are typically only for traditional publishing (contracting with a book publisher) and do not exist when the author decides to self-publish.
8. Trademark Royalties
Much like patent royalties, trademark royalties are payments made by the licensee to the licensor for the use of the trademark.
Then, through a trademark licensing agreement, the paid royalty rates are usually a percentage of the revenue produced by the trademark.
How To Invest in Royalties?
Investing in royalties depends on the type of royalties you’re looking to invest in.
Below is short list of how and where to invest in them at.
Whenever you’re looking to buy and invest in royalties of any kind, it’s usually done through an auction. Most auctions can be bid on online on auction sites.
Tip: To find auction sites, Google [royalty type] + “auction site”
- Learn more about oil and gas royalties and the Federal Oil and Gas Royalty Management Act of 1982.
- Learn more about music royalties.