Investing in Music Royalties: Does it Rock?

Updated: 3 days ago



It's important to me to have a diverse approach to my investment portfolio, as I'm sure it is to you as well. I want to build multiple streams of income across multiple asset classes. One of these asset classes I've chosen is music royalties. Let me tell you about them.



What are music royalties?

As simply as I can put it, music royalties are payments made for the use of a song. That use can be anything from being played at a dance club, on the radio, online or in a movie. Some of the royalties go to the recording of the music, others go to the publishing of the music.



What are the advantages of music royalty investments?

  • Tax Benefits: The biggest tax benefit is that you can depreciate the royalties, similar to how you can for real estate. Find out more about the tax benefits here.

  • Growth: Since 2014 royalty payments are growing, and growing quickly!


  • Diversification: Music royalties are diverse from other traditional asset classes like stocks, bonds and real estate.

  • Quarterly Payouts: Every 3 months you get a check for your royalties. Nice way of turning investments into an automatic income stream.

  • Passive Income: After making the purchase of the royalty, you have to spend exactly 0 hours on the investment. Can't get any more passive than that.

  • Competitive Yield: On average the yield on royalties are 8% - 10%, but obviously your mileage may vary.



How do I invest in music royalties?

I've only invested via Royalty Exchange to date, although there are other platforms out there.

note: I'm in no way affiliated with Royalty Exchange, do not receive any referral payments. I'm simply a customer




I choose Royalty Exchange after spending lot of time researching their platform, attending office hour sessions, watching YouTube videos, reading articles written about them etc. I also had a 1:1 call with them to ask a lot of detailed questions. At the end of that I was really comfortable with their offering. So far they've lived up to my expectations.


Let me give you a quick overview of how Royalty Exchange works, how I've invested with them, and some tips I've picked up along the way.


First of all they have 3 different ways of making investments.


  • Auction House: These are catalogs that are coming to the market for the first time on the Royalty Exchange platform. They tend to be larger catalogs, but not always. They are listed for auction with a set time for when the auction expires, and investors make bids on them. Highest bid at the end of the scheduled auction timeline wins.

  • Secondary Market: These are catalogs that have generally been sold on the platform previously, and are up for sale again. There is no timeline for when the offering ends like the auction. Some catalogs have been on the secondary market for many many months. Bids that you make on these expire in 24 hours however. There's also an option for a list price, where the seller of the royalty sets a price that they will automatically accept. This is where most of the investments options exist.

  • Private Syndicates: These are the biggest of the catalogs. Royalty Exchange creates an LLC for each that investors can choose to buy into with other investors. Note: you must be an accredited investor to invest in a private syndicate. There are not many of these that come to market however.

So far I have only successfully made investments through the secondary market. I've made bids on the auction house, but never went all the way to the end of being the high bidder. I've also signed up for a private syndicate investment, but it failed to get enough investors to cover the total investment of over $3 million.


For the investments I've made, 3 of the 4 were made by accepting the List Price for the royalty catalog (when listing a catalog for sale the seller can provide a list price that they will accept outright, bypassing the bidding process). Be cautious though as a lot of catalogs have ridiculous list prices. Pay close attention to the LTM multiple (Price divided by Last Twelve Months of Earnings). If at catalog has a LTM multiple higher than the years remaining, run!


I've made 100 or so bids on royalties over the past 4 months, and only had 1 of them accepted outside of the list price. That process can be exhausting and frustrating. It seems that many catalogs are listed without the owner really having a desire to sell.


Royalties have a few different timelines:

  • Term: After 10 or 30 years (depending on the offering) the royalty ownership transfers back to the original owner.

  • Life of Rights: Royalties are paid to you for the life of the artist + 70 years!


Some royalties listed are less than these timelines, however, as investors choose to sell their royalties before the original term expires. Example someone buys a 10 year royalty, owns it for a couple of years, then sells it. When they sell it the purchaser will only enjoy the payments for that royalty for the remaining 8 years of the initial purchase term.


Each listing provides a detailed breakdown of where the royalty payments are coming from (online streaming, radio, satellite radio, international sources, video, other sources etc). I pay close attention to this. I really try and find royalties that earn most of their revenue from streaming, as radio play royalties especially tend to be short lived as the song ages.


What investments have I made?

Over the past 4 months I've invested in 4 different music royalty catalogs (I'm keeping the artist anonymous, but all 4 of these catalogs are in the hip hop / rap genres).



Here's a description of each of the columns:

  • Purchase Amount: How much I paid for the royalty rights to that catalog.

  • Dollar Age at Purchase: How many years, on average, has each song in the catalog been earning royalties.

  • Years Remaining at Purchase: How many years until I no longer own the rights to the royalties for that catalog

  • LTM at Purchase: How much did that catalog earn the twelve months prior to purchase.

  • LTM/Purchase Ratio: Purchase price divided by the LTM at purchase. Shows how many years it would take to break even if the catalog earnings remained constant.


As you can see the LTM / Purchase ratio is higher for the catalog I've purchased lifetime royalty rights for. This is to be expected. You'll also noticed that the LTM / Purchase Ratio is higher for catalogs that have a higher dollar age at purchase - reason being, the older the catalog, the more stable the royalty payment amounts tend to be. New music has a large spike the first year or so, but then drops significantly after that until it reaches a plateau of sorts.


I've only owned 2 of these investments long enough to earn a royalty check for them, so not enough of a data point to draw any sort of conclusion on performance. That being said last quarter I earned $1,132 total off of two of these catalogs (the other two I purchased after the Q4 2020 payout date). I'll keep you posted on performance as time moves on.


Closing

So that's a brief overview of music royalties, why to invest, how to invest, and my investments to date. I'm committed to growing my investments in this asset class over the coming years & look forward to sharing lessons learned along the way. Not only do I think this investment class will have solid returns for years to come, it is also an exciting investment to make.


Let me know if you have any questions about royalty investments - I'll gladly share what I know or where to find the answers you may have. We're all in this investment journey together - the more we give, the more we receive!


As with ANY investment, please do your own due diligence! I'm not an investment advisor, I'm simply a dude who blogs about investments for entertainment purposes. :)


PS: I've started a Reddit page to focus on music royalty investments. Feel free to join me there: https://www.reddit.com/r/MusicRoyaltyInvest/


PSS: I've written an article on how I analyze a royalty investment here: https://www.3qfi.com/post/how-i-analyze-a-royalty-investment



Wanna support this blog?

  • Personal Capital: My go to place for tracking all things Net Worth.

  • YNAB: My go to place for managing my spending and budget.

  • Betterment: I use this account for general investment purposes.

  • M1 Finance: I use them for my dividend stock investments.

  • SoFi Invest: This is where I make individual stock investments.





1,039 views0 comments
  • Twitter

©2020 by 3QFI. Proudly created with Wix.com