Warren Buffett once said that if you can’t find a way to “make money while you sleep,” you’ll be forced to “work until you die.” Unfortunately, when most people think of passive income ideas, they get bogged down by visions of million-dollar real estate or billion-dollar stock portfolios.
The truth is, earning passive income is easier than you might think. Passive income streams don’t necessarily require a massive initial investment to get started. They're much more accessible in today's modern world plus- they're an important part of diversification and growing your wealth. We’ve created a list of practical passive income investment ideas to help you get started.
What is Passive Income?
As the name suggests, passive income is a stream of income that requires little to no maintenance from you. Contrary to active income (which is what you earn from your job), passive income, in theory, has no limitations. This is because you don’t have to worry about time constraints to draw in income.
Passive income is usually taxable along with your regular income and income from your stock portfolio. The IRS defines passive income as “trade or business activities in which you do not materially participate” and income earned through rental property. The spread of the internet and online lending has created a wide range of passive income strategies.
Top Factors to Consider Before Choosing a Passive Income Stream
To get the most out of a passive income investment, you'll want to review the following best practices.
1. The Amount of Time You Have to Invest in the Beginning
Passive income does not translate to income with no effort. While passive income streams eventually become largely self-sustaining, most require an initial investment of time and/or money. If you don’t have a ton of time to initially invest in your passive income endeavor, choose a method that doesn’t require a huge amount of time up front. This can come in the form of investing through a robo-advisor or peer-to-peer lending.
2. The Amount of Money You Have to Invest
In addition to time spent researching and comparing passive income streams, most also require an initial cash investment. Consider choosing a passive income stream (or side hustle) that requires more effort in lieu of startup cash.
3. The Knowledge You Currently Have and Your Professional Strengths
Take into account your professional strengths and the things you’re knowledgeable about. Were you in charge of production at a previous job? Your lighting and scriptwriting experience can come in handy if you choose to start your own YouTube channel.
Do you have a background in construction, electricity, or plumbing? You probably know exactly what to look for in a rental property, and what will make the landlord’s job more difficult. Creating a stream of passive income doesn’t require learning a whole new set of skills; the ones you currently possess are probably more monetizable than you think.
9 Ways to Make Passive Income
Wondering how to generate a passive income stream? We've compiled a list of top side hustles and passive income ideas that will allow you to earn during your down time.
Idea #1: Start a Blog or Buy an Existing Blog
Do you know a lot about how to make, fix or analyze something? Do you have a hobby that makes you excited enough to write about it? Starting a blog allows you to bring in readers and sell advertising space. This way of monetizing is known as affiliate marketing and can be a great supplementary income stream. As an affiliate marketer, you would monetize your blog through sponsors and ad clicks.
Your income will depend on how many views you get per month, but don’t be hesitant if your passion is specific or obscure. The best and most profitable blogs are written about niche topics.
Low-cost sites like Wordpress and HostGator can help you set up your blog and get it online for as little as $5 a month. https://www.youtube.com/embed/hxjMjDHIkjc
Don’t have the technical skill or desire to start your own blog? You can buy a blog that’s already making money through sites like Flippa. Writers decide to sell their blogs for a host of reasons: They may not want to keep writing, they may have had a life change (like a move or a new baby) that makes continuing the blog a hassle, or they may need a quick injection of cash.
You should look for a blog that’s at least one year old and that gets at least 10,000 views a month. You can even offer to keep the writer on as a contributor in exchange for a cut of the monthly profits. This encourages loyal followers to keep coming back and lessens the workload for you.
Idea #2: Get Started in Peer-to-Peer Lending
Peer-to-peer lending is a new type of online lending that matches up men and women who need a loan with everyday consumers who have money to lend. People use peer-to-peer lending services like Lending Club and Prosper to get money for auto loans and other short term investments. They do this when they cannot qualify for a traditional loan through their bank or credit union.
Peer-to-peer lending is advantageous for everyone involved; the borrower gets the loan with a higher rate of approval and the lender earns interest on the money given out, sometimes to the tune of 10 percent or higher.
Loaning out your money can be risky, but peer-to-peer lending sites put qualifications in place to help prevent their backers from being burned. For example, lending services often require that borrowers maintain a certain credit score or income level to qualify for a loan. You can usually view these factors before you decide to issue a loan.
Make sure to thoroughly read your site’s qualifications and borrower restrictions before you decide to commit to a loan. Like investing in high-stake penny stocks, you should only invest money that you can comfortably lose.
Idea #3: Invest in Real Estate
When you think about investing in real estate, you might imagine yourself as a landlord who fixes kitchen sinks and chases down tenants for rent. However, there are a number of other ways to invest in real estate that require a much lower time commitment.
Real Estate Investment Trusts (REITs) are companies that invest in income-producing real estate, ranging from rental properties to commercial spaces and storefronts. By law, REITs are required to pay out at least 90 percent of their rental income profits out to investors, though most aim for as close to 100 percent as possible to attract high-value investors.
This means that REITs typically have much higher dividend payouts when compared to stocks, bonds or ETFs.
If you do want to purchase a rental property and become a landlord, you should take steps to limit your legal and financial risk. You’ll want to choose a property that doesn’t involve a huge amount of plumbing, electric or construction work, especially if you’re purchasing your first property.
You’ll also want to learn about how to choose high-quality tenants who will respect your space and pay their bills on time, how to be picky with your tenants and how to navigate your state’s tenant’s rights laws. If you’re thinking about purchasing a rental property, consider taking a course at your local community college or online through a site like Udemy on the specifics of the landlord-tenant relationship.
Idea #4: Invest in an IRA Using a Robo-Advisor
If you don’t already save money in an IRA, you can set one up through a robo-advising service. This makes saving for retirement and collecting dividends easy. The best IRA accounts automatically reinvest your dividends into more shares of the stocks or funds that you own, which allows your money to compound past your initial investment.
You should consider IRA contribution limits before you open your account; if you’re under the age of 55, you’re limited to $5,500 in annual contributions.
If you don’t want to choose the individual funds and stocks you’d like in your account, you can open an IRA through a robo-advising service. A robo-advisor will ask you questions about your income, your employment status and your age when you sign up. Then, when you contribute funds, your robo-advisor will automatically purchase assets on your behalf based on your unique risk tolerance and the number of years until you retire.
As you age, your robo-advisor will make your profile more conservative, investing in assets that are less risky so you can retire on time. If you’d like to learn more about the best robo-advisors on the market, check out our guide.
Idea #5: Write an e-Book
If you’re an expert in one particular subject or area of expertise, you can write, price, and publish your own e-book. E-books don’t need to be particularly long or insightful; they just need to explain a concept in clear, concise language.
Sites like Amazon’s Kindle Direct Publishing Services and Lulu can help you format and put your e-book on sale for free or for a low-cost, one-time price. You can also pay for add-on services like editing and marketing.
After your book has been formatted, edited, and is ready for sale, you can list it on one of the aforementioned sites. When a customer buys your book, you’ll receive a percentage of the profits. If your book does well, you can even consider creating an audiobook for an additional stream of income.
Idea #6: Create an Online Business
In the digital age, creating an online business has become a lucrative venture. The internet provides a global market and constant stream of potential customers, generating significant sales and growth opportunities for entrepreneurs. There are several passive income models to consider when establishing an online business, such as e-commerce stores or dropshipping businesses.
E-commerce stores, for instance, sell products and services online. They offer a broad range of products, from fashion to home goods, and advantageously leverage social media, email marketing, and SEO to expand their reach. Dropshipping businesses, on the other hand, does not require any inventory. Instead, it partners with manufacturers and suppliers and fulfills orders once a customer makes a purchase. The dropshipper serves as a middleman between the customers and the manufacturer, earning a commission on each sale.
While creating an online business can be a profitable investment, you'll also need to research and understand the market niche, consumer behavior, and target audience to maximize return on investment. With proper setup and automation, an online business can earn significant passive income streams, providing a sustainable source of income and an opportunity to pursue other passions and interests.
Idea #7: Royalties
Royalties are a type of passive income that can be earned through licensing or royalty agreements on creative works such as books, music, patents, or trademarks. Royalties are usually paid by companies or individuals who want to use the intellectual property owned by the creator. These agreements can provide a steady income stream and can help authors, artists, and inventors to monetize their work.
When you own intellectual property, you have the right to use and profit from it. This can be done by licensing it for use by others in exchange for a percentage of the income generated from the work. Royalties paid are often a percentage of the revenue earned from the sale or use of the intellectual property.
The benefits of royalties are that they provide a passive income stream that can continue to generate income for a long time. This income can accumulate over time, resulting in a significant financial return. Additionally, licensing or royalty agreements can provide a platform for creators to reach new audiences and to monetize their work in new ways.
Overall, royalties are an excellent way for authors, artists, and inventors to earn income from their creative works while retaining ownership and control over their intellectual property.
Idea #8: High-Yield Savings Accounts and Certificates of Deposit (CDs)
While not as lucrative as other options, depositing money into interest-bearing accounts or CDs can generate passive income in the form of interest payments.
If you're looking for a way to grow your savings passively, save for a short-term financial goal, or earn a higher interest rate than a traditional savings account, high-yield savings accounts and certificates of deposit (CDs) may be the answer.
High-yield savings accounts are similar to traditional savings accounts, but with a higher interest rate. These accounts are often offered by online banks and credit unions and can offer rates of up to 20 times higher than traditional savings accounts. The interest rate is typically variable, so it can change over time, but it can still be a good way to earn a little extra money on your savings.
Certificates of deposit (CDs) are also a type of interest-bearing account that generally offers a fixed interest rate and term length, ranging from three months to several years. The longer the term, the higher the rate. While CDs typically offer a higher interest rate than high-yield savings accounts, you must leave your money in the account for the entire term length. If you withdraw your money early, you may receive a penalty fee.
Overall, while high-yield savings accounts and CDs may not offer the highest possible returns, they can still be a valuable tool to earn passive income on your savings. These options can be especially beneficial for those looking to save for short-term goals or who want to grow their savings with low risk. Just make sure to compare rates and terms from multiple banks to find the best deal for your needs.
Idea #9: Renting Out Your Home or Car
Renting out additional space can definitely be a viable way to generate passive income. This has become easier than ever thanks to the digital age we live in. Nowadays, you can earn income by renting out an additional parking space, an extra room in your home, or even your car when you're not using it through various online platforms.
Whether you're looking to earn a little extra cash or create a full passive income stream, there has never been a better time to cash in on your unused space.
One of the biggest advantages of renting out additional space is that it provides an extra income stream without requiring any significant investment on your part. You already have the available space, so why not monetize it? Renting out a parking space, for instance, requires nothing more than a clean parking spot and a rental agreement. Similarly, renting out a room in your home can be an easy way to supplement your income without having to move out or add on any extra rooms.
Another great aspect of renting out additional space is the flexibility it provides. Internet platforms such as Airbnb and Turo give you the freedom to set your own rules, availability, and prices. This means you can easily rent out your space on a part-time basis without disrupting your daily routine or other commitments. With today's fast-paced lifestyle being able to generate passive income through renting out unused space can be a great way to ensure financial stability while having the flexibility to pursue other ventures.
Final Thoughts
If your goal is to save money for retirement through passive income, know that where you put your money is just as important as saving regularly. Identify the best type of account and asset mix to improve your chances of retiring on time. To learn more about saving for retirement, check out our list of the best retirement planning books.
Frequently Asked Questions
Can anyone make passive income?
Yes, anyone can make passive income. However, it requires a lot of upfront effort to set up the passive income stream. Once it’s set up, you can continue to make money without putting in much effort.
How much time and effort does it take to make passive income?
The amount of time and effort required to make passive income varies depending on the income stream. Some passive income streams require more effort and time than others. For example, you might need to spend time and money setting up a rental property before you can start making rental income. On the other hand, creating and selling digital products online can be a more straightforward process, but still require effort in creating the product.
Is passive income really "passive"?
While the term “passive income” can be somewhat misleading, as most methods require at least some upfront effort, the goal is to eventually reap the benefits of your initial work without constantly trading time for money. While you may still need to monitor and maintain your passive income streams, the idea is that they require less ongoing effort than traditional forms of income that require you to show up and work each day.