How to Make Passive Income

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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 require a massive initial investment to get started, and 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.

Things to think about before choosing a passive income method:

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. 

Passive Income Ideas

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 depends 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.

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.

Source: https://www.griffincapital.com/investor-education/understanding-reits

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.

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.  

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