Did you know that working a 9-to-5 isn’t the only way that you can earn money? “Passive income” is a form of income that you can earn without active participation. While passive income doesn’t translate to “income with no effort,” adding a passive income stream to your portfolio can increase your earning power without adding a 2nd job to your resume.
There are many different strategies that you can use to explore passive income. Our crash course will introduce you to 8 popular strategies that you can consider starting to earn passive income, as well as a few of our favorite platforms you can use to begin.
1. Invest in Rental Properties.
Real estate can be an excellent place to begin your journey to creating multiple streams of income. There are 2 major strategies that you can use to invest in rental properties:
- Invest directly: In a direct investment, you’ll purchase a piece of real estate, ensure that it’s suitable for tenants and rent it out as you see fit. While direct real estate investing requires more work, it gives you a high level of control when it comes to where your money is being spent.
- Investing in REITs: Real estate investment trusts (REITs) are shares of stock that represent companies that own real estate properties or real estate investments. Most REITs operate in a relatively simple way. First, the company collects capital from investors through shares of public stock. From there, the REIT uses that money to invest in residential or commercial real estate opportunities, returning a large portion of rental income back to shareholders in dividends. REITs are legally required to pay out at least 90% of their taxable income back to shareholders through dividends — and many REITs aim for returns as high as 100%.
Investing in REITs is a more passive way to earn money through real estate income but provide you with much less control over where your money goes. If the REIT goes bankrupt, you could also lose up to 100% of your initial investment — a scenario that’s very unlikely to occur when you purchase a property directly.
You can also invest in real estate through a specialized real estate investing platform. Some of these platforms operate as REITs while others are set up using the crowdfunding model. Browse a few of our favorite real estate investing platforms below to learn more.
2. Rent Your Extra Space.
If you have an extra bedroom in your home, you can earn money each month by renting it out on a space-sharing website. Sites like Vrbo, Airbnb and Homestay allow you to rent out spare space in your home to vacationers, travelers and business professionals passing through town. You maintain control over your space and you can choose dates that you don’t want to rent out — so if you decide to head out for a vacation, you won’t need to worry about strangers being alone in your home.
Don’t have an extra furnished bedroom? You can still rent out your spare space using Neighbor. Neighbor is a unique website that allows you to list spare storage space you have in your home for free. For example, if you have a garage or basement that’s empty, you can use Neighbor to list it. People who live around you can then use Neighbor to rent the space for a vehicle or personal item storage. Neighbor then coordinates payment and access policies on your behalf. You receive a monthly payment for space that you weren’t using, and your neighbor gets an affordable place to store extra things — it’s a win-win.
When most people think of investing, they primarily think to buy stocks and bonds on the New York Stock Exchange or NASDAQ. While investing in stocks can be a fantastic way to secure your financial future, choosing which individual stocks and funds to invest in can be a major challenge for a beginner.
A robo-advisor is a class of financial investors that can make investing easier and more welcoming for beginners. Simply create a portfolio, answer a few questions about your risk tolerance and employment, and your robo-advisor will generate a portfolio customized to your needs based on your answers. Most robo-advisors also allow you to invest on an automatic schedule that allows you to see returns without even opening your app.
If you’re interested in robo-investing, we recommend starting with Betterment. Betterment is a robo-advising hybrid platform that provides you with a complete shop for all of your financial needs. Set future financial goals (like a college fund or new home renovation) and watch your investments grow to fit your needs.
4. Earn Returns on Bonds.
Looking for a lower-risk way to invest? Consider investing in bonds instead of stocks. Bonds are financial instruments that represent debt to a corporation or local government. When you purchase a bond, the bond accrues interest while retaining its value until it matures. On the bond’s maturity date, you can redeem your bond for the full value that you initially invested plus any interest accrued.
Worthy is a bond investing platform that focuses on offering strong, consistent annual bond returns of 5%. Worthy’s bonds are backed by secured assets deemed to have a greater appraised liquidation value than the loan amount, which makes them exceptionally safe choices for low-risk investors. Finally, unlike most bonds, you can also redeem your Worthy bonds at any time and take the interest you accrued on your investment.
5. Rent Your Car Out.
No room in your home to rent out? Why not consider renting your car out using a service like Turo? Turo is an alternative to traditional car rental sites, allowing you to list your vehicle for visitors to rent in exchange for a daily fee. Turo insures drivers with $750,000 worth of protection from Liberty Mutual — so you don’t need to worry about coverage should the person you rent your vehicle out is involved in an accident. Turo can be an excellent opportunity to earn a little extra income, especially if you live close to a major airport or hotel chain.
6. Consider High-Yield Savings Accounts.
No matter who you are, you should have an emergency fund in case an unexpected medical bill, car repair bill or other expense should arise. Your emergency fund should be held in a liquid account so you can access it quickly for those unanticipated events. For most people, this means holding money in a savings account at their local bank. Unfortunately, traditional banks tend to pay out very little in interest — according to data from the FDIC, the average savings account pays out just 0.05% per year in interest. That means that if you have an emergency fund with $5,000 in a standard savings account, you can expect to earn about $2.50 each year in interest.
A high-yield savings account is an alternative to traditional savings accounts. As the name suggests, a high-yield savings account is exactly the same as a traditional account but offers a significantly higher interest rate. For example, a high-yield savings account could offer you an interest rate of 0.6%. If you put your $5,000 deposit into this account instead of the standard account, you’ll earn $30 per year in interest. Like a traditional bank, high-yield savings accounts also have FDIC insurance, which means that your money is safe.
7. Join LendingClub.
LendingClub is a peer-to-peer loan service that allows you to earn interest by providing borrowers with loans. LendingClub’s loans are rated using risk grades A through C and are sold in 3- to 5-year terms. Instead of funding the entire loan, you can fund using increments called “notes” that are small portions of the loan broken down and split among investors. Notes start at just $25, and you only need a $1,000 minimum investment to get started. This unique structure allows you to easily diversify your investments while earning a return on the money you loan out.
8. Invest in Stocks.
Finally, you can earn passive income through stock market investing. There are 2 major ways to earn passive income on the stock market:
- Buying and selling: You can earn money by investing in a company and selling shares of stock for a higher price at a later date. Though some investors take a very active role in their day-to-day trading, many investors take profits on a monthly basis.
- Collecting dividends: You can also earn passive income through dividends. Dividends are a small share of a company’s profits distributed to shareholders on a monthly, quarterly or annual basis. Though not every company offers a dividend, dividend investing is a truly passive way to earn money through the stock market.
If you don’t have a brokerage account, you can browse a few of our favorite options here to begin your search.
Expanding Your Investments
You don’t need to be a millionaire to create a passive stream of income. If you only have a small amount of money to start investing with, we recommend beginning with the basics of stock market investing. Most major brokers now allow you to invest in fractional shares of stock — which means that if you have just $1 you can get started investing.