What is Passive Income and What are Some Passive Income Ideas?
Passive income is the term used to describe money earned in a “passive” manner with the help of rental properties, limited partnerships, or other enterprises that do not require your active involvement for the generation of income. Passive income is taxable in the same way active income is. But the Internal Revenue Service (IRS) treats it a little differently. Portfolio income is considered passive income by some analysts. This results in the dividends and interest being considered as passive. In this post, we will take a look at the basics of passive income and go through some passive income ideas which you can start using to generate some passive income for yourself and build your wealth. Let’s get started.
Passive Income: All You Need to Know
What is Passive Income?
In general, income is divided into three categories: active income, passive income, and portfolio income. Passive income has been a comparatively loosely used term in recent years. Colloquially, it’s been wont to define money being earned regularly with little or no effort on the part of the person receiving it. Popular sorts of passive income include land, peer-to-peer lending (P2P), and dividend stocks. People who champion the cause of passive income usually affiliate with a work-from-home and be-your-own-boss professional lifestyle. The type of earnings people usually associate this term with, are gains on stocks, interest, retirement pay, lottery winnings, online work, and capital gains.
While these activities fit the favored definition of passive income, they don’t fit the technical definition as outlined by the IRS’s Passive Activity Losses—Real inheritance tax Tips. In technical terms, passive income is also defined as “net rental income” or “income from a business during which the taxpayer doesn’t materially participate.” In a few cases, it also takes self charged interest into account. It goes on to mention that passive income “does not include salaries, portfolio, or investment income.”
What Do You Need to Earn Passive Income?
If you take the “passive” of “passive income” literally, you might be lulled into thinking that you won’t need to do anything in order to keep the income flowing. If you want to build a positive income stream, you will need to have one of the following at least:
1) An upfront monetary investment, or
2) An upfront time investment
You can’t earn residual income without being willing to supply a minimum of one among these two. So if you are ready and willing to start working towards earning some passive income, let’s explore some awesome passive income ideas.
Great Passive Income Ideas for Wealth Creation
Passive Income Ideas That Require an Upfront Monetary Investment
These sorts of passive income require you to have some money upfront which can be used to generate passive income at a later point in time. However, you don’t need a million dollar trust fund to start it. The options that we have listed, can be utilized with a very small amount of money. Here we go:
Dividend stocks are a great tool for earning passive income. They have been tried and tested over many years by numerous investors. You will need to do much research to seek out good stocks and invest a big amount of cash to receive large dividend checks. However, if you consistently invest money into dividend stocks you’ll amass a pleasant residual income over time.
For any of those investment opportunities, confirm you open an account at the simplest online brokerage, and obtain rewards while doing it.
Peer to Peer Lending
P2P lending is the practice of loaning money to borrowers who typically don’t qualify for traditional loans. As the lender you’ve got the power to settle on the borrowers and are ready to spread your investment amount to mitigate your risk.
A cash flowing rental property is a great way to usher in a monthly income. However, to make it completely passive, you will have to consider outsourcing your property’s management to a dedicated property management company. However, just like with everything else, the advent of the internet has resulted in rental property investment becoming far easier than ever before. There are a lot of ways you can invest in rental properties depending on what your goals and interests are. You can be a limited partner in large residential or commercial properties, otherwise, you can purchase homes and be a landlord – all online!
In case you want the exposure and the income but don’t want to become a landlord, you can consider being a limited partner for a large development. With these options, you’ll invest in multi-family or commercial properties. You get the income and tax treatment a bit like regular land ownership, but you do not do any of the work!
High Yield Savings Accounts And Money Market Funds
In case you don’t want to spend too much time and effort thinking about your money and want the money to do the work for you, you can invest your money in a high yield bank account or money market fund.
The difference is within the account type and where it’s located. High yield savings accounts are offered by top banks and are usually FDIC insured. Money market funds are often offered by both banks and investment companies, and FDIC insured sometimes.
Interest rates have been rising, so putting more money into a savings account can generate a safe passive income stream.
Certificates of Deposit (CD) Ladders
To build a CD ladder, you will need to buy CDs (certificates of deposits) from banks in certain increments so that you can keep earning increasing returns from your money. Most banks offer CDs. These are low risk investment tools, hence the return rates are also low. It’s great for people who are risk averse. In case you find the construction of a CD Ladder a bit too complicated and convoluted, you can choose to stick with a standard high yield bank account or market fund. CDs offer low rates of returns compared to other options on the list, but on the other hand, they also carry very little risk.
Annuities are a type of insurance product that requires you to pay in the beginning but it can provide you with passive income for the rest of your life. Annuities usually have varying terms and don’t always offer a great deal. So before you invest in annuities, you should try speaking to your financial advisor. Annuities are definitely not for everyone as they can come with high fees and might not yield desired returns in the end. However, if your risk tolerance is as low as possible and you want a decent passive income stream, annuities can be a good addition to your portfolio.
Invest Automatically In The Stock Market
If you’re not interested in picking dividend paying stocks (and we can understand that), there are still ways to invest passively in the stock market. You can automatically invest in various ways through what’s called a robo-advisor.
A robo-advisor is quite self explanatory. It’s a robotic financial advisor. You spend about 10 minutes answering a few questions and setting up your account, and the system will take it from there. It will make investments as per your goals and risk appetite, rebalancing your portfolio periodically.
REIT (Real Estate Investment Trust)
If you’re concerned about investing directly in real estate, or maybe you’re not yet an accredited investor, that’s okay. Enter REITs – Real Estate Investment Trusts, which allow you to take advantage of real estate investments. These are investment vehicles that hold property within them – and you as the owner get to benefit from the gains, refinances, sale, income (or loss) on the property.
Refinance Your Mortgage
At first glance, this definitely appears a bit weird in a passive income generation article, but if you refinance your existing mortgages wisely, you can free up a lot more money and save hundreds of thousands of dollars over your lifetime. That is a lot of money.
Right now, interest rates are still near historic lows, and if you haven’t checked out your mortgage lately, now’s a great time to shop around and compare rates. If you can save 0.50% or more on your loan, you’re potentially adding tens of thousands of dollars back into your pocket. Not many investments can beat that.
Pay Off Or Reduce Debt
Along the same lines as refinancing your mortgage, if you can pay off or reduce your debt, you’re making huge progress in building income. It does need some upfront monetary investment for it to take place. When you pay your debt off, you get immediate monetary returns. For example, if you have a credit card at 10% interest, paying it off is a 10% return on your money! That’s huge.
When it comes to debt, you can take one of these two approaches: refinance or consolidate, or balance transfer and pay down.
In the case of student loan debt, refinancing makes a lot of sense. In case you are encumbered with credit cards or other debt, consolidating with a personal loan also seems to be a good idea. This option works best when you can’t see yourself paying off the debt in a year, but want to lower your interest. Finally, you could get a 0% balance transfer card and use your 0% time to pay off the debt. There are some credit cards right now that offer 15 months at 0% with no fees – that gives you over a year to pay off your debt.
Invest In A Business
Investing in a business and serving the role of a silent partner is another great method to earn some passive income. We can’t emphasize it enough, this can prove to be very risky. However, the potential for returns is very high. Take the case of Lyft and Uber who were looking for private investors to invest in their companies. Both these firms are valued in billions today. However, if you are an investor, you can only reap the benefit of that growth if the company goes public via an IPO or is bought by some other company. Hence, it’s quite risky.
However, there are ways with which you can reduce your risk levels. One of the great ways of doing that is investing in a company by virtue of lending it money through small bonds. A lot of tools exist that allow you to loan money to a business and get paid a solid return for doing it!
Passive Income Ideas That Require an Upfront Time Investment
As the name suggests, these passive income ideas require you to invest your time instead of money. The key to most of these passive income ideas is starting a blog or website of your own but don’t worry, it isn’t as expensive or complicated as you might think. On to the options now:
Sell an eBook
There was a time when self publishing was almost impossible and very few people could pull it off. However, things have changed radically now and self publishing is quite common today. Most of the eBooks sold on Amazon are self published. It is quite easy to do. All you need to do is write and edit your book on your laptop, design a cover and upload on a program such as Amazon’s Kindle Direct Publishing. Don’t expect to become a bestselling author like JK Rowling immediately though. You will need to do a lot of marketing in order to succeed in this field. Once you establish yourself, you can create a good passive income stream.
Make a Udemy Course
Udemy allows its users to enroll in one (or more) of its numerous video courses on a wide variety of subjects. If you feel like you have an important skill that you can teach, try making a course for that and instead of being a Udemy consumer, you can be a producer and share your knowledge with the world and earn money through it. What’s even better, is that you don’t have to take live classes, whatever videos you record at the time of uploading your course, will be used by students all over the world. Udemy is a great way to turn traditional tutoring into a passive income stream.
Sell Stock Photos
Most of the spectacular photos you see online or in magazines are usually stock photos. All of these photos are usually bought from stock photo websites. In case you enjoy photography, submit your photos to a stock website and you will earn some money every time someone purchases them.
If you create music on your own, you can also license it and get paid for it whenever someone uses it. Music used in YouTube videos, podcasts and advertisements is always licensed. With over 500 hours of content being uploaded on YouTube every minute, there is no shortage of demand and people are usually willing to pay for it. Try to get your music in a library where people search and enjoy a great passive income stream.
Make an App
Everyone in today’s world knows what apps are. In fact, many aspects of our lives are completely dependent on numerous apps. In case you come up with a great app idea, get in touch with a programmer and app designer to get the app done. Once that’s done, upload it on the App Store/Play Store and earn passive income from it.
Try Affiliate Marketing
Affiliate marketing involves partnering with a company (becoming its affiliate) and receiving a commission on every sale. If you own a blog or a website, it is a great tool for you. However, for it to reach a stage where it’s a truly passive source of income, it will take some time and effort from your end. You will need to have a certain amount of regular traffic in order to succeed as an affiliate marketer.
Try Network Marketing
Network marketing, or multi-level marketing, is pretty trendy these days. Some of today’s top multi level marketing companies are Young Living Oils, Avon, Pampered Chef, and AdvoCare. You can earn passive income through network marketing by building a team underneath you (often referred to as a down line). Once your team is large enough, you can earn a good amount of commissions off their sales in a passive manner.
Design and Sell T-Shirts
Many popular websites today allow users to custom design items like T-shirts. In case your designs catch people’s fancy and start selling in significant numbers, you can start earning a good amount of passive income through royalties. In case you are unsure about the validity of a lot of sites involved in this business, you can start out with the tried and trusted Amazon Merch. All you need to do is upload your design, and Amazon will take care of the rest (manufacture, packaging and shipping).
Sell Digital Files on Etsy
A lot of people have admitted to purchasing artwork and designs from Etsy to decorate their homes. If you are a graphic designer, this is a wonderful passive income idea for you. Every time someone purchases your design, you get paid for it.
Semi-Passive Small Business Ideas
The term “Semi Passive” is used to describe these options because they operate a lot more like businesses instead of the completely passive ideas discussed earlier. Also, these ideas need you to invest (at least a small amount of) a combination of time and money. However, once you complete your investment, you can earn decent returns in a passive manner. Let’s check them out:
List Your Place On Airbnb
In case you have a spare house, room, or even a backyard, you can list it on Airbnb and start earning income from it once it’s booked online. Airbnb is great because you can earn money on a space you already own. You have to do a little bit of prepping and cleaning up before and after, but aside from that, it’s a passive income source.
Start a Car Wash
We are talking about a very basic car wash here. Something that is made up of cinder blocks and a pressure washer (preferably coin operated). A drive through car wash is very expensive and needs to be operated as a full time active business and not a passive income stream.
Rent Your Car
Just like renting your house for others, you can also rent your car out. Once your car is listed and rented by someone else, it becomes a passive source of income.
Get Some Vending Machines
Vending machines are awesome as low maintenance business ideas. You can eventually have vending machines across multiple towns. You can replenish and cash them out once every two weeks. If it works well, it can even become a part of your retirement plan.
You can set up a set of storage rentals and receive monthly checks for letting customers rent these out. The only time you will have to work for these is when you have an opening for one of the storage units. In case you aren’t fully sure, you can invest via a REIT.
Easiest Passive Income Ideas
We saved the easiest passive income ideas for last. These don’t require money or time investment. Yes, the return rates are quite low, but they are still quite great as easy passive income sources. Let’s check them out.
Cashback Rewards Cards
In case you are a regular credit card user, ensure that you have a card with good cashback rewards. You don’t have to encash your rewards immediately and you can let them accrue till you have a significant amount. Maybe you can use that cashback to start another passive income stream. Be mindful of the card’s annual fees as well, as high fees might nullify all of your cashback rewards.
Similar to cashback cards, you can use cashback sites while shopping online. It’s easy money and doesn’t need a lot of work.
Get Paid To Have An App On Your Phone
There are a lot of apps that pay you for installing and using them. The app will track your data and pay you money for it. If you are comfortable with your data being tracked by an app, it can be a good source of passive income
Use Coupon Codes
Whether it’s buying stuff or paying bills, you will usually be able to find coupon codes that will offer you great discounts. While it’s technically not a “passive” source of income, but remember, money saved is money earned.
So that was a slightly detailed look at passive income and different passive income ideas. Hope you have a better idea of the topic now and you will be able to start creating some passive income streams for yourself very soon.