Passive income can be a great way to help you generate extra cash flow, and the economic upheaval largely caused by the COVID-19 crisis is a testament to the value of having multiple streams of income. With the pandemic throwing the job situation of many Americans into disarray, passive income helps you bridge the gap if you suddenly become unemployed or even if you voluntarily take time away from work.
With passive income, you can have money coming in even as you pursue your primary job, or if you’re able to build up a solid stream of passive income, you might want to kick back a little. Either way, a passive income gives you extra security.
And if you’re worried about being able to save enough of your earnings to meet your retirement goals, building wealth through passive income is a strategy that might appeal to you, too.
What is passive income?
Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.
“Many people think that passive income is about getting something for nothing a quick cash scheme,” says mentoring lifestyle coach and author of Rich Girl Code, Christia’n Annice. “It may have a ‘get-rich-quick’ appeal to some … but in the end, it involves dedication and work.”
In practice, you may do some or all of the work upfront, but passive income often involves additional labor along the way. You may have to keep your product updated or your rental property well-maintained, in order to keep those passive dollars flowing, sis.
But if you’re committed to a strategy, it can be a great way to secure the bag creating some extra financial security for yourself along the way.
12 passive income ideas for building wealth
Check out the strategies below and learn what it takes to be successful with them, while also understanding the risks associated with each idea.
Passive income ideas:
- Selling information products
- Rental income
- Affiliate marketing
- Flip retail products
- Peer-to-peer lending
- Create an app
- Invest in a high-yield CD or savings account
- Rent out your home short-term
- Advertise on your car
- Create a blog or YouTube channel
- Rent out useful household items
1. Selling information products
One popular strategy for passive income is establishing an information product, such as an e-book, or an audio or video course, then kicking back while cash rolls in from the sale of your product. Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.
Alternatively, you might consider a “freemium model” – building up a following with free content and then charging for more detailed information or for those who want to know more. For example, language teachers and stock-picking advice may use this model. The free content acts as a demonstration of your expertise and may attract those looking to go to the next level.
Opportunity: Information products can deliver an excellent income stream because you make money easily after the initial outlay of time.
Risk: “It takes a great deal of effort to create the product,” Christia’n says. “And to make good money from it, it has to be appealing. There’s no room for half steppin’ here.”
Christia’n says you must build a strong platform, market your products and plan for more products if you want to be successful.
“One product is not a business unless lady luck is really on your side.” The best way to sell an existing product is to create more excellent products and social networking buzz.
Once you master the business model, you can generate a good income stream, she says.
2. Rental income
Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.
If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some.
Opportunity: To earn passive income from rental properties, you must determine three things:
- How much return you want on the investment.
- The property’s total costs and expenses.
- The financial risks of owning the property.
For example, if your goal is to earn $10,000 a year in rental cash flow and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.
Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.
And the pandemic has posed new challenges, too. Due to the economic downturn, you may suddenly have tenants who can no longer pay their rent, while you may still have a mortgage of your own to pay. Or you may not be able to rent the home out for as much as you could before, as incomes decline. And home prices have been rising quickly of late due in part to low mortgage rates, so your rents may not be able to cover your expenses. So you’ll want to weigh these risks and have contingency plans in place to protect yourself.
3. Affiliate marketing
With affiliate marketing, website owners, social media “influencers” or bloggers, you can promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the best-known affiliate partner, but you can find over 100 affiliate partner programs on Adamenfroy. Instagram and TikTok have become huge platforms for those looking to grow a following and promote products.
You could also consider growing an email list to draw attention to your blog or otherwise direct people to products and services that they might want.
Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission. The commission might range from 3 to 7 percent, so it will likely take significant traffic to your site to generate serious income. But if you can grow your following or have a more lucrative niche (such as software, financial services, or fitness), you may be able to make some serious coin.
Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something.
Risk: If you’re just starting out, you’ll have to take time to create content and build traffic. It can take significant time to build a following, and you’ll have to find the right formula for attracting that audience, a process that itself might take a while. Worse, once you’ve spent all that energy, your audience may be apt to flee to the next popular influencer, trend, or social media platform.
4. Flip retail products
Take advantage of online sales platforms such as eBay or Amazon, and sell products that you find at cut-rate prices elsewhere. You’ll arbitrage the difference in your purchase and sale prices, and may be able to build a following of individuals who track your deals.
Opportunity: You’ll be able to take advantage of price differences between what you can find and what the average consumer may be able to find. This could work especially well if you have a contact who can help you access discounted merchandise that few other people can find. Or you may be able to find valuable merchandise that others have simply overlooked.
Risk: While sales can happen at any time online, helping make this strategy passive, you’ll definitely have to hustle to find a reliable source of products. Plus, you’ll have to invest money in all of your products until they do sell, so you need a robust source of cash. You’ll have to really know the market so that you’re not buying at a price that’s too high. Otherwise, you may end up with products that no one wants or whose price you have to drastically cut in order to sell.
5. Peer-to-peer lending
A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub. Other players include Funding Circle, which targets businesses and has higher borrowing limits, and Payoff, which targets better credit risks.
Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default, meaning you could end up with nothing.
To cut that risk, you need to do two things:
- Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com and LendingClub, the minimum investment per loan is $25.
- Analyze historical data on the prospective borrowers to make informed picks.
Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive, and you’ll want to carefully vet your prospective borrowers, and because you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build an income.
6. Create an app
Creating an app could be a way to make that upfront investment of time and then reap the reward over time. Your app might be a game or one that helps mobile users perform some hard-to-do function. Once your app is public, users download it and you can generate income.
Opportunity: An app has a huge upside if you can design something that catches the fancy of your audience. You’ll have to consider how best to generate sales from your app. For example, you might run in-app ads or otherwise have users pay a nominal fee for downloading the app.
If your app gains popularity or you receive feedback, you’ll likely need to add incremental features to keep the app relevant and popular.
Risk: The biggest risk here is probably that you use your time unprofitably. If you commit little or no money to the project (or money that you would have spent anyway, for example, on hardware), you have little financial downside here. However, it’s a crowded market and truly successful apps must offer a compelling value or experience to users. You’ll also want to make sure that if your app collects any data that it’s in compliance with privacy laws, which differ across the globe. The popularity of apps can be short-lived, too, meaning your cash flow could dry up a lot faster than you expect.
A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.
Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.
Like dividend stocks, individual REITs can be riskier than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks — and you’ll still get a nice payout.
Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy — a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing. Like any stock, the price can fluctuate a lot in the short term.
REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.
8. Invest in a high-yield CD or savings account
Investing in a high-yield certificate of deposit (CD) or savings account at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. You won’t even have to leave your house to make money.
Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates or the top savings accounts. It’s usually much more advantageous to go with an online bank rather than your local bank because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000 if your financial institution is backed by the FDIC.
Risk: As long as your bank is backed by the FDIC and within limits, your principal is safe. So investing in a CD or savings account is about as safe a return as you can find. However, while these accounts are safe, they’re returning even less these days than before. And with the Federal Reserve targeting 2 percent inflation, you’re likely to lose out to inflation in the short term at least. Nevertheless, a CD or savings account will yield better than holding your money in cash or in a non-interest-bearing checking account where you’ll receive approximately zero.
9. Rent out your home short-term
This straightforward strategy takes advantage of space that you’re not using anyway and turns it into a money-making opportunity. If you’re going away for the summer or have to be out of town for a while, or maybe even just want to travel, consider renting out your current space while you’re gone.
Opportunity: You can list your space on any number of websites, such as Airbnb, and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a tenant who may be in place for a few months.
Risk: You don’t have a lot of financial downsides here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.
10. Advertise on your car
You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.
Opportunity: While you do have to get out and drive if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.
Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.
11. Create a blog or YouTube channel
Are you an expert on travel to Thailand? A maven of Minecraft? A sultan of swing dancing? Take your passion for a subject and turn it into a blog or a YouTube channel, using ads or sponsors to generate your income. Find a popular subject, even a small niche, and become an expert on it. At first, you’ll have to build out a suite of content and draw an audience, but it can create a steady income stream over time, as you become known for your engaging content.
Opportunity: You can leverage a free (or very low cost) platform, then use your great content to build a following. The more unique your voice or area of interest, the better for you to become “the” person to follow. Then draw sponsors to you.
Risk: You’ll have to build out content at the start and then create ongoing content, which can take time. And you’ll need to be really passionate about the product, since that can help you maintain the motivation to continue, especially at the start as your followers are still finding you.
The real downside here is that you can outlay a bunch of your time and resources, with little to show for it, if there’s limited interest in your subject or niche. Your area of expertise may be to niche to really draw a profitable audience, but you won’t be sure of that until you experiment.
12. Rent out useful household items
Here’s a variation on renting out an idle car: Start even smaller with other household items that people may need but that may be collecting dust in your garage. Lawnmowers? Power tools? Mechanics tools and toolbox? Tents or large coolers? Look for high-value items that people need for a short period of time and where it might not make sense for someone to own the item. Then put together a way for clients to discover your inventory and a way for them to pay for it.
Opportunity: You can start small here, and then scale up if there’s interest in a particular area. Do people suddenly want a tent for weekend camping when the weather gets warmer or cooler? Figure out where the demand is, and then you could even go buy the item, rather than having it right on hand. In some cases, you might be able to recoup the value of the item after a few uses.
Risk: There’s always the possibility that your property is damaged or stolen, but you can mitigate this risk with contracts that allow you to replace the item at the client’s expense. If you start small here, you’re not exposed to many risks, especially if you already have the item and you’re not likely to need it in the near future. Pay particular attention to liability issues, especially if you’re renting out equipment that has the potential to be dangerous (e.g., power tools.)
How many streams of income should you have?
There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.
You’ll want to make sure that putting in effort into a new passive income stream isn’t causing you to lose focus on your other streams. So you do want to balance your efforts and make sure you’re choosing the best opportunities for your time.
Minimize your taxes on passive income
A passive income can be a great strategy for generating side income, but you’ll also generate a tax liability for your effort. But you can reduce the tax bite and prepare for your future, too, by setting yourself up as a business and creating a retirement account. This strategy won’t work for all these passive strategies, however, and you’ll have to be a legitimate business to qualify.
- Register with the IRS and receive a tax identification number for your business.
- Then contact a broker who can open a self-employed retirement account such as Charles Schwab or Fidelity.
- Determine which kind of retirement account might work best for your needs.
Two of the most popular options are the solo 401(k) and the SEP-IRA. If you stash the cash in a traditional 401(k) or SEP IRA, you can take a tax break on this year’s taxes. The solo 401(k) is great because you can stash up to 100 percent of your earnings into the account, up to the annual maximum. Meanwhile, the SEP-IRA allows you to contribute only at a 25 percent rate. In addition, the solo 401(k) permits you to make an additional contribution of up to 25 percent of your profits in the business.