It’s easy to think of passive income as money earned while sitting on a beach sipping mojitos, but there is lots of work involved, says financial coach and retired hedge fund manager Todd Tresidder.

Still, passive income can be a great supplementary source of funds for many people, and it can prove to be an especially valuable lifeline during a recession or during other tough times, such as the government lockdown imposed in response to the coronavirus pandemic. Passive income can keep some money flowing when you lose a job or otherwise experience some financial hardship.

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.

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,” Tresidder says. “It has a ‘get-rich-quick’ appeal … but in the end, it still involves work. You just give the work upfront.”

In practice, you may do some or all of the work upfront, but passive income often involves some additional labor along the way, too. You may have to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.

• What is the Best Passive Income?
• How can I make $1000 a Month in Passive Income?
• What are the 7 Streams of Income?
• What are other Income to Focus on in your Business?

What is the Best Passive Income?

If you’re thinking about creating a passive income stream, check out these 11 strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.

Read Also: How Millionaires Build Passive Income

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.

Opportunity: Information products can deliver an excellent income stream, because you make money easily after the initial outlay of time.

Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”

Tresidder 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 you get really lucky,” Tresidder says. “The best way to sell an existing product is to create more excellent products.”

Once you master the business model, you can generate a good income stream, he 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, says John H. Graves, an Accredited Investment Fiduciary (AIF) in the Los Angeles area and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”

Opportunity: To earn passive income from rental properties, Graves says 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 income 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.

3. Affiliate marketing

With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the most well-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too.

Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission.

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.

4. Invest in a high-yield CD

Investing in a high-yield certificate of deposit (CD) 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. 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, your principal is safe. So investing in a CD is about as safe a return as you can find. Over time, the biggest risk with fixed income investments such as CDs is rising inflation, but that doesn’t appear to be a problem in the near future.

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.

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.

To cut that risk, you need to do two things:

• Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com, 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. 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 income. Economic recessions can also make high-yielding personal loans a more likely candidate for default, too.

6. Dividend stocks

Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock. Dividends are paid per share of stock, so the more shares you own, the higher your payout.

Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.

Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. “You’ve got to investigate each company’s website and be comfortable with their financial statements,” Graves says. “You should spend two to three weeks investigating each company.”

That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks.

“ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,” Graves says.

Another key risk is that stocks or ETFs can move down significantly in short periods of time, especially during times of uncertainty, as in early 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch.

7. Savings accounts

It doesn’t get any more passive than putting your money in a savings account at the bank or one of the many online banks offering high yields. Then sit back and watch the interest mount up.

Opportunity: Your best bet here is going with an online bank, since they typically offer the highest rates and you can usually easily transfer your money between your primary bank and the online bank. Online rates can often be 10 times higher or more than what your local bank may offer.

Risk: If you invest in an account insured by the FDIC, you have almost no risk at all up to a $250,000 threshold per account type per bank. The biggest risk is probably that interest rates tend to fall when the economy weakens, and in this case, you would have to endure lower payouts that potentially don’t earn enough to beat inflation. That means you’ll lose purchasing power over time.

8. REITs

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 more risky 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.

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.

9. A bond ladder

A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments.

Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You can sit back and collect your interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years.

In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.

Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.

Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal. And you’ll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio.

Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.

10. Rent out a room in your house

This straightforward strategy takes advantage of space that you’re probably not using anyway and turns it into a money-making opportunity.

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 longer-term tenant.

Risk: You don’t have a lot of financial downside 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.

11. 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.

How can I make $1000 a Month in Passive Income?

1. Dividend paying stocks and other investments

The first passive income idea on this list does take some start-up cash, but it absolutely helps me earn more than $1,000 per month. Dividend-paying stocks, ETFs, and other investments like Fundrise and Lending Club are helping me earn money around the clock – and all with no work on my part. While the amounts I have invested in these accounts vary, they’re all paying me more than $1,000 per month.

Dividend investing in particular has been a profitable endeavor for me and for many other investors. According to Forbes contributor Brett Owens, dividend investors who look ahead have the potential to score annual returns of 15%, 20%, or even 25%, if only they pick the right dividend-paying stocks and stay the course.

Obviously, it takes time and consistent investing to build up your portfolio where you’re earning $1,000 per month. But you have to start somewhere, right?

2. Affiliate Marketing

Where investing is a wealth-building strategy that has been around forever, the second passive income option on this list is fairly new. Affiliate marketing is an income idea that requires you to have a website or platform you can use to promote other companies, or “affiliates.” When someone uses your affiliate link to purchase a product or sign up for a service, you get paid.

GoodFinancialCents.com, earns all kinds of affiliate income through relationships it has with investment firms, insurance companies, online banks, and more. But you don’t have to do things the way they did; you could start nearly any type of website and find affiliates that work in your niche.

And remember, you don’t necessarily have to start a blog per se. There are people who are crushing it with affiliates using YouTube, podcasts, and other avenues. You can even build an affiliate business using social media!

3. Display Ads

Another way you can earn more than $1,000 per month passively is by using display ads. Once again, this is going back to the blog. The beauty of having online property is the fact that you can monetize it in so many ways.

Display ads work like billboards you see on the side of the highway, only they’re featured on your website instead. The point is that advertisers are paying to promote their products — their ads just so happen to be on your website.

Most display ads are set up by ad networks that work as the middlemen between you and advertisers who want to pay you. The best part about display ads is they are entirely passive. You can get paid a ridiculous amount of money based on your traffic — even while you sleep!

4. CPC Ads (Cost Per Click)

With affiliate advertising, you only get paid when someone clicks on your link and signs up for something or buys something. Display ads, on the other hand, pay based on the amount of traffic and eyeballs you get on their ads.

With CPC ads, also known as “cost per click” ads, on the other hand, you get paid when someone clicks on an ad no matter what they do after that. You don’t have to hope and pray they buy something or sign up for anything at all. Every single click puts money in my bank account.

Does that mean you can head to your own website and click on ads all day long? You could, but eventually, that company would figure out what you are doing and cut me off! With that in mind, clicking on your own ads should not be a part of your strategy here. Instead, try to build up traffic so your ads are seen by more and more people every day.

5. Sell leads

After they launched Good Financial Cents, they also launched a niche insurance site called Life Insurance by Jeff. Believe it or not, but they generated $100,000 in income within just nine months of launching this website.

While building the website wasn’t passive at all, they made a lot of changes to the website over time to make it much more passive. Eventually, they even decided selling the leads my website generated was a lot better deal than earning commissions when a purchase was made.

6. Course Sales

Earning money with course sales is not as easy as turning on a switch! You have to create the course first, which can require weeks or months of your time. Once you’re done with the work required to create your product, however, the income can become passive.

Holly Johnson, a professional freelance writer who earns over $200,000 per year creating online content, is another successful entrepreneur who is doing well with course sales. Johnson launched her Earn More Writing freelance writing course in 2017 and has sold over 700 courses for $199 each since then. In January of 2019, she also launched a “Pro” version of her course that retails for $349. She sold 40 on the first day.

“Selling 700 courses doesn’t sound like a lot,” says Johnson. “But when the price of a course is a hundred dollars or more, you don’t have to sell thousands to earn considerable income.”

That’s a good point, and it’s one to consider if you have skills to teach that people will pay $100 or more to learn. If you can get enough people to buy or your price is high enough, courses can bring in plenty of cash flow over time.

7. Create a Digital Product

While courses are digital products you can sell over and over, there are other types of digital products you can dive into. We are talking about e-books, online instruction guides, and basically anything else you can market and sell online.

If you think digital products can’t work, consider a Forbes interview in 2016 with Christian rockstar Chris Greenwood. While Greenwood has earned considerable sums of money online now, his first product was a self-published book.

Greenwood launched the book idea on Kickstarter and raised $20,000! This just goes to show how a little idea can translate into big profits with the right plan.

The bottom line: Think of an online product you can create that solves a problem or provides a service. Once you create it, you can sell it over and over and earn passive income in your sleep.

8. YouTube Ads

While YouTube ads aren’t nearly as “passive” as some income-producing strategies on this list, they still fit in with the rest of this post. The passive part comes in because you might make the video once and earn income over and over as more and more people see it.

And it’s amazing just how much content YouTube viewers consume. Some people make a living with videos about extremely random topics. Take the “Slime Queen” Karina Garcia, who boasts over 10 million social media followers who tune into watch her play with slime. She is only 24-years-old according to Forbes, yet she’s making bank!

If you love being on video and want to earn some passive income while you sleep, YouTube ads are where it’s at.

9. Selling a Business

Selling a business can sometimes lead to upfront income you get right away; other times, you’ll receive payments over several years.

Like owning a business and managing it from a distance, selling a business requires a lot of work upfront. You have to build the business first and get it to start producing revenue. Only then will you have a business someone will pay for.

Once you reach that point, however, you can achieve the holy grail of passive income — a huge sum of money that’s hitting your bank account each month.

What are the 7 Streams of Income?

Without an income stream, your business will fail. A simple fact. Many small businesses have a single income stream, such as an electrician or plumber. Having multiple streams of income is a good way of safeguarding your business against a downturn in one particular stream. It can give your business stability and the opportunity to grow.

If you are a tradesperson, such as an electrician, it may be challenging to figure out how you can generate multiple streams of income. Hopefully, reading this will give you some ideas on different income streams.

1. Earned Income

Earned income is your primary income stream through a job. The majority of us start here, and many go no further. For most, earned income is very limiting and has attracted the acronym, Just Over Broke!

In other words, you earn just enough to survive. Of course, some jobs pay exceptionally well, but these are exceptions, not the norm. To go beyond a job and start your own business requires taking risks and moving into profit income.

2. Profit Income

By selling a service or products for more than they cost you is the basis of profit income. You could open a retail store and sell products, offer professional services and charge for your time, or combine the two.

It is one of the hardest steps to move from earned income to profit income, but it is the dream of many employees. Becoming self-employed or an entrepreneur can be a difficult road, and there are risks. 

3. Interest Income

If you or your business has spare cash sitting in the bank account, it is losing money. There are many ways you can put your money to work and earn a passive income stream. 

Maybe invest it in a savings scheme and use the power of compound interest to gain a passive income. Buying government bonds is another safe investment that will generate interest.

4. Dividend Income

When you buy shares in a company, you become part-owner of that company and entitled to dividend payments. Well-timed investments in companies can generate excellent passive income streams.

5. Rental Income

Property investment is an excellent way of protecting your money and generating an income from rent. There are two downsides to this income stream. First, it requires a substantial investment initially, unless it is part of an investment scheme. Second, releasing the cash can be time-consuming and costly, so if you may need the money quickly, this is not for you.

6. Capital Gains Income

Buying and selling assets can provide you with an income known as capital gains. For example, if you buy stocks and shares worth $100 and then sell them on for $120, the capital gain is $20. 

It is essential to consult an accountant first about capital gains, as each country has different rules. Depending on the asset sold, the capital gains tax may wipe out all of your profit.

7. Royalty Income

This is a passive income stream generated by designing, building, or making something unique and charging people and businesses to use it. Musicians are a prime example. In most cases, musicians are signed to a particular label, such as Virgin Records. The record company pays to record the musicians, produce the records, market them, and sell them. 

The musicians receive a royalty payment for every album sold and every time it is played to the public. Famous musicians, such as Elton John, make millions from the royalties for playing his music.

An old English is saying, “don’t put all your eggs in one basket.” It simply means, don’t concentrate on one thing, and applies particularly well to this article. Spreading your income streams is an excellent way of earning more money and reducing risk.

What are other Income to Focus on in your Business?

There are two types of income stream, active and passive. Your business is most likely using an active income stream. This is where you do some work or provide a service, and someone pays you for it. Very simple and a direct connection between the work and payment.

Passive income is where the income is not directly tied to the work you do. Don’t be fooled. Although it says passive income, there is still work required to generate the revenue. It doesn’t come for free. In general, the work needed for a passive income stream takes place early on, and the income comes later.

An excellent example of this is an online store. The work at the beginning is to build the website, upload your products, and then promote them. The passive income comes later as people begin to buy products from your store. It’s passive, as people can even buy products when you are asleep!

Diversification

Big business has been diversifying its income streams for centuries. They expand their business operations into different sectors to generate new streams of income. Almost any company can diversify. A flower shop can develop a separate wedding flower business, for example, or offer mail order. The most potent diversification is into a completely new business sector. But that takes a lot of effort and expense. 

Read Also: How to Become a Self-Made Millionaire

An excellent study of a company that has grown and diversified is the Virgin Group. Initially started by Sir Richard Branson as a record label, Virgin has since expanded into aviation, holidays, mobile telephony, and much more.

An example of a good way for an electrician to find other streams of income is to work with property management companies. His core business may currently be private homeowners, but management companies often need additional tradespeople. Another route could be to start offering courses to people on basic electrics and how to stay safe with electricity.

Conclusion

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 catch more fish with multiple lines in the water,” says Greg McBride, CFA, chief financial analyst at Bankrate. “In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream.”