Investing in certain financial assets or launching enterprises that, following an initial investment, begin to create revenue without ongoing labor are two ways to earn passive income. Depending on where the money comes from, you may have to pay different taxes on passive income, so be sure to keep thorough records of everything you earn.
You can make money without having to perform a regular job and with minimal effort if you have passive income. By renting out real estate, investing in dividend stocks, or maintaining a high-yield savings account, you can generate passive income.
This is the reverse of earned income, also known as active income, which is typically understood to be money obtained through employment or contract work. This is not to argue that passive income is simple money; in fact, just the reverse may be true. The majority of passive income-generating strategies demand an initial time, money, or both investment; the revenue portion arrives later (often much later). But after that initial investment, passive income can yield long-term financial benefits.
Investment-based Passive Income Ideas
Here are a few different types of investments that pay dividends, which can create a passive income stream.
1. Dividend stocks
Investing in dividend stocks, which regularly (usually quarterly) distribute a portion of the company’s earnings to investors, is one strategy to create an income stream. The greatest dividend stocks help you boost your future income by gradually increasing their payout.
Moreover, dividend stocks can help stabilize and diversify your investment portfolio because they are generally less volatile than growth firms. Reinvesting dividends back into the stock is another option available to investors, which could increase their investment if the stock performs well.
2. Dividend index funds and exchange-traded funds
You can also invest in index funds or exchange-traded funds that hold dividend stocks rather than picking and choosing individual stocks to buy. This is a form of passive investing for those who prefer a more hands-off approach.
Index funds hold a well-rounded selection of many stocks that aim to mirror the performance of a given index, such as the S&P 500. A dividend ETF or index fund will invest in a selection of stocks that pay dividends. Index funds can help balance portfolio risk, as market swings tend to be less volatile across an index compared with individual stocks.
Dividend ETFs offer the diversification benefits of index funds while mimicking the ease with which stocks are traded. To invest in dividend stocks, index funds, ETFs or other publicly traded assets, you’ll need to open a brokerage account if you don’t already have one.
3. Bonds and bond index funds
Rather than buy an ownership stake in a company through stock, bonds are a way for investors to lend money to companies — as well as federal, state and local governments — and collect interest income. Bonds are considered a safer investment than stocks, but also generally earn a lower return on your investment.
Experts suggest investing a portion of your portfolio in bonds because of their lower volatility and relative safety compared to stocks, then having a higher ratio of bonds in your portfolio the closer you are to your investing goal (such as retirement).
4. Real estate investment trusts (REITs)
If you want to build passive income from real estate without the fuss and bother (not to mention the hefty down payment) of buying and managing properties yourself, REITs may be the answer.
Similar to mutual funds, REITs are companies that own commercial real estate, such as office buildings, retail spaces, apartments and hotels. REITs tend to pay high dividends, but they vary in complexity and availability. Some are publicly traded on stock exchanges; others are not.
New investors may want to stick to publicly traded REITs, which you can purchase through an online broker. You can also diversify your real estate holdings by investing in mutual funds or ETFs that track multiple REITs.
5. Money market funds
Like high-yield savings accounts, money market funds are currently paying lucrative interest rates — you can find rates upwards of 4%. Money market funds are mutual funds that invest in lower-risk securities like short-term government debt or corporate bonds that pay income. In some cases, that income may be tax-exempt. Keep in mind that money market funds are not the same as money market accounts, which are more similar to a savings account and typically come with FDIC insurance.
6. High-yield savings accounts
Another way to earn passive income (albeit at a lower level than stocks and bonds) is a high-yield online savings account, which can be ideal for growing your emergency fund. The interest paid by savings accounts is added to your balance.
High-yield accounts are a type of federally insured savings account that earns an interest rate that’s often much higher than the national average. The APY of these high-yield accounts may vary slightly, and over time, those small differences add up to real cash, so it pays to shop around for where you put your savings.
7. CDs
A certificate of deposit is a type of savings account that’s used for a fixed period of time. For example, you might deposit funds in a three-year CD, and in exchange, you’ll receive a fixed interest rate for those three years. This is in contrast to a high-yield savings account, which typically has a variable interest rate.
Read Also: Types of Income Streams: Passive, Active, and Residual
CDs often pay higher interest rates than savings accounts, because they require you to lock up your money for a set period of time. (You’ll pay a penalty if you want to access your funds before the CD term ends.) If you’re willing to do that, locking in interest rates while they’re high can be well worth it — especially if you expect them to come down soon, as many experts do.
8. Private equity
Perhaps the original form of peer-to-peer lending, another common form of passive income is funding a private business you believe has the opportunity to generate future income. For high-net-worth individuals, this might be investing in private equity funds, which are typically only available to accredited investors who meet certain net worth or income requirements.
Another way is to back a family member, friend or other trusted partner to help fund their business with an agreement to earn returns from any future profits. But beware: No matter how large or small, investing in a single business is an inherently risky, long-term bet. Never invest more than you can afford to lose.
9. Crypto staking
Crypto staking is a way of growing your holdings in certain cryptocurrencies by using them to help verify activity on an underlying blockchain network. When you stake a cryptocurrency, you can be rewarded with more cryptocurrency.
Staking, for most people, involves delegating your cryptocurrency to someone who is compiling records of transactions on the network on which it runs. Those verifiers need to put some tokens at stake to guard against fraudulent transmissions. By giving the voting power of your tokens to a reputable verifier, you can get a share of the rewards they receive for carrying out their job accurately.
But there is some risk: If the verifier you’re working with is penalized, you may be as well. And staking sometimes requires you to commit your holdings for a set period of time, meaning you can’t sell or trade them.
Several crypto platforms offer staking programs, though these arrangements have recently experienced regulatory scrutiny in the U.S. It’s important to note that staking is not available on all cryptocurrencies — notably Bitcoin does not support staking.
Other Ways to Generate Passive Income
Real estate
Purchasing real estate and renting it out is one of the most popular forms of passive income. A significant down payment is usually necessary for this, and many real estate investors use mortgages to finance their properties. The goal is to generate enough revenue from rent payments to pay the entire cost of the mortgage, insurance, and administration, in addition to a profit.
In general, real estate investing calls for a great deal of study and expertise. Because it can be difficult to locate reliable tenants who will pay on time and cover all of your bills, it is also seen as extremely dangerous.
Rent out useful household items
If you have tools, yard equipment, a gaming system, or other pricey or bulky household items, someone may be willing to pay to rent them for the day. You could post on neighborhood message boards on social media to find renters, or partner with an online third-party company to find people who will pay to use your stuff.
Start a vending machine business
If you’ve got upfront cash—about $3,000 to $5,000 for a new machine, on average2—starting a small vending machine business could create a refreshing income stream, to the tune of $525 per machine per month on average, according to the National Automatic Merchandising Association.3 While it may sound unconventional, this business idea has been gaining in popularity, with mentions on social media and search-engine queries jumping significantly over the past 4 years, according to the Wall Street Journal.
If you’re handy, you could buy a cheap machine and watch online tutorials or look up manuals on how to fix it. Then ask local businesses, office buildings, and community centers if you could put your machine in their building. (Some may charge a fee.) From there, you can start a weekly routine of checking and stocking your machines. A couple hours of work per week could make a difference for your bank account. Before you start, check with a legal professional to see if you may need any insurance or licenses/permits.
Sell stock photography
Love snapping pics? You could sell your images as stock photography. Scroll through your camera roll for existing shots, or plan weekend shoots to build your inventory. If you’re looking for inspiration, some stock photo companies may list subjects or themes that are particularly marketable on their sites. Or look at the calendar: If a major holiday is coming up, content creators might be looking for related images.
Once you have a portfolio you’re proud of, create an account on a stock photography website. Keep in mind that you’ll be competing with other photographers, including professionals, who may have more experience, editing skills, and equipment, so keep financial expectations in check. It could be a good idea to seek legal advice to make sure you have your bases covered around copyright and intellectual property.
Create a course
Do you do something niche for your day job or have a hobby other people may be interested in? Online courses are popular, and people may pay to learn what you know. To sell your course, research websites that help connect you with potential students, or post your course on industry- or hobby-specific online communities. You could even set up an email inbox for student questions.
Build and sell spreadsheets
Do you have a knack for creating spreadsheets? Some businesses will pay for a pre-built spreadsheet that helps them visualize or process data efficiently. For example, spreadsheets tracking budgets, expense reports, project schedules, or even event schedules could be useful. Market them to your network on professional services sites and on other online marketplaces that connect customers and sellers.
Rent out your parking space
People will pay for your pavement, especially if you live near an office building, in a city where space is at a premium, or near a stadium or other venue. You could advertise your empty spot near popular destinations or sign up for an app that connects drivers to your driveway. If you have a regular customer, you could try striking a monthly deal to ensure consistent income. Before renting out any space, consider contacting a legal pro to understand what your liability may be.
Rent out a spare room for short-term storage
Your extra room, closet, or basement could be prime real estate for someone in need of storage. You might be able to find clients via flyers or word of mouth and use prewritten contracts available online. Again, it’s smart to contact a legal professional to understand what your liability may be.
Final Words
Rather than aiming to outperform market returns in the near term, passive investment strategies usually aim to replicate market returns over an extended period of time. Compared to active investing tactics, passive investing is usually simpler, less expensive, and sometimes less dangerous.
Investors who are new to investing or have little time, experience, or interest in studying and tracking investments may find passive investing to be very helpful. One popular method of passive investing is to use funds for investments such as mutual funds or exchange-traded funds (ETFs).
