Who wouldn’t want to earn more money without having to go out and sweat for every cent?
While people with passive income are playing with their kids, teeing off, hiking in South America, or, yes, even working an unrelated job, they’re earning money. Therein lies the beauty of passive income: It streams in without you having to lift a finger.
Investing for passive income doesn’t just serve your long-term financial goals. Your investments can earn you income right now.
Types of Passive Income
You can earn passive income from many sources, but they all share one thing in common: They require money, work, or both to create. You invest these upfront, and then you get to reap the benefits.
This is precisely why so few people earn passive income. They don’t have the money, don’t have the time, or even just lose interest when they realize how much upfront investment it requires.
But if you can save the money or make the time and have the inclination and drive, you can pick and choose a combination of the best passive income sources to fuel your adventures for the rest of your life.
1. Dividend-Paying Stocks & Funds
One of the simplest and most common forms of passive income is dividends from stocks, mutual funds, or exchange-traded funds. You buy a share, and that share pays you a dividend each quarter indefinitely.
Some stocks pay higher dividend yields than others, of course. One stock may pay an annual yield of 1% of its share price, while another pays 5%.
To reduce the risk in your stock portfolio, buy exchange-traded funds that contain a wide range of dividend-paying stocks so you don’t overinvest in any one company. There are hundreds of ETFs that specialize in high-dividend stocks, though they can be a bit pricey.
That makes stocks a good starting point, with their high liquidity, easy diversification, strong historic growth, and low initial cash requirement.
Open a brokerage account if you don’t have one already. You can opt for a free online brokerage, many of which are robo-advisors, or a brokerage that offers incentives to jumpstart your portfolio. If you’re new to investing, opt for a beginner-friendly online brokerage.
You can also easily invest in them using retirement accounts such as individual retirement accounts or employer-sponsored 401(k)s.
2. Bonds
Bonds typically pay out interest payments until they mature and you get your initial money back.
If you’re new to the concept of bonds, they’re basically a loan from you to a borrower, which you can sell on the secondary market to another investor at any time.
Bonds come in two fundamental forms: government bonds and corporate bonds. Some government bonds, including many local municipal bonds, come with tax benefits.
In recent years, bonds have paid out lower returns than they did in the 20th century. In an environment of perpetually low interest rates, many investors have a hard time getting excited about them.
Still, bonds have historically played an important role in reducing risk for retirees. Because bonds tend to be lower-risk investments, many investors gradually buy more bonds in lieu of riskier stocks as they approach retirement.
3. Rental Properties
Rental properties generate ongoing income without requiring you to kill the golden goose and sell off any assets. That means you can spend less time worrying about safe withdrawal rates or risk management as you approach retirement — at least when it comes to your rental income.
In fact, real estate assets generally drive your net worth higher over time, as the properties (hopefully) appreciate in value and your tenants’ rent payments pay down your mortgages.
Rents also adjust for inflation, so you don’t have to worry about inflation diminishing your returns. The returns are predictable because you know the purchase price of the property and the market rate for rent, and you can accurately forecast the long-term averages of all expenses.
Property owners can mitigate the primary risks of rental properties through aggressive tenant screening, rent default insurance, and property management best practices, including semiannual inspections.
And as a cherry on top, real estate comes with outstanding tax benefits.
Plus, no one says you have to rent to full-time tenants. Alternatively, you can rent your property short-term on Airbnb.
That said, rental properties aren’t a good fit for everybody. They require skill and knowledge to invest in profitably, which is precisely why so many new rental investors end up losing money.
Rental properties also require many thousands of dollars of cash upfront in the form of a down payment and closing costs, which makes diversification a challenge at first.
Real estate is also notoriously illiquid. It costs a great deal of money and time to cash out your equity by selling.
4. Public REITs
Only invest in rental properties if you’re genuinely interested in learning the ropes and making a hobby or business out of it. If you’re only interested in diversifying your assets, you have plenty of easier options for gaining exposure to real estate, including real estate investment trusts, or REITs (pronounced REETS).
Through your brokerage account, you can buy publicly traded REITs just like stocks or exchange-traded funds. That makes them the most liquid option for investing in real estate. Unfortunately, it also makes them the most volatile.
The United States Securities and Exchange Commission requires publicly traded REITs to pay out 90% of their profits in the form of dividends. That means REITs tend to pay high yields, but it’s difficult for REIT managers to grow their portfolios, which limits REITs’ growth potential.
If you want a fast and easy way to diversify your portfolio and add real estate, public REITs are a simple first step.
But because they trade on stock exchanges, they tend to move more in line with stock markets than other real estate investments, limiting their upside as a diversification strategy.
5. Private REITs
These privately owned funds typically invest in commercial real estate — often apartment buildings — and allow individual investors to buy shares in the funds.
Unlike publicly traded REITs, private REITs don’t offer much liquidity. Most funds clearly state that they represent long-term investments, often five years or longer. Some allow investors to sell their shares early, but usually with a penalty.
Some private REITs also invest in real estate-secured debt, not just direct property ownership. That helps them pay out more ongoing income in the form of dividends to investors rather than investors relying solely on rental cash flow from their buildings.
You can buy private REITs on sites like Streitwise, Fundrise, and Concreit.
6. Crowdfunded Real Estate Loans
The past few years have brought a wide range of real estate crowdfunding websites that don’t invest in real estate directly at all. Instead, they serve as hard money lenders, making short-term purchase-rehab loans for house flippers.
These sites lend money for a flipper to buy and renovate a house, then they recoup that money through investors. In many cases, they let you pick individual loans to fund, and they pay interest based on the degree of risk in each particular loan.
And the loans are shorter than your typical mortgage. Most are around five years in duration, while companies like Groundfloor offer even shorter-term loans — usually six to 12 months. That’s assuming the borrowers pay their loan back, of course. No passive income investment comes without risk.
Some real estate loan crowdfunding sites cater to or allow only accredited investors. Accredited investors must have a net worth above $1 million dollars or income of at least $200,000 for singles or $300,000 for married couples. Crowdstreet and EquityMultiple are examples. Yieldstreet also has some opportunities that are only for accredited investors.
Fortunately, you can find some companies that allow nonaccredited investors to participate. Examples include Groundfloor and Fundrise, though RealtyMogul and Yieldstreet have some opportunities for nonaccredited investors.
7. Private Notes
A private note works similarly to real estate crowdfunding, but without the lender between you and the borrower. Instead, you directly lend money to another person or company.
Ideally, it’s someone you know and trust implicitly because if they don’t pay you back, you don’t have many options at your disposal beyond guilt-tripping them.
Be careful with this option if you don’t operate in the real estate investing world yourself. The risk directly correlates with how well you know the borrower and your confidence in their experience.
8. Business Income
I own an online business that I love and plan to continue managing for many years to come.
But my business partner is nearing 60. She no longer feels the same affinity for the headaches and stresses of running a business, so we’ve started planning her exit.
That doesn’t mean she’ll stop earning money from the business. Although her salary will cease, she’ll still earn distributions as a business owner, even if she never helps with affiliate marketing or contributes as a blogger again.
Starting a business allows you to leverage other people’s time and money to create your own passive income engine.
What starts as a hobby business can evolve into something larger and more complex that takes on a life of its own. And a successful business continues generating money even after you hire someone else to run it for you.
Explore some potential money-making hobbies you could grow into a business, and build your own empire that endures even after you bow out.
9. Literal Income-Generating Machines
Still looking for passive income ideas? Consider actual income-producing machines, such as laundry machines, ATMs, arcade games, bar games, or vending machines.
The hard part of this strategy is finding a building to agree to let you install your machines. From there, you simply service them occasionally to keep them running and periodically stop by to collect your coins.
It’s not a bad gig, and it’s one you can delegate to employees relatively easily. You may need to pay your salespeople a residual commission to sweeten the deal and get them hustling for you, though.
10. Residual Sales Income
Some sales jobs pay ongoing residual commissions, not just a one-time commission. You bring in a client once but keep getting paid as long as that client stays with the company.
For example, some life insurance salespeople are paid both an initial commission on a sale and a percentage of the policy’s monthly premium every month the client pays until the policy ends.
Although you probably shouldn’t choose your career based on the commission structure, residual commissions create passive income for some salespeople. In some cases, salespeople only earn residual commissions for as long as they continue working for the company.
But other companies keep paying residual commissions even after employees leave, giving them a runway for an easy landing in retirement or for entering a new career.
11. Annuities
Annuities pay out a certain amount of money every month, usually until you kick the proverbial bucket. They serve as a floor for your retirement income, providing insurance against running out of money before you die
If you buy an immediate annuity, the payments to you begin — you guessed it — immediately. More often, you have to wait a certain number of years to start receiving regular annuity income.
Annuities are complex financial products you should review carefully before buying. Talk to several financial advisors before deciding to purchase one, and only consider annuities one component of a broader retirement income strategy.
12. Royalties
In the film “About a Boy,” the protagonist lives off the royalties from a Christmas song his father wrote decades earlier. Amusingly, he hates the song that has enabled him to live without working for his entire adult life.
But the example demonstrates the power of royalties, which keep on paying out as long as people keep buying your creative work.
In the art and entertainment world, book writers often receive royalties, as do musicians. Photographers and graphic artists can receive royalty income if their images sell through stock photography websites.
Royalties don’t come only from artistic works, though. Inventors and patent holders can earn royalties when other companies use their patented products or designs. Franchisees pay a form of royalties to the original franchise owner.
Why Invest for Passive Income?
People invest in income-producing assets for many reasons. A few of the more common reasons include:
To Enjoy an Early Retirement
No one says you have to wait until 65 to retire. With enough passive income, you can cover your living expenses so working becomes optional.
That simple concept serves as the foundation for the financial independence, retire early (FIRE) movement: You can retire young if you pump enough savings into income-producing investments.
I’ve known teachers who have retired at 30 because they built enough passive income from rental properties (more on that shortly).
To Enjoy a More Comfortable Retirement
Yes, you’ll probably collect a (small) check for Social Security benefits each month after you retire, but that doesn’t mean you’ll be living large. The more passive income you earn from your investment portfolio, the better the quality of life you can lead in your later years.
To Reduce Dependence on Your Job
Being fired ranks among the worst experiences most of us face. It leaves you feeling not only rejected and broke, but it also lays bare your dependence on others for your livelihood.
Losing your only source of income makes you feel utterly helpless. When you have other sources of income, however, you don’t feel nearly the same helplessness or desperation to find a replacement job immediately. You can take your time and find the right job at your own speed.
To Ditch Your High-Octane Job for Something You Love
High-stress, high-income jobs tend to lock us with golden handcuffs. We succumb to lifestyle inflation, then find that we can no longer afford to leave that high-stress job even when we grow to hate it.
With passive income, however, you can walk out the door and pursue your passion, even if it doesn’t pay as well. You may even take a job that lets you work remotely so you can drop the commute, work from home, or move wherever in the world you want to live.
To Live Anywhere
With enough passive income, you sever the tether of your job, and thus the need to live near it.
There are plenty of countries where $2,000 a month buys a comfortable lifestyle — in some cases, even a luxurious one. Build $2,000 in monthly passive income, and you can live out your dream adventures wherever you like.
To Build Wealth Quickly
Wealth begets more wealth, and nowhere is that clearer than with passive income.
Imagine someone handed you a rental property earning $1,000 per month in passive income, and you set aside your newfound extra income and invested it as a down payment for another property.
Now, you have two properties generating income, so you can save up the next down payment even faster — and the next, and the next, in a self-perpetuating cycle of higher income and wealth.
Stress-Free Passive Investing
With the economy changing by the minute, you have to watch your investments like a hawk. But there is an overlooked “set and forget” investment that’s truly passive: fine art.
Why? Not many people understand the financial power of art, but on average, contemporary art prices appreciated by 14.1% annually from 1995 to 2021. That’s even higher than the average 9.9% returns you’d see with the S&P 500. Plus, fine art provides some protection from inflation and helps diversify your portfolio.
So it makes sense why more financial professionals are finally realizing art’s strength as an asset class.
In fact, a 2014 Deloitte survey found only 53% of wealth managers believed art should be included as part of a wealth offering. In 2021, that figure jumped to 85%.
Art investing used to come with a ton of hurdles. You had to research the artists, come up with $5 million to buy a quality painting, and store the darn thing. Then, to cash out, you’d need to go find a buyer yourself.
With new online investing platforms, you can sidestep all these obstacles. Now you invest in Picassos and Warhols for a fraction of the cost. And you have liquidity. You can buy and sell shares of art to other investors on the platform.
The best part? Getting started only takes a few clicks.
Final Word
The list above is far from exhaustive.
Technically, certificate of deposit accounts(CDs), money market accounts, and high-interest savings accounts all qualify as sources of passive income. But because they barely keep pace with inflation (if they keep pace at all), many consider them more inflation-protection devices than sources of passive income.
Investing doesn’t have to revolve around the remote future, and retirement doesn’t have to wait until you find yourself humming “When I’m 64.” You can enjoy the fruits of investing right now by building an income portfolio while simultaneously laying the foundation for a wealthier future.
You may just develop a passion for financial independence and plan your escape from the 9-to-5 lifestyle.
