Over the years, many people have been using “passive income” strategies to supplement their paychecks. And now, with the COVID-19 pandemic lockdown forcing many businesses to close at least temporarily, it seems like nearly everyone whose job has been impacted is looking to replace lost earnings. Passive income sources offer some great ways to do just that.
The IRS defines passive income as coming from two sources: rental property or a business that you do not actively participate in, such as book royalties or stock dividends.
Such income can be a lifeline during times like these. It can keep some money flowing in when you lose a job or otherwise experience some financial hardship. Here are a few avenues to consider.
Stocks, bonds, and exchange-traded funds (ETFs)
ETFs can all pay dividends and are some of the easiest ways to bring in passive income money, usually making payouts each quarter. Stocks are usually publicly traded on the NYSE or Nasdaq stock exchange and translate to equity ownership for investors. Bonds are also investments that investors can add to their portfolios and equate to a contract between a bond issuer or borrower and the investor, or lender who will often also receive interest with their investment. Exchange traded funds are also publicly traded on the stock exchange and represent a basket of securities that tracks an underlying index and are a popular investment for those investors looking for a diversified interest in a specific industry, such as technology or healthcare or index like the popular S&P 500.
The trick is in picking stocks that are likely to keep up their dividends in the event the COVID-19 pandemic triggers a recession. Some traits to look for are stocks that have had a history of maintaining their dividends during previous economic downturns, conservative balance sheets and future cash flows and earnings. If you’re an inexperienced investor, this might be a good time to consult a financial advisor to help you choose.
Annuities and bond ladders
Annuities and bond ladders can turn part of your retirement account into a regular source of income. Annuities are issued by insurance companies and are insurance contracts. A bond ladder is a popular diversification strategy for investors who own bonds. Since many bonds only pay interest two times a year, an investor would consider purchasing a portfolio of bonds that have different maturities and interest payment periods so that they are able to build a ladder and receive a monthly income stream each month of the year. These contracts that promise to pay investors or contract owners a regular stream of income either immediately upon purchase or in their future. But choosing these can be tricky, especially in the changes the pandemic is causing, so it’s a good idea to consult a financial advisor before buying one of these vehicles.
Rental Income
This is a great way to make money. Repair expenses are generally deductible, so they provide a hedge against taxable income. This is especially great if the rent covers mortgage and other costs. There is also a strong possibility of building equity as the value of the property increases over time.
Rental incomes also come with the ability to build equity as the value of your property increases over time.
Peer to Peer Lending (P2P)
P2P involves individuals getting loans from other individuals instead of from a financial institution, thus effectively cutting out the “middleman” and ensuing costs. Also known as social lending or crowd lending, P2P lending often allows investors to choose which loans they want to fund, so the approval process may be a bit more flexible than with a traditional lender. This form of passive income can be risky because investors often lend to those who cannot qualify for traditional loans but it can be quite profitable.
Buying a laundromat or vending machines
This does require a substantial upfront investment. It’s probably better to buy an established laundromat than to build one from scratch. As for vending machines, all it takes, besides the machine, are a well-chosen product and a good location in an area that gets a lot of foot traffic.
Debt
While getting out of debt isn’t technically a passive income technique, it will free up cash for you to use for other things. If you’re not paying interest on credit cards and other types of loans, you will have more money in your pocket. Even if you can’t fully pay off large debts, such as a mortgage or college loans, you might be able to refinance them at a lower interest rate. And if you don’t need the interest savings to make ends meet during this time of economic stress, you can always use it to build your emergency fund or retirement account.
Experience = unexpected cash streams
Everyone is familiar with ridesharing and delivery services, but there are other ways you can get creative to launch a new side business for yourself. First, consider how your experience and interests might lead to a new cash stream. Look at Glassdoor, Payscale, or Salary.com to see what your new gig might pay and talk to others who have recently started up side businesses; look at job listings to see what the market is. Here are a few ideas:
- Create an audio-visual course that you can sell online. Some websites to help include Udemy, SkillShare, Coursera and Teachable.
- With closed schools switching to online classes during the pandemic, parents are looking for tutors who can work virtually with their children and teens. All you need, in addition to a specialty, is a laptop or computer, a reliable Internet connection and a quiet place in your home to conduct your tutoring sessions. Wyzant, Tutor.com and Chegg are a few tutoring sites or advertise yourself through Facebook. Other places to find local tutoring jobs are with your local community college and schools.
- If you’re crafty, don’t overlook E-Bay or Etsy for selling your crafts or artwork.
Winnie Sun is an award-winning financial advisor and managing partner of Sun Group Wealth Partners. She’s serves on the CNBC FA Council, Forbes contributor, the personal finance pro on Good Day Los Angeles, and the host of the television show Level Up with Winnie Sun distributed on NASDAQ and coming to the CW San Francisco. Follow her on Twitter at @winniesun.
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