Let’s face it. Growing up, working as an employee to earn a living to support your family was just what was expected of you. However, after a few years in the workforce, sitting at a desk for 40 hours a week just isn’t as exhilarating as we thought it was.
“But I have no choice,” we think.
That’s where we are wrong.
The secret? Cultivating streams of passive income.
Just think – you could be earning income while you sleep! If you built up your passive income streams big enough, you could quit your job. Plenty of people have done it. While it’s not easy nor quick, it is possible.
Here are 25+ ways you can generate passive income. Some may require an investment of time or work upfront but can generate an income passively ad infinitum once the project is completed.
Invest in (crowdfunded) real estate.
If you are looking to add real estate exposure to your portfolio but don’t want to bother with holding properties directly (definitely NOT passive income), you could invest in a crowdfunded real estate project.
In this case, you would loan the money to a corporation, landlord or rehabber who would buy the property and they would pay you interest to use your money. You would invest alongside others.
The three I really like are (all are free to sign up so you can join, poke around, see which one you like):
- Fundrise is an eREIT with a $1,000 minimum investment and no accredited investor requirement. You invest in a fund and they pick the investments. (here's more on Fundrise)
- stREITwise is a REIT with a $1,000 minimum investment and no accredited investor requirement. The fees are very straightforward (3% on the raise, 2% AUM) and they've been paying 10% dividends since inception (though past performance is not indicative of future results, here is our full review of stREITwise).
- Roofstock is a marketplace where you can buy leased rental property (single family homes) online with only 20% down. They also connect you with a network of vetted property management, lending and insurance companies to help make the transition seamless, it's a way to generate passive income in rental property from day one. It's free to join and review the available properties.
- RealtyMogul is for accredited investors who have a few thousand dollars they want to invest into individual properties, whether it's homes, commercial real estate, or mixed use buildings. (we go in deeper on this RealtyMogul review)
- PeerStreet – PeerStreet offers investments in real estate backed loans, which is safer than equity because they are senior to equity holders. They boast returns of 6-9% and they only select loans with a LTV of 75% or lower. The terms are also fairly short too, only six to thirty-six months.
The appeal of these passive income sources is that you can diversify across many small investments, rather than in a handful of large ones. When you invest directly in real estate, you have to commit a lot of capital to individual projects. When you invest in these crowdfunded investments, you can spread your money across many uncorrelated real estate ventures so individual investments don't cause significant issues.
Invest in Worthy Bonds
Worthy Peer Capital is a company that has created and sold SEC-registered bonds that support growing companies who need funding and are able to secure those loans with assets like inventory. It's a way for you to invest in bonds, earn 5% interest with an investment as little as $10, and help small businesses who need funding.
Founded in 2016, Worthy sells bonds with a three-year maturity but you can cash out at any time. The interest paid out is a flat 5% and you don't pay any fees. Worthy makes its money on the interest rate spread, the amount they charge businesses for the loan minus the 5% they pay out to bondholders.
A High Yield Savings Account
I wouldn't think of a high yield savings account as a source of passive income but your savings should be getting something (less like Seinfeld syndication residuals and more like a commercial jingle residuals!). It won't make you rich but it's nice if your baseline, risk-free rate of return on cash is 1% or more. The best high yield savings accounts (or money market accounts) offer higher interest rate and there is absolutely no risk.
If you don't mind locking your money up, you can get slightly more with a certificate of deposit, though rates there are not that attractive.
Invest in Stocks/bonds/REITs.
A traditional choice for throwing off passive income, holding equities or fixed income in your investment accounts generates dividends/capital gains and or interest income, respectively.
REITs, or Real Estate Investment Trusts, invest in real estate and must pass at least 90% of income to shareholders in order not to be taxed as a partnership. Depending on the larger economic environment, REITs can potentially have higher yields than stocks and/or bonds.
My personal favorite stock broker is Ally Invest because they have inexpensive trade commissions at $4.95 a trade and no maintenance fees. The commission drops to $3.95 if you have a daily balance over $100,000.
Invest in Dividend Growth Stocks
I wanted to specifically call out one particular strategy within equity investing that bears mentioning – dividend growth investing is when you focus on stocks that not only pay a dividend but have a history of strong dividend growth. When I was first building my portfolio of individual stocks, I focused on buying companies with a history of dividends, a history of strong growth, and financials that supported a continuation of both.
I also used it as an opportunity to scratch that itch I had for picking individual stocks. Now, more than ten years later, many of these stocks sport double digits yields and the cashflow from those investments helps me manage the irregularity of income I experience as a business owner.
We have this list of Dividend Aristocrats organized by dividend payout date, useful if you want to build a monthly paycheck from dividends.
Invest in a rental property (or two).
Though it can take a while to build up enough cash to put a 20% down payment on an investment property (the typical lender minimum), they can snowball fairly quickly. The key here is to correctly project income and expenses in order to calculate cash flow (the free cash you can put in your pocket after all associated property expenses have been paid). However you have to be sure to include the cost of a property manager in your calculations unless you want to manage the property yourself. Even with a property manager, you may be required to make large repair decisions every now and then – so while this is not a 100% passive activity, you are not directly trading your time for money like traditional employment.
Many buy and hold (ie rental property investors) take that excess cash flow and put it toward their next down payment. This is how they are able to slowly amass portfolios of dozens and sometimes hundreds of rental properties.
Write an e-book.
Writing an e-book is very popular among bloggers, as many have noted that “it's just a bunch of blog posts put together!” You will not only have to make an investment of time and energy to create the e-book, but market it correctly. However, if marketed correctly (through blogging affiliates in your niche, for example), you could have residual sales that last a very long time.
Generally, e-books can sell very well because they are priced low. If your customer can afford to have a functioning laptop, tablet, or smartphone on which to read the e-book, they can afford to buy a cheap e-book without much financial difficulty. Cha-ching – residual income!
For example, if you run an online shop and are interested in building up your Pinterest presence to drive traffic to your shop, you have options as far as further education. However, online courses even typically cost upwards of $100, while e-books tend to be under $10.
Create an online course.
If you have specialized knowledge in a certain topic, you can put together an online course to teach others. For example, if you have experience in real estate investing, you can create an online course “Real Estate Investing 101”. The benefit of an online course is that once you create the course material, you can sell it to as many people as you want.
Get paid to do things you're already doing.
Surf the web? Answer polls and surveys? Watch funny videos? See what color best matches your personality?
There are a lot of things you're doing on the web that you could, if you signed up for the right services, get paid to do.
Promote products and earn affiliate income.
If you have a blog, you can make money by becoming an affiliate and promoting products to your readership. Basically, when they click through to the website using your unique link, you will receive a commission on their purchase. This is how many bloggers have grown their income month to month.
To learn more, Making Sense of Affiliate Marketing by Michelle Schroeder-Gardner of Making Sense of Cents is a highly recommended course.
If you need to start a blog, here's my easy ten-minute guide to starting a blog.
Take advantage of credit card sign-up bonuses.
Most credit card companies offer sign-up bonuses to entice you to open a credit account with them. As long as you don’t spend money just to hit the minimum balance and always pay your balance on time, this can have a minimal impact on your credit score while earning you hundreds – or even thousands – of dollars a year. Some of the best travel credit cards offer 100,000 points to new accounts when you meet reasonable spending requirements.
Also known as “travel hacking,” these rewards can be redeemed as cash (statement credit) or airline miles (for free airfare).
For those who travel frequently, The FlyerTalk forums are a great resource.
Take advantage of bank account promotions.
If you don't want to mess with your credit score and chase credit card bonuses, you can apply the same ideas towards bank promotions and bonus offers without the credit hit. There are dozens of banks who will give you hundreds of dollars to open an account and most will do only a soft pull to confirm your identity if you apply online.
This is not entirely “passive” in the traditional sense but it's zero risk and a great way to make a few extra dollars. The income will typically be reported on a Form 1099-INT so it'll be taxed like interest income, which is passive income.
Advertise on your blog.
If you run a blog and get decent traffic, you can incorporate ads to your site. These will usually be on the sidebar, and perhaps at the bottom of your posts. Different ads will have different characteristics, but you can get paid per click or per view on each ad. If you have a lot of traffic, this can add up to a decent chunk of change.
If you need to start a blog, here's my easy ten-minute guide to starting a blog.
Rent out extra space in your house.
If you have a spare bedroom, you can find a roommate or list the space on AirBnB for travelers. Having a roommate is the more passive of the two, as being an Airbnb host will require more work in the form of turning over the room between stays. This is a super painless way to earn $500 to $1,000 a month without much effort – you may even be able to cover your mortgage payment with this extra income!
(if it's your first time, use this link to get $40 in travel credit)
Rent out items you already have.
Given the growth in the sharing economy, your junk can start to pay for itself. For example, if you have some awesome vintage furniture inherited from your grandmother sitting in a storage unit, you can rent this out to photographers for their “styled shoots” which are becoming all the rage. If your furniture is more modern but you still can’t bear to get rid of it – perhaps a home stager will be interested.
Become a peer to peer lender.
Websites such as LendingClub streamline the lending process between peers/friends.
Returns are advertised as 5-7%+ and hit your account as monthly payments. There is some risk of default, but the risk can be minimized with adequate diversification.
Become a private lender.
As a private lender, you can lend to anyone in your social circle. For example, many home rehabbers need access to a source of capital they can tap into very quickly in order to fund the initial purchase of their properties. You can partner with a rehabber who uses your capital for a short-term in exchange for an interest rate that is mutually agreed upon.
Design products to sell on CafePress or Redbubble.
If you are creative and can tap into the latest trends to figure out what sorts of graphics would sell, you can post your design on CafePress Shop or Redbubble, where customers can buy all different kinds of merchandise printed with your design. They take care of back-end support while you earn a commission on the items sold.
Flip domain names.
Domain names cannot be replicated. If one is taken, the only recourse would be to approach the owner to discuss a sale. While there are other variations you could choose, sometimes owning a certain domain (especially if it is attached to your business) can be worth the premium. Often, people will scout out domain names that are still available, buy them, and then sit on them in order to sell them down the road. Depending on who may want the domain down the road, you could sell it for a large markup.
You can search whether a domain is available using the site GoDaddy.
This can be a little easier said than done, but if you have a large social media following, you can definitely earn money promoting a product or advertising for a company. You can even combine this with different marketing campaigns if you are an influencer and have your own blog (advertisement + affiliate income). This is how many bloggers make money! Again, it is not 100% passive but once set up correctly and then scaled, can be surprisingly lucrative.
Buy a laundromat/car wash.
Laundromats and car washes are infamous for being cash flow machines, but before you buy one make sure you complete your due diligence. Verify the books and the income as well as expenses. Will you have to pay an attendant or any employees? Is the city planning on raising the cost of water anytime soon?
If you are lucky and find a seller who just needs money and wants to unload quickly, you could scoop up an even better deal.
Rent out ad space on your car.
Some companies will pay up to a few hundred dollars a month for ad space on your car. Besides initially setting it up, after that you don’t have to do anything special to earn that income except driving your car around (which you probably do anyway).
Invest in a local business.
Investing in a local business can be a risky proposition but one with good returns if you're able to do it successfully. Becoming a silent partner is great because you don't need to do any work – it can be less great if the business doesn't do well.
Sometimes you can become a silent partner in a business because they need cash and are unable to get financing from the bank – this was common during the last recession. A perfectly good business with cash flow issues is the ideal target for this type of investment.
Start a Vending Machine Business.
Vending machines are not completely passive but are similar to being a real estate investor with lower stakes. The key to making these successful is to get high-value locations and negotiate good deals with the people who own those locations.
You need to decide which machines you want to run, get the necessary licenses to operate them (you're selling items so you need to get sales licenses and whatnot from your state), buy the machines and a truck for the items in the machines, find a supplier of the products, and then finally you can secure locations. Finally, you need to service them periodically or hire someone to service them.
Invest in Royalty income.
For those who enjoy the music business or want to diversify their income stream, purchasing music royalties offers the artist upfront capital in exchange for an ongoing payment every time the piece of intellectual property (aka the song) is used.
For example, Royalty Exchange offers auctions where investors are able to bid on royalties.
Sell pre-packaged stock photography.
Many online business owners don’t have the time or desire to take their own photos for their websites. Instead, they turn to stock photos, which are generic, professional photos. These are usually purchased in packages or for a monthly subscription to a stock photo website.
If you are a photographer looking to diversify your income stream, putting together styled stock photo packages can be lucrative. For example, a package of 15 wedding-themed stock photos for $10. You can then market this to any bloggers or businesses who are in the wedding business for their use (photos of different engagement rings styles are super popular). Through this method, it’s possible to make a continuous stream of income off of photos you’ve taken once (similar to a licensing deal).
Build an app.
Know how to program? You can create an app, put it on the App Store or Google Play store, and then earn money for each download it receives. You will have to put some work into researching the apps that sell as well as marketing the app, but after it is built, the income can be relatively passive.
There you have it: 20+ ways to generate passive income. Many traditional paths of employment overlook the fact that you can earn money using a little out-of-the-box thinking. The best part is that you can combine many of the above items to supercharge your passive income strategies.
What is passive income?
Before we get into the list of proven ways you can earn passive income, let's define it so we're all on the same page.
There is a specific tax definition of passive income, known as “passive activity” to the Internal Revenue Service. Passive income is any income you make without actively working or are materially involved. The IRS defines it as any rental activity or any business in which the taxpayer does not “materially participate.” Nonpassive activities, or active activities, are businesses in which the taxpayer works on a regular, continuous, and substantial basis.
If you are paid a salary, whether annual or hourly, that's active work. If you don't go to work, you don't get paid. That's pretty straightforward.
What are sound boundary cases? Let's say you invest in a business owned and operated by a friend. It is passive income if you don't participate in the operation of that business in any material way.
The IRS defines “material participation” as:
- Put in 500+ hours in the business in a year,
- If you've done “substantially all” of the work in abusiness in a year,
- You've put in up to 100 hours and that is at least as much as any other person involved.
There is a tax reason for this definition too. When you are actively involved, your income is taxed differently. If it's more like residual income, it's taxed more efficiently.
For the purposes of this list, we stuck with the truly passive income sources.
Which one are you going to try?