Passive Income: What It Is And 19 Ideas For How To Start Earning More
Sarah Li Cain11-Minute Read
December 03, 2021
Earning money without working long hours sounds enticing, and is possible. Yes, you can earn money while you’re sleeping, running errands and even on vacation. The secret is finding passive income sources.
Granted, different ways to make passive income may be better suited for you than others. The good news is that there are numerous options to choose from. Here are how these revenue streams can change your life and set you closer to financial freedom.
What Is Passive Income?
Passive income is money earned with minimal involvement from the person who’s created the income stream. One of the most appealing aspects of earning passive income is that, unlike with active income, you don’t have to spend hours each day putting in work to generate funds. Once the initial effort is put in to establish your passive income stream, it usually only requires small amounts of occasional maintenance work.
While some passive income sources might need a larger initial investment of time or money than others, there are many that don’t. Whatever passive income ideas you choose, you can create an income source that can help you pay off debt and live a more comfortable lifestyle.
How To Make Passive Income: 19 Creative Earning Ideas
There are many ways you can earn passive income, whether that’s through real estate, investing in the stock market or honing your skills at affiliate marketing. Remember each idea has its risks and rewards, so make sure you do your research before diving in.
1. Rent out property on Airbnb
Going out of town for the weekend? Why not let someone stay in your home while you go?
Many visitors check out Airbnb listings to help them save money, instead of staying at a hotel. Why not capitalize on this trend, and earn money from your existing property?
Even if it’s not tourist season where you live, if there’s a big event going on in your area such as a festival or college football game, you could make your listing available and earn big bucks that can finance your next vacation or make a dent in your mortgage.
If you have a second property in a desirable location for travelers, Airbnb can also be a good passive income source. Since you don’t use it year-round, there are more opportunities to rent to others without it disrupting your daily life.
2. Become a landlord
Purchasing a property to lend it out to others as a passive income stream is becoming increasingly popular as it can provide predictable returns. Don’t underestimate the commitment of becoming a landlord. It can require a high initial investment of your time and money – and there’s nothing passive about getting a call in the middle of the night because there is something wrong with the property.
Rental properties also take significant upkeep, and some repairs are expensive. Consider paying a property manager so you can collect passive income without doing too much yourself.
3. Buy and sell raw land
While it may not sound as sexy as rental properties, buying and selling raw land can net you a larger return with less effort. That is, assuming you have enough capital to get started.
To turn buying and selling raw land into a more passive income source, you engage in owner financing. This practice is where the seller will finance the purchase directly to you, the buyer, so you both don’t have to go through a bank. That way, you can save money on a loan, and pay the owner directly when you sell the land for profit.
As with being a landlord, there’s a lot of upfront work, including tasks like finding properties, making contact with potential buyers and completing any due diligence. However, it can potentially be one of the best passive income streams out there.
4. Invest in real estate crowdfunding
Want to invest in real estate but you don’t have a huge down payment or a high net worth? Check out real estate crowdfunding websites. These fintech platforms allow investors to make a minimum investment (along with any required fees) on their listed properties. These platforms then invest the pooled assets into commercial and residential properties and offer a return based on performance.
Before you start investing, do your research to make sure these companies are reputable. You should be able to see how long they’ve been in business, what their rate of return has been for previous properties and more. Plus, check to see if you need to be an accredited investor, which can mean you need to have at least a $1 million net worth, not counting your primary residence.
5. Flip houses
Flipping homes isn’t as passive an option as some of the others on our list, but you have the potential to make a lot of money if you flip multiple homes and seek the help of professionals.
Here’s how it words: You buy cheap homes in a decent or more desirable area, renovate them and sell them at a higher price to turn a profit. This more-active type of passive investing may have more tax consequences than other forms of real estate investing, so it’s best to speak with a tax professional before proceeding.
6. Purchase REITs (Real Estate Investment Trusts)
REITs are another way to invest in real estate. Instead of buying individual properties outright, you’re investing in a group of real estate assets. You’ll own shares of commercial properties such as office buildings, apartments or malls in the same way you’d own shares of a company’s stock.
You can purchase these through your brokerage, or some real estate crowdfunding platforms have their own version of REITs.
7. Invest in dividend stocks
This is a common way for people to earn passive income because you may not need a lot of money to get started. You might already know about stocks, where you buy a share of a company. To earn money, you’ll need to sell them at an appreciated price.
With a dividend stock, the company takes part of its earnings and sends them to investors each year in the form of a “dividend.” How much you earn will depend on how the company fares year to year.
8. Invest in peer-to-peer (P2P) lending
Peer-to-peer lending is when individuals lend and borrow money from each other through a formalized means. The idea is to bypass the banks, helping borrowers increase their chances of being approved for a loan, and for investors to earn a good rate of return.
There are many reputable platforms where you can lend out money – your returns vary depending on the platform and loan.
As with any investment, there is risk involved in P2P lending. When investing in peer-to-peer lending companies, there’s a chance of default, when the borrower stops making payments. Fortunately, many platforms have strict underwriting standards that decrease the likelihood of this happening.
9. Put your cash in high-yield savings accounts
If you have cash sitting around – like the money you put aside for short-term savings or your emergency fund – consider parking it in a high-yield savings account. With this passive income idea, you’re literally making money by doing nothing except having your money in the right type of account. The amount you’ll earn will depend on the rate of return the bank offers and the amount you have on deposit.
10. Leverage affiliate marketing
Affiliate marketing means you’re earning a commission each time you successfully refer another person to a company’s products or service. Many people do so by writing reviews on their blog or mention it as an “ad” on their own podcast.
All you need to do is to sign up for a unique link with the company proving you’re the one making the referral. The money you earn will then be paid out. Terms may differ and you might have to hit a certain threshold to withdraw the cash.
Another common type of affiliate marketing today involves being an “influencer” – think social media personalities who promote a product on their posts. They get paid when a follower clicks on their affiliate link.
You don’t have to be a celebrity to succeed in affiliate marketing. Your local hair salon might pay you to promote their hair products, or a clothing store could outfit you so fellow fashionistas will want to find out more about the outfit you’re wearing.
11. Using Google AdSense on your website
If you have your own website, you can become a Google AdSense partner. Google will place ads on your website for you, and you’re compensated every time someone clicks on the ad. It can be a smart choice because AdSense selects the ads for you and makes sure they are relevant to your site. That way, they’re more likely to be of interest to your visitors.
There are also other ad placement programs, each with its own set of requirements. In many cases, you need to have a certain number of visitors to your website before you can even consider applying.
12. Sell digital files
Selling products like candles is fine, but creating and selling digital products requires less effort and can technically be a more passive income source. All you need to do is create it once – whether it’s a coloring page, worksheet, or an art print – and sell it repeatedly.
You can certainly create your own website, but there are plenty of existing ones out there that have flocks of visitors going to see what’s available. You can sign up for free and it’s easy to set up. All you need to do is to pay out a small commission each time you sell something.
13. Sell online courses
If you have a special skill, there’s probably someone who will pay to learn it. Like digital files, creating an online course allows you to create your product once and then earn money through multiple sales. You should be able to earn a better return than teaching a class in person or tutoring, both of which require your participation each time.
When considering whether you should create a course, see if you already have an existing audience online or those who are willing to listen to what you have to say. Then, think about what people ask you about all the time. There’s your superpower that would translate well to a course.
Take it one step further and create materials to supplement the course, such as an ebook, downloadable worksheets, additional videos or kits. Not only will this make your course more enticing, you could also charge more money for the course.
14. Flip websites
Flipping websites you purchase (or create a website), create it into a valuable asset, then selling it for a profit. When you purchase a website, you want to see that it has the potential to generate a lot of revenue, whether that’s through ads, online courses, products, or affiliate marketing.
To purchase existing websites, there are online marketplaces that help to broker deals – you can use this site when you’re ready to sell yours. Make sure you have ample documentation to prove your website earns what you say it earns.
Or, you can purchase a website and generate passive income for you as-is, or you can improve the site with your own content for a greater potential profit.
15. Wrap your car
Yes, there are companies that’ll pay you to let them put an ad on your car. While these ads will be anything but subtle, it might be well worth it to use that extra money to fill your gas tank.
Not all cars qualify. In most cases, you’ll need to live in certain locations or drive a minimum number of miles for companies to be interested.
16. Purchase vending machines
You’d have to occasionally visit the machine to restock it (and – the good part – empty out the money!). However, this passive income stream can be very low maintenance as you make money on snacks. All you need is to spend some money upfront on machines and to negotiate where you can place them. Then you just need to keep them stocked with inventory..
17. Take advantage of cash-back opportunities
Earning cash back is as easy as using certain apps or rewards credit cards.
With apps, you can sign up for free and earn cash back each time you make a purchase from a participating retailer. In essence, you earn a cash-back reward for purchasing items you were planning to buy anyway.
With credit card rewards, terms will depend on the issuer. To really reap the benefits of the rewards, pay off your balance each month. That way, you won’t have to worry about paying interest which could negate the rewards you earned.
18. Develop an app
If you’re tech savvy, you could create an app for mobile phones that charges a small fee to download. You may also be able to earn money from free apps you create if you’re able to make income from ads shown each time a user uses it.
To start, look to see if there are any gaps in the market you can fill. Once you make your app public it’ll provide you income with each download.
19. Rent your car
If you’re a homebody, work from home or otherwise don’t drive much, you could rent your car out on a car share platform. Find a company that allows you to list your car for free, then set the ground rules and a price. In some cases, you may have to pay a service fee, but it’ll probably be minimal.
Most car share programs offer liability insurance and damage protection. If you own a car, this could be a good option to earn passive income. If you lease your car, this may not be a good option since leases often limit the number of miles you can drive per year.
Is Passive Income Taxable?
The short answer is yes, passive income counts as taxable income. However, the IRS may treat income sources differently. How much you’re taxed will depend on several factors. For instance, if you held onto investments for more than 12 months, you’ll be in a different tax bracket than someone who buys and sells stocks often.
Other ways you could be taxed different depending on the amount you made per year and how much you can legally deduct as business expenses. Since taxes can be tricky, it’s best to speak with a tax specialist or financial advisor.
Generating Passive Income: What To Know As You Get Started
Earning passive income isn’t a get-rich-quick scheme. You will need to do some upfront work and invest in a bit of capital to get started. Plus, the amount you’ll earn will depend on how you go about doing so.
For instance, if you want to flip homes, you’ll have to do more research and invest more money than someone who wants to earn a bit of cash using cash-back credit cards. Granted, the returns tend to be higher if you’re making more upfront investments, so figure out what’s worth your time.
It’s also a smart idea to think about the tax consequences of your new passive income stream. How much will it affect the way you pay your taxes? For instance, if you run a website and sell your own products, you may have to pay quarterly taxes in addition to filing an annual tax return. If so, you’ll have to set aside enough money to pay the IRS. Tax laws and regulations can get complex depending on your income stream, so consult a tax professional before you get started.
Once you understand what it takes to start a new passive income stream, consider whether you’re willing to handle the risks. What would happen if you invested in a rental property and you can’t attract tenants? Or if you launch a blog and can’t earn enough ad revenue to flip it, what will you do?
You want to consider these scenarios because there are downsides to investments. Part of making a plan is to create backups in case things don’t turn out the way you expect them to. Of course, you want them to work out, but thinking this way allows you to see the bigger picture of what you’re trying to do – create long-term streams of revenue.
Don’t forget to consider whether you’ll want to create a legal entity for your passive income. For instance, if you run an online business, it might be a good idea to create an LLC to protect your personal assets. Consult a legal professional to see what your options are.
The Bottom Line
Passive income, like any investment, requires thinking beyond the short term. Remember the adage that if it sounds too good to be true, it probably is. Meaning, if you want to earn money right away from your Airbnb listing, you may have to wait a while before you see real earnings.
If you’re patient and continue to be consistent, you can create multiple passive income sources and generate multiple income streams. The goal is to think beyond today and determine how much it will make tomorrow. Long-term thinking is the key to understanding how passive income can bring financial freedom.
Whether you want to use passive income to supplement your cash flow or to entirely replace your full-time job, consider how you can layer multiple strategies and build a cascade of revenue streams that will earn you money day and night, putting you that much closer to maximizing your earning potential and your financial goals.
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