This post may contain affiliate links. Please read my disclosure for more info.
Do you ever wonder how people can become financially independent, especially so early in life? How it’s possible that they can get to the point where they no longer have to work for a paycheck?
The answer is passive income. They have found a way to generate income utilizing work they’ve done in the past. If you are hoping to become financially independent or just retire comfortably one day, you need to start creating sources of income that will continue to pay out long after the work is done. I’ve listed 11 sources below to get you started.
Table of Contents
Investing in the Stock Market
This is a source of income that can be active, passive, or some combination of the two depending on how you choose to invest.
Index Funds Investing
If you are truly interested in passive investing, you should consider index funds. Index funds are mutual fund with a portfolio to match or track the components of a financial market index. For example, if you chose the S&P 500 index fund, it would match and track the stocks that were listed in the S&P 500 at any given time.
If you choose an S&P 500, Total Stock Market, or Total World Stock index funds you’ll be investing in large funds of stocks that are tied directly to the S&P 500, US Stock Market, or World Stock Market, respectively. By choosing such large groups of stocks, you are minimizing the risk associated with stock market investing.
To get started, you just have to open an account, add funds, and purchase shares. I personally use and recommend Vanguard for index fund investing because of their low fees. With index fund investing, you’ll realize passive income in the way of dividends and increases in the fund itself, so when you need to access your funds for income, you’ll most likely have to sell shares in addition to your dividend income.
Dividend Stock Investing
Another strategy for creating passive income in the stock market is through dividend stock investing. This strategy typically involves building a portfolio of stocks that give high dividends. By their very nature, high dividend stocks are typically large cap companies and less risky than their small and mid-cap counterparts.
However, even having a large portfolio of different high dividend stocks is still riskier than index fund investing because, for the most part, you’re only invested in a small segment of the market (large cap). Also, as a side effect of only being invested in a small segment of the market, this strategy may not return the biggest bang for your buck through all economic conditions.
Investing in Real Estate
Rental Real Estate Investing
Like stocks, there are various ways to invest in real estate and varying degrees of passivity. I probably wouldn’t call investing in real estate completely passive, but there are strategies to cut down on the amount of work you’ll need to do once you’ve got everything setup.
In a nutshell, the passive income strategy with real estate includes buying a piece of property and renting it out to residential, commercial, or even industrial customers. To make it more passive, you can hire a property manager to handle many of the active aspects with renting out property. You’ll always need to be in a position to check on your property and finances related to the property, but it could cut down on the time you spend doing it.
To get started with real estate, you first need to understand what constitutes a viable rental property. You’ll need to consider things like the price and condition of the property, location, type of property, market, etc. If you don’t buy the right property, you could easily end up with a property that either won’t rent or rents for less money than is required to keep up with the loan and property repairs/other expenses. If you’re interested, I recommend visiting BiggerPockets, doing your research, and joining their community.
Real Estate Investment Trusts (REITs) Investing
If you’re looking for a truly passive way to invest in real estate, a Real Estate Investment Trust (REIT) is a great option. A REIT is similar to a mutual fund except instead of a portfolio or stocks, you invest in a portfolio of real estate related activities (different properties, real estate projects, etc.).
There are various types of REITs; some focus on timber operations, healthcare, residential, commercial, industrial, etc. If you are interested in investing in a particular type of property, but don’t have the cash to invest directly, a REIT is going to be your best option.
REITs typically pay higher dividends than stocks, bonds, or bank investments. Also, similar to stocks, its easy to sell your interest in a REIT which makes it much more liquid than owning real estate directly.
Produce YouTube Videos
As you’ve probably seen, you can make a video about just about anything on YouTube, but did you know you can make money from it? If you can create compelling videos and are a born influencer, you can make passive income from your videos.
This strategy involves creating videos and attaching Google Adsense to the videos. Google Adsense will overlay your videos with automatic ads. When one of your viewers clicks on the ad, you’ll earn a little money from Adsense.
To create a significant passive income, you’ll need to develop a large following (the more people, the more clicks, the more money). If you’re worried it’s not possible to make significant income with this strategy, think again. The top 10 YouTube earners leveraged there “star” status to deals and partnerships with other companies (clothing, toys, video game leagues, advertising companies, etc.).
Affiliate Marketing
This is a strategy best used for folks who have online assets like a blog or website. Essentially, the website or blog owner makes money from promoting a product or service.
To get started, a website or blog owner identifies a product or service they use regularly or have used personally and would recommend (this isn’t required, but recommended). In the course of writing blog posts or creating pages, the owner includes a mention of the product or service and includes a unique affiliate link. When the reader clicks that link and purchases that product or service, the owner receives income in the form of either a fixed sum, percentage of the sale, or other arrangement. This is similar to how sales people earn money (commission based).
Post Your Photography Online
Do you enjoy photography? Is photography one of your hobbies (i.e. do you already have the equipment)? Why not sell your photography on websites like iStockphoto or Shutterstock.
To start, you would sign up with the respective site(s) you’re looking to post your photographs on. Then you would upload photographs that meet the terms and conditions or the website. When someone finds your photo and downloads it for their use, you earn a percentage of the sale (typically 15% – 45% of the sale). They earn a majority of the sale because you are using their platform and their built in- traffic to connect you with the end customer.
In this strategy, you post the photograph once to these sites, but continue to earn money each time the picture is downloaded. If you are good at photography and have a knack for capturing photos that become popular, this could be a great way to make a passive income.
Write a Book (or ebook)
This works for a physical book and an e-book, however the physical book requires more up-front costs and isn’t as easily scalable.
Everyone is different, but for an example of relevant book topics, let’s say you own a blog about gardening. You notice that one of the most frequent problems your readers encounters is centered around a certain type of plant that you just happen to be an expert in. This is a great topic and opportunity to write a book and solve your readers’ problem.
Once you’ve written an ebook, you can sell it on your website, as an affiliate arrangement with other websites, and/or through large ecommerce websites like Amazon.
Silently Invest in a Local Business
Do you know someone that is killing it with their business and needs an influx of capital to expand? Approach them about becoming a silent partner. Trade your money for a share in the business (and the business revenue). You won’t be involved in the day-to-day operations, but will benefit from a share of the revenue when the business makes a profit.
Take Advantage of Referral Programs
Are you happy with a product or service? If you are, see if they have a referral program. The way referral programs typically work is they compensate you for referring customers to them. Be aware of the referral programs for your favorite products or services and make sure to mention it to friends, family, and coworkers. It should be a win-win for everyone.
Rent Out Your Extra Space on Airbnb
Airbnb is similar to having a lake house, beach house, or other short-term rental with the added benefit of a ready made and popular platform. If you have an extra bedroom, apartment, or even house, you should consider renting it out on Airbnb.
Build an App
Do you have a problem that you’ve created a workaround for? Do you have a great idea for something funny, interesting, inspirational, or just useful? You should consider building an app.
Think about the amount of web traffic that comes from mobile devices (at the time this article was written, it’s about 50% of the traffic). That’s billions of potential customers and users. If you can make an app that actually helps people and makes their lives better, you can leverage this large number of users to create a steady stream of passive income.
Even if you don’t know how to code, you can either hire someone to do the coding for you or learn for a minimal amount from a resource like Treehouse Island, Inc (teamtreehouse.com)
Create an Online Course
Whether you know it or not, you are an expert at something. It may be relationships/people related, your career field, a side hustle, or just a passion. If you can teach the material to someone, you can create an online course for the material.
To start, you can use an online platform with a built-in audience like Udemy.com or just create your own program and sell it on your site. To be effective you’ll need to add everything you can think of to make the learning successful. This includes applicable videos and audio files, practice exercises, checklists, quizzes, interviews, access or links to reference materials, etc.
To market to the most audiences, you may want to offer different materials at different price points. For example, if you’re talking about making money online, you may offer a lowest price point that provides the minimum material to get started and make money online.
For those folks who have already started and are making money, you may offer an advanced course with a little higher price points that helps them take their website or online business to the next level.
Conclusion
This isn’t a comprehensive list by any means, but I’m hoping there are enough ideas to get you started on creating a passive income. To date, the only sources of passive income I enjoy is index fund investing and a little bit of affiliate marketing on this website. Creating a source of passive income shouldn’t be thought of as a get rich scheme or something that you can create overnight. It’s typically the result of some pretty intense up-front work. In my opinion, I’d much rather work my butt off up front and enjoy the fruits of my labor for years to come (potentially the rest of your life) than to muddle through life working for an hourly wage.
Also, a word of caution, earning passive income is only part of the equation for reaching financial independence. You’ll still need to get rid of debt, create a budget and make sure your passive income is greater than your expenses each month.
Do you have any sources of income? What are they and how did you get to a point where they were passive?