I’ve got 21 passive income ideas that I’m excited to share with you today. Continuing from last week’s post about net worth, you likely noticed my pervasive emphasis on having a side project and creating passive income streams. This is because passive income is one of the best wealth creation strategies you can employ. Put another way, building passive income on the side while you work, can help you reach your financial goals quicker. At the risk of being too dramatic, if you can establish a well built passive income stream you will become a multi-millionaire well before you retire.
Passive Income Ideas Outline
I’ve broken out the ideas into four broad categories so you can quickly navigate to the section that interests you most or review them all category by category.
Investing Based Passive Income Ideas
It really should come as no surprise that the first of our passive income ideas comes in the form of market based investments. Certainly these are some of the easiest and most time tested methods to create multiple sources of income that require no work. In other words, they are extremely passive, and as such their potential returns reflect this. However, these are great places to start while you evaluate other income options.
Dividend Paying Stocks
Dividend paying stocks are a favorite among most, if not all, investors who are focused on income from their investments. Firstly, their payment are predictable, arrive as a cash deposit into your brokerage account, and are easily withdrawn or reinvested. Secondly, they are taxed less than interest generated from cash and bonds. Lastly, the dividend payments usually increase faster than the rate of inflation. To quickly sum up dividend stocks, they tick all the boxes.
One major point of concern is the inherent risk that comes with owning any individual stock. Luckily there are many dividend ETFs which can take diversify the risk away and still provide a terrific income and yield against your investment.
Bonus, if you would like to goose the yield a bit higher, consider covered call ETFs. These funds generate extra income by writing call options against the stocks held in the fund. Fund managers receive cash “premiums” for these call options and then pass this onto the investor along with the dividend income. As a word of caution, mind their fees, as some can get quite expensive.
Diversified Portfolio With Set Withdrawal Rate
This one requires careful tax consideration, but the idea is to utilize a robo-advisor platform such as Betterment or WealthSimple. First, we fund the account and let them build the portfolio of ETF’s for us just like normal. Afterwards, we setup a predefined and customized withdrawal schedule whereby they sell a portion of our portfolio each month or quarter and deposit the cash into our bank account.
Done right, this will be configured based on our growth needs, income requirements, and payment frequency. For example, in Canada this works terrific with WealthSimple and a TFSA account. Just be careful not to set the withdrawal rate higher than the anticipated growth rate of the account. As doing so will slowly erode the asset base over time. One additional benefit of this strategy is that you’re more diversified and able to take advantage of all stocks and not just dividend paying stocks.
If you’re interested in reading more on this option read my detailed post: My Favorite Way to Generate High Cash Flow
Yes, this idea is inspired from a traditional retirement account, but there’s no reason you can’t utilize the strategy now. Just be careful of tax consequences and erosion of the asset base. As such, it may not be a good fit for your situation.
Real Estate Investment Trusts (REIT)
Rental properties and commercial real estate are two perennial favorites for income investors. However, some investors like a more hands off approach and want someone else to manage the tenants and the problems real estate can bring. Further to this, it can be difficult to diversify across multiple properties, locations and categories given the enormous capital requirements of property ownership.
REITs offer an answer to these problems and trade just like equities on the stock market. You can even buy REIT ETFs to further diversify your holdings. The income they generate is usually a touch higher than a dividend paying stock, offer even better tax advantages, and some even pay monthly. On top of this, the payments go up over time so you have some nice inflation hedging built in.
Bonds / Cash / CD
Next, we look at bonds, cash, and certificates of deposit. Now these are the lowest risk investments available and therefore they offer the lowest returns. To top it off, they are also taxed the heaviest when held inside a typical investment account. For these reasons, it makes little sense to rely on these for income. Moreover, the effects of inflation will erode your returns.
Perhaps the only cash based investment where this would make sense is with your Emergency Fund. To this point, we will need 3 to 6 months of savings, and it is best to have these in a safe, insured, high interest savings account. After this is funded, consider all other options first.
To sum it up, in these days of super low interest rates, it makes little sense to rely on any income from these cash based investments. I happen to also have an article on bonds and some basics on how to invest in bonds. You can find it here: What is the Deal with Bonds?
Crypto Lending
If you’re currently an investor in Bitcoin or Ethereum you should know that you can lend out your cryptocurrency and earn a healthy yield on the investment. Put another way, not only can you gain with the price appreciation of the coin, but now you can earn interest. What I personally love about these investments is the interest is paid in the same currency as the deposit. This is to say, if you lend Bitcoin you get paid in Bitcoin. In order to do this investment I use Crypto.com. You can also read about my experience here if you would like to learn more: What it Looks Like to Lend Out Your Crypto.
Earn Interest on Gold
If you love Gold, but wish it paid interest, you need to look into the following idea. There just happens to be a crypto coin called PAXG. Each coin of PAXG is backed by one ounce of gold held in a London vault and its price tracks perfectly. What’s more, you can actually redeem the digital asset for physical gold. On top of this, and to our point, it so happens that you can also lend this coin out for a 2% return right now. Now, because the interest is paid in PAXG, you’re literally being paid in gold. Consider this an elbow nudge to look into a method to earn interest on your gold holdings! Therefore, do some research into PAXG, the audit filings on how the currency is backed, and see where you can lend it for the best return.
Monthly Reductions Based Passive Income Ideas
While it may not be the first thing we think about when we go looking for good cash flow investments, putting some attention on reducing our monthly expenses has exactly the same result. In fact a dollar saved is actually more than a dollar earned when you consider the taxes you pay on income before you spend it. To this end, here are some great ideas where you can save money and thereby improve your monthly cash flow.
Control Monthly Subscriptions
Controlling our monthly subscriptions is a terrific way to easily add $20-$100 a month to your bottom line. Obviously, this money could be put to better use, and even invested to create additional passive income. However, the problem with these subscriptions is they can be difficult to track, spot and cancel. Luckily there are numerous apps and tools we can use. PCMagazine did a recent review of many of these so I’ll refer you to them to use the best one for you needs.
While avoiding monthly subscriptions altogether is impossible, they should be controlled and fully accounted for. Also consider prepaying a year in advance for our must-have subscriptions. This can often save you 1-2 months when you agree to pre-pay like this. I do this for my Amazon Prime and Disney Plus subscriptions.
Refinance Your Mortgage
Refinancing your mortgage is a simple and painless way to add $100 or more to your monthly budget without having to forego anything. Simply talk with a mortgage advisor at your bank who holds the current mortgage or contact a mortgage broker. During the recent COVID-19 pandemic, interest rates were lowered to record levels so if you haven’t taken advantage of this yet, do yourself a favor and call your bank. During your meeting with them, they will be able to run the numbers and quickly tell you the results. Furthermore, the fees to refinance and terminate the current mortgage can be rolled in and taken into account.
Pay Off or Reduce Debt
Along the theme of reducing your monthly mortgage payment, comes reduction of any and all other debts you currently hold. Credit card debt should be prioritized first because the interest rates are so high. For this very reason, this debt should be taken care of first before investing. After this, any and all debt reduction will have a positive impact to your monthly cash flow and have the same net effect as acquiring a new passive income stream. Above all, remember when you’re paying a loan or interest you are someone else’s passive income stream! Obviously we want to flip that around.
Cash Back Credit Cards
Cash back credit cards are incredible. At the risk of sounding too enthusiastic, these literally give you free money for buying things you need anyways. Without hesitation, my favorite way to use these is when I’m buying something I need to get, like gas for my car, and then have them reward me with a 2% cash reward. After a year, this can amount to a significant amount. Please be sure to give these a serious look and enjoy the free money!
Cash Back Sites
Building on the theme of cash back credit cards, there are a number of cash back sites that reward you for spending. Far and away the most popular one is Rakuten. Simply log in and see if they support the online retailer you want to purchase from. Rakuten will then give you “cash back” from shopping on these sites for things you have to buy anyways. While the reward is usually in the 1-2% range it can add up over a month or two.
Small Business Passive Income Ideas
Passive income ideas centered around owning, starting, and managing a small business is where the focus for most will be. First, because this is where you will find the biggest return for your capital. Secondly, because this is where you can truly make a substantial difference in your financial picture. And lastly, this is where you will do the most learning and finding of even more opportunities.
Opportunities multiply as they are seized
~Sun Tzu, The Art of War
Rental Property
Owning and managing a rental property is one of the best ways to get into building a solid and steady passive income stream. On top of this, if you buy in a good location, you will have no problem finding good tenants. So with a good location, you could reliably count on this stable income for years to come. True, they can present some headaches if you have a problem tenant but through proper screening you can weed these out. Last trouble point is that with owning a real property come real problems in all shapes and sizes. In summary, if you don’t like handling tenants and random problems, then maybe hire a property manager or go the REIT route mentioned above.
List a Property with Airbnb
If you own a vacation property you could easily rent it out on Airbnb and make some decent income. In fact, you may even generate more revenue than a typical rental property after all things considered.
If you live in a city with a well known annual festival or event you might consider renting out your home for the week. While inconvenient, you can make substantial money for this service during a high demand period.
Rent out your Parking Stall
If you happen to live in a condo or multi-unit building and you don’t have a vehicle, you can make an easy $50-$100 a month renting out your parking stall.
Storage Rentals
You might be surprised to find out how much people will pay each month for the right to store extra things in something resembling a large gym locker or a small garage. These are such terrific, easy money makers that they are hard to find. That being said, if you happen to come across such an opportunity jump on it. Each small storage unit will easily bring in $200 to $300 a month!
RV Storage Yard
Take a quick drive around the outskirts of your city and you will find some RV Storage Yards where happy campers park their trailer when they are not using them. You may find such a property for sale in which case you might inquire to find out more. Typically, each trailer is paying $500 – $600 a year for the right to park there. Multiply that by how many you see and you can quickly estimate how much revenue the property is taking in. Additionally, because you’re close to the city, you also have the prime opportunity of being annexed; such a proposal will net you millions.
Franchise Business
Laundromat
Owning a laundromat can be a great way to earn some extra money on the side. You will likely only need to check in on these once a week and pull the money. On top of that, maybe you’ll have the occasional service call. All in all these should carry with it a very high level of passive income and require very little effort on your part. Furthermore, you if you own a multi-unit apartment building you could easily install a few of these in the basement for extra revenue.
Car Wash
Car washes can be terrific money makers with ample passive income. In fact these are universal money minting machines that are so coveted it could be difficult to find one offered at a reasonable price. Be sure to understand local by-laws and restrictions regarding water usage and sewage treatment because you’ll be sending high levels of dirty compounds down the drain. Just something to be aware of and know about before you buy. It is not unreasonable to expect an annual income of up to $250,000 or more from a single car wash with a few bays. Consider also, that you’ll want to hire an employee because the site requires daily attention.
Vending Machines
Vending machines is my least favorite passive income idea, and I have experience to back it up. Yes, given the right location at a school or sporting arena, these can be incredible money makers. However, this being said, I’ve personally owned a vending machine route and found it not as advertised. So be sure to get good machines with credit card acceptors and in super busy locations. Small office buildings, staff rooms, or low traffic areas are just not good ideas. In my experience, you’ll just be monetizing the machine slowly over time and they are very expensive to repair. For this reason I don’t recommend these unless you can find an incredible location with lots of passing foot traffic.
Online Small Business Passive Income Ideas
With the widespread adoption of online shopping, and everyone having access to it from their smartphone, there are limitless opportunities to build passive income online. The list that follows is by no means exhaustive but instead meant to give some starting points
Sell Your eBook Online
Have a great story idea? Or know how to do something that would also make a great tutorial? Write an eBook and sell it on gumroad.com. First, you write your work, edit it, and make it look just way you want it using your favorite desktop publishing program. Second, save it as a locked PDF and then upload it to gumroad.com under your account. Lastly, you advertise your work on social media or website and each time someone buys it, gumroad sends you the payment minus 5% and a charge fee.
Sell Stock Photos
If you’re good at photography and photo editing you should consider selling some of your work on shutterstock.com. So how it works is you take some of your best photos, edit them so they are impressive, and then upload them to shutterstock.com. Once they review your work and list it on their site, every time someone downloads your image shutterstock pays you. Obviously you need to have a natural inclination towards good photography and what appeals to people to make this truly successful. So no uploading your family photos taken from your iPhone 12.
Affiliate Marketing
While you might not be good at creating original content, maybe you’re good at marketing. Setup an affiliate arrangement with the content creator and promote their work. Each time you make a sale you get a sizeable commission – often in the 50% range. Forbes.com has a great article on just how successful this can be and how to get started. Additionally, any product or service online today more than likely has an affiliate program so contact them directly and ask if they have an affiliate program or scheme. Lastly, don’t forget about the Amazon affiliate program which is incredibly easy to setup
Sell Digital Files Etsy
Next, we take a look at Etsy. Here you can sell digital files such as personalized gifts, greeting cards, invitations, artwork, custom prints, and small jewelry. If you happen to have a 3D Printer, or have a talent with Publisher, Photoshop or similar desktop application, you can create sellable content on Etsy. If this appeals to you go check out their site for more details. Last point before we move on, consider that Etsy also has an affiliate program.
Flip Retail Products Online
Passive Income Ideas Scorecard
As you reviewed my list of passive income ideas I’m sure you noticed some take more work than others, while some seem to generate more passive income than others. On top of this, some expose you to risks you might not be comfortable with. For these reasons, I put together this handy scorecard! Now keep in mind these are just my opinions, but where possible I’ve based these scores on my experience.
Conclusion
So in conclusion, and taking into account the scorecard above, the best ideas to start with are the following:
- Dividend paying stocks
- REITS
- Pay off or reduce your debt
- Get a good cash back credit card
- Rental property empire
This would be a great synergistic approach for getting started. On top to this, as you grow your rental property empire you will find other opportunities such as an RV Storage Yard, or a Laundromat. You’ll be able to grab equity from your investments and buy new assets and most of all this will all be tax efficient.
