When it comes to personal finance, passive income is the holy grail. And, for a good reason. A passive income gives you more time on your hands and less financial stress. Also, as we’ve hopefully learned from the COVID-19 pandemic, having multiple income streams can make all the difference in the world.
But, how can you create a passive income stream? By investing in the following eleven ideas.
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1. Annuities
“As a refresher, annuities are contracts that you purchase from an insurance or annuity company with either a lump-sum payment or installments,” explains Deanna Ritchie in a previous Due article. “Eventually, your money will earn interest, and you’ll start receiving monthly payments. You should consider purchasing an annuity if you’re planning to live a long and healthy life.”
Before making such a commitment, you need to do your homework. In this case, comparing the different types of annuities to see which works best for you. “In the right situation, annuities can provide an excellent source of incremental income without having to earn any additional labor,” adds Deanna.
“When it comes to creating passive income in retirement, annuities are one of the most reliable and effective strategies, she says. The reason is that after it’s been purchased, there’s “no need to participate actively once you have purchased your annuity contract. Instead, just sit back and wait until the annuitization period begins.”
Furthermore, “annuities generate higher income than other passive income streams like stocks, bonds, CDs, and mutual funds.” But that’s not the only advantage. Other perks “include tax-deferred arrangements, premium protection, and contract provisions that allow” for customization.
2. Dividend Stocks
Is there any better way to earn passive income than dividend stocks? Of course, you need to do a lot of research and invest a significant amount of money if you want this to be a worthwhile investment. But, if you put in the time and more, along with regularly investing money into dividend stocks, you will amass a solid residual income.
Even better? Anyone can take advantage of these investment opportunities. All you have to do is open an account with an online brokerage, such as M1 Finance. This specific platform lets you build a custom portfolio of the stocks and funds you want. Or, you can choose from more than 80 expert portfolios. You can also take advantage of its auto-balance feature so that your dividends will be reinvested without lifting a finger.
3. A Bond Ladder
What’s a bond ladder, you ask? It’s merely a portfolio containing a series of individual bonds that mature on different dates. As such, this will diversify an investor’s bond holdings.
Investors who stagger bond maturity dates (and thus the income received) can ensure that they receive income when they need it while also diversifying their assets at the same time. The advantage of diversifying your bond portfolio is that you’re able to predict when and how much you’ll earn.
4. Index Funds
Index funds are mutual funds or exchange-traded funds that are connected to a particular market index, such as the S&P 500. As such, the performance of these funds are based on the performance of the underlying index they track. And, they’re also passively managed.
How exactly are index funds a passive income? Well, their underlying securities won’t change unless the index shifts. That means for investors; there are lower management costs and lower turnover rates. And, as a result, this makes index funds one of the best tax-efficient vehicles available.
5. High Yield Savings Account
With a high-yield certificate of deposit (CD) or savings account via an online bank, you’ll generate a passive income. Even better? You’ll also earn one of the highest rates in the nation. And, you can achieve this without having to leave the comfort of your home.
If you want to get the most out of your CD, thoroughly search for the nation’s best CD rates or top savings accounts. In most cases, an online bank offers more favorable interest interests than local banks. And, to reduce risk, make sure that the financial institution is backed by the FDIC as you’ll be guaranteed a return of principal up to $250,000.
6. Rental Property Real Estate
You can also bring in a monthly income with a cash-flowing rental property. Moreover, a management company can take over the running of these properties so that this becomes truly passive.
And, it’s never been easier to invest in rental properties thanks to online platforms like;
- Roofstock allows you to purchase cash-flow positive single-family home rentals.
- Fundrise is a real estate crowdfunding platform where beginners can invest in private real estate.
- RealtyMogul lets you become a limited partner in a large development, such as multi-family or commercial properties.
- EquityMultiple allows you to invest in real estate with as little as $10,000.
- Groundfloor is a crowdsourced real estate investing and lending platform that aims to make private capital markets open to all for as little as $10.
- FarmTogether allows you to invest in farmland for a more steady and consistent investment option.
7. REITs
“Real estate investment trusts, or REITs, work by pooling investors to generate funds that can be used to purchase or fund income-generating properties,” clarifies Rumzz Bajwa in another Due article. “REITs are companies that own several real estate properties like commercial buildings, apartment complexes, or hotel buildings.” When you purchase stock from these companies, you’re able to “enter the real estate investment market without actually owning the property.”
Why are REITs so appealing? First, because “you don’t own the properties you invest in, you are free from the responsibilities of maintaining them,” states Bajwa. And, secondly, “REITs usually pay higher compared to other investments. This is because companies must cash-out 90% of their taxable income and distribute it to their investors through dividends.”
Another reason why you should invest in REITs? You’re allowed to “choose to reinvest your income from REITs back, which grows your investment (and income) even further.”
“Willing investors can buy REIT stocks on major brokerage firms (i.e., New York Stock Exchange or NASDAQ) or go for a non-traded REIT. However, if you’re relatively new to the concept, it might be better to stick to publicly traded REITs because it is much more liquid and easier to sell compared to non-traded REIT.”
Just note that if you do want to invest in REITs, you might need to present a significant amount of money upfront. It’s not uncommon for companies who offer REITs to require an investment minimum that can be between $1,000 to $25,00.
8. Peer-to-Peer Lending
Despite the fact that the peer-to-peer lending (P2P) industry, aka crowdfunding, is over a decade old, there are no signs of it slowing down. And, you can thank platforms like LendingClub and Prosper for letting people directly lend money to others with a click of a button.
How much can you expect to get back? According to Minstos, 10.58% is the current average interest rate.
Investors are attracted to P2P programs since they are few barriers to entry, and you may eve3n be able to get started with just $25. And, most permit both accredited and nonaccredited investors to partake.
9. Information Products
A tried and true strategy for earning a passive income is creating and selling an information product. Examples include an e-book, templates, webinars, membership sites, or audio or video courses. Then, after investing the time in creating the product, you sit back and wait for the money to flow through your product’s sale. For example, creating an online course can be distributed and sold via Udemy, Skillshare, and Coursera.
Another option is to adopt the “freemium model. Here you would build a following with free content and then charge for more detailed information. A model like this could be used by language teachers or stock-picking advisers. By providing free content, you can display your expertise so that people will be willing to purchase your products.
10. Existing Business
Another way to generate passive income? Invest in an existing business. Usually, this will make you a silent partner. That means you provide capital to the business but aren’t involved in the business’s daily operations.
While this can be risky, there’s potential for high returns. However, you can mitigate your risk by investing in small bonds. In addition, platforms like MainVest allow you to invest in small brick-and-mortar businesses for as little as $100. There’s also Worthy, where your funds are lent to small businesses. And, you only need $10 to get started.
11. Royalties
This is probably the most unique passive investment on this list, if only because few people are aware it even exists. But it’s a true source of passive income, but one with a unique twist.
With royalties, you’ll invest in licensing arrangements rather than securities or properties. As such, you will be able to participate in a range of revenue streams. These can include those generated by music, videos, syndicated TV programs, mineral rights, products, oil, and gas, as well as venture capital financing.
Here’s how it works. Royalties are sold off by the creators or original investors in order to generate immediate cash. Then, you’ll earn royalties on these investments made in those ventures or products. There’s even the possibility of reselling the royalties you’ve already purchased.
A popular location to invest in royalties is the Royalty Exchange. The exchange has invested in a variety of royalties, including those from popular artists. According to its website, over 1,000 transactions in excess of $90 million have been completed by the company. Investing typically returns more than 10% per year.
Be aware that each deal is unique before embarking on this type of investment. Each royalty investment has its own underlying product, minimum investment, and expected annual return.
Minimize Your Taxes on Passive Income.
A passive income is a great way to generate side income and alleviate financial stress. But you will also accrue a tax liability. Setting yourself up as a business and creating a retirement account can help reduce your tax burden, along with helping you prepare for the future. To qualify for this strategy, you must be an established business.
- Your business needs a tax identification number, which can be obtained from the IRS.
- Then, contact a broker, like Charles Schwab or Fidelity, who can help you set up a retirement account.
- Choose the retirement account that is most suitable for your needs.
A solo 401(k) and a SEP IRA are two of the most popular options. If you invest in a traditional 401(k) or SEP IRA, you can take a tax deduction this year. Another perk with a solo 401(k) is that you can put up to 100 percent of your earnings into the account. In contrast, SEP IRAs only allow for 25 percent contributions. You can also contribute an additional 25 percent of your business profits to your solo 401(k).
The Bottom Line
Investors can greatly simplify and improve their lives by investing in passive income. Each of the options listed above represents a different level of risk and diversification. But, if you are considering passive income opportunities, you must weigh the expected returns against the potential losses.
