Passive Income Is A Sound Investment In 2021

12 Ideas To Help You Make Money With Little To No Effort!
Passive income can be a great way to help you generate extra cash flow despite the economic upheaval largely caused by the COVID-19 crisis.
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It is a testament to the value of having multiple streams of income.
With the pandemic throwing the job situation of many Americans into disarray, passive income helps you bridge the gap if you suddenly become unemployed or even if you voluntarily take time away from work.
With passive income you can have money coming in even as you pursue your primary job, or if youâre able to build up a solid stream of passive income, you might want to kick back a little.
Either way, a passive income gives you extra security.
And if youâre worried about being able to save enough of your earnings to meet your retirement goals, building wealth through passive income is a strategy that might appeal to you, too.
What Is Passive Income?
Passive income includes regular earnings from a source other than an employer or contractor.
The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.
Many people think that passive income is about getting something for nothing,â says financial coach and retired hedge fund manager Todd Tresidder. âIt has a âget-rich-quickâ appeal ⊠but in the end, it still involves work. You just give the work upfront.
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In practice, you may do some or all of the work upfront, but passive income often involves some additional labor along the way, too.
You may have to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.
But if youâre committed to the strategy, it can be a great way to generate income and youâll create some extra financial security for yourself along the way.
12 Passive Income Ideas For Building Wealth
If youâre thinking about creating a passive income stream, check out these 12 strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.
1. Selling Information Products
One popular strategy for passive income is establishing an information product, such as an e-book, or an audio or video course, then kicking back while cash rolls in from the sale of your product.
Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.
Alternatively, you might consider a âfreemium modelâ â building up a following with free content and then charging for more detailed information or for those who want to know more.
For example, language teachers and stock-picking advice may use this model.
The free content acts as a demonstration of your expertise, and may attract those looking to go to the next level.
As a third alternative on this theme, you could use advertisements (or sponsors) to generate your income, while you provide information or content to a growing audience on a free platform such as YouTube.
For example, take your love of video games or music and turn it into content.
Opportunity: Information products can deliver an excellent income stream, because you make money easily after the initial outlay of time.
Risk: âIt takes a massive amount of effort to create the product,â Tresidder says. âAnd to make good money from it, it has to be great. Thereâs no room for trash out there.â
Tresidder says you must build a strong platform, market your products and plan for more products if you want to be successful.
One product is not a business unless you get really lucky,â Tresidder says. The best way to sell an existing product is to create more excellent products.
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Once you master the business model, you can generate a good income stream, he says.
2. Rental Income
Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.
If you donât take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) in the Los Angeles area and author of âThe 7% Solution: You Can Afford a Comfortable Retirement.â
Opportunity: To earn passive income from rental properties, Graves says you must determine three things:
- How much return you want on the investment.
- The propertyâs total costs and expenses.
- The financial risks of owning the property.
For example, if your goal is to earn $10,000 a year in rental income and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, youâd have to charge $3,133 in monthly rent to reach your goal.
Risk:Â There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if youâre unable to rent out your property? Any of these factors could put a big dent in your passive income. And the pandemic has posed new challenges, too. Due to the economic downturn, you may suddenly have tenants who can no longer pay their rent, while you may still have a mortgage of your own to pay. Or you may not be able to rent the home out for as much as you could before, as incomes decline. So youâll want to weigh these risks and have contingency plans in place to protect yourself.
3. Affiliate Marketing
With affiliate marketing, website owners, social media âinfluencersâ or bloggers promote a third partyâs product by including a link to the product on their site or social media account.
Amazon might be the best-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too.
And Instagram and TikTok have become huge platforms for those looking to grow a following and promote products.
You could also consider growing an email list to draw attention to your blog or otherwise direct people to products and services that they might want.
Opportunity:Â When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission. The commission might range from 3 to 7 percent, so it will likely take significant traffic to your site to generate serious income. But if you can grow your following or have a more lucrative niche (such as software, financial services or fitness), you may be able to make some serious coin. Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you wonât earn anything if you canât attract readers to your site to click on the link and buy something.
Risk: If youâre just starting out, youâll have to take time to create content and build traffic. It can take significant time to build a following, and youâll have to find the right formula for attracting that audience, a process that itself might take a while. Worse, once youâve spent all that energy, your audience may be apt to flee to the next popular influencer, trend or social media platform.
4. Flip Retail Products
Take advantage of online sales platforms such as eBay or Amazon, and sell products that you find at cut-rate prices elsewhere.
Youâll arbitrage the difference in your purchase and sale prices, and may be able build a following of individuals who track your deals.
Opportunity: Youâll be able to take advantage of price differences between what you can find and what the average consumer may be able to find. This could work especially well if you have a contact who can help you access discounted merchandise that few other people can find. Or you may be able to find valuable merchandise that others have simply overlooked.
Risk: While sales can happen at any time online, helping make this strategy passive, youâll definitely have to hustle to find a reliable source of products. And youâll have to really know the market so that youâre not buying at a price thatâs too high. Otherwise you may end up with products that no one wants or whose price you have to drastically cut in order to sell.
5. Peer-To-Peer Lending
A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub.
Other players include Funding Circle, which targets businesses and has higher borrowing limits, and Payoff, which targets better credit risks.
Opportunity:Â As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default, meaning you could end up with nothing. To cut that risk, you need to do two things:
- Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com and LendingClub, the minimum investment per loan is $25.
- Analyze historical data on the prospective borrowers to make informed picks.
Risk:Â It takes time to master the metrics of P2P lending, so itâs not entirely passive, and youâll want to carefully vet your prospective borrowers, and because youâre investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build income. Economic recessions can also make high-yielding personal loans a more likely candidate for default, too, so if COVID-19 continues to hurt the economy, these loans may go bad at higher than historical rates.
6. Dividend Stocks
Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company.
Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock.
Dividends are paid per share of stock, so the more shares you own, the higher your payout.
Opportunity: Since the income from the stocks isnât related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money. The money will simply be deposited in your brokerage account.
Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. âYouâve got to investigate each companyâs website and be comfortable with their financial statements,â Graves says. âYou should spend two to three weeks investigating each company.â That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks. âETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,â Graves says. Another key risk is that stocks or ETFs can move down significantly in short periods of time, especially during times of uncertainty, as in 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch. Compare your investing options with Bankrateâs brokerage reviews.
7. Create An App
Creating an app could be a way to make that upfront investment of time and then reap the reward over time.
Your app might be a game or one that helps mobile users perform some hard-to-do function.
Once your app is public, users download it and you can generate income.
Opportunity:Â An app has huge upside, if you can design something that catches the fancy of your audience. Youâll have to consider how best to generate sales from your app. For example, you might run in-app ads or otherwise have users pay a nominal fee for downloading the app. If your app gains popularity or you receive feedback, youâll likely need to add incremental features to keep the app relevant and popular.
Risk: The biggest risk here is probably that you use your time unprofitably. If you commit little or no money to the project (or money that you would have spent anyway, for example, on hardware), you have little financial downside here. However, itâs a crowded market and truly successful apps must offer a compelling value or experience to users. Youâll also want to make sure that if your app collects any data that itâs in compliance with privacy laws, which differ across the globe.
8. REITs
A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate.
REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.
Opportunity:Â You can purchase REITs on the stock market just like any other company or dividend stock. Youâll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time. Like dividend stocks, individual REITs can be more risky than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks â and youâll still get a nice payout.
Risk: Just like dividend stocks, youâll have to be able to pick the good REITs, and that means youâll need to analyze each of the businesses that you might buy â a time-consuming process. And while itâs a passive activity, you can lose a lot of money if you donât know what youâre doing. REIT dividends are not protected from tough economic times, either. If the REIT doesnât generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.
9. A Bond Ladder
A bond ladder is a series of bonds that mature at different times over a period of years.
The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments.
Opportunity:Â A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You can sit back and collect your interest payments, and when the bond matures, you âextend the ladder,â rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years. In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.
Risk:Â A bond ladder eliminates one of the major risks of buying bonds â the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable. Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal. And youâll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio. Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.
10. Invest In A High-Yield CD Or Savings Account
Investing in a high-yield certificate of deposit (CD) or savings account at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country.
You wonât even have to leave your house to make money.
Opportunity: To make the most of your CD, youâll want to do a quick search of the nationâs top CD rates or the top savings accounts. Itâs usually much more advantageous to go with an online bank rather than your local bank, because youâll be able to select the top rate available in the country. And youâll still enjoy a guaranteed return of principal up to $250,000, if your financial institution is backed by the FDIC.
Risk: As long as your bank is backed by the FDIC and within limits, your principal is safe. So investing in a CD or savings account is about as safe a return as you can find. However, while these accounts are safe, theyâre returning even less these days than before. And with the Federal Reserve targeting 2 percent inflation, youâre likely to lose out to inflation in the short term at least. Nevertheless, a CD or savings account will yield better than holding your money in cash or in a non-interest bearing checking account where youâll receive approximately zero.
11. Rent Out Your Home Short-Term
This straightforward strategy takes advantage of space that youâre not using anyway and turns it into a money-making opportunity.
If youâre going away for the summer or have to be out of town for a while, or maybe even just want to travel, consider renting out your current space while youâre gone.
Opportunity: You can list your space on any number of websites, such as Airbnb, and set the rental terms yourself. Youâll collect a check for your efforts with minimal extra work, especially if youâre renting to a tenant who may be in place for a few months.
Risk: You donât have a lot of financial downside here, though letting strangers stay in your house is a risk thatâs atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.
12. Advertise On Your Car
You may be able to earn some extra money by simply driving your car around town.
Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles.
If youâre a match with one of their advertisers, the agency will âwrapâ your car with the ads at no cost to you.
Agencies are looking for newer cars, and drivers should have a clean driving record.
Opportunity: While you do have to get out and drive, if youâre already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.
Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.
How Many Streams Of Income Should You Have?
There is no âone size fits allâ advice when it comes to generating income streams.
How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are.
But having at least a few is a good start.
âYouâll catch more fish with multiple lines in the water,â says Greg McBride, CFA, chief financial analyst at Bankrate. âIn addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream.â
Of course, youâll want to make sure that putting in effort into a new passive income stream isnât causing you to lose focus on your other streams.
So you do want to balance your efforts and make sure youâre choosing the best opportunities for your time.
Minimize Your Taxes On Passive Income
A passive income can be a great strategy for generating side income, but youâll also generate a tax liability for your effort.
But you can reduce the tax bite and prepare for your future, too, by setting yourself up as a business and creating a retirement account.
This strategy wonât work for all these passive strategies, however, and youâll have to be a legitimate business to qualify.
- Register with the IRS and receive a tax identification number for your business.
- Then contact a broker who can open a self-employed retirement account such as Charles Schwab or Fidelity.
- Determine which kind of retirement account might work best for your needs.
Two of the most popular options are the solo 401(k) and the SEP IRA. If you stash the cash in a traditional 401(k) or SEP IRA, you can take a tax break on this yearâs taxes.
The solo 401(k) is great because you can stash up to 100 percent of your earnings into the account, up to the annual maximum.
Meanwhile, the SEP IRA allows you to contribute only at a 25 percent rate.
If youâre thinking of going this route, compare the differences between the two account types.
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