The Best Ways to Create a Passive Income Stream

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If you’re looking for ways to generate income without actively trading your time for money, you’re not alone. According to Ben Johnston, COO of lending platform Kapitus, we can thank a combination of “a trend toward remote work, a tight labor market with greater work flexibility, and a greater ability to reach consumers through online markets.” For many, passive income streams are the ultimate goal—it’s the promise of earning money while you sleep, travel, or pursue other interests. While it takes some initial effort to set up passive income sources, the long-term benefits can be life-changing. Here are some of the best ways to create a passive income stream.

Rental income

One of the most classic examples of passive income is rental real estate. Johnston explains how “with the advent of rental aggregation sites such as Airbnb and VRBO, even more real estate owners are now able to generate passive income buy renting out what they already own, from unused vacation homes to unused bedrooms in a primary residence.”

By purchasing a property and renting it out to tenants, you can collect monthly rent payments with relatively little ongoing work besides property maintenance and management. Johnston also points out how this income stream benefits from tax deductions for mortgage interest, depreciation of the property, and the cost of managing and maintaining the property. Buy strategically in areas with solid rental markets and property values that are likely to appreciate over time.

Of course, this is all easier said than done. Buying—and properly maintaining—property is a daunting financial feat.

Dividend stocks

Investing in stocks that pay dividends allows you to earn passive income simply from owning the shares. Companies that offer dividends provide investors with a regular income as the stock price moves up and down in the market, and you can reinvest dividends to grow your income stream through compounding over time.

If you invest enough money in a dividend-issuing company, you could earn some serious income every quarter. Most of us don’t have enough to invest to make it that lucrative, but theoretically, it’s possible. Check out companies with a solid history of paying consistent dividends. For more, here’s our beginner’s guide to dividend investing.

Affiliate marketing

If you have a website, blog, or social media following, you can earn passive income through affiliate marketing. This involves earning a commission by promoting other company’s products and services. Amazon Associates is one popular affiliate program, but there are affiliates for all types of products and niches.

Online courses and e-books

Develop and sell digital information products like online courses or e-books. After the initial creation effort, you can continue earning revenue from each purchase with no additional work required on your part. Promote through your own platforms or on online marketplaces.

Peer-to-peer lending

Act as the bank by lending money to other individuals through peer-to-peer lending platforms. With sites like Prosper or Funding Circle, you can earn interest on the payments from borrowers, spreading your investment across many different loans to mitigate risk.

Dropshipping

Dropshipping allows you to sell products without holding any inventory. When an order is placed through your online store—or, say, selling through Amazon—it gets forwarded to the supplier who handles the shipping. You keep the difference between the retail and wholesale price.

This model can come at a cost—especially when it comes to customer experience. Sure, there’s low overhead; there are also lower returns. If you’re curious if dropshipping could still work for you, Amazon has a pros and cons guide here.

Gig work

Johnston also points out how ride sharing apps like Uber and Lyft, and freelancing apps such as Fiverr and Upwork, allow you to source jobs in your spare time. “While this isn’t strictly passive income,” Johnston recognizes, “it does allow workers to pick up extra income during otherwise idle time.” Many ride share drivers pickup rides during their own commute to the office, allowing them to earn income during otherwise idle time. Other professionals, like graphic artists and accountants, may moonlight on nights and weekends using freelancing sites to earn extra cash, while holding down a steady 9-5 job.

Tips for making the most of your side hustle

Some of the most successful entrepreneurs start their businesses as a “side hustle” that takes off as a full-time business. As Johnston puts it, “exploring a new market while earning income from another source allows an entrepreneur to make mistakes and try new ideas, without risking the business if they fail.” Trial and error is part of the process: You should have the discipline to be a planner, but also the flexibility to update the plan—or abandon it entirely—when the market shows that a change is needed. 

With investment properties specifically, Johnston says “success involves having the discipline to buy the property at the right price and securing a mortgage that can be more than covered by the cashflow of the rental income net of maintenance and management expenses.” A good rule of thumb is that you will need to charge monthly rent of between 1% and 2% of the purchase price in order to consistently turn a profit on a real estate investment. 

As far as what to avoid? Johnston warns of multi-level marketing schemes circulating in the market. “While early adopters of these models can make money,” Johnston says, “the later you are to the game, the fewer economics are available, and the startup costs may ultimately out way any potential for profit.” Keep a safe distance from scams like selling home cleaning supplies, cosmetics, or cookware

For more ideas, check out some of the best side hustles with little or no start-up costs.

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