The 19 Best Ways to Generate Passive Income in 2021 – Passive Income Ideas
[Editor’s Note: Today’s article in a guest post from Michael Dinich who blogs over at Your Money Geek. He’s worked in the personal finance industry since 1999, where he helped families plan for retirement, reduce taxes, eliminate unnecessary expenses, and plan their estates.]
Making money while you sleep has a beautiful ring to it. I mean, who wouldn’t want to be making some extra money while playing with the kids or while watching a game?
The only problem is that most ‘passive’ income ideas that you’ll come across are not passive at all. Since you’re already busy with your everyday life, you won’t want to pick up a 2nd job that you don’t have time for.
Most passive income ideas require you to put in a LOT of work. And doesn’t that kind of wipe out the passive in passive income?
The truth is that to generate passive income, you’ll need to invest in an asset that produces passive income for you. Unless you are making money the old-fashioned way (inheriting it), or you are willing to put in some effort.
The good news is that you don’t necessarily need a new cash outlay either. If you already have an asset that isn’t being fully used, that can serve as your investment. We’ll get into how that works shortly.
For now, let’s talk about a few passive income ideas if you’re ready to invest and make your money work for you instead of losing value in a bank account.
Truly Passive Income Ideas
1. Passive Real Estate Investing
Talk to anyone who’s a landlord, and they’ll tell you that passive is the last word they’d ever use to describe having to replace a washing machine after a full day of work.
However, there are a ton of companies that give you the ability to invest in commercial and residential real estate projects without having actually to do any of the heavy liftings yourself.
One example is DiversyFund. It’s a private REIT (real estate investment trust) that allows you to invest in professional real estate projects passively for as little as $500. The thing I love about companies like DiversyFund is that they don’t make money unless the investors make money since they invest and manage the projects themselves.
Another thing that makes DiversyFund different is how they invest. Rather than try and be all things to all people, DiversyFund invests in lower risk multifamily housing. They use technology and expertise to scour the country for properties that fit their specific criteria. They’re looking for properties that are highly occupied with positive cash flow that need some work. We’re not talking about complete renovations. It could be updating bathrooms or kitchen. Or maybe they just need a fresh coat of paint.
The fact they do all of the work themselves means they can do it for much less than many of their competitors. Once complete, when leases run out, they can increase rents, which increase cash flows and the value of the properties. Holding periods are designed to be in the five-year range. Preferred returns for their properties are in the 7% range.
When incentives are aligned, you give yourself the best chance to win.
2. Open a High-Interest Savings Account
If you are afraid of investing, there’s a chance you have a decent chunk of change saved in a checking or savings account. Saving money is always a good thing.
Sadly, the banks brick and mortar banks that most people use don’t value them and barely pay any money in interest. The big banks like Wells Fargo, Chase, Bank of America, and the others essentially pay around 0.08% interest. This means that even if you have hundreds of thousands of dollars with them, you’ll very little money (like ~$200 per year).
That’s why having your money in a high-interest savings account is CLUTCH.
The best high-interest banks are online only so you won’t need to mess with going into the bank to get started. The best part is that as of this writing, they pay over 2% interest per year. That means you’ll be making $4,000 per year off of your couple hundred thousand dollars instead of $200 like you would with a megabank.
Even if you don’t have a ton of money saved up, you will still make way more money than you would with a regular checking or savings account. One of my favorites is VARO Money. They consistently pay higher rates than almost any local or national brick and mortar banks.
Invest Your Money Wisely
While having a high-interest savings account is an excellent way to make some income passively, it pales in comparison to investing your money.
While earning 2% on your savings is about as good as it gets, you can make much higher returns in the stock market. The S&P 500 had an annual return of over 19% in 2017.
Investing comes with its risks. Investing requires an understanding of a fundamental principle. Risk and reward are related. Here’s what I mean. The higher the risk of an investment, the higher the expected return. Volatility comes with higher returns. That’s why we need to have a long term perspective when investing in risky assets. Investing money in the market and holding the funds for the long term is the way to be successful. Timing the market, stock picking, and active trading are not winning strategies.
Oh sure, some people get lucky and guess right. And they always make the headlines. But follow them for any length of time and you’ll find they do not consistently keep up their past performance. Investing in funds that track the market and holding them for many years is the right strategy.
Many people feel comfortable doing their own investing. However, that’s not true for many. If you’re someone who doesn’t want to invest on your own or need help, seek to find a qualified financial advisor.
3. Invest in Dividend Stocks
Dividends are profits that are paid out to owners of stocks. Some companies pay dividends on a regular schedule, which means it can become a dependable source of income.
Investors who love dividend stocks will talk about the fact that their investment is not only generating dividend income but potentially also appreciating. Keep in mind that stocks that pay high dividends still have risk in them. They can drop in value like any other stock. Historically, the drops in value are less than the overall stock market. But you should never invest in any stock, a high paying dividend stock or otherwise, thinking you’re doing it without risk.
Dividend stocks are similar to other stocks in the sense that it’s usually best to buy and hold for a long time.
Some people even rely on dividend checks for their regular expenses. Depending on your expenses, that might mean you have to own a significant number of shares! If you have some extra cash to invest and you understand the risk involved, dividend stocks are something to consider.
4. Earn Passive Income with Lending Club
If you’re looking for another way to earn passive income, you may want to consider Lending Club’s peer-to-peer lending platform. Lending Club allows investors to diversify their assets by investing in different types of loans. The type of loans you choose will determine the return and risk exposure of your investment (remember, risk and return are related).
All you need to do is invest as little as $25 in a single loan. Your investment is combined with other investors to make up the entire loan amount. While others may want to invest more many sticks with $25 to reduce their risk exposure. By only investing a small amount in different loans, you can reduce your risk of default.
After you make your initial investment, you will begin to make passive income on the payments the borrower makes. As the borrower continues to pay down the loan, you will receive interest payments every month. Even if you don’t plan on reinvesting your passive income back into the platform, you will still earn a return on your investment. Keep in mind, interest rates may vary and will be determined by various factors including the borrower’s creditworthiness and the amount of their loan.
Since this is a peer-to-peer lending platform, you’re essentially the lender. This means that you must collect the principal and interest amount. It’s up to you to choose whether to cash out or reinvest your funds in your Lending Club accounts.
Semi-Passive Income Ideas
1. Put Your Real Estate to Work
I was recently contacted by a long-time reader who had just received her first passive income check in the mail, and she was ecstatic. She was a single mom of two daughters and her youngest had recently gone off to college.
She had always dreamed of running bed and breakfast but never had the time to devote to it. But once she became an empty-nester, and realized she had two empty bedrooms, she could rent out to guests.
After signing up for Airbnb and jumping through the hoops, she was able to rent out her rooms for $50/night each. She said she’s considering moving out to a smaller space and renting out the entire home since it’s in an in-demand area of Fort Worth, TX. She said she is making enough money to hire a neighbor to handle the clean-up duties, so it’s as passive as can be.
Not bad!
Rent Out an Extra Bedroom
Sticking to this theme of real estate, there’s a decent chance you have an extra room that hardly gets used in your home.
Consider renting it out for extra income. Maybe you hate the thought of having a guest in your home more than the notion of a few extra hundred bucks of residual income. If that’s you, then maybe this isn’t right for you, but for those who wouldn’t mind the company, it may be a no-brainer.
A few hundred bucks a month means a couple of thousand extra dollars a year. Do that for several years, and you’ll be able to retire a couple of extra years earlier.
Just make sure you both sign a formal rental agreement so that everyone is on the same page.
Rent Extra Land to Tiny Home Owners
There is a tiny home bonanza sweeping the country right now. That means creating products for small homes or catering to tiny home enthusiasts is an excellent idea.
The only problem is that you might not know the first thing about tiny homes.
The good news is that you don’t need to necessarily need to build a product to sell if you have some other property.
A lot of people are choosing to live in tiny homes and embracing the minimalist lifestyle. For a lot of those people, the only downside can be found where to place their tiny home. If they want to live in a tiny home to save money, it likely doesn’t make sense to spend hundreds of thousands of dollars to buy a lot.
If you have some land, this creates an opportunity for you to rent out space on your lot. You’ll want to make sure you don’t violate any laws or codes on your city, town, etc.
Getting paid a couple of hundred bucks to let someone place a tiny home on a piece of land you don’t use and don’t want to sell can make you a nice stream of residual income.
2. Renting Your Car
Companies like Turo and GetAround are making it easier than ever for you to rent out your car when you aren’t using it. And let’s face it, if you live in an area with Lyft and Uber service, there’s a chance you might not even need your car daily.
You’ll want to keep in mind that you renting out your car will mean additional wear on your vehicle so your repair bills might increase, but users have said it’s well worth it for the passive income checks coming in the mail.
If you have a 2nd car sitting around that never gets used, or you have begun to bike to work and no longer need the vehicle daily, this might be the absolute perfect way to start generating some passive income finally.
3. Refer Friends to Great Products You Already Use
Companies like Rakuten.com (formerly eBates) have existing referral programs that pay out cash for every friend you can refer. If you have a lot of friends or social media followers, this can be an effortless way to earn money.
All you have to do is set up an account by clicking the join now tab at the top of the homepage. Once the account is up, go to your account settings and click where it says refer and earn to get a link you can send your friends.
To find other programs like this, it’s super simple. Nearly any company that delivers food or other products have similar programs.
4. Try Affiliate Marketing
I started a website from scratch. It was not easy undertaking (unless you know what you are doing and have done it before). If you don’t want to start and build your own site, why not find an existing site that is already making money from affiliates and take it over?
Affiliate marketing is where you get paid a fee for referring new customers to brands. So for example, if you have a site like Kayak.com that compares prices, you can earn a commission for referring customers to existing brands.
This type of investment can be genuinely passive if it’s already generating revenue with very little hands-on involvement. Keep in mind, if a site is making money, they are not cheap to buy. If it’s making money, you’re paying for the revenue the site generates. However, you don’t have to reinvent the wheel.
5. Run a Site with Display Ads
If you’ve spent any amount of time on significant sites like ESPN, The Weather Channel, Google, etc., then you’ve seen lots of advertisements on them. If you don’t remember seeing ads, then you either have a formidable adblocker, or you’ve learned to ignore them. Nice!
As you can imagine, the reason these sites have ads on display is that they are being rewarded handsomely to do so. The key to generating income in this way is to have a website with a lot of users since there is a strong correlation between the number of eyeballs on your website and the amount of income you’ll be making. Easy enough to understand.
If you have a friend with an old site that they never use it might be worth acquiring, it if they have traffic. Adding ads to a website is super simple, and you could be earning some passive income quickly.
Passive Side Hustles
1. Learn to Flip Products on eBay
The chances are that there’s a product that you know better than anyone else. For some people, it may be game consoles or cell phones; for others, it might be makeup, shoes, or handbags. Learn how to sell that and other products on eBay. The learning curve may be a little steep at first. Once you get the hang of it, you can be churning out additional income on a regular basis.
Here’s a guide to selling on eBay to help you get started.
Identify a Market with Many Buyers and Sellers
The beautiful thing about eBay is that there are so many buyers and sellers. All you have to do is find opportunities where you can buy products for less than you know they are worth and flip them.
I could have quickly done this with soccer cleats. I always knew precisely what cleats were worth and how to get the best deal for them. Heck, I even knew which cleats (identical pairs) were sold for more or less in different parts of the world.
Instead of spending countless hours cleaning old dirty used cars at the car dealership, I could have spent a fraction of the time in front of a computer and made some real residual income.
That sounds pretty nice.
If you are reading this and you already have a tab open learning about soccer cleats you are missing the point. You have to identify something you can become a domain expert in. Maybe that’s baby products or strollers. Who knows. The world is your oyster when it comes to making extra residual income.
2. Use Your Washing Machine
If you don’t have money to invest, you may need to make money quick. And if you have a washing machine and dryer, there’s a good chance you can start right away. Sound crazy? Maybe it is. Let me explain.
Several companies bill themselves of the Uber for Laundry, and they are pretty simple. You sign up, pick up clothes from people who live near you and wash them. Once you deliver their laundry, you’ll get paid.
It’s that simple.
If you are SUPER enterprising, you could always pick up several different loads and head to a laundromat to be able to wash several loads at the same time. But be careful so that you know what to do with all of that cash you’ll make. I recommend you invest it!
3. Become a Tutor
Getting into top schools and programs is as hard as ever. Getting highly sought after jobs is just as tricky. That means that there’s a lot of people looking for tutors.
And the crazy thing is that with all of the new technology available, you can easily tutor kids in China and make money while sitting on the couch in Texas.
Check out companies like VIPKid for online tutoring jobs.
You can make a lot more than minimum wage by working around your regular work schedule. This type of gig is perfect for those seeking to make extra money on the side.
Residual Income
Ok, you may think we’re wordsmithing or splitting hairs, but there is a difference between passive income and residual income. Though many who write about it don’t differentiate. Here are a couple of definitions from Webster:
- the difference between results obtained by observation and by computation from a formula or between the mean of several observations and any one of them
- a residual product or substance
- a payment (as to an actor or writer) for each rerun after an initial showing (as of a TV show)
The payment to an actor for reruns is the best of representation of how I think about residual income.
Examples of Residual Income
Royalties
Let’s say you wrote a book. Maybe it’s an eBook, or perhaps it’s a traditional book published in print. The publisher pays you an upfront fee for the book. Once they recover that fee from sales, any additional income you receive (net the publisher’s cut) is residual income. You’ve done the work by writing the book. Sales proceeds going forward come from residual income
Product Sales
Let’s say you’re a widget salesperson. You sell the widget for a set price. Part of the sale is for ongoing service. The purchaser pays a monthly (or other) ongoing fee for your company to service the widget. The company receives the money, the service department handles the continuing service, and you get a piece of the ongoing fee from the service contract – residual income.
Another example comes from the insurance world. Salespeople get an upfront commission for the initial product sale. The sale might be life insurance, property, and casualty or health coverage. After the initial commission gets paid, the salesperson receives an ongoing residual income from the initial sale as long as the person continues to pay the premiums. Service usually comes from the client services team, not the selling agent.
MLM Marketing
For those not familiar with it, MLM is multi-level-marketing programs. I’ll explain how it works below.
Now, before you go off on me for putting this in the post, give me a minute to explain. I’m not endorsing MLM sales or saying you can make money at it. However, the concept of MLM marketing is based on residual income.
In MLM programs, participants are encouraged to sell the company’s products. They get paid for that. The big money promised (or at least promoted) comes from recruiting others to sell those products under your account. You encourage those folks to recruit others, and that level to do the same. The idea is to build a sales empire and make a bazillion dollars. Sorry. The sarcasm got away from me.
The residual income comes from money the person at the top of the food chain makes on those underneath them in their “line.” They’re not doing the selling but making income from the sales of those underneath them.
Though similar in many ways, residual income isn’t the same as passive income in the traditional sense.
The Bottom Line
Remember, generating truly passive income requires creativity and some initial work to set things up. If you’re someone who is already super busy, that’s even more true for you. But if you can take the time to learn whatever it is you think you’d be good at you can make some extra money. Maybe a lot of extra money.
I hope you can find at least one of these ideas intriguing enough to give it a try. Don’t listen to the negative nellies or the pounding pundits of pessimism (credit to Brian Wesbury for that one). Do your homework. Learn what you need to know. And give it a try. You just might be the talk of the town because you’ll be making money while everyone else is breaking their back.
This article originally appeared on The Money Mix, and has been republished with permission.