Passive income is money received on a regular basis that requires little effort to maintain. Sounds great, doesn’t it?
Generating passive income is a great financial goal because it’s a smart way to build wealth. One thing to realize is that creating passive income requires an upfront investment — whether it’s money or time. You’ll need to be committed in order to be successful at creating a passive income stream. Here are three passive ideas and how they work:
Idea #1: Investing
Investing is a tried and true way to make passive income. Of all the passive income ideas, investing is probably one of the most passive. The most significant investment you’ll make is your money upfront. There isn’t much upkeep after that.
Whether you’re starting out with $1, 000 or $100, 000, you can make money in the stock market. The important thing to know is that investing doesn’t come without its risks. The value of your stock portfolio will continue to fluctuate as long as you own it. If you’re in it for the long haul, however, you can ride out those fluctuations and see profits over time.
There are many methods for investing your money in the stock market. One way is to invest in dividend-paying stocks. A dividend is a payout some companies provide to shareholders on a regular basis. Dividend yields vary from company to company, so keep that in mind.
It’s important to not merely go after stocks with the highest dividend yield. Instead, focus on companies that have a proven track record of increasing dividend payouts over the years. You can either receive your dividend payouts as cash or choose to reinvest them in the same stock. The latter is known as DRIP, a dividend reinvestment plan.
One way to invest your money that doesn’t involve the stock market is peer-to-peer lending. Peer-to-peer lending involves funding personal loans to borrowers through an intermediary like Prosper or LendingClub. As a lender, you make money through interest payments on the personal loans.
Although peer-to-peer lending doesn’t have the risk of stock market fluctuation, your money isn’t completely secure. Borrowers have the ability to default on loans. To mitigate this risk, you can diversify your portfolio with multiple personal loans. You can also review personal loan requests and decide which ones you’d like to fund. For example, you can review criteria such as credit worthiness and the reason for the loan.
Idea #2: Rental Properties
Making passive income from rental properties is effective, but it often takes more time than people expect. The way you make passive income is by receiving rent payments each month that exceed the mortgage payments. If you bought the property outright, you’ll begin making passive income right away. However, you will need calculate how many years it’ll be until you recoup your initial investment.
There are many things besides the cash investment that go into making rental properties profitable, though. You’ll need to spend the time learning about real estate to make sure you don’t lose your investment.
When looking for rental properties to invest in, one of the first things you’ll want to consider is location. In the real estate industry, properties in good school districts tend to have great potential. The same goes for properties near expanding retail or local transportation.
The next thing you’ll want to consider is your return on investment. If you want to charge a higher rent, consider doing renovations to the property. For example, tenants are usually willing to pay a higher rent for updated kitchens and bathrooms. Make sure you leave some buffer room for occasional expenses such as plumbing problems and other tenant requests.
The least passive part of rental property income is managing tenants. You’ll want to minimize the amount of time that your property is vacant because this means no rental income for you. Finding and screening tenants can be a time-consuming process. Moreover, managing tenant requests takes up time as well. To save time, you can hire a property manager to take care of these tasks for you. This expense will eat into your returns but may be worth it to avoid the headache of tenant management.
Idea #3: Information Products
Unlike investing and rental properties, information products generally do not require much upfront monetary investment. Instead, it requires a greater upfront time investment.
You’ll need to spend time researching the market for your information products (whatever type or topic they may be), creating the actual information products, and then marketing them. Despite the time investment required, creating information products is a very attractive way to generate passive income because you don’t have much to lose. If you don’t sell any, you won’t be losing money.
There are many different types of information products. There are eBooks (which you could sell on Amazon or your own website), physical books, online courses, training material, and audio content, among others. The type of information product you create will greatly depend on the topic. For example, if you want to teach people about software programming, an online course would be ideal so that you can show live examples and include practice prompts. The barrier to entry for creating information products is low. If you’re an expert in a subject matter that people are interested in, you’ll have a market. You can even outsource the creation of your information product if you just have a good idea.
A good way to prepare yourself for creating a profitable information product is to start by freelancing or consulting. Not only will working in industry increase your credibility, it’ll also give you insight into your market. For example, if you have a personal fitness training business, you can take note of the common problems your clients experience. Then, you can use that insight to package a set of videos and training material to sell to people who’d like to get in shape.
As you can see by the three examples above, passive income requires some upfront investment. Whether it’s money or time, you’ll need to invest something before you can begin generating passive income. Seeking after passive income is well worth it though. Once you establish the right foundation, you can create a continuous stream of income that requires little maintenance.