The 7 Best Sources of Passive Income
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Crowdfunded REITs
If you don’t want the headaches that come with owning properties directly, you can still invest in real estate. In fact, some real estate crowdfunding platforms allow you to invest with as little as $10. You can literally skip two lattes this week to come up with the extra cash needed to start investing in real estate.
Crowdfunded REITs work similarly to publicly-traded REITs, in that they represent pooled real estate funds that own various residential and commercial properties, or sometimes debt secured against real estate. But rather than buying and selling shares instantly on stock exchanges, you buy shares directly from the crowdfunding platform. That eliminates the volatility of the stock market, but it also makes shares hard to sell. Most crowdfunding platforms expect you to leave your money invested for at least five years.
Check out Fundrise as a reputable platform for residential and apartment buildings, and Streitwise for commercial properties.
Crowdfunded Loans Secured by Real Estate
You can also invest money toward loans secured by real property.
My favorite of these is Groundfloor, a hard money lender that issues short-term loans. These are purchase-rehab loans for real estate investors, usually 6-18 months in length. After the borrower finishes renovating the property, they sell it as a flip or refinance it using the BRRRR strategy.
Since 2013, Groundfloor has consistently returned around 10% as an average across their loans. If you prefer liquidity over returns, try their Stairs fund instead: you earn 4-6% returns and can pull out your money at any time with no penalty. Or try their competitor Concreit, which uses the same model of a pooled fund of short-term loans. You collect weekly interest income, all completely passive.
Crowdfunded real estate loans offer one more option for passive streams of income from real estate.
Bonds
I don’t love bonds personally, given their performance compared to stocks over the last few decades. But they have their place in retirement planning, particularly for older adults with lower risk tolerance.
Even so, I find ways to replace bonds with real estate in my investment portfolio. I earn higher returns, both on active real estate activities (such as rental investing) and indirect ownership. Beyond the better returns, I also hedge against inflation, while scoring great tax breaks. In fact, “active participation” as a landlord lets you deduct paper losses on rental activities from your taxable income, up to $25,000 per year.
Business Income
Yes, businesses take an enormous upfront investment of work to start and grow. I should know, as a founder of SparkRental — it’s been exhausting!
But at a certain point, founders can start delegating the work of managing and growing their business. They can hire managers to take over most of the day-to-day business activities.
Consider online businesses and digital products for their low overhead and quick setup. You can explore information products, such as online courses. Or you can flip retail products, or earn money referring people to affiliate partners. In fact, affiliate links are the easiest way to start earning extra income from an online business.
There are endless business models out there, and not all of them require your active participation every day. To continue the affiliate marketer example, you could hire a writer to produce your blog content, while earning affiliate revenue or selling digital assets through that content.
Just know going in that you typically work twice as hard as employees work, in the upfront time investment of getting a business off the ground.
Alternative Types of Passive Income
You can get as creative as you want in exploring passive income ideas.
Different passive income types could include advertising on your car, or buying and installing vending machines or laundry machines. It could mean creating intellectual property such as art, stock photos, or music, and earning residual income from royalties from them.
Do some research on the good ol’ interwebs for more niche ideas for the best sources of passive income. The more diverse your types of income, the greater your financial security. One stream of income might suffer due to a market correction or change in the economy, but your other financial investments can keep pumping income to you month in and month out.
Thinking About Time & Money Differently
With active income, you get immediate gratification: you earn money right away, in exchange for labor.
This is how most of us think about money. Our parents raised us to think this way:
“If you do more chores you’ll earn more money.”
And then your first five jobs also reinforced this message:
“If you pick up the Saturday shift you’ll earn more money.”
We talk about this at length in how parents can raise their kids to be good entrepreneurs, rather than good employees. It starts with teaching your kids to think differently about money.
With passive income, you have to invest money, time, or both before you start seeing any results. Passive income requires more work than active income… at first.
Fun hand-drawn graph courtesy of AffordAnything.com
See all that investment of time put in, before the money starts coming in?
Yeah… most people aren’t all about that.
That graph above looks nothing like the traditional relationship between time and money. Passive income is about breaking out of that “time = money” mindset. The thinking goes more like this:
“If I spend the next 60 days scouting for potential rental investments, making offers, settling on a property, and placing a good long-term tenant in my new rental, I’ll earn $400/month in income for the rest of my life.”
You put in money and effort up front for a period of time, then you can stop working but continue to earn money.
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