Let’s start this discussion by clearing away a myth. There really are no truly passive income sources right now - if there ever even were any. In order to generate any kind of passive income, you typically have to do one of two things:
1) Invest a bunch of money, or
2) Add an income earning source to an existing active venture
Keeping those two realities in mind, here are 5 ways to earn passive income.
1. Real Estate Investment Trusts (REITs)
In the long run, investing in real estate is one of the best ways to create passive income. You buy a property, rent it out, use the proceeds of the rent to cover the monthly payment, plus a little extra for profit. As the years pass, and the rents increase, the profit portion gets higher. Once the mortgage on the property is paid in full, the property becomes a cash machine.
The limitation of direct investment in real estate is that it requires a large down payment up front and it can be difficult to buy a property that will produce a sufficient rent to cover your monthly payment and give you a profit.
But there’s a better way to invest in real estate that will enable you to overcome those obstacles. REITs are like mutual funds for real estate. A REIT will hold several commercial properties, typically office buildings, shopping centers, or apartment buildings. The REIT can either have an equity position in the properties, invest in their mortgages, or some combination of both.
Best of all, REITs pay dividends that are generally much higher than the dividend payout on stocks, and much higher than the interest rate paid on fixed income investments. And unlike direct investment in real estate, they can earn you a passive income as soon as you begin investing, and you can sell and cash out any time you want.
2. Robo Advisors
These are online investment platforms, that are essentially investment managers. You turn your money over to them, and they invest it for you in exchange for a small fee (generally less than 1%). They allocate your portfolio based on your own risk tolerance and investment goals, re-balance the portfolio as necessary, and even provide tax loss harvesting to minimize your income bite.
You can pay a human investment advisor to do the same, but the fee will be somewhere between 1% and 3%, and that will reduce your investment returns.
Two prominent examples of robo advisors include www.wealthfront.
You can invest your money with these platforms, earn income, and never have to spend one minute managing your portfolio. That’s passive investing at its finest.
3. Your Own Blog
If there is a topic or two that you are passionate about, and you love to write – or create pod casts or videos – creating your own blog could be a natural venture. Though it isn’t passive in the truest sense, it is an opportunity to create an income that comes from a hobby or passion. And the income that you receive is only loosely connected to the amount of effort that you put into it, especially once the blog is up and running.
Essentially what you do is create your own blog using a wordpress.com website application, then regularly add relevant content to the site. You can promote the site through the social media, and by writing guest articles and commenting on related sites.
Once your blog’s been around for a few months, and you have a few thousand visitors each month, you can begin to monetize it. You can do that by adding Google AdSense, paid banner ads and a variety of other ad types. The ad revenue will roll in each month from then on, creating a whole new cash flow.
4. Affiliate Programs
If you have a blog, or a business website, there are affiliate programs that you can participate in that will provide you with an extra income. For example, if you have a blog, you can participate in affiliate programs through www.clickbank.com. They give you everything you need to set up an affiliate program on your site. Then every time someone clicks through an ad or link on your site, and makes a purchase, you will get a percentage of that sale.
You can also do this for a business website. Whatever your product or service line is, you can also participate in affiliate programs through related vendors. They will pay you a percentage of their sales that come from your site, which can be anywhere from 10% to 50% of the purchase price.
Whether you have a blog or a business website, this is a way to add a passive income to an existing active venture.
5. High Dividend Yielding Stocks
The ultimate source of passive income is interest income. You invest your money with a bank or in a bond, and you get back interest income – without having to do anything at all. The problem with that strategy right now is that interest rates are downright microscopic.
But you can use high dividend yielding stocks to earn healthy returns on your money. It’s fairly easy to get stocks that are paying dividends yielding 3%-4% per year, and you can do even better than that by investing in dividend paying stocks where the stock price has been depressed by the kind of bad news that doesn't hurt the company’s cash flow.
There’s also a bonus to this type of passive income, one that does not generally occur with interest-bearing investments. In addition to the dividend yield, you can also get capital gains income. This is particularly true if you hold the stock for several years, or if you buy a stock that is depressed in value. Over several years, the income that you earn on the increase in stock price can be more significant than the dividends.
The advantage to all five of these ways to earn passive income is that each is relatively low risk. There are other ways to earn passive income, but they would involve taking on an abnormal amount of risk, such as becoming a silent partner in a small business. That kind of venture could make you rich with little effort – or it could leave you broke. So take a stab at one of these five, and see if you can’t get a decent passive income going.
Kevin Mercadante (outofyourrut.com)