Passive income, or income for which no or minimal work is required, is the key to securing a comfortable retirement or just financial independence. Passive income on a smaller scale can be a great way to boost your annual income, or supply some extra spending money. In this post I want to explore 11 different sources of passive income that can bring in a few dollars per year all the way up to millions.
1. Dividend Paying Stocks - This is by far my favorite method of pursuing passive income. Regular investments in companies that have a consistent track record of increasing dividend payments year after year. This strategy allows me to achieve capital appreciation in line with the S&P500 index, but also produces regular dividends.
2. P2P Lending - Many times, people need a loan, but can’t or don’t want to get one from a bank. Enter, peer to peer (P2P) lending. The system works roughly as follows. Individuals apply for loans (for cars, new furniture, starting a business, paying off high interest credit card debt, whatever). The P2P lending company does the heavy lifting of screening the loan application and checking the applicant’s credit. Next, the loan is split into pieces and sold to individual investors, with each investor financing a small portion of the loan. As the loan is paid back, each investor gets back a piece of their principal and some interest to boot. The two big names in this arena are Lending Club and Prosper. Unfortunately, only certain States allow P2P lending.
3. Article Residuals - Writing can be a great way to earn a bit of money. You can write for websites or you could write for print magazines. Oftentimes, you are paid an upfront fee for your content and then offered additional payments (called residuals) based on how popular your article is. The more views or reprints, the more residuals. While the initial act of writing takes effort, collecting the residuals is entirely passive.
4. Book Royalties - Basically the grown up version of collecting article residuals. If you write a book, you get to collect royalties for every copy of the book sold. Writing the actual book is a very long and effort consuming task. But thankfully, in today’s world, there are plenty of ways to publish the book. You can go through the traditional route of finding an agent or you can go the self publishing route with services such as LuLu or Amazon self publishing.
6. Rental Properties - I really hesitate to add this one to the passive income list. But if you’re just the owner and have all the management tasks taken care of by someone else, then this is actually passive income. You can be a small time landlord, who rents out a room in your house, or you can go for the big time and invest in single family homes or 2, 3, and 4-plexes. Rental property generally appreciates over time and produces regular monthly income from the rents. Once the mortgage is paid off, that monthly income becomes much larger. The downside is that you need to keep renters in your units. No renter, no rent, but you’re still on the hook for the bills and property taxes.
7. Stock Photography - Another version of royalty based income. Basically, you sell access to your photographs through a stock photography company like Shutterstock. One could argue that this isn’t particularly passive. I would say that the naysayers are correct. Except for people who take tons of photos anyway. I love to go hiking, camping, sightseeing, and generally being a tourist. Especially in summertime. I also take a metric crap ton of photos. Most are mediocre at best, but some are actually descent. If you’re like me, but maybe with a better ratio of awesome to crappy photos, you might wish to look into adding your better photos to the stock photography universe. Making a few extra bucks off a hobby isn’t a bad idea.
8. Patent Royalties - If you invent something new and patent it, you own the rights to produce and sell that product for the duration of the patent; 20 years in the US. But maybe you aren’t interested in making or marketing your invention. In that case you can license (or sell outright) the patent to another party. Oftentimes licensing agreements are made that allow you to get a share of the profit.
9. Silent Partnerships - These are a kind of business partnership where you bring money to the table, but you aren’t expected to do anything. In exchange for helping someone get their business off the ground, you have an ownership stake and are entitled to some share of the profits as worked out between yourself and the other partners. As you can probably imagine, there are all kinds of potential problems that can arise with these kinds of arrangements, especially if the managing partner(s) are running the business into the ground.
10. Hobbies – Hobbies aren’t really passive income. But you may be one of the lucky people out there who happens to have a hobby that can somehow translate into income. Photography comes to mind. As do certain online ventures like running a website about some passion of yours. What makes the income from these “passive” is that you would be doing the activity anyway, even if you weren’t paid for it.
11. Business Owner - Just like in the real estate example above, the focus here is on the act of owning the business. Not the act of actually doing any work. If you own a thriving business and have a trustworthy manager who can handle all the day to day operations, then congratulations, you’ve got yourself a nice chunk of passive income. Just make sure that you keep that manager happy and working for you. If he or she quits, the passivity of your enterprise may evaporate when you have to get in the trenches and start doing work.
Some general thoughts
The personal finance community favors investment income and real estate. I don’t think that one is particularly better than the other. Real estate is essentially a business and appeals to people who have a bit more of an entrepreneurial bent. Investments appeal to those of us who don’t mind continually researching new and old investments and aren’t particularly interested in running a company. Investment income also has a much lower entry point. Got $1000 laying around? Rock on, you’ve got dividends! Want to get into rental properties? Better start saving for that 20+% down payment.
One of the problems with any of the royalty or residual based income is that the income will probably decrease over time. New things come out and older books and photos get pushed to the back. The world changes and your work slowly goes out of date. Unless my name was J.K. Rowling or E.L. James, I wouldn’t plan on retiring comfortably off of royalties.
NOT Passive Income (bonus section)
The below are a few things that I often see conflated with passive income in the personal finance world. They aren’t bad sources of income, but they aren’t passive.
Anything Online - I’ve been blogging for fun for a little while now. There is nothing passive about this. There’s a whole community out there who will happily sell you an ebook explaining how you can quit your day job and then make a good living by blogging, setting up affiliate marketing programs, and hocking eBooks. And somehow this will all be done in 4 hours a week or less. Of course, you’ll be spending the rest of your time relaxing on a beach in Thailand. The reality is that you’ll be spending way less time than you expect chasing Asian hotties, and way more time than you expect trying to grind out content and freaking out every time Google updates its search algorithms. Online income can be very real and online activities can be very rewarding, they just aren’t passive.
Side Hustles - A wonderful catch all term for all kinds of hobby-jobs ranging from coaching Little League to buying and selling rare books.
Part Time Jobs - If it has the word job in the title, it’s not passive.
Selling Your Crap - Selling your crap can be a great way to generate passive income. Except for the fact that you will eventually run out of crap to sell. And the annoying realization that you’re probably selling stuff for way less than you bought it for originally.
Readers: What kinds of passive income are you pursuing at the moment? What kinds of passive income do you hope to develop in the future? What draws you to one particular style of passive income? What drives you away?