Common Ways To Seek Passive Income
Why not sit back and let the money come to you? Sounds like a dream, right? Some people are seeking this dream with strategies that can generate passive income.
Passive income options vary, and while it can be a “takes money to make money” situation, these choices can also offer low-barrier ways of getting a new chance to add to your bank account.
So although it may take a little more time and money at the outset, once it starts generating, these options may be a good “set-and-forget” addition to your portfolio.
What is Passive Income?
Passive income is a method of earning money without too much ongoing effort. It typically requires a certain degree of knowledge gathering at the outset, as well as regular monitoring and maintenance, but once on track, this can amount to mere minutes of work per week.
There are three commonly known ways of generating a passive income:
- Asset Sharing
- Asset Building
Each of these categories may have potential, but there are also risks that go along with all of them.
It must be stated that a large amount of research and due diligence should be involved before investing in any way. When in doubt, remember the old adage that if it seems too good to be true, it probably is.
However, most passive income sources are extremely commonplace and include things like dividend investment, real estate, and art collecting.
How Do People Commonly Generate Passive Income?
With investing, you purchase securities or other assets with money you already have with the hopes of earning more money from returns or dividends.
Dividend stocks reward shareholders with regular payouts of company profits called dividends. A certain dividend share is paid out (usually quarterly) for every stock owned.
Because an investor must own the stock to receive dividends, this method will likely require significant investment to earn a substantial income from dividend stocks. The S&P 500, for example, provides an average dividend yield of just over 1%.
The company’s board of directors decides on the type of dividend, dividend amount, and dividend schedule. Cash dividends are the most common, but shareholders can also opt to offer stocks, dividend reinvestments, special dividends, or preferred dividends. Each comes with its own reward toward cash or the opportunity to generate more cash.
Dividend investing isn’t without its risks. Companies may fall on hard times and be unable to pay out dividends or have to decrease them. Look to preferred stocks or dividend aristocrats for higher dividend yields.
Alternative Investing Platforms
Today there are various alternative investment options, including venture capital, private equity, hedge funds, managed futures, real estate, Contemporary Art, and antiques.
Alternative investments are typically preferred by those who wish to have a highly diversified portfolio with the opportunity to generate returns that are not directly tied to the volatility of the traditional stock market.
Investing in real estate is one of the oldest and most common ways of generating passive income. To receive a passive income from real estate is not as simple as purchasing your own home, but instead involves owning rental or business properties.
When you own a rental property, repair and maintenance requirements can become a major time commitment. The alternative is to hire a property manager, which will cut into your income. In addition, buying real estate may require an upfront investment of hundreds of thousands of dollars.
If you’d prefer to avoid the cost and headache, consider alternative sources of real estate investing, like real estate investment trusts (REITs) or real estate crowdfunding platforms. Both options provide passive income with fewer upfront costs and ongoing responsibilities.
P2P lending is like a small-scale form of private equity, hedge fund, or venture capitalism lending. In this option, investors act as a third party, lending out a principal upon which interest is generated. In return, each of the investors receives the initial plus interest based on the original investment.
Investing in domain names is a lot like trading stocks — it’s as simple as buying a domain name and reselling it at a profit. It can have a low financial barrier to entry for new investors. However, domaining has the risk that the name won’t sell, and in that scenario, the owner will be left with an unsellable investment.
Asset sharing is when one attempts to generate earnings from assets they own, like renting out a house. More modern examples of asset sharing include platforms associated with vacation rentals and ride-sharing.
There are land, home, and transportation rental markets that can be leveraged in today’s market.
Homes can be rented to long-term tenants, but vacation rentals are an alternative.
Also noteworthy is the increasing population of digital nomads who are looking for short-term stays in urban and rural areas.
Land can be rented for campers or leased for storage purposes. Transportation, whether cars or boats, can also be rented out for ride shares or short trips — potentially even as part of your vacation rental package.
Asset building is the most complex category of the three because it has mainly to do with technology. Examples of asset building include having an affiliate link on a website or blog. Asset building also includes licensing and participating in digital products like NFTs.
NFTs are one form of a digital product. By definition, non-fungible investments are unique and not easily comparable. Since they are unique items, the most popular will sell out quickly.
This category can also include photos, eBooks, meal plans, workouts, and so forth as unique products which can be rented out and used over and over again.
A digital product will be an initial investment in terms of time or money, but once it is ready, it can be a purely passive income source.
Similarly, digital products like music, designs and photos can also be licensed through a variety of means. Of course, some make whole careers out of licensing their art products, but there are platforms that will help out small fish creatives as well.
Those who have podcasts or blogs can post a link or offer a referral code that will provide the buyer with a discount, and the host receives a commission from the purchase.
Affiliate linking has become so popular that it’s actually quite competitive at this point.
The rates of return on passive income can vary widely, and that is why it can be a great way of diversifying one’s portfolio. The most important thing is to make sure not to skip the research phase before diving into any new investments.
Passive income isa cash stream that requires little daily effort to maintain, unlike active income, such as cash earned from working a job.
You can attempt to create passive income through investing in certain financial products, by owning assets that may generate wealth over time, or by starting businesses that, after an initial investment, may generate income without regular work.
Every investor’s goals and knowledge is going to differ, so the best passive income strategies will differ for each investor.