2020 was a rough year. Many found themselves with lower income or none at all. Passive income can be a great way to help you generate extra cash flow, and the economic upheaval largely caused by the COVID-19 crisis is a testament to the value of having multiple streams of income. So we find the need to be making money. Luckily, I found 12 passive income ideas to help you make money in 2021.
With passive income, you can have money coming in even as you pursue your primary job, or if you’re able to build up a solid stream of passive income, you might want to kick back a little. Either way, a passive income gives you extra security. Plus, if you are one to worry about being able to save enough of your earnings to meet your retirement goals, building wealth through passive income is a strategy that might appeal to you, too.
Make Money: First Things First: What is passive income?
Before we get into the ideas, let us discuss what Passive income is. Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.
“Many people think that passive income is about getting something for nothing,” says financial coach and retired hedge fund manager Todd Tresidder. “It has a ‘get-rich-quick’ appeal … but in the end, it still involves work. You just give the work upfront.”
In practice, you may do some or all of the work upfront, but passive income often involves some additional labor along the way, too. You may have to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing. Yet, if you are committed to the strategy, it can be a great way to generate income and comes with some extra financial security for yourself along the way.
Make Money: Now for the Good Stuff: 12 Passive Income Ideas for Building Wealth
If you are thinking about creating a passive income stream, check out these 12 strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.
1. Selling Information Products :Make Money
Do you have a wealth of knowledge on a particular topic? If so, a great strategy for passive income for you is establishing an information product, such as an e-book, or an audio or video course, then kicking back while cash rolls in from the sale of your product. Courses can be distributed and sold through sites such as Udemy, SkillShare, and Coursera. This way you can talk about your passion and get paid for it.
Alternatively, you might consider a “freemium model” – building up a following with free content and then charging for more detailed information or for those who want to know more. This will take a great deal of networking. For example, language teachers and stock-picking advice may use this model. The free content acts as a demonstration of your expertise and may attract those looking to go to the next level.
As a third alternative on this theme, you could use advertisements (or sponsors) to generate your income, while you provide information or content to a growing audience on a free platform such as YouTube. For example, take your love of video games or music and turn it into the content. This could also work for your podcast or blog. Especially if you make a secure relationship with a sponsor.
Opportunity: Information products can deliver an excellent income stream because you make money easily after the initial outlay of time.
Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”
Do not let the risk frighten you. Once you master the business model, you can generate a good income stream, he says. So try it today!
2. Rental Income :Make Money
Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect. Plus, you might need some money in the bank to start out and look closer at the risks.
If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) in the Los Angeles area and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”
Opportunity: To earn passive income from rental properties, Graves says you must determine three things:
- How much return you want on the investment.
- The property’s total costs and expenses.
- The financial risks of owning the property.
For example, if your goal is to earn $10,000 a year in rental income and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.
Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.
Sadly, the pandemic has posed new challenges, too. Due to the economic downturn, you may suddenly have tenants who can no longer pay their rent, while you may still have a mortgage of your own to pay. Or you may not be able to rent the home out for as much as you could before, as incomes decline. So you’ll want to weigh these risks and have contingency plans in place to protect yourself.
3. Affiliate Marketing :Make Money
With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account.
One of the biggest being Amazon. However, eBay, Awin, and ShareASale are among the larger names, too. Recently, Instagram and TikTok have become huge platforms for those looking to grow a following and promote products. You could also consider growing an email list to draw attention to your blog or otherwise direct people to products and services that they might want. Yes, people still read emails.
Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission. The commission might range from 3 to 7 percent, so it will likely take significant traffic to your site to generate serious income. But if you can grow your following or have a more lucrative niche (such as software, financial services, or fitness), you may be able to make some serious coin.
Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something. So you might need to sell the product to your targeted audience.
Risk: If you’re just starting out, you’ll have to take time to create content and build traffic. It can take significant time to build a following, and you’ll have to find the right formula for attracting that audience, a process that itself might take a while. After all of that work, your audience still might not bite. They could just move on to the next big thing, so keep that in mind.
4. Flip Retail Products :Make Money
If you are a smart shopper, then flipping retail products could be a great passive income idea for you. Take advantage of online sales platforms such as eBay or Amazon, and sell products that you find at cut-rate prices elsewhere. Especially if it is a limited edition. You’ll arbitrage the difference in your purchase and sale prices, and may be able to build a following of individuals who track your deals.
Opportunity: You’ll be able to take advantage of price differences between what you can find and what the average consumer may be able to find. This could work especially well if you have a contact who can help you access discounted merchandise that few other people can find. Or you may be able to find valuable merchandise that others have simply overlooked.
Risk: While sales can happen at any time online, helping make this strategy passive, you’ll definitely have to hustle to find a reliable source of products. And you’ll have to really know the market so that you’re not buying at a price that’s too high. Otherwise, you may end up with products that no one wants or whose price you have to drastically cut in order to sell.
5. Peer-to-peer Lending :Make Money
A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub. Other players include Funding Circle, which targets businesses and has higher borrowing limits, and Payoff, which targets better credit risks.
Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default, meaning you could end up with nothing.
To cut that risk, you need to do two things:
- Diversify your lending portfolio by investing small amounts over multiple loans. At Prosper.com and LendingClub, the minimum investment per loan is $25.
- Analyze historical data on the prospective borrowers to make informed picks.
Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive, and you’ll want to carefully vet your prospective borrowers, and because you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build an income.
Economic recessions can also make high-yielding personal loans a more likely candidate for default, too, so if COVID-19 continues to hurt the economy, these loans may go bad at higher than historical rates. Again, you must weigh the risks.
6. Dividend Stocks :Make Money
Do not fret when it comes to working with stocks. Let me explain, shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Still with me? Then companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock. Dividends are paid per share of stock, so the more shares you own, the higher your payout.
Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money. The money will simply be deposited in your brokerage account.
Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock.
There are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. It is advised to go with exchange-traded funds or ETFs. ETFs are investment funds that hold assets such as stocks, commodities, and bonds, but they trade like stocks.
Another key risk is that stocks or ETFs can move down significantly in short periods of time, especially during times of uncertainty, as in 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch. Again, this could be a lot to take on. If you are not fully able to grasp the stock world, I suggest finding a more suitable idea on this list.
7. Create an App :Make Money
Have you ever found yourself saying, “I wish there was an app for that.”? Well, now you can create said app! Creating an app could be a way to make that upfront investment of time and then reap the reward over time. Your app might be a game or one that helps mobile users perform some hard-to-do function. Once your app is public, users download it and you can generate income.
Opportunity: An app has a huge upside if you can design something that catches the fancy of your audience. You’ll have to consider how best to generate sales from your app. For example, you might run in-app ads or otherwise have users pay a nominal fee for downloading the app.
If your app gains popularity or you receive feedback, you’ll likely need to add incremental features to keep the app relevant and popular.
Risk: The biggest risk here is probably that you use your time unprofitably. If you commit little or no money to the project (or money that you would have spent anyway, for example, on hardware), you have little financial downside here. However, it’s a crowded market and truly successful apps must offer a compelling value or experience to users. You’ll also want to make sure that if your app collects any data that it’s in compliance with privacy laws, which differ across the globe.
A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.
Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.
Like dividend stocks, individual REITs can be riskier than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks — and you’ll still get a nice payout.
Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy — a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing.
REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.
9. A Bond Ladder
A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments. We like payments.
Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You can sit back and collect your interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years, and seven years.
In a year, when the first bond matures, you have bonds remaining of two years, four years, and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.
Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.
Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.
10. Invest in a High-yield CD or Savings Account
Investing in a high-yield certificate of deposit (CD) or savings account at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. Yes, it can be difficult to stick with setting money aside for a savings account, but you can do it. I suggest coming up with a grand plan. You won’t even have to leave your house to make money.
Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates or the top savings accounts. It’s usually much more advantageous to go with an online bank rather than your local bank because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000 if your financial institution is backed by the FDIC.
Risk: As long as your bank is backed by the FDIC and within limits, your principal is safe. So investing in a CD or savings account is about as safe a return as you can find. However, while these accounts are safe, they’re returning even less these days than before. And with the Federal Reserve targeting 2 percent inflation, you’re likely to lose out to inflation in the short term at least. Nevertheless, a CD or savings account will yield better than holding your money in cash or in a non-interest bearing checking account where you’ll receive approximately zero.
11. Rent Out Your Home Short-Term
This straightforward strategy takes advantage of space that you’re not using anyway and turns it into a money-making opportunity. If you’re going away for the summer or have to be out of town for a while, or maybe even just want to travel, consider renting out your current space while you’re gone. This has become very popular in recent years.
Opportunity: You can list your space on any number of websites, such as Airbnb, and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a tenant who may be in place for a few months.
Risk: You don’t have a lot of financial downsides here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.
12. Advertise on Your Car = Makes You Money
Did you know that you have a grade A space for advertisement? You may be able to earn some extra money by simply driving your car around town. Yes, it is that simple. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.
Opportunity: While you do have to get out and drive if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.
Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.
What is the best number of streams of income to have?
There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.
“You’ll catch more fish with multiple lines in the water,” says Greg McBride, CFA, chief financial analyst at Bankrate. “In addition to the earned income generated from your human capital, rental properties, income-producing securities, and business ventures are a great way to diversify your income stream.”
Of course, you’ll want to make sure that putting in effort into a new passive income stream isn’t causing you to lose focus on your other streams. So you do want to balance your efforts and make sure you’re choosing the best opportunities for your time.
Minimize Your Taxes on Passive Income
Not a lot of people like thinking about taxes, but with this extra income, you must. A passive income can be a great strategy for generating side income, but you’ll also generate a tax liability for your effort. But you can reduce the tax bite and prepare for your future, too, by setting yourself up as a business and creating a retirement account. This strategy won’t work for all these passive strategies, however, and you’ll have to be a legitimate business to qualify.
- Register with the IRS and receive a tax identification number for your business.
- Then contact a broker who can open a self-employed retirement account such as Charles Schwab or Fidelity.
- Determine which kind of retirement account might work best for your needs.
Two of the most popular options are the solo 401(k) and the SEP IRA. If you stash the cash in a traditional 401(k) or SEP IRA, you can take a tax break on this year’s taxes. The solo 401(k) is great because you can stash up to 100 percent of your earnings into the account, up to the annual maximum. Meanwhile, the SEP IRA allows you to contribute only at a 25 percent rate. If you’re thinking of going this route, compare the differences between the two account types.
Final Thought, Then Go Make Money:
There you have it, 12 passive income ideas to help you make money in 2021. Which one(s) will you try? My hope is 2021 is a much better year and I wish you financial success! To read more articles (some with ideas on making money) visit my blog. Feedback is always encouraged.