Generating a passive income is hard to do, but there are many ways to do it (here's a list of 35 different ways to generate a passive income). But today I specifically want to talk to you about how to invest to generate a passive income.
It is important to note that most income is not truly passive in the sense that no work was required. However, in my examples below, you will see how the income is now passive since the work was done prior to the income being made.
Also, when it comes to investing to generate a passive income stream, most of the time it's money that's required up front. It's nearly impossible to create an investing passive income stream without capital. However, the amount doesn't need to be large, and you can allow your investing income stream to reinvest and grow over time.
That's why I encourage everyone to start building passive income streams today. You might start with just $100, but that $100 will grow and the money will work for itself. And the more you add to it, the more it will grow, and the more passive income it will generate.
This of it like a passive income snowball - the beginning is slow, but as momentum builds, so does the income. Now let's look at how to invest to make it happen.
Passive Investment Income
The first major way individuals generate passive income is through investments. This can be done because many investments distribute gains in the form of dividends or distributions. These dividends and distributions are income, and many people are able to live off of them.
A common strategy is to put together a portfolio of high dividend paying stocks. In fact, there is an ETF that trades under the symbol DVY that does just this - it is the top dividend paying stocks in the Dow Jones Industrial Average. Also, you could invest in something like peer to peer lending, where you loan money and get paid back interest, but it's all automated.
I personally invest in high paying dividend stocks, peer to peer lending, and also REITs (which I will actually discuss more below). These stocks pay dividends quarterly, and I count the income when I receive it.
Investment income is passive once the investment is made, but most investments to require some work in the form of research and ongoing monitoring of positions. You, of course, also need to have some money to invest.
We recommend getting started investing at Fidelity - they have a lot of commission free ETFs that you can use to get started creating a passive investment income. There are also free apps that you can use to get started investing as well.
Passive Royalty Income
Some royalty income is truly passive - if you lease your land for natural resource production. You really didn't have to do much besides negotiate a contract with a company. However, there may be work involved in monitoring the company and following up on the contract. You also would have had to do something to acquire the land in the first place.
However, most royalty income is the result of hard work. Most individuals create something, and spend a lot of time and resources doing so. They then sell the rights to the creation (whether a product, a song, etc.), and they get income from others using and selling their works. In this case, the work is up front, but there is no longer work once the income is coming in. At the top of this list are artists like Michael Jackson, who even after he passed, his estate is still earning in excess of $800 million by selling the rights to his music and more.
A new form of royalty income is investing in blogs and websites. Once again, this requires some investment, and usually some time, but could provide a nice income stream. If you want to get started creating a blog, it's really cheap and relatively easy to do if you want to put in the time. We recommend using Bluehost to get started. You get a free domain name and hosting starts at just $2.95 per month - a deal that you won't find many other places online! You can afford that to start building a passive income stream.
Passive Rental Income
Some people consider rental property income to be passive, and others consider it to be more like a business. I consider it to be a combination of both - you have to treat it like a business and it requires work to find tenants and do the general maintenance, but once it is rented, the income is usually pretty passive. You get your rent each month and pay the expenses, and you don't usually need to do much else.
One of the most popular investments right now is crowdfunded real estate. Instead of having to buy and manage a rental property (and having to use a large amount of money), you can now join others on platforms to invest in real estate. This allows you to invest much smaller amounts of money (typically $1,000 or $5,000) and you get a slice of a property that earns you money.
Fundrise is a REIT that allows you to start investing in real estate for as little as $500.
Services like Realty Mogul allow you to invest as little as $5,000 into real estate investments. You can invest in equity, preferred equity, or debt on various projects.
Streitwise is a similar platform to RealtyMogul in that it's a private equity REIT. The minimum is $1,000 to get started.
If you have a little more to get started, check out Roofstock. With Roofstock, you can purchase single-family turnkey investment properties directly online! Check out Roofstock here >>
Related: Here's a list of 19 Ways To Invest In Real Estate >>
Passive Business Income
This one may be shocking to most, but you can have passive business income. There are two main ways to do this:
- Be a partner in a business (usually a limited partner)
- Invest in a partnership
If you are interested in venture capital, a common way to make money is to become a limited partner in a round of financing. You don't get much say, but you don't do much work either. You can then (possibly) earn a return on your investment.
You can be a partner in a variety of companies without much experience through crowdfunding. Check out all of the major equity crowdfunding platforms and know the risks.
Another common way to get passive business income is to invest in a business. You can invest in Master Limited Partnerships (MLPs), which trade like stocks, but are taxed as partnerships. You can also invest in REITs, which are like stocks, except distribute most of their income, like businesses.
Final Thoughts
Investing is a great way to build a passive income stream. You can build a diversified portfolio of investments that can work together to generate a steady stream of income. Once you make your investment, little work is actually required, making this one of the most passive income streams available.
Readers, what other ways do you know of that can generate passive income?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
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