Building Passive Income Streams
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Struggling to pay your rent each month? Maybe you need help paying down your credit card debt. Building passive income streams can help.
What’s passive income? It’s money you earn without working for it each month.
Passive income doesn’t mean you earn money for nothing, though. Building a passive income stream usually takes some upfront work or at least some extra dollars.
Maybe you publish an online self-help book on Amazon Kindle. It takes work to write your book, design its cover and publish it on Amazon. But once you do this, the hope is that it will generate steady monthly sales. The money from those sales is passive income: You’re not working each month to earn it.
Or maybe you decide to invest in a stock that makes regular dividend payments, payouts made by the company behind the stock to its shareholders. It takes extra money upfront to invest in these stocks. But once you do, the hope is that the company offering the stock performs well enough financially to continue to make regular payments to you.
Interested in building your own passive income streams to supplement your income from full-time work or side gigs? Here is some advice on finding opportunities and steadily growing the financial payouts of these passive income streams.
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Start easy: Open a high-yield savings account
One of the simplest ways to earn passive income is to invest your money in a high-yield savings or money market account. These accounts earn higher interest rates than do traditional savings accounts. Because of that, you’ll earn more in interest from the money deposited in them.
According to the Federal Deposit Insurance Corporation, the average interest rate on a traditional savings account was 0.42% in July of this year. That's low and won't earn you much interest on your savings.
You can, though, find high-yield savings accounts from companies such as SoFi, Citizens Access Savings and Barclays with interest rates as high as 4.5%. That can earn you significantly more money in your savings.
And savings accounts are the definition of passive income: You deposit your money and then wait for it to grow. No work is required on your part.
How to make it work: The key to growing money in a money market or high-yield savings account is to leave the dollars you’ve deposited alone. Don’t make withdrawals from your account. The longer you leave your money untouched, the more you’ll earn.
Say you make an initial deposit of $2,000 in a high-yield savings account with an Annual Percentage Yield, or APY, of 4.4%. If you deposit $100 into that account every month over five years, your savings will grow to more than $9,163. Of that amount, $1,163.31 would have come from the interest you earned.
Related: Best High-Yield Savings Accounts
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Take the next step: Invest in dividend stocks
That's not a ton of money. Maybe you want to boost your passive income with another stream of revenue. You might consider investing in dividend stocks.
With dividend stocks, you can earn money in two ways: First, you hope the stock you've invested grows in value. When you sell your shares, you can then earn a solid profit. What sets dividend stocks apart from traditional stocks is that you can also receive regular payments from them.
The companies offering these stocks share a portion of their profits with their stockholders through dividends. How much you receive and how often depends on the individual companies issuing these stocks.
Dividend payments are another good example of passive income. You'll receive your payments without doing any additional work. The challenge, though, is that dividend payments aren't guaranteed. The amount you receive can rise or fall depending on the financial performance of the company issuing these stocks. If companies face serious financial problems, they might stop issuing dividend payments.
You’ll also need the money upfront to invest in these stocks.
How to make it work: Patience is the key when investing in dividend stocks. You don’t want to sell these stocks when their value is falling. Instead, you might need to wait out the challenging times and hope the stock increases in value. Don’t panic if your dividend payment falls. The company you’ve invested in might be working through a tough financial time but might emerge stronger. If that happens, your stock value and dividend payment might rise again.
Go the safe route: Invest in bonds
Investing in bonds is similar to investing in stocks. But bonds are loans you give to a company or government entity, not ownership shares. They are also considered far less risky than stocks, though the money you'll make on them is generally lower.
You can invest in two main types of bonds. With a coupon-paying bond, you'll receive regular interest payments. Maybe you invest $2,000 in a 10-year bond with a coupon rate of 4%. You'd earn $80 in interest annually, meaning that the company or government entity issuing the bond will send you that much each year, often broken into payments every six months.
You can also earn money by buying a coupon-paying bond for less than face value. Say that a coupon-paying bond with an interest rate of 4% had a face value of $2,300, but you only paid $2,000 for it. When the bond matures, the issuer will pay you $2,300. That's an extra profit of $300 on top of the interest payments that you’ve already received.
You might also invest in a zero-coupon bond. This type of bond does not make interest payments. Instead, you buy it for an amount less than its face value. When the bond reaches its maturity date, you are paid the full face value of it. U.S. Treasury bills and U.S. savings bonds are examples of zero-coupon bonds.
Say you purchase a five-year U.S. savings bond with a face value of $200 but only pay $100 for it. You won't receive any interest payments from this bond, but when it matures after five years, you'll sell it back for its face value of $200, earning $100 profit.
How to make it work: The best way to earn passive income from bonds is to invest in several with different maturity dates. The amount of money you invest matters, too. The more you invest upfront, the greater the passive income you'll earn.
Say you invest $3,000 in a coupon bond that pays you $200 in interest payments each year for five years and an additional $2,000 in a coupon bond that pays out $150 in interest payments each year for 10 years. If you also invest $2,000 in five zero-coupon bonds that will pay out $6,000 when they mature, you'll have earned a total profit of $6,500 on your investment over 10 years. That's not a ton of money, but again, it's dollars that you didn't have to work for.
Related: What Are Bonds And How To Buy Them
Make a bigger move: Invest in residential real estate
You'll either need to apply for a mortgage or have access to a big chunk of cash, but investing in residential real estate is one of the most common and potentially lucrative ways to earn passive income.
You can do this in several ways, by buying a single-family home for yourself and renting out a room, purchasing and renovating a single-family home that you rent out entirely, or buying an apartment complex with several units.
The hope is that the real estate you buy will appreciate. Say you buy a single-family home for $200,000. Maybe you can sell it for $300,000, earning $100,000 in profit in seven years.
You'll also earn passive income if you rent out the real estate you buy. Maybe you purchase a two-flat with two separate units. Depending on the property's location, you might be able to rent out each unit for $2,000 or more each month.
The challenge is buying the properties. If you're like most people, you'll need to apply for a mortgage to finance any real estate buy, making a monthly mortgage payment as you repay what you borrow. You’ll have to keep making those payments until you sell your property, hopefully for a profit, or pay the loan in full.
Another challenge? You'll need to purchase the right property at the right price. Your goal is to see the residential real estate you buy increase in value over time. How to increase the odds of this happening? By purchasing a home or apartment for a low enough price. You'll need to research your local real estate markets before buying any investment property.
Finding good renters isn't easy, either. You don't want to get stuck with renters who stop making their rent payments. Evicting non-paying renters is time-consuming and costly.
How to make this work: Research. Lots of research. Work with real estate agents to find neighborhoods where single-family homes or apartment buildings are offered at lower prices. It helps if you're handy, too. You might find a fixer-upper to renovate and flip for a higher sales price.
You might consider investing in the services of a property manager, too. Property managers will take late-night calls from renters when a home's furnace conks out or its roof is leaking.
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Get creative: Write a book
Ever dreamt of writing your own book? Get to it: With some luck, an online book could earn you yet another stream of passive income.
That’s because publishing and selling books online’s so easy today. You can choose from such free publishing options as Amazon Kindle Direct Publishing, Barnes & Noble Press and Smashwords.
And if your book grabs the attention of the public? You’ll hopefully sell copies each day, earning money long after you’ve written all those words.
How to make it work: It’s not that simple. Writing your own book – whether a self-help tome or an epic fantasy novel – and publishing it might be the easy part. The challenge is getting your book noticed. Whatever you write, you’ll have to stand out against a seemingly unending stream of competing self-published books. Earning the attention, and dollars, of readers is no easy task.
This means you’ll need to market your book. You might need to invest in advertising campaigns and press releases. And you’ll certainly need to spend plenty of time online to promote your writing.
But if you get lucky and capture the imagination of the public? Your online book could generate a steady stream of revenue.
Taking advantage of what you already have: Rent out your stuff
Have an unused parking space? You might be able to rent it out for cash. Or maybe you drive your car 45 miles a day for work. You might be able to rent advertising space on its sides and top. Maybe you have an extra room you don’t use in your home. Consider renting it out.
Renting out tangible and intangible items you already have could bring in passive income each month.
Consider your car. Many companies will pay you to advertise their products or services as you drive around town. First, sign up with an advertising company such as Nickelytics, Wrapify, and Carvertise and download their app. After analyzing your driving patterns, these companies might send you a proposal for an advertising campaign that you can accept or reject.
If you accept, car-wrap companies will send you banners to stick to the sides of your car or an electronic sign that you or a professional can attach to its top. How much you earn will vary, but some campaigns might pay out $150 to $225 for campaigns that last from seven to 10 days.
Not everyone will qualify, though. Most companies will require that you drive a certain number of miles daily, often 30 or more and that you own a newer-model car.
Depending on your neighborhood's scarcity of parking, you might also earn solid money each month by renting your parking space. You can do this by signing up with companies like Spacer or SpotHero.
These companies will require information about your spot, such as whether it is indoor or outdoor and its dimensions. You can then set an asking price for your space’s monthly rent. How much you can rent your spot will vary depending on location and size. But in neighborhoods in which parking spots are difficult to find? You might earn up to $400 a month, not bad for a parking spot you’re not using.
Do you have a second bedroom that’s home to the exercise bike you never ride? Or maybe you have a home office you haven’t entered in three months. Maybe it’s time to rent that room out. You can list the room with services such as Roomies, Kangaroom, and Cirtru.
How to make it work: You’ll need to offer something someone wants. Renting a parking space won’t work if you live in a community in which free parking is plentiful. And you might not find any takers for that spare room in your home if it’s little bigger than a closet. Don’t expect companies to pay you to advertise products on your car if it spends most of its time tucked away in a garage.
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Writer
Dan Rafter is a freelance writer who has more than 20 years experience covering personal finance. He's written for the Chicago Tribune, Washington Post, Bankrate, CreditCards.com, Rocket Mortgage, NortonLifeLock and several others.
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