Passive Income Strategies to Try

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Last Updated:November 27, 2023

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Passive income. It just sounds nice: Income that flows into your bank account with little to no effort from you.

The challenge lies in finding the right passive income stream – or streams – that match your talents and will generate enough money each month to improve your financial health.

Finding the right source of passive income requires an honest look at your finances: Do you need just a bit of extra cash each month to help boost your savings? Or do you need a side hustle that generates enough money to cover your monthly car payment?

The answer will help determine which passive income vehicle fits you best.

Here, then, is a look at eight possible ways to earn passive income each month, plus the pros and cons of each strategy.

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What is passive income?

Passive income isn’t about getting money without working. It’s more about working hard upfront and, hopefully, watching a steady income flow into your accounts because of that initial work.

Maybe you purchased a home, fixed it, and hired a property manager to maintain it and handle repairs. The goal is to earn monthly rental payments, a form of passive income. But to get that income, you had to put in plenty of work upfront: Finding a home, buying it, renovating it, researching property managers, and finding reliable renters.

The same holds if you sell handcrafted stuffed animals on Etsy. You hope to generate monthly sales from customers clicking on your site. But you still had to work hard to sew enough toys, build your Etsy site, and market your product.

Passive income, then, isn’t necessarily easy income. It requires work. But its earnings come from an initial burst of work you don’t have to take on daily.

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Ready to generate your stream of passive income? Here are some strategies to try:

Open a high-yield money market or savings account

You won't make much money by stowing your dollars in a traditional savings account or certificates of deposit from a financial institution. The FDIC says the average interest rate on U.S. savings accounts was just 0.58% in November 2023. You might, though, earn a greater amount of interest payments by opening a high-yield savings or money market account.

As the name suggests, these accounts come with higher interest rates than traditional savings accounts, meaning that the money you save will earn a greater amount of interest. If you shop around, you might find a savings or money market with an annual percentage yield, or APY, closer to 4.5%. It's a simple and accessible way for beginners to grow their savings without needing a lot of money to get started.

Pros: The biggest benefit of investing in a high-yield savings account? It truly is passive income. Once you deposit your money, you can forget about it and wait for it to earn interest.
Cons: You won’t earn much, even if you find a savings account with an APY as high as 4.5%. Say you deposit $5,000 in a high-yield savings account with an APY of 4.5%. If you contribute $100 monthly to this account for five years, your initial deposit will grow to $12,974. During these five years, you will earn $1,974 in interest, or about $395 annually. This won't make you rich.

Invest in dividend stocks

Investing in dividend-paying stocks can be an excellent passive income strategy, especially when guided by a financial advisor or through a brokerage account. This approach offers two avenues for earning passive income. Firstly, you hope for the stock's value to appreciate, allowing you to realize a significant profit when you decide to sell your shares. However, what sets dividend-paying stocks apart is the potential for regular income.

Companies that issue dividend-paying stocks distribute a portion of their profits to shareholders in the form of regular dividends, often paid on a quarterly basis. The amount and frequency of these payments can vary, making it essential to consider a diversified portfolio, potentially including exchange-traded funds (ETFs), for stable income.

Pros: Dividend payments are a good example of passive income. They will hit your bank account without any additional work on your part. And even if these payments aren't overly large, you can also earn income if these stocks increase in value over time, helping you build wealth.
Cons: Dividend payments are not guaranteed. They can rise and fall depending on the performance of the stock price in the short term. If the company issuing stock is struggling, its stock price might fall, reducing your quarterly dividend payments. Companies might also stop making dividend payments. They are not obligated to continue making these payments forever and might suspend them if they face financial struggles. It's important to consider your initial investment and the potential risks when investing in dividend-paying stocks.

Peer lending for passive income

Peer lending, facilitated through platforms like LendingClub, offers an innovative way to generate passive income as a lender. In this arrangement, you become the source of funds for borrowers seeking personal loans or small business financing. As a lender, you can earn passive income through the payouts you receive as borrowers repay their loans with interest.

One key advantage of peer lending is the potential for diversification. Instead of relying on a single source of income, you can spread your investments across multiple borrowers, reducing the risk associated with defaults. While peer lending requires an upfront investment of capital, it can provide a steady stream of passive income over time, making it an appealing option for those seeking financial independence through diversified lending strategies.

Pros: Peer lending allows you to earn passive income through interest payments from borrowers, you can spread your investments across multiple borrowers, reducing the risk of defaults, and it offers an avenue for achieving financial independence through diversified lending.
Cons: It requires an initial capital investment to fund loans, there's a risk that borrowers may default on their loans, impacting your earnings, and peer lending returns can be influenced by market fluctuations and economic conditions.

Open a retirement account

This is something everyone should do, whether it’s investing in a 401(k) account offered by your employer or opening your own traditional or Roth IRA.

You might not think of saving for retirement as a form of passive income, but the money that you deposit in a 401(k) or IRA will grow over time without you doing anything. That is the definition of passive income.

And you can earn a lot depending on how much you invest and how early you start.

Say you earn a $50,000 annual salary. If you invest 15% of every paycheck in your employer's 401(k) plan starting at age 25, that account will have more than $1.8 million by the time you reach 65, assuming an annual rate of return of 7%. Your savings could be even higher if your annual salary increases over time.

Pros: Investing in an IRA or 401(k) plan is simple: You simply deposit the money with every paycheck or once a month, quarterly or annually. You can then forget about it as it grows over time.
Cons: As with any investment vehicle, retirement accounts are not risk-free. Depending on the stock market's performance, the value of your retirement account could fall during volatile economic times. The key is to invest for the long haul, ignoring temporary dips in the value of your retirement accounts and letting them steadily grow over time.

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Invest in residential real estate

Investing in residential real estate can create one of the best investments for generating cash flow and earning passive income in two ways: First, the property you purchase could increase in value. Maybe you purchase a single-family home for $250,000. Seven years later, you sell it for $350,000.

Secondly, you can rent out your own real estate, collecting monthly rent payments from your tenants. These payments could cover any mortgage you must pay on the property while you wait for its value to increase. Investing in residential real estate can be lucrative for creating a sustainable passive income stream.

Pros: Real estate is considered one of the safer investments. Your property’s value isn’t guaranteed to increase, but the odds are good that it will. A good rule of thumb for residential real estate? If you hold onto your property for at least seven years, the odds of it increasing in value, though not guaranteed, are high. You also get the opportunity to earn a second income stream through monthly rent. And like the price of single-family homes, apartment rents have been on the rise, too.
Cons: As with all investments, you aren’t guaranteed to profit when you sink your dollars in a single-family home or multifamily property. It can be a challenge to find good renters, too. Your renters might stop making monthly payments, forcing you to start the expensive and tedious eviction process. Finally, investing in real estate isn’t inexpensive.

Invest in commercial property with a REIT

Would you prefer investing in an office building, retail store, or warehouse? You can by investing in a REIT.

A REIT, or real estate investment trust, is a company traded on the stock market that owns income-producing commercial real estate, such as office buildings or retail spaces where tenants pay monthly rents. This can be a great way to achieve your financial goals through passive income, which complements your active income.

You can invest in a REIT much like you buy stock. The REIT will then collect monthly rents from its properties, passing out a share of that rent to each investor, including you, as a dividend. How much you earn and how often your REIT pays out will vary depending on the guidelines of your REIT.

Pros: A REIT allows you to invest in commercial properties without buying the entire property alone or with a more limited number of partners. This makes it more affordable to invest in commercial real estate. You can also invest in REITs specializing in any property type you like. For instance, you might find a REIT that owns self-storage properties throughout the southern portion of the United States. If you think self-storage properties are likely to generate a steady stream of rental income, you can choose one of these REITs in which to invest.
Cons: Though it’s cheaper to invest in a REIT than it is to buy a commercial property on your own, it still requires a hefty amount of money. A REIT that interests you might require a minimum investment of $10,000 or more. There’s no guarantee that you’ll continue receiving the same income from a REIT each month. Say your REIT specializes in office properties. If those properties struggle to fill vacancies, the monthly rent the REIT collects might fall, meaning you’ll earn less monthly.

Earning passive income with affiliate marketing

Affiliate marketing is a popular way to generate passive income in the digital age. It involves promoting products or services offered by other companies through your unique affiliate links. When someone makes a purchase through your link, you earn a commission, all without the need for owning or creating the products yourself.

Pros: One of the key advantages of affiliate marketing is its low upfront investment, as you don't need to create your own products or services. Additionally, it provides the flexibility to work from anywhere with an internet connection, offering a location-independent source of income. Once your content is live and your affiliate links are in place, it has the potential to continue generating income over time without constant active effort. Another pro is the wide variety of digital products available for promotion within the affiliate marketing space.

Cons: It's important to acknowledge the upfront work required, which involves creating valuable content and building an audience, a process that demands time and effort. Earnings in affiliate marketing can be somewhat unpredictable, particularly during the initial stages, which may not provide stable income right away. Additionally, the affiliate marketing landscape is competitive, with many affiliates promoting the same products or services, increasing the challenge of standing out. Lastly, your income in affiliate marketing is dependent on the policies and reliability of the affiliate programs you choose to join, which can sometimes be a potential drawback.

Self-publish a book

Ever dreamt of writing your epic fantasy romance? Or maybe you’d like to create a series of books teaching people how to build and run their photography studio. Why not write these books and self-publish them online?

If you do, you can sell them on one of the many online publishing platforms, earning a percentage of every sale. You’ll have plenty of options for publishing your book online, including Amazon Kindle Direct Publishing, Barnes & Noble Press, and Smashwords.

Pros: It’s free to publish your books at the most popular online sites. You’re also limited only by how fast you can write. There is no limit to how many books you can self-publish. And if one or more of your books catch on? You might sell enough to generate some hefty profits each month.
Cons: There are a lot of self-published books out there. It’s difficult to catch possible readers' attention or dollars. No matter how strong your prose is, you’ll usually need to invest in marketing your work extensively if you want to generate sales. Most authors never make any significant money from the books they publish online. While it’s free to publish on sites such as Barnes & Noble Press and Amazon Kindle Direct Publishing, each will take a percentage of your sales, eating into your profits. Then there’s the work: You will have to invest time and energy into thinking up book ideas and writing them. Editing can take a significant amount of time, too.

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Turn your car into a mobile billboard

Have a car? Do you drive a lot of miles each week? Then, you can earn passive income by advertising companies and products on top of or on the side of your vehicle as you motor around town.

To do this, you’ll first sign up with an advertising company such as Nickelytics, Wrapify, and Carvertise and download their app. The company might then track your driving habits and send you an advertising campaign that you can accept or reject depending on where you drive each day.

If you accept the company’s offer, it will mail you wrap-around banners you can place on your car. It might also send you an electronic sign on your car that might need to be custom-installed.

Each advertising campaign is different, but Nickelytics reports that most drivers earn from $175 to $250 for every campaign. Most campaigns last from seven days to three months.

Pros: Little work is required once you sign up with a company and accept an advertising campaign. If you already work as a delivery or ride-share driver, these campaigns allow you to earn a few extra dollars.
Cons: Not all drivers will qualify for advertising campaigns. Most companies require driving at least 30 miles daily or 150 a week. You might also need a newer model car; some companies require that your car be no more than 10 years old and have no visible body damage.

Rent your parking space

Parking spaces are coveted in many big cities. If you have a space that you don’t use? You might be able to rent it out to earn extra income each month.

The best way to do this is by signing up with a company like Spacer or SpotHero. You’ll fill out an online form, provide the dimensions and location of your space, and upload pictures of the spot. You’ll also list whether your space is inside a parking garage, in an outdoor parking lot, or on the street. You can then set a price for renting the spot.

How much you earn varies, but Spacer says you can earn up to $400 monthly in a passive income.

Pros: Most of the work is done once you list your spot. You can then earn truly passive income from a parking space you otherwise do not use.
Cons: You must own your parking space to participate. If you rent an apartment, you might not own the spot assigned to you. You also need a parking spot in a busy part of town. You won’t attract many parkers if your spot is in a far-away suburb or isolated city area.

The bottom line

exploring various passive income ideas can be a game-changer in your personal finance journey. These strategies can generate extra money and provide financial stability beyond regular income sources. Whether through dividend stocks, residential real estate, or investing in REITs, embracing a well-planned passive income strategy can help you achieve your financial goals and secure a more prosperous future. So, don't miss out on the opportunity to diversify your income streams and take control of your financial well-being with these powerful passive income options.

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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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