Passive income seems to be getting more attention recently. Probably in large part due to the overall economy of gurus, courses, investing in meme stocks, and other schemes which must in some way have been successful, even if only for a small minority of people who then talk the most and the loudest about their experiences.
Is passive income feasible as a replacement for your day job, or at least as a significant side hustle?
The answer is going to vary wildly for most people and has a lot to do with your current income, your available capital, your age, and the time you have to work and research new investments.
Examples of Passive Income
There are probably hundreds of ways to make money ‘passively” but we will cover some of the most common, and some of the best, as far as I know.
Dividend-Based Investment Portfolio Income
The stock market is the traditional investment vehicle, and while there is always some risk, you can do fine with an index fund or a diverse portfolio of dividend stocks.
Dividends are small payments that some companies pay you every quarter based on their profits. As long as you hold their stock on a particular day, you will receive your dividend payment.
This of course is an extremely passive form of income, but like everything on this list, it does require some effort. In this case, the effort required is in research and making sure you are buying stocks in companies that are stable, offer a good dividend and most likely you will want a large, diversified portfolio of these stocks so if one company reduces its dividend, it doesn’t represent a massive dip in your income.
One thing to keep in mind is that a dividend of a stock is usually inversely proportional to its performance, and stability. This means that a company that offers a dividend is more likely to reduce its dividend as it gets more and more successful.
The dividend, therefore, can act as a lure for investors who may not see full value in the stock price itself, and a dividend may financially offset some of the instability in the company’s long-term future.
Now, this isn’t always the case. Some companies just offer a small dividend, regardless of their stability, and it just adds value to the investors. Take Johnson & Johnson for instance, certainly not a company in financial instability, it still offers a relatively small, but stable dividend.
One of the downsides to trying to use a dividend portfolio for income is that the true power of dividend investing is reinvesting the dividend to increase the overall investment, and over long periods of time, the compound effect of this is incredible.
If however, you are using this dividend as income and living off of it, then you are not utilizing compound interest, and while you can create an income of around 5-10% ROI depending on your portfolio, the initial capital investment required to live off of a strategy like this is significant.
To earn $50,000/year with a dividend portfolio would likely take a total of a million dollars invested. This is a strategy that’s out of reach for most people and would be far better for investors who already have massive capital, and want to reduce their working hours to practically nothing, in a true passive income retirement.
Capital Required: High
Time Required: Low
Passive Income Score: Almost 100% Passive
Crowd-Sourced Funding Income
One of the most recent and interesting investment opportunities these days is crowdsourced funding and lending. People are aware of crowdsourced funding like Kickstarter and GoFundMe but there are peer-to-peer lenders out there who connect investors with borrowers directly.
There are probably hundreds or even thousands of these types of networks available these days, but they all share some similar qualities.
Most of these crowdsourced lending networks fund small loans to individuals or small businesses from a few $1000 up to $50,000 or so. Many of these lending networks also charge much higher interest rates than a typical bank because the type of loan they are funding can be high-risk loans or debt consolidation, etc.
There are however some networks that are catering to much larger loans and even crowdsourced mortgages. These types of networks do carry more risk because the types of people who want to get funding through these loans have been typically turned away from the bigger banks that have a low-risk tolerance.
Unfortunately for investors, this means that there will be some percentage of default on some percentage of these loans and while I don’t have any specific numbers I suspect they are non-trivial and would contribute to the risk profile of your portfolio heavily.
That being said I think that they provide a very good service to some people who simply need some time or some help to get out of a sticky situation that maybe the banks have decided is too risky for them but in many cases, these loans are small in the $1000 to $4000 range and carry high-interest rates around 25%.
They also typically have terms of around 1-5 years for a typical peer-to-peer loan. This means that your investment would not be liquid and you would not be able to withdraw your money if you needed the capital until the loan matures.
Here in Canada, I have a little bit of experience using a lending platform called goPeer which allows you to invest in individual loans. They have a list of available loans which are waiting to be fulfilled, And you can invest in very small amounts to spread your risk among a number of different loans.
One misconception I had before I started my research into these networks was that as an investor I would need to fund 100% of a loan, But that’s simply not the case. Most platforms will allow you to invest in a spread of loans again to minimize your risk.
These investments would be about as passive as you can get, with goPeer you can even set automatic investments and automatic withdrawals so at the end of every month you can have a certain Amount of money withdrawn from your bank account and invested into the platform which would then be automatically distributed among the classes of loans that you set your risk tolerance for.
This is a really nice feature because it acts very similar to something like Wealthsimple where you have regular investments into their platform but the returns on these peer-to-peer loan platforms should be significantly higher than something like Wealthsimple just because of the nature of the loans that are involved.
I will be writing a full article on these types of investment opportunities because there are just so many available and there are so many options and variables to consider I think it’s worth its own exploration. I will link to the article here as soon as it is complete.
Capital Required: Low-High
Time Required: None
Passive Income Score: 99% Passive
Affiliate Marketing Income
Affiliate marketing is one of the easier income streams to jump into without much in the way of investment and knowledge. It is a skill you can start anytime in your investment career, and at any age of your life.
However, the level of success you will have is very likely going to be tied to the amount of effort and time you have to spend. Success as an affiliate marketer is in every sense of the word, a good, hard hustle.
You can easily start being an affiliate marketer by picking a niche you want to work in, writing content, and finding affiliate programs that match your content. Once you have some content, and a matching affiliate program, you just rinse and repeat. Your website should grow organically and using social media and even promoting with some ads may be the key to your first few successful sales.
Luckily, affiliate marketing is one of those things that as long as you keep adding content to your website, and achieve a critical mass of visitors, your content will continue to make money. Income will increase as you add new content, and a little bit of content curation and keeping your content relevant will assist in an incredible source of income.
Now, obviously, this is far from passive, and it borders on a full-time job at times, especially early in your project. However, after you have reached that critical mass of visitors, you do get a significantly better return on your investment of time, and many affiliate marketers I know work 3-4 hours a week while still making a 6-figure income.
Capital Required: None
Time Required: High
Passive Income Score: Almost 100% Passive
Income from Royalties
Another passive income is a royalty of some kind. If you have some musical talent, you could write some music that may sell on marketplaces like envato.com and continue to provide you passive income if the music you write is in demand for long periods of time. Or maybe you are a developer and can make WordPress themes or some other digital product.
Other than the initial cost of time for you to develop these, the income you make can be almost totally passive. However, it’s never guaranteed income and it would be a lot of work for any of these sources to replace a $60,000 income without significant amounts of work. Also keep in mind if you are selling a digital product or service, you will need to arrange for technical support, returns, etc., and this will either affect your bottom line because you are paying someone to take care of those for you, or you have to spend your time doing it yourself, reducing the passiveness of the income.
However, if you manage to create a digital product or service that becomes highly profitable and successful then it should be relatively trivial to hire a virtual assistant or support staff in order to maintain and update your product or service depending on customer needs and requirements.
A digital product that I’m constantly buying and I always think is a great market to get into for a young professional who has a bit of talent and drive to build templates for things like WordPress and digital products. Things like templates for graphic design and video editing are extremely popular and the demand is extremely high. It seems like someone with a bit of time and talent on their hands would easily be able to break into this as long as they do some research and find out what niche area is lacking in quality templates and then the proper marketing.
If you are able to create a digital product that doesn’t require huge amounts of expertise to use as well then your customer service requirements will be very low and your passivity of income will rise significantly. Some of this might be due to the simplicity of the product, something like a simple Photoshop template. You could also invest heavily in the time it takes to properly write out instructions and tutorials for how to use a more complicated product which will alleviate questions and concerns from users in the future.
Capital Required: None
Time Required: High
Passive Income Score: Variable, 50%-100% Passive
I live in Canada, and the housing market here it’s considered widely to be one of the most inflated parts of the Canadian economy. For various reasons including foreign investments as well as high numbers of wealthy immigrants moving to areas like Toronto and Vancouver, the average home price in larger urban centers has risen significantly in the last 10 years.
It has risen so sharply in places like Vancouver that small 500-square-foot condos that used to be worth around $250,000 in 2012 are now selling for over $800,000. Single-family homes in the Vancouver area have also risen astronomically, and the land value is so high that teardown houses in Vancouver are still being sold for two or three million dollars.
Now, this might seem terrifying and counterintuitive for an investor but the sad fact is, areas like Vancouver have nowhere to expand and the natural beauty, as well as the exceptional quality of life in an area like Vancouver, is so high that immigration and population migration will continue to increase the population of the greater Vancouver area.
It might seem very difficult to invest in this type of market because the barriers to entry are so high most of the houses in Vancouver even crappy ones being sold for millions of dollars. However, the shrewd investor will notice that the value of real estate extends beyond the major city centers, and even places like Alberta, Saskatchewan, and Manitoba Are starting to see rising property values.
There’s no way to predict exactly what’s going to happen in any market but if you consider that most people are being pushed out of the housing market in areas like Toronto and Vancouver it’s logical to assume that many of them will abandon those provinces and cities in search of smaller areas with more affordable housing, especially given thees at which you can work from home in a lot of different companies these days.
This of course provides a potential opportunity for investors to purchase real estate in areas That are expected to increase in value in the coming decades.
Of course, this isn’t limited to Canada you can model this exact same situation in areas like California and New York where land values have become so extraordinarily high that you’re starting to see migration from the working class away from those centers and into areas like Austin TX and Las Vegas where property values were much lower a few years ago and they are starting to increase.
Property Value Increase
The most obvious way to make money from these investments is to move from an area of high demand into an area of lower demand. For instance, moving from a city like Los Angeles into a city like Las Vegas. If you are fortunate enough to work in an environment where you can move or you are in an industry where you could easily find a job in another city that has a lower cost of living, then the money that you will save by living in that city can be put towards other investments, increasing your total net worth significantly.
And if you are able to choose a city that has a likely increase in value like Austin TX or San Antonio TX or Las Vegas or other desirable Areas, you will likely see your property value increase over time.
Of course, there is also a risk that you might buy into a market that is not as stable as you thought and your property value could go down, so it is for this reason that I don’t feel extremely confident that this kind of investment is for everybody it has significant risk as well as significant difficulties due to having to move either yourself or your family long distances in order to achieve this.
Of course, the other obvious way to invest in real estate and make a “passive” income is as a landlord.
The obvious benefit to becoming a landlord is that you earn income from your investment immediately in the form of rent and it’s not difficult to calculate the costs of your investment based on housing prices mortgage costs and what it would take to ensure and maintain a property.
I think the last part of that equation is the variable that’s difficult to know and that is maintaining a property is always a bit of a roll of the dice, and you may be able to negate some of that risk by buying a newer property, especially one that might have a warranty on it for things like the roof and the building envelope which are very expensive things to have to repair.
A newer property will also have the benefit of newer appliances which also need to be replaced every 10 or 20 years so calculating these maintenance costs will be very key in understanding your actual income from this investment strategy.
As well as the rental income you may also be able to Benefit from the property value increases as above. This is typically where most landlords will make their money and they usually consider the money that they earn from their rent as just enough income to pay for Maintenance and mortgage costs.
This strategy of getting rental income will vary wildly based on your area and the availability and prices of rental houses so a lot of research will be required to properly and successfully execute this strategy. Also compared to some of our other investments this requires a huge amount of risk because the value of properties is typically very high and you will most likely need a mortgage in order to pay for any sort of rental income or second property.
Also, you may notice that I have put the word passive in quotes when I refer to the income because contrary to popular belief being a landlord can be very far from passive depending on the property you have invested in and how much time it’s going to take to either do the repairs and maintenance yourself or hire people to do it for you as well as dealing with tenants and other things. Take any stories you hear from people on being a landlord as being incredibly easy and exceptionally passive income with a grain of salt, As for every story there is about income being as easy as apple pie there are probably 50 stories of nightmare tenants and horrible investment returns based on bad decisions by the investor.
Capital Required: High
Time Required: Low
Passive Income Score: 80% Passive