Passive income has become an increasingly popular subject in the past few years. As the FIRE movement has caught on, the #1 thing needed for that is a reliable passive income source that will last a lifetime.
This article will go through some of the top ways to earn passive income today and give the advantages and drawbacks to each. I’ve done a bunch of them personally myself so I have firsthand experience.
#1) CD/Savings account
Ok, this is by far the weakest way to earn passive income, but it’s also the safest. While right now they may be terrible, that may not be the case in a few years. So for now it’s not a recommended place, having a small part in either of these is probably a part of everyone’s portfolio.
Right now you’ll be lucky to get 2% to 3% at best on these items. Not very good unless you’ve got a ton of money or adverse to risk. Ally Bank in particular is famous for their high rate savings accounts.
#2) Rental Houses
Rental houses probably take more capital than all the other forms of passive income, but they can also be the most lucrative. The hardest one is always the first house, after that it becomes really easy. Reading books is absolutely essential when going into this category. There are three keys to rental houses (kudos to Jake and Gino’s Podcast). They are buy right, manage right, and finance right. If you don’t do those three things right, you’re going to have issues.
You buy it for too much money, and it’s not going to cashflow very well. Or you give it to the wrong manager who rents it to a bad tenant, that isn’t going to work well either. Or if you take out a loan with a balloon payment you can’t afford, that may end poorly as well.
You’ve got to do all three things well in order for rental houses to pay off. It’s not for everyone, but the long term returns (5% to 25%+) are hard to beat.
#3) Affiliate Websites
Affiliate websites are money making machine if you can get one going. Starting from scratch is tough though, it is NOT a quick road to success unless you’ve got a bunch of money to poor into it for articles.
Typically it takes years of effort to get a website going to a decent level (couple hundred per month). That’s the hard part, you never quite know exactly how much a website is going to earn until it’s going. It could be thousands, it could be almost nothing.
There is a way to short cut this somewhat, you can buy websites via brokers like flippa.com and empireflippers.com. They offer websites for sale, typically at 20x to 35x monthly earnings. So yeah, even at the highest multiple, the website should pay you back in 3 years or less, which is a really high return.
However, websites are also somewhat risky, so you can get a really high return for your money. Google algorithm changes, affiliates changing payout rates, competitors, etc all can reduce your income very quickly. Of course, the opposite is true, you may suddenly be the benefactor of a change that quickly helps you out.
#4) Real Estate Syndicates
Real Estate Syndicates are mostly reserved for accredited investors (those making 200k individual/300k joint or have over a million in assets) but they can be great if you meet those qualifications. Basically, most of these have a minimum of $50k in which they pool together a bunch of investors and buy a large asset like an apartment building or self storage facility. Then over the next 5 to 7 years usually they improve the asset and increase rents, therefore increasing the value of the asset. Most of the time it seems like they’re hoping for a double in value over that time, and usually they pay dividends on a quarterly basis until that sale happens (dividends usually 5% to 10% depending on the asset).
Syndicates can fail though (which happened a lot in 2009) due to unforeseen circumstances. In 2009 what happened to a lot of them was their balloon payment came due while financing was unavailable. So instead of being able to refinance or sell as planned, they were forced into foreclosure even though they had never missed a payment and were performing as planned. Bad deal for all involved.
#5) Real Estate Notes
Real estate notes are a mostly unknown asset class for most people. Most of the time, it’s buying the mortgage note for a single family home that someone is paying on. So say a family has a loan out for $100k on a house. An investor can sometimes buy the mortgage ‘note’ to then get payments on that loan. Most of the notes are discounted based upon the asset and rate of return. So a note at $100k paying 4% may only bring $90k, a note paying 8% at $100k may bring close to the full amount.
Along with that you have notes that are the first mortgage, some that are second mortgages, non-performing, etc. There’s a whole world of note investing out there.
There are also Note Funds like the one from PPR Note Company. These pay a dividend every month usually anywhere from 6 to 12%. Most of them you have to be an accredited investor though, which is one drawback.
#6) Stock Dividends
This used to be a better option years ago when dividends were higher, with the current S&P 500 average being under 2% it makes it a little harder. It’s also different because while taking the dividends to spend sounds great (low taxes, quarterly income) some of the best returns you get are from reinvesting the dividends back into the stock (and getting even more dividends).
There are a lot of companies that have increased their dividend every year for decades. Those are usually the companies to invest with. You may look at some of these and think “but the dividend is only 3%? How does that help?”. Well what happens is as the dividend increases, the stock price usually does too by the same amount. So you get both dividends and price appreciation.
The one drawback is that this category is that your equity does tend to fluctuate a lot, so if you need this money regularly you may end up having to sell some of the stock at less than desirable prices.
#7) Amazon Retail Arbitrage
Most people have shopped on Amazon at one point or another, and most do it quite regularly. A lot of items have that “Sold by Somebody, Fulfilled by Amazon” tag on them…that’s Amazon FBA. Amazon FBA is where people send in products for Amazon to sell on their marketplace. These products can be almost anything that you find at a regular store (and that you have permission to sell on Amazon…there are a lot of restricted brands).
Retail Arbitrage works like this. You find an item on sale at your local store. You scan the items barcode with the Amazon Seller’s App and you can use it to determine your profit on your product after all expenses (selling fees, shipping, etc). It’s very slick and not hard to do.
After you find item to sell, you’ll need to create a shipping label and send it to Amazon. After it’s at Amazon, you just have to wait for your items to sell. The higher the sales rank usually the faster they will sell.
It’s a great way to earn money on the side if you have free time. It’s a time for money deal though, and not nearly as passive as some of the other items.