This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about AP Buyline here.
In a nutshell
Passive income can come in the form of an investment, a savings account or even a side hustle. Passive does not necessarily mean hands-off, though. It’s important to understand how each opportunity works, the benefits and any potential risks.
- Passive income can be a supplement to income earned from your regular job.
- Passive income is largely hands-off once you have the income stream established.
- Be sure you fully understand the pros and cons of any type of passive income stream.
Basic passive income: The high-yield savings account
A high-yield savings account is a bank savings account typically offered by a bank or a credit union. Often online savings institutions often offer the best rates. These accounts are federally insured either through the FDIC (Federal Deposit Insurance Corporation) for banks or the NCUA (National Credit Union Administration) for credit unions. In both cases the limit for insurance is $250,000 per account.
The main work involved here is selecting the bank or credit union and the account that you want to use. Once you deposit your money in the account you will want to monitor the interest rate, as it can fluctuate with market interest rates.
As of April 2024, there are a number of high-yield savings accounts yielding anywhere from 4.5% to over 5%. Savings rates are quite favorable due to the generally high level of interest rates.
CDs and CD ladders
CDs (certificates of deposit) are interest bearing savings vehicles that have a fixed time to maturity. CD maturities typically range from three months to five years but can be longer or shorter than that range. CDs must be held until maturity, and not doing so results in a penalty which is often in the form of lost interest.
A CD ladder is a series of CDs maturing at various intervals. The purpose of a CD ladder is to provide frequent income while maximizing your investment return. As CDs on the ladder mature you must make a choice as to what to do with this money. This could include buying another CD or using that money for another purpose.
Your main tasks in setting up this income stream are selecting the CDs to invest in and (in the case of a ladder) deciding the overall length of the ladder and the intervals at which the various CDs would mature. You will also need to decide on the financial institutions to use. CDs are federally insured in the same fashion as high yield savings accounts.
Dividend stocks
Dividend stocks are stocks in companies that pay a regular quarterly dividend to shareholders. Once you are invested in a dividend-paying stock, the income portion from the dividends is passive. Dividends are paid quarterly.
There is some work involved in selecting the best dividend stocks to invest in for your situation. In looking at stocks for investment you will want to look at the consistency of the dividends: Did the dividends increase or decrease over time? Also, since these are stocks, you will need to review them periodically to ensure that there are no issues that could significantly impact the stock price.
For those who don’t want to research and monitor individual stocks, there are also a number of ETFs that invest in dividend-paying stocks.
Bond ladders
Bonds are debt instruments issued by corporations, state and local governments, several U.S. government agencies as well as the U.S. Treasury. Treasury bonds are considered to be a riskless asset in that they are guaranteed by the full faith and credit of the U.S. government.
Bonds can be purchased as new issues or in the secondary market. Bonds mature at a set date and generally pay interest semiannually.
One way to invest in individual bonds is to construct a bond ladder. This involves investing in a series of bonds that mature at different dates. You might have a group of bonds that mature at six-month intervals over a five-year period, for example. As each rung on the ladder matures you have the option to reinvest the proceeds at the far end of the ladder or in any other way that suits your needs.
Since individual bonds mature at a set date, you know that regardless of how interest rates may rise or fall over time, you will still receive the face value of the bond when it matures. And you will receive the interest payments during the time you hold the bond.
Index funds
Index mutual funds and ETFs are the epitome of passive investing. These funds invest with the objective of tracking the fund’s underlying index as closely as possible. Common indexes tracked by mutual funds include the S&P 500, the Russell 2000 (small cap stocks), MSCI EAFE (non-U.S. developed markets) and a host of others. There are also indexes that track the total U.S. stock market and the total bond market.
Index funds allow investors to invest in a fund that passively tracks a segment of the stock or bond market by tracking a particular index. Using index funds allows an investor to easily put together a diversified portfolio with just a few funds. As long as you rebalance the funds back to their target allocation periodically, this is a valid and almost totally passive strategy.
Peer-to-peer lending
Peer-to-peer lending is a personal loan from you to another individual. Often these loans are facilitated through one of several peer-to-peer lending sites.
The opportunity here is that you can earn interest on the money lent at potentially higher rates than you would get from a bank. The risk is that if the borrower defaults you may have little recourse and may be out the amount defaulted on. To help reduce the risk of default you might consider lending smaller amounts to a larger number of borrowers.
Money market funds
A money market fund is a type of mutual fund that is often connected with a brokerage account. Unlike a money market account, this is a mutual fund and not a savings account. Money market funds are also not federally insured.
Money market funds typically invest in highly liquid and low risk money market securities. These can include short-term Treasury instruments, corporate debt or bank debt. Money market funds are low risk and an easy place to invest and draw interest on your money. There is little or any analysis to be done: you will just want to be cognizant of the ongoing interest rate of the fund.
Your money is accessible typically the next business day. Most money market funds also have check-writing privileges as well.
Rental properties
There are a number of ways to invest in rental properties. A common way is to purchase the property and rent it to a tenant. This may or may not be a passive investment. It can be made to be passive if you hire a property manager who will do all of the day-to-day work including screening tenants, maintaining the property and so forth. In this case all you have to do for the most part is collect the rental income. That said you would be wise to monitor the work of the property manager to ensure they are managing the property in a way that is consistent with your objectives.
Real estate investment trusts (REITs)
Real estate investment trusts (REITs) are funds that invest in real estate of various types. This can be commercial or residential real estate, mortgages or other types of real estate investments. REITs can be publicly traded like individual stocks, but some are private REITs offered through firms like Realty Mogul.
Additionally, there are mutual funds and ETFs that invest in various REITs both on an active and passive basis. REITs are considered an alternative investment when compared with asset classes like stocks, bonds and cash.
Investing in a REIT or a REIT fund is passive since the managers of the REIT do the research and monitor the holdings in the investment. REITs generally pay regular dividends and can be a good source of regular income at set points during the year.
While investing in REITs can be a good source of passive income, there still is work to be done upfront in selecting the best REIT option for your needs. You will also want to do your homework to be sure you understand what the REIT invests in, the expenses and the dividend payout.
Invest in preferred stock
Preferred stock has characteristics of both bonds and common stock. Preferred stock has a preference when it comes to dividends, the preferred stock dividends must be paid before the dividends on the company’s common shares can be paid.
Many preferred shares have higher yields than both common shares and in some cases than bonds. While you might not see the share price appreciation as with shares of top performing common stock, the dividend yield is a classic form of passive income for investors.
The risk is that preferred shares do trade on the open stock exchange. As big dividend payers, their share price can be impacted by fluctuations in prevailing interest rates in much the same fashion as bonds.
Rent out your parking space
If you have a parking space that you are not using you could rent it out to someone in your area. Perhaps you are close to a commuter train station and someone wants to park their car there while they are at work. Or perhaps you live close to a school where parking is scarce. If someone is willing to pay to use this extra parking space, this is extra income that is totally passive in nature.
Affiliate marketing
If you own a website, a blog, or are a social media influencer, affiliate marketing might be a good way to monetize these activities. You will generally have an arrangement with one or more companies to promote links to their product on your site, your blog or through your social media activities via a link to their site.
Prominent companies that offer affiliate marketing opportunities include Amazon and eBay, though there are many, many others. If your site or blog are focused in a particular area there might be companies in that niche that would love to work with you to offer links to promote their product or service.
Affiliate marketing is largely passive in that once you add the links of your affiliate partners to your site or your social media activities, it is up to the people viewing the links to decide whether they want to click on the link and potentially purchase the product or service.
Invest in art
Buying art and collectibles can be a source of passive income. You can own these pieces for your own enjoyment, perhaps displaying them in your home, but these pieces can also potentially be sold to other interested buyers. If your intent is to sell these pieces in the future you will want to do some homework upfront on the potential market for the types of art or collectibles that you are considering.
Another way to invest in art and collectibles is through an investment fund. Masterworks is one company that offers this type of fund. The fund owns interests in a wide range of artworks and investors can own a piece of this fund by investing. This is a passive investment in a fund that securitizes artwork, so there is little or no research required by those investing in the fund.
Rent out your home
If you know you will be gone for a period of time, consider renting out your home.
You can list your home on websites such as Airbnb or Vrbo, where you can set the rental terms. This can be a way to monetize your time away from home and receive money to cover your home expenses and other costs. Note that sites like Airbnb do not do comprehensive background checks on tenants.
The potential downside is that you may have a bad tenant who damages your home, potentially incurring costs to fix the damage.
Buy an annuity
Annuity contracts are purchased through insurance companies and are designed to provide a guaranteed stream of income for life or a set period of time. Annuities can be structured in a number of ways including variable annuities (whose value will fluctuate based on the performance of the underlying investments in the contract) and various types of fixed annuities.
Most annuities offer a range of payout options including income for a single life expectancy, a joint life expectancy, payments for a guaranteed minimum timeframe, or the opportunity to take lump-sum payments.
This is a passive income opportunity that can be tailored to your needs. There is work to be done on the front end in terms of choosing the best annuity contract. This includes expenses, distribution options and whether the growth of your payments comes from variable or fixed returns.
Annuities can be purchased from a variety of financial services companies including brokerage companies like JP Morgan Self-Directed Investing.
The AP Buyline roundup
Beyond our jobs, there are other ways to earn money. One option involves earning passive income. Passive income can mean a lot of things, but in general it refers to income that is generated with a minimal amount of work. There may be some upfront work involved, but after that the income stream generally takes a minimal amount of maintenance.
These are just a few of the passive income ideas that you might consider. The right option for you will depend on things like the level of money you can invest or whether you can add a passive income stream to an aspect of your primary or side business activities.
Whatever route you choose, be sure to understand the pros and cons, the potential income that can be earned, any associated expenses and any risks that you might be incurring.
Related: How to start an online store
This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about AP Buyline here.