A Beginner’s Guide to Passive Income
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Your income doesn’t have to come from working a single job that you hold for life. Making ends meet can mean working two jobs or having a side hustle or two for passive income.
According to the U.S. Census Bureau, about 13 million U.S. workers hold down more than one job. About one-third of Americans have a side hustle, according to one analysis.
Instead of holding down two or more jobs, a common tactic is a side hustle that becomes a passive income. Instead of spending most of your day working, you set up a passive income or side business that almost runs on its own and helps you meet your financial goals.
In this article
What is passive income?
A side hustle can be a second job, though, for most people, it’s a passive form of income that doesn’t require much work.
Some passive income ideas require more work than others, such as setting up your home to rent out on Airbnb when you’re away or doing a podcast or dropshipping. But once the small business is set up, it can take little effort to generate passive income.
Other passive income streams can take less work, allowing your money to work for you. These include real estate, peer-to-peer lending, dividend stocks, mutual funds, or a simple savings account.
Passive income ideas can come from just about anywhere. Whether you just want some extra cash for weekend expenses or are ready to set up an online business and set up a business model that can run on its own so you can retire and never work again, passive income opportunities can help you achieve your goals.
We’ll go over some passive income ideas that may be a fit for you. We’ll start with ones that could require full-time, hands-on work for a while and then review somewhere your money will do most of the work for you.
Hands-on passive income ideas
If you don’t mind doing some hands-on work to set it up and keep it going, a source of passive income can be a relatively easy way to earn some extra cash or turn it into a full-time income.
These ideas can require selling products or ideas and may require more time to set up than investment opportunities. A hobby, for instance, can be turned into a way to make money. Here are some passive income ideas that beginners, and anyone else, can try.
Real estate
Buying real estate and holding it for years as a rental property landlord is one way to have a passive income. But that requires having enough money for a down payment and then a mortgage. You can hire a property manager to deal with repairs and tenant issues, making real estate a regular cash flow income that may not take up much of your time.
Another real estate option is to flip homes. It requires a fair amount of upfront money also, but one small business website says it usually costs around 10% of the purchase price to buy, repair and sell, among other costs. If you’re good at fixing things, this may be the passive income you’re looking for. If not, you can pay someone to make repairs.
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Airbnb
Airbnb is another rental property option for earning passive income. You can either use your own home and rent it out on the popular website or buy a home exclusively for Airbnb rentals.
One couple wrote about buying a $300,000 house with a $60,000 down payment and $28,000 more to renovate, furnish and get it ready for launch. After expenses, they now earn around $22,000 in passive income from their Airbnb rental.
Most Airbnb hosts pay a flat service fee of 3% of the booking subtotal.
Affiliate marketing
If you have a popular website or think you can start one that will attract a lot of traffic, then affiliate marketing can be a way to earn money in your sleep.
Affiliate marketing is an online business you run where you earn a commission for marketing products for another person or company. You earn a piece of the profit from each sale you make, which is tracked through affiliate links from one website to another.
Amazon is a standard e-commerce site to set up affiliate marketing partnerships. You link to an item on Amazon from your website, and hopefully, your readers will buy it.
Joining an affiliate marketing group can be free. Some charge $500 to $2,000 in setup fees.
Podcast
If you’re an expert on something and want to talk about it to the world through a podcast, you may be able to make some extra money.
Sponsorships are the most common way to make money from a podcast. They’re essentially advertisements and are expected in podcasts. You can also set up premium content that listeners pay for and only receive as supporters of your show.
Starting a podcast can require some equipment, such as audio editing software. Some costs are as low as $9 per month, up to $500 for a one-time purchase.
YouTube channel
If video is more your thing than a podcast, setting up a YouTube channel and creating regular videos can be a good source of passive income.
You don’t need millions of subscribers to make money with a YouTube channel. You can earn money by the level of engagement you generate, the niche you cater to, and other revenue channels. Buying video production equipment can cost between $1,300 to $10,000.
Related: How to Make Money on YouTube
Digital products
Continuing the strategy of using your hobby or expertise for passive income opportunities, you can use digital products to sell your knowledge without much work once you create the products and promote them.
These include writing an eBook that you save as a PDF and then sell online or online courses that you set up. Videos, for example, can supplement eBooks and can be sold separately.
Udemy
Instead of setting up an online course by yourself, you can start with Udemy, where 183,000 online video courses with new additions are published every month. Become an instructor of a topic you’re an expert in, such as design, development, marketing, personal development, music, and photography. There’s no fee to be an instructor.
Dropshipping
Want to be a middleman and make some extra cash? Dropshipping may be for you.
Dropshipping is where you act as the selling merchant to a buyer, a consumer, by selling products that you don’t own or keep in stock. You act as the middleman and purchase inventory as needed from a third party — usually a wholesaler or manufacturer.
The third-party supplier then ships the items directly to the customer. The process can be automated, with you acting as the online store owner. When a customer clicks the Order button, the supplier sends the product to the customer without you having to do anything more. Starting a dropshipping business costs $280, according to one estimate.
Etsy
Etsy is an online shopping store where sellers make what they sell. Again, suppose you have a hobby to create something unique relatively easily. You can sell it on Etsy and earn a passive income as a sort of active income.
By selling products that you enjoy making through Etsy, you can turn a passion into a source of passive income. Make your hobby your side hustle.
Etsy charges 20 cents to publish a listing, which lasts for four months or until the item is sold. A 5% transaction fee is charged on the sale price.
Let your money do the work
Using your money to make money is another form of passive income that can increase your cash flow while you sleep. Some passive income ideas can require some research and risk but can be worthwhile if you do your homework.
Invest in the stock market
With some extra cash that you’re willing to lose if the stock market tanks, you can use an online brokerage to invest in the stock market and potentially earn a passive income.
Mutual funds can be a good start because they spread your risk more and are cheaper to buy than individual stocks.
Dividend stocks are another excellent way to get your feet wet in the stock market. Stocks that pay dividends usually pay them quarterly so that you can earn some money every three months. Or you can reinvest the dividend in the stock and watch your earnings grow.
Buying stocks or mutual funds through a brokerage can be free. Most, however, charge commissions and fees every time you trade a stock.
Related: Best Free Stock Trading Apps
Invest in real estate investment trusts (REITs)
Real estate investment trusts (REITs) are companies that own or finance income-producing real estate across various property sectors. Most REITs are traded on major stock exchanges. They typically pay high dividends, plus the chance for long-term capital appreciation.
REITs can have an investment minimum of $1,000 to $25,000. They may have 1-2% of the total equity invested asset management fees.
Related: How to Invest in Your 20s – Small Moves for Big Impact
Peer-to-peer lending
Peer-to-peer lending lets you loan money to other people without a financial institution as the middleman.
Also called P2P or “crowdfunding,” you can invest in peer-to-peer lending through many websites that offer this service. Upstart, Prosper, and Happy Money are companies that match lenders (or investors) with qualified applicants at competitive interest rates and with low fees. Some platforms charge a 1% fee to their investors.
Related: Best Peer-to-Peer Lending Companies
Cryptocurrency
If you have a high threshold for risk, then investing in cryptocurrency may pay off as a passive income stream for you.
The risks of buying cryptocurrency include a hack, outage, price volatility, being locked into a specific time to sell, as the Motley Fool explained.
Cryptocurrency can cost thousands of dollars, so you may be able to buy some in fractional shares and start with an investment of just $25. However, exchange fees are likely, such as 0.50% for buying less than $10,000 in cryptocurrency.
Savings account
At the opposite end of investment options is a savings account. According to the FDIC, as of January 18, 2022, the interest rate on a savings account in the U.S. was 0.06%. That won’t make you rich, but it’s a safe place to put your money and receive the most basic form of passive income around.
Savings accounts can be free to open. A monthly maintenance fee of $25 or so can quickly eat into any savings, so look for a bank that waives the fee if you keep at least a few hundred dollars in the account.
Related: Best High-Yield Savings Accounts
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Costs
We’ve explained the costs of each of the above passive income streams as they were explained, so you should already have a good idea of what you might need to pay to get started.
Some are free, such as eBooks and online classes. You just need to have a website on which to sell them. An Etsy store can be inexpensive to run, and buying and selling stocks can be relatively cheap if you find a brokerage that doesn’t charge high trading fees.
Real estate is where upfront costs can be the highest. Buying a $300,000 home to own and rent, or to flip, isn’t cheap, and you’ll need tens of thousands of dollars to get started.
Pros and cons
Pros
- Earn money while you sleep.
- Your passion can become your income.
- Many passive income opportunities can be worked on anywhere in the world with an internet connection.
Cons
- Real estate startup costs can be prohibitive for some people looking for passive income.
- Investing in the stock market can be risky, so be willing to lose all of your investment.
- It can take a lot of work and time to set up a successful passive income business.
The bottom line
With little or no startup costs, you can be on your way to a passive income that lets you earn money every hour of the day without having to do much work.
Start by researching passive income opportunities that fit your skills and how much time you devote to them. Podcasting may not be for you, for example, if you don’t want to talk about something for hours. Instead, you may do better at writing about your area of expertise.
If successful, you won’t think of passive income as work but as a fun way to make money without working 40 hours a week on your way to financial freedom. Or worse, working two jobs.
Related: How to Buy Airbnb Stock in 2023
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Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
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