What Is Passive Income, and What Are Examples of It?

What is passive income?

Passive income refers to money earned with minimal effort or ongoing involvement on the part of the recipient. It is a stream of income that continues to generate revenue even when you’re not actively working. Passive income can be a key component of achieving financial independence and building wealth because it can provide financial stability and reduce reliance on traditional employment.

Passive income can be a great way to help you generate additional cash flow, which can help you in case of an emergency such as unemployment.

Example of passive income

It’s important to note that generating passive income often requires significant upfront investment, time, or expertise. Additionally, not all passive income sources are truly “hands-off”; some may require occasional monitoring or maintenance. Building a diversified portfolio of passive income streams can help provide financial security and potentially lead to financial independence over time.

Here are some examples of passive income:

Dividend Income

Investment is a good passive income source. If you own shares of dividend-paying stocks, you can earn passive income in the form of regular dividend payments. Companies distribute a part of their profits to shareholders every year in the form of dividends, which is a good source of passive income.

Investing in exchange-traded funds (ETFs) or mutual funds that focus on dividend-paying stocks can provide a diversified source of passive income.

Opportunity: 

• If you have invested your money in dividend-paying stocks, you may be able to earn a good income consistently over a long period of time.

Risk: 

• There is always market risk associated with investment.
• You are first required to pay a lump sum amount for investment purposes.

Learn more: How to Buy Stocks for Beginners: 7 Easy Steps

Rental Income

Renting has always been one of the best sources of passive income. You can generate passive income by renting out ownership of real estate such as apartments, houses, or commercial spaces. In this way, you continue to receive monthly rental payments from tenants.

Opportunity: 

• If you have a property in a good location, you can generate passive income continuously from there. 

Risk:

• To generate rental income, you need to invest a lot of money in the property; only then can you generate rental income.

Interest Income 

When you invest in interest-bearing assets like bonds, certificates of deposit (CDs), or certain savings accounts, you earn interest on your principal investment. This interest income is considered passive.

Opportunity: 

• By investing in these assets, you may be able to earn a consistent, good income over the long term.

Risk:

• You need a lot of money to generate a decent amount of interest from assets like bonds, certificates of deposit, or some savings accounts.
• If your CD doesn’t have high-yield returns, those returns may pale in comparison to inflation, hurting the real purchasing power of your money.

Royalties and Patents

Authors, musicians, artists, and inventors can earn passive income through royalties. For instance, a writer earns royalties from book sales, and a musician earns royalties from music downloads and streams.

Opportunity: 

• A good source of passive income

Weakness:

• To generate royalty income, you must have your own talent.
• It requires time and effort.

Peer-to-Peer Lending

In peer-to-peer lending, you can lend money to individuals or small businesses through various platforms or through your own contacts in exchange for interest payments. In return for these loans, you can get interest every month, which is passive income.

Opportunity: 

• Through this type of lending, you may be able to earn high interest compared to other investments.

Risk:

• Generally, peer-to-peer lending involves lending money to individuals or small businesses, and this type of lending is unsecured; in the event of default, your money is lost.

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT), is a company that owns and manages real estate. It has a special legal structure, so it pays little or no corporate income taxes when it distributes most of its income to shareholders.

Opportunity: 

• Since the finest REITs typically increase their dividend on a yearly basis, you might accrue a growing stream of income over time. You will earn whatever the REIT pays you as a dividend.

Risk:

• Like dividend stocks, you need to be able to choose good REITs, and that means you’ll need to analyze each business you buy. To do this analysis, you will have to learn, which will be a time-consuming process.
• There is also market risk (like any stock, the price can fluctuate a lot in the short term) associated with this investment, and while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing.

Real estate crowdfunding

Some platforms allow you to invest in real estate projects with a group of investors. You earn passive income from rental income or property appreciation.

The real estate platform would charge you a yearly management fee, and your initial investments might be as little as $10 or as much as $100,000.

Opportunity: 

• This real estate can be helpful in diversifying your investment portfolio.
• You can get access to private real estate deals that have been pre-selected by knowledgeable investors and may be attractive for investment purposes.
• You can also check the returns on these platforms to know what level of returns you can expect and in what time frame.
• Popular platforms for real estate crowdfunding include Fundrise, DiversyFund, and Yieldstreet.

Risk:

• As we mentioned above, you must check the past returns on these platforms before making your investment so that you can get an idea of the returns. It may be that the past returns are looking good, but they may not give those good returns in the future.
• Here also, before investing, you need to understand everything in detail, i.e., read the prospectus of the deal you are interested in and understand its pros and cons.

Create an Online Course or Digital Product

In today’s information technology age, you can create and sell online courses, e-books, stock photos, or software that people buy without your direct involvement after the initial creation and marketing. From which you can make good money. 

Opportunity: 

• If your products, such as courses, eBooks, software, and photos, have potential and demand in the market, then you may be able to generate passive income over time. This means you can potentially sell the same product (courses, eBooks, software, and photos) hundreds or thousands of times or more.

Weakness:

• It takes considerable effort to create courses or software, go out and shoot photos, then process them, and stay connected with events that can ultimately increase your revenue.

YouTube and Blogging

Building a successful YouTube channel or blog can generate passive income through ad revenue, affiliate marketing, or selling digital products.

Opportunity: 

• Due to your content, you can create a large audience over time and generate a good passive income.

Risk:

• In this, you will have to create content in the beginning and then continue to create it continuously, which can take time. You’ll need to be really passionate about the product, as this can help you maintain the motivation to move forward, especially in the beginning when your followers are still finding you.

Franchise Ownership

In franchise ownership, you can take ownership of a famous franchise. Owning a franchise can be a form of passive income, as you hire a manager to run the day-to-day operations while receiving a share of the profits.

Opportunity: 

• In a franchise, you get the support of a ready-made brand that you can manage well and generate a good income from.

Risk:

• In this case, you have to share some of your earnings with the owner of the brand.

Sponsored posts on social media

If you have a strong following on social media sites like Instagram or TikTok, you may be able to generate income from sponsored posts. In this case, you can get paid by growing consumer brands to post about their product or otherwise feature it in your feed.

You can start increasing your social media followers from scratch. For this, keep posting stories and feeds continuously. After some time, you will build a large audience, which will help you generate a good income from sponsored posts.

Opportunity:

• Leveraging your social media presence is a lucrative business model. From which good income can be generated.

Risk:

• To get meaningful sponsored posts on social media, you need a large audience, which takes time, and until you get a meaningful audience, you are no longer an attractive option.

Which passive income source is best?

The best source of passive income depends on various factors such as the amount of money invested, the amount of income generated, the size of the overall opportunity, your interest and ability in the field, the amount of time you need to invest, and your ability to invest, and the opportunities to succeed.

So you have to weigh the opportunity against these factors and see which passive income strategy works best for you.

How can I make passive income with no money?

As you can see from the above list, you may identify various options for passive income that can be started from scratch with no money. You may be required to invest your time and continuously do so, but after some time, you will definitely be able to generate passive income.

Some of the options that you start with no money

1. Create an online course or digital product.
2. YouTube and blogging
3. Sponsored posts on social media
4. Royalties and Patents

How can I make passive income with money?

If you have the money, you may be able to generate passive income from the start. Money can provide you with more passive investment opportunities.

You do not need to spend much time on this. As you can see in the above list, there are many options in which you can invest and enjoy a good passive income.

You must have money to take advantage of the following passive income areas:

1. Dividend/Interest Income
2. Peer-to-Peer Lending
3. Real Estate Investment Trusts (REITs)
4. Real estate crowdfunding
5. Franchise Ownership