Passive Income Strategies
Passive income is 1 of the 3 types of income but the only type that will allow you to be financially free.
Passive income is money that flows in consistently without the need to put in considerable amount of effort or time.
Investing in assets that generate cash flow allow you to focus on other things in life, like family and friends, passions, early retirement and becoming financially independent. Passive income also gives you a ‘buffer’ in case of emergencies like losing your job (COVID pandemic) or having to take time off work to care for a loved one.
Passive income is not a ‘get rich quick’ scheme. In actuality, work and due diligence is done upfront and then the consistent flow of money is your reward. Passive income is essential in building wealth. In addition, passive income is taxed at the lowest rate in relation to the other forms of income (earned and portfolio). Therefore, you keep more of what you make.
For an explanation of the 3 Types of Income, please click here. You’ll find out more about what they are, the differences, advantages and disadvantages of each type of income.
Strategies for Building Wealth through Passive Income Sources
There are many ways to build a portfolio of assets that generate passive income consistently. However, as mentioned above, many passive income strategies require research, analysis, due diligence, patience, time and work upfront. If you are not willing to do so, passive income generation is not for you as it is not a ‘get rich quick’ strategy. In most cases, passive income strategies are long-term investments and require higher Financial IQ and continual education. This is why only a small fraction of adults invest the time and effort into creating passive income streams.
1. Real Estate
Real estate has proven to be one of the top asset classes for generating passive income time and time again. This is why some of the most wealthy individuals and families started to make their fortunes through investing in real estate.
A. Residential Real Estate
If you are new to property investing, you’ll probably start with residential real estate first. The magic occurs through leverage (think mortgages). Because the real estate asset makes you a consistent return, the mortgage, or debt is considered ‘good debt‘.
Depending on location and rental market, if you were to put a down payment of 25% of the purchase price and financing the other 75% (leverage through a mortgage), chances are you will make 2-5% return on investment (ROI) on your original investment every year (to start).
But that’s not the entire story. With each mortgage payment, you are paying both principal and interest. And with each subsequent month, more of your payment goes towards paying down the principal. So the lower the debt (mortgage), the faster you pay off the principal, increasing your equity each month.
With ultra-low mortgage rates at the moment, it is common to see a 15-20% yearly ROI when you combine the property cashflow (income minus expenses) and the mortgage principal paydown. And that’s incredible!
But that’s not all! Passive income generated through residential real estate cashflow is taxed much lower than ordinary earned income. In addition, real estate investing affords numerous tax breaks and allows you to write-off lots of expenses, much like a business. Therefore, you get to keep more of what you make … a lot more!
Here are some residential real estate passive income opportunities:
- purchasing a property and renting it out long-term (tenant) or short-term (like Airbnb and VRBO)
- purchasing a property with 2 rentals (home and basement suite or duplexes) to increase cash flow and passive income
- renting out a room or basement suite in your home
- renting out your home when you go on vacation
- renting out your storage space
- renting out your parking spot or detached garage
- allowing the film industry to shoot in your home (get on the list and websites for location scouts)
B. Commercial Real Estate
Another way to generate significant passive income and leverage is by investing in commercial real estate. Depending on where you live, commercial real estate can also be ‘residential’ as most jurisdictions define ‘commercial’ as 4 or more residential units in one building.
The uber-wealthy consistently invest in commercial real estate because of the yields which can range between 5-20% ROI to start and only increase as debt is paid off and rental income increases. Investing in commercial real estate for passive income requires a lot more effort and time upfront, larger investment (capital costs) and is only for those with high financial IQs. However, there are exceptions…
Here are some commercial real estate passive income opportunities:
- commercial retail space
- office space
- residential buildings with more than 3 or 4 units (apartment complexes, condo buildings, fourplexes etc)
- parking lots
- storage facilities
2. Paper Assets
The most popular way of passive income generation is by investing in paper assets, which is also the most popular asset class as it requires lower financial IQ, time and effort. Oftentimes, people will unknowingly generate passive income through paper assets as their financial planner does all the work (and gets paid their commission regardless of whether they make you money or not). It’s therefore one of the most passive form of income generation.
Paper assets are very accessible to the common folk as you can buy, sell and hold them through an online brokerage. Returns can be between 0.01-15% ROI per year. Most passive income payouts are done quarterly, but some monthly or yearly. In many cases, the higher the payout, the riskier the underlying asset is.
Here are some paper asset opportunities to generate passive income:
- dividend-yielding stocks (highest paying sectors are utilities, energy, telecom, consumer staples and real estate)
- exchange-traded funds (ETFs)
- guaranteed investment contract (GICs)
- mutual funds
- real estate investment trust (REITs)
- bond ladder (series of bonds that mature at different times over a period of years)
- high-yield certificate of deposit (CD) or savings account
Crypto or virtual currencies are a completely new asset class that most people should have some exposure to. It could be transformational in many industries and sectors in the upcoming decade, along with completely changing the world of finance (corporate and personal) as we know it.
First came cryptocurrencies, easily tradeable through online exchanges (much like stock brokerages). Then came Centralized Finance (CeFi) and Decentralized Finance (DeFi) whereby crypto assets can generate yield. But not just any yield … spectacular returns on investment (ROI).
Passive income through crypto investing is accessible and easy through CeFi as it looks and feels like financial platforms we are used to. DeFi is slightly more complicated currently, but produces even higher ROI. You can generate up to 10% a year conservatively speaking and some platforms (albeit riskier) can give you upwards of 100% a year returns.
Generating passive income through cryptocurrencies is very new. Therefore, consistency in opportunities and returns beyond a couple of years remains to be seen.
Here are some other crypto currency opportunities to generate passive income:
- staking ‘proof-of-stake’ (PoS) crypto currencies
- running masternodes
- CeFi (interest bearing savings accounts)
- DeFi (interest bearing staking accounts plus lending)
- peer-to-peer Bitcoin lending
- lending to margin traders
- cloud mining
- running a Lightning Network node
- yield farming
- dividend paying cryptocurrencies
4. The Internet
Leveraging the internet can be extremely lucrative when it comes to passive income opportunities. The internet is global so your reach is also global. You’re no longer restricted to your own city or country when selling or advertising goods and services, which is very powerful.
Generating passive income on the internet has a steep learning curve if you aren’t tech savvy. But it is also a very quick learning curve as once you master the art of selling on the internet. It requires very little upfront financial investment. However, it does require patience, time and effort at the beginning.
If you are looking to generate passive income on the internet, start with a hobby or passion or interest.
Here are some opportunities to generate passive cashflow on the internet:
- build an affiliate marketing website (promote a 3rd party product or service to get a commission and/or get paid for advertising space)
- launch a blog about a personal hobby or passion (add advertisement and sponsors)
- become an influencer on social media platforms (like TikTok, Instagram, YouTube)
- peer-to-peer lending
- photography, design and digital artwork (licensing)
5. Design & Launch a Product
For those entrepreneurial types, designing and launching a product without having to start a business can be very fulfilling. It requires expertise, time and effort but can become very lucrative if you or your product become viral.
Here are some opportunities to generate passive income through products:
- information products (e-books, audio and video courses)
- mobile apps
- design a product and sell it
There are too many ways to generate passive income to mention in this article. Be creative as many opportunities are right in front of us including:
- writing books and collecting royalties
- writing music and collecting royalties
- flipping retail products (buy low and sell high)
- advertisements on your car
- rent out useful household items (like a lawnmower, chainsaw, snow plow, power washer)
As you can see, determining your goals and interests are the first steps to creating a long-term passive income strategy. The more passive income streams you have, the better you will weather any market cycle or downturn, and the faster you will reach financial freedom and early retirement.
Some passive income opportunities are labor intensive while others are perceived to have higher risk. Some strategies for passive income require high financial IQs while others can be managed by a 3rd party. Regardless of what opportunity you’re interested in, the key is to start today.