How does an extra $4,200 sound? According to the US Census Bureau, that's the median amount generated each year by households that bring in passive income.1 Not bad. Haven't joined the club, but want to? Check out these 13 ideas for how to make passive income.
What is passive income?
Passive income is generally defined as a regular cash flow that doesn't require much time or effort to maintain. For example, that could include money from certain types of investments, rent from property you own, or revenue from side hustles that don't require ongoing work, such as collecting a commission from images you sold to a stock photography site.
The IRS says passive income streams that fit its definition (including investments and rental activities) come with special tax implications. If you have questions about the tax treatment of your passive income streams, consult with a tax pro for help.
Passive income ideas
How to generate passive income from investments
Some investments have the potential to generate passive income. Just keep in mind that there's always the risk that you lose money on any investment. Before getting started, make sure you've set an investing strategy that considers your time horizon, risk tolerance, and unique financial goals.
1. Dividends
Dividends are portions of profits that some companies pay to shareholders—kind of like a "thanks for being an investor" bonus. Individual stocks or funds that pay dividends give investors a cash return on a yearly, quarterly, or even monthly basis that can complement additional potential returns from share price growth. Dividends are voted on by a company's board of directors and are usually expressed as a percent of the share price, known as a dividend yield. There are no promises that a company will pay its dividend. However, certain companies (sometimes called "dividend aristocrats") have long track records of paying and increasing their dividends over time. Because earning dividends can require owning stocks, dividend investing can be considered high risk.
2. Money market funds
A money market fund operates in much the same way as other mutual funds: It pools investors' money to buy a basket of investments. Instead of buying stocks or long-term bonds, a money market fund buys low-risk, short-term debt, such as US Treasury bills, with the goal of preserving your savings principal and giving you easy access to your money. These funds usually pay interest in the form of a monthly dividend payment.
3. CDs
Opening a certificate of deposit (CD) at a bank will generally give you a higher interest rate on your money than a regular savings account pays. In return, you agree to park your money in the CD for a set time, usually months or years. You can't access your cash for the duration of the agreement, or you may owe a penalty. If you don't touch your CD until it matures, you'll get your principal (what you paid for the CD) plus any interest.
One reason CDs are considered very low risk is that they're insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, for each account ownership category.
However, Fidelity offers investors a different type of CD, called a brokered CD. These offer many of the same features of a traditional CD—such as fixed rates of return and FDIC insurance—while providing some distinct advantages.
Brokered CDs are issued by banks for the customers of brokerage firms. The CDs are usually issued in large denominations and the brokerage firm divides them into smaller denominations for resale to its customers. Because the deposits are obligations of the issuing bank, and not the brokerage firm, FDIC insurance applies.
4. Bonds
Investing in bonds is like loaning money to companies or governments that agree to pay you back with interest. Bonds are typically considered lower risk compared to stocks and are assigned ratings, so you can better understand the risk that the issuer could default on their promise to repay you.
Bonds vary in duration, from months to years to decades. In addition to considering the amount of income you could get and the risk of the issuer defaulting, consider the duration of the bond. Unless the issuer defaults, holding a bond until it matures will ensure that you'll get your principal plus interest. However, if you sell the bond before its maturity, you may lose money.
5. Bond funds
Bond funds remove the hard work of researching and buying individual bonds and can offer instant diversification. Each fund holds hundreds if not thousands of bonds and may focus on the broad bond market or a narrower slice of the bond market, such as a short-term Treasury fund. In return for holding shares of a bond fund, it provides you typically with monthly payments (kind of like dividends). The expected returns and risks associated with a bond fund depend on what it invests in.
6. Real estate
One of the most common examples of passive income is buying property and renting it out. This typically requires a substantial down payment, and many real estate investors finance their properties with mortgages. The idea is to make enough money from tenant payments to fully cover the mortgage, insurance, and management costs—plus an additional profit.
Real estate investing generally requires a lot of research and knowledge. It's also considered very risky, as it's not always easy to find responsible tenants who will pay on time and cover all your costs.
How to generate passive income with no initial funds
It's possible to create passive income streams without any upfront investment. The tradeoff is that these may require more setup effort before you start generating a regular cash flow.
7. Rent out your parking space
People will pay for your pavement, especially if you live near an office building, in a city where space is at a premium, or near a stadium or other venue. You could advertise your empty spot near popular destinations or sign up for an app that connects drivers to your driveway. If you have a regular customer, you could try striking a monthly deal to ensure consistent income. Before renting out any space, consider contacting a legal pro to understand what your liability may be.
8. Rent out a spare room for short-term storage
Your extra room, closet, or basem*nt could be prime real estate for someone in need of storage. You might be able to find clients via flyers or word of mouth and use prewritten contracts available online. Again, it's smart to contact a legal professional to understand what your liability may be.
How to make passive income online
9. Create a course
Do you do something niche for your day job or have a hobby other people may be interested in? Online courses are popular, and people may pay to learn what you know. To sell your course, research websites that help connect you with potential students, or post your course on industry- or hobby-specific online communities. You could even set up an email inbox for student questions.
10. Build and sell spreadsheets
Do you have a knack for creating spreadsheets? Some businesses will pay for a pre-built spreadsheet that helps them visualize or process data efficiently. For example, spreadsheets tracking budgets, expense reports, project schedules, or even event schedules could be useful. Market them to your network on professional services sites and on other online marketplaces that connect customers and sellers.
Other ways to make passive income
11. Rent out useful household items
If you have tools, yard equipment, a gaming system, or other pricey or bulky household items, someone may be willing to pay to rent them for the day. You could post on neighborhood message boards on social media to find renters, or partner with an online third-party company to find people who will pay to use your stuff.
12. Start a vending machine business
If you've got upfront cash—about $3,000 to $5,000 for a new machine, on average2—starting a small vending machine business could create a refreshing income stream, to the tune of $525 per machine per month on average, according to the National Automatic Merchandising Association.3 While it may sound unconventional, this business idea has been gaining in popularity, with mentions on social media and search-engine queries jumping significantly over the past 4 years, according to the Wall Street Journal.
If you're handy, you could buy a cheap machine and watch online tutorials or look up manuals on how to fix it. Then ask local businesses, office buildings, and community centers if you could put your machine in their building. (Some may charge a fee.) From there, you can start a weekly routine of checking and stocking your machines. A couple hours of work per week could make a difference for your bank account. Before you start, check with a legal professional to see if you may need any insurance or licenses/permits.
13. Sell stock photography
Love snapping pics? You could sell your images as stock photography. Scroll through your camera roll for existing shots, or plan weekend shoots to build your inventory. If you're looking for inspiration, some stock photo companies may list subjects or themes that are particularly marketable on their sites. Or look at the calendar: If a major holiday is coming up, content creators might be looking for related images.
Once you have a portfolio you're proud of, create an account on a stock photography website. Keep in mind that you'll be competing with other photographers, including professionals, who may have more experience, editing skills, and equipment, so keep financial expectations in check. It could be a good idea to seek legal advice to make sure you have your bases covered around copyright and intellectual property.
