Earning passive income is a good way to help you build your wealth with minimal effort to earn and grow it. So how can you generate passive income? Examples can include rental income, CD’s (certificates of deposit), interest from your savings account, peer-to-peer lending (P2P), and stock or bond dividends.
Passive income is usually taxable but it can be treated differently by the Internal Revenue Service (IRS). So, check with your tax professional if you are unsure when its tax time.
Real Estate Income
Rental income is probably the most widely known to most people. The problem with rental income is that it often becomes a lot more work than expected. You must consider mortgage payments, taxes, insurance, late rent payments, property maintenance, and property vacancies. Do you want to manage the rental payments, maintenance, and repairs, or do you need to hire a property management firm? If you are managing the rental property yourself, that will also mean that you will be on call 24/7 if any emergencies occur.
Do you due diligence and research the neighborhood to get the average rent amount. Research the area or neighborhood crime rates, schools, jobs, stores, the number of current rental listings and determine if a rental property is financially feasible for your current situation.
Another option for real estate investing could be Fundrise. Starting with a $500 starter plan, you can invest in a diversified portfolio of institutional-quality real estate. Note that this should also be viewed as a long-term investment (5+ years).
RealtyMogul is open to accredited and nonaccredited investors. RealtyMogul offers access to its public nontraded REITs (MogulREIT I and MogulREIT II) with an investment minimum of $5,000. They do offer a redemption program with no penalties after a three-year holding period, 99% for two years but less than three, and 98% for one year but less than two.
Buy CD’s
Investing in a certificate of deposit (CD) can allow you to generate a passive income. Investing in a CD is a safe guaranteed return of your principal up to $250,000 as long as the financial institution is backed by the FDIC. Check online for the best rates and terms. Some financial institutions such as Ally will allow you to purchase the no-penalty CD and withdraw your full balance and interest without any monthly maintenance fees.
You can also build a CD Ladder that requires buying in certain increments so that you can earn a higher return on your money.
Savings Accounts
Again, check online for the best rates and check to make sure that the financial institution is FDIC-insured. You can often find rates 10 times higher than what your local bank may offer. PNC Bank, Vio Bank, Citibank, Live Oak Bank, and Ally Bank currently offer some of the best high-yield online savings rates.
Money Market Fund
Investing in a money market fund is not quite as safe as cash or CDs, but they are considered an extremely low-risk and low return investment. A money market fund invests in high-quality, short-term debt instruments, and cash equivalents. They are usually used as a temporary place to park cash before investing it. They are not used as long-term investments and are not insured by the Federal Deposit Insurance Corporation (FDIC).
Peer-to-Peer Lending (P2P)
You can open a P2P account at Prosper, LendingClub, Peerform, and Upstart, to name a few. You will be making a personal loan to a borrower, facilitated through a third-party such as LendingClub. These are a 3 to 5-year investment commitment and you face the risk of default since the loan is unsecured. P2P can help you diversify your portfolio you can start out with as little as $25.
Dividend Stocks & The Stock Market
Many investors choose from popular investment brokerages such as Fidelity, Charles Schwab, TD Ameritrade, and E*Trade. However, other online brokerages offer an easier way to invest for new investors. Robinhood, Webull, Ally Invest, and SoFi are ideal for investors learning about stock trading.
You can passively invest in dividend stocks. Dividends are the distribution of publicly listed companies’ earnings to their shareholders as long as they own the stock before the ex-dividend date. Typically, dividends are paid out as cash or in the form of additional stock or DRIP.
You can also passively pick dividend-paying stocks through what’s called a robo-advisor. Answer a few investment questions while setting up your online account, and you can invest easily and passively. Be sure to check out the fees associated with a robo-advisor. Acorns and Betterment are good places to begin your search, but not limited to a robo-advisor.
Bonds
Worthy Bonds currently offer a fixed 5% interest on every $10 bond purchase. Worthy Peer Capital uses money from the bond sales to fund fully secured, asset-backed small business loans. In return, the businesses repay loans to Worthy with interest.
Your funds are not FDIC-insured, but Worthy Bonds are registered with the U.S. Securities and Exchange Commission (SEC). A Worthy Bond investment would be considered higher risk than CD’s or keeping your money in an FDIC-insured savings account. The bonds have a 36-month repayment term but you can withdraw your money without any penalty or early withdrawal fees at any point during the term.
You can have a similar automatic investing option at Worthy called the “spare change”. Connect your account to your checking or savings account and it will round up your purchases and automatically purchase a bond once the “spare change” amount reaches $10. You can also set up a monthly recurring investment and deposit money into your account on a scheduled day of your choice.
You can invest up to 10% of your net worth or annual income for non-accredited investors.
Other options for passive income
- Refinance your mortgage.
- Pay off or reduce your debt.
In closing, it’s always a good idea to talk to a financial professional when it comes to your investment portfolio.
