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What is “passive income?” The IRS defines it as income from rental real estate or a limited partnership, according to Investopedia. But Investopedia also gives us this more common definition:
“Money being earned regularly with little or no effort on the part of the person who’s receiving it.”
That sounds like money for nothing, right?
Before you get too excited, you should know that a decent stream of passive income generally requires a large upfront investment. Some strategies listed here require tens of thousands of dollars to generate meaningful passive income.
Of course, you can invest a little at a time and build your portfolio over time, but what if you have almost no money to start? Fortunately there is another form of investment you can use to generate passive income: Your time and effort.
Yes, you’ll have to work at this. The “little or no effort” part comes later. But if you do it right you can relax at some point and let the money stream in. For example, half of my current income is passive, and it requires only a few hours of management per year.
So if you’re willing to work at it, or invest what money you have and build from there, here are some ways you can develop passive income.
1. License Your Invention
Maybe you have an idea for making water-ski bicycles or some other invention, but you don’t have money for a prototype and a patent. Or perhaps you don’t want to spend thousands of hours figuring out how to manufacture and market your invention. You want passive income, after all.
The solution is to license your idea to an existing company. Nolo says you can expect royalties of between 2% and 10% of net revenue if you find a buyer. Once the deal is made they do the work and you collect your share for as long as the product sells.
But be ready to fail several times. One survey found that only 13% of inventors who tried to license an invention succeeded
There are people and companies who can help. For example, Harvey Reese, the guy who invented reindeer antlers for dogs (a Christmas novelty that’s been selling for decades), has licensed more than 100 ideas, and he offers his services in a fairly straightforward manner.
I once paid Reese to evaluate my idea for a poetry-creation card game called “Deal-a-Poem” (what was I thinking?). For a couple hundred dollars he told me exactly, and in detail, why it wouldn’t sell. It was money well spent. Well, moving on…
2. Create a Blog or Website
You can start a free blog with WordPress. But you’ll be limited in what you can do with it and in how you can monetize it. It’s better to invest a few bucks for a domain name and hosting. For example, NameCheap can get you started for under $10 per month.
Bluehost usually has a special in which you can get hosting for just $3.95 per month plus a free domain when you sign-up for a year. You can use any of the free WordPress themes to build the blog.
I worked hard to build a collection of blogs and websites years ago. My website on how to remove carpet stains, built over a weekend, used to produce over $1,000 per month from Adsense revenue (the easiest way to monetize a site). Although my website empire has mostly failed now, I still make a few hundred dollars monthly, and I haven’t looked at most of my websites in over a year.
Warning: This can be a great way to develop a large passive income, but getting traffic is the key, and that is more difficult than ever. There is no guarantee that your efforts will pay off. Still lost? Here are some key points you need to keep in mind when starting a blog.
3. Buy a Blog or Website
If you have some money and want to avoid the work and uncertainty of building a successful blog or website, just buy one… or two or three.
There are at least five ways to value a website, but if it’s passive income you want, avoid any speculative purchases. It isn’t potential that interests you, but current revenue.
Various earning multiples are suggested, but you probably shouldn’t pay more than 24 months’ earnings for a site. So, for example, if a website has been generating about $200 per month you might buy it for up to $4,800.
Theoretically that’s a 50% annual return on your investment ($2,400/year). But since you want passive income you probably won’t work on the site, so the revenue will drop over time. It may even fail altogether due to a Google algorithm change, and then you lose everything.
You can afford to lose it all on one or two investments if you get a great return for years from the others. You can buy established websites on Flippa, and can even search the listings using income and price criteria.
I may yet try this more seriously. My experience so far is limited to buying a website for $100 that produced about $8 per month (I later sold the site for $700).
4. Invest on Social Lending Platforms
My own experience, investing no more than $20,000 at any given point in the last 9 years, is less successful. I made 6%+ for years, but lately the return has been closer to 3.5% for some reason(s). It’s still better than the bank, but for a portfolio diversified into hundreds of loans at nominal rates of 10% to 24%, it’s not an inspiring result.
I hope you do better. One nice feature of these platforms is that you can invest as little as $25 in each loan. Also, to make this truly passive income you can use the automatic investing features to reinvest incoming payments.
5. Put Your Money in the Bank
Worried about the risks inherent in some investments? FDIC-insured accounts are about the safest thing you can invest in. Of course, you won’t make much of a return.
You’ll do a bit better with online banks. For example, I have money with Ally. At the moment they offer a 1.50% 11-month CD. It has no early withdrawal penalty, which makes it essentially the same as a savings account.
If you park some of your money in banks, check for the best rates at least once or twice each year.
6. Invest in Dividend Paying Stocks
A list of the highest-yielding dividend stocks is more exciting than bank accounts, with the top ten in the S&P 500 paying between 5% and 8.4%. If you’ve saved up 100K and get a 6% average return you’ll have $500 in passive income monthly.
The problem here is that companies paying that much may be the most likely to fail (will Kohls survive the general retailer wipeout?).
I want to invest in solid companies that rarely cut their dividends, like Walmart and Coca Cola. Sadly, their dividends are at 2.5% and 3.2% at the moment — too low for the risk.
But when the price drops, the dividend is the same per share, meaning you get a higher return for your investment. So you might want to do what I plan; wait for a market correction and buy a diversified portfolio of companies that will be around for decades or longer, and at prices where the dividends represent a 4% or better return.
It may be a while before stocks are cheap enough to implement this strategy.
7. Sell Your Photos
If you like to take photos, and you’re good at it, you can offer them for use on one of the online platforms that pay you royalties. Here are three of them:
Most people don’t reveal their earnings from these websites, but at least one man says he made $1,255 in royalties the first 4 months of 2017. That’s an average of more than $300 monthly.
You need to upload hundreds of photos to numerous sites to start making a decent income. But once you have a good-sized portfolio you may collect royalties for years.
Some stock photo platforms are very selective, so send your best photos as samples. I was refused membership by two platforms after sending them what I thought were ten really good pictures (it must have been the camera).
8. Use a Few Good Cash-Back Credit Cards
I’ve previously written about ways to make money with credit cards, but many require ongoing efforts, so they don’t produce “passive” income. The exception is if you just use cash-back credit cards for all your normal purchases.
For example, use a Citi Double Cash card for normal purchases and you’ll get 2% back. Use an American Express Blue Cash Everyday card to get 3% back at grocery stores. Over the course of a year you might collect hundreds of dollars in cash back without extra effort (well, you may have to login to your account and click those “redeem” buttons).
9. Write a Book
Royalties from a book are a great source of passive income. Do the work upfront and the money can keep coming for years. Fiction, while harder to sell, might provide royalties for a longer stretch, since non-fiction tends to be out-of-date quickly.
For example, my book 101 Weird Ways to Make Money is old information now (I wrote it in 2010). I received an advance and royalty checks for thousands of dollars, but now it’s just a couple hundred dollars every six months. On the other hand, I’ve invested no time on it since initially spending two months writing it, and doing a few interviews.
The odds of getting published by a traditional publisher are slim (I got lucky), but once you’ve written a book you might as well try. There are clear advantages to having a big publishing company promoting your book.
If that fails you can self-publish for less than $100 on platforms like CreateSpace. Again, the odds of success are slim, but you might combine a self-published paperback with the next strategy.
10. Write an eBook
Any book can be an ebook, but I like the fact that the format lends itself to short, easy-to-write books that can be sold inexpensively. For example, years ago I wrote a handful of short (under 20,000 words) books in about three days each, on topics ranging from ultralight backpacking to real estate investing (hobbies of mine), and loaded them up to the Kindle publishers platform.
I generally sold them for $2.99, of which I got a royalty of $2.09. They’re gone now (sales dropped and I didn’t want to update them), but for years I collected hundreds of dollars per month in royalties. That’s peanuts, by the way. Self-published author Amanda Hocking made millions with her ebooks. The owner of this blog – Jason Wuerch – also created his own book called 101 Free Money Making Apps and gets anywhere between 10 – 20 sales per month.
If you have a website on which to promote them you can also sell your books as PDFs using ClickBank. I did that as well, making a few thousand dollars annually for years.
Success is more difficult now, and I no longer make anything from ebooks, but if you have the time, you don’t need much money to give it a try. A Kindle publisher account is free, and it costs just $49.95 to create a ClickBank vendor account.
11. Buy Income-Producing Real Estate
My wife and I have owned rental real estate several times now. One thing I like about it is that, unlike with business profits, you usually don’t pay self-employment tax on rental income. Not paying that extra 15.3% really helps.
Rent is not necessarily “passive income” in my book. After all, you don’t usually get to relax and forget about your properties. In fact, if I subtract a reasonable $15-per-hour for my labor on the duplex we owned last year, the remaining “investment” return was pretty lousy.
On the other hand, you can make it a more passive activity if you hire management. We did that when we rented out our condo in Florida a few years ago. We never even met the tenant, and we had one phone call to authorize a repair.
12. Buy REITs
If you like the idea of real estate income but don’t want to look for or buy houses, put your money in real estate investment trusts (REITs). These companies invest in real estate and pay out regular distributions to investors. They trade just like stocks.
Search a list of REITs to find ones that meet your criteria. For example, you can go with the highest yields, or focus on residential REIT’s, or those that invest in office buildings.
13. Make YouTube Videos
Making money on YouTube is as simple as clicking the “monetize” button when you upload your video. Of course how much you make depends on the traffic you get.
Years ago I created a YouTube “show” on ultralight backpacking. It was a fun way for my wife and I to get out in the mountains of Colorado, where we lived at the time. At its best it generated $80 per month, but the revenue kept trickling in for years without any additional effort.
That’s better than nothing, but much more is possible. For example, Rosanna Pansino makes $6 million annually from videos about baking. I suspect that if she stopped uploading videos she would still have a decent income from her YouTube channel for years.
14. Become a Real Estate Lender
My wife and I used to loan money to an investor at 10% interest. He used it to flip homes for a profit (we always had a first mortgage on these for safety).
That was nice, but the money came back to us every five or six months and we had to do a deal all over. So we later loaned on a rental, collecting 9% for years.
It may be even easier to find the deals now, thanks to new peer-to-peer hard money platforms like GroundFloor. They do 6 to 12 month loans at 5% to 25% interest, and they allow you to invest as little as $10 in each loan.
15. Put Up Some Affiliate Links
The concept is simple enough; link to a product on your blog and if someone clicks the link and buys something, you earn a commission. You can find relevant products for your blog on a list of the top affiliate programs.
When my websites did well I made hundreds of dollars monthly from affiliate links. For example, I made 7% when someone clicked a link on my backpacking site and bought a sleeping bag, and I received a $30 commission when a visitor to my brainpower website clicked a link and bought a set of meditation CDs.
I still get occasional affiliate checks from sites I haven’t looked at in years.
If you don’t have a blog or website, you can post affiliate links on Facebook. Of course, that’s a more active way to make money, since you have to post again and again for the links to be seen for more than a few days.
16. Create an App
The nice part is that if you create a popular app the money may keep coming in for years. You can get help selling your apps through websites like SellMyApp.com, and keep up to 90% of each sale.
17. Design Something
If you’re artistic you can create a design, like a picture with a cute quote. Then you can upload it to your Cafe Press account and let them put it on t-shirts, coffee mugs, and other products. You choose the products to display in your online shop, and every time something with your design on it sells, you earn a royalty.
A Final Thought
If you can develop one big source of income, great! But developing many small streams of money may give you even more financial security, because losing any one of them means losing only a small portion of your total income. So get started with something, anything, and then keep adding to your passive income portfolio.
If you have sources of passive income, tell us about them below… and keep on frugaling!