11 Ways to Create Passive Income

Money for nothing — what could be better? That's the optimistic promise of passive income. Passive income is money you earn with minimal regular effort.

While most passive income sources will require some investment in time or money up front, that hurdle can be worth it. Once you get your passive income stream rolling, you have a source of cash that's not tied to your boss or your timecard. It could even grow into a business that allows you to quit the daily grind and achieve financial independence.

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Passive Income written on a chalkboard with money lying on top. — Image source: Getty Images

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2. REITs

REITs, or real estate investment trusts, are companies that buy and rent commercial properties. Like stocks, many REITs are publicly traded. Also like stocks, REITs don't require much effort besides research and monitoring. And, because the IRS requires REITs to pay out 90% of their taxable income to shareholders, they can yield more than dividend stocks.

Downsides and risk. REIT earnings are taxed as ordinary income, which is higher than the long-term capital gains rates used for most dividend income. Also, REITs fluctuate in value and profitability — meaning you could lose money on your investment.

Getting started. Open a brokerage account and start researching REIT funds. REIT funds invest in a diversified collection of REITs, which is less risky than owning a single REIT.

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3. Bond investing

Bonds are loans to corporations or government entities that are sliced up into units and sold to investors. When you invest in a bond, you put up funds and the borrower repays those funds with interest over time.

Downsides and risk. The borrower could go out of business or stop repaying the loan. Market interest rates could rise so that your bond's rate is less than what you could earn elsewhere.

Getting started. The simplest way to get into bond investing is to buy a bond exchange-traded fund (ETF) from your brokerage account. A bond ETF provides exposure to corporate or government bonds of varying maturities, which is safer than funding just one bond or one type of bond.

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5. Vacation rentals

Renting your existing home or an investment property to travelers is another passive income option. For properties in popular neighborhoods, vacation rentals command higher nightly rates than residential rentals. They are also a lower commitment. You can customize the property's availability schedule however you want, and most of your visitors will only stay for a few days.

Downsides and risk. If you are renting an unused room in your existing home, the risks are low. Your renters might be loud or messy, or your room may not generate the rents you expected. Renting an investment property is a different story. As with a long-term rental, you risk default if the property doesn't generate enough income to pay the mortgage plus the other expenses.

Getting started. Check your homeowner's insurance to see if you need more coverage for short-term rentals. Review properties like yours on vacation rental marketplaces, including Airbnb, HomeToGo, and FlipKey. Then fix up your place, take some pretty photos, and list it.

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7. Dropshipping

Dropshipping is another way to sell products online and without having a warehouse full of inventory. You'd have an online store, either on your own website or on Amazon. Your product catalog would be items you can purchase from wholesalers. When someone places an order, you collect the funds and then order the item directly from the wholesaler at a lower price. The wholesaler ships the product straight to your customer.

Downsides and risk. As with affiliate marketing, the biggest challenge with dropshipping is generating traffic and sales. A secondary risk is fraudulent transactions. If you fund the purchase with the wholesaler and the customer's payment subsequently fails, you're on the hook.

Getting started. Find wholesalers that dropship products you can promote. Then set up those products in an online store and start driving traffic to it.

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8. Membership website

A membership website charges members a monthly fee for access to exclusive content. If you have specialized knowledge, you could build a website to share that knowledge through articles, videos, and other tools. Membership websites also allow members who share an interest in the site's subject matter to connect and interact.

Downsides and risk. You could spend many hours building a website and developing your exclusive content and then have trouble securing new members. If your content isn't better than what's available online for free, your members will cancel their memberships.

Getting started. Join a membership site or two to see how they work. Define how your site will be different and ask friends and family for feedback on your idea. Once you've set your direction, start creating content.

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9. Peer-to-peer lending

If you have cash on hand, you can make small loans at high interest rates via peer-to-peer lending platforms such as Prosper, LendingClub, and Funding Circle. These are fixed-rate, fixed-payment loans with no collateral. The platform manages the money transfer and repayments, and you are responsible for choosing borrowers and funding the loans. Prosper reports that its loans average a 5.5% annual return.

Downsides and risk. The risk of default can be high, and you have no collateral to collect if the borrower stops paying. You can mitigate the risk somewhat by diversifying your funds across many small loans.

Getting started. Review how the different platforms work, including minimum loan amounts and tools available to manage your funds. Choose a platform and start making small loans to test the experience. You can invest more as you gain confidence.

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11. Social media brand ambassador

As a social media brand ambassador, you earn free products and cash payments for promoting brands in your social media posts. You can connect with brands through influencer platforms such as Activate and BrandBacker.

Downsides and risk. To make money as an influencer, you need a strong and engaged follower community. You could lose some of that engagement if your feed becomes too promotional. Avoid any brands that require their influencers to buy products.

Getting started. Join influencer platforms and compare your social metrics to other influencers. Review and apply for brand opportunities that interest you.

Making passive income work for you

The profit potential of a passive income idea often correlates to the size of the up-front investment in time or money. Dividend stocks, for example, can generate tens of thousands in income over time — but they demand a larger cash outlay to start. On the other hand, cashback apps have lower upside potential but don't require much to get started.

If the strategy you can afford today has less potential than you'd like, you could use one passive income stream to fund another. For example, you could take your cashback app earnings and invest them in dividend stocks. That's a long-term play, but it's also a smart move financially. Down the road, you can look at your portfolio and feel good about how you funded it.

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About the Author

Catherine grew up in Southern California wearing a lot of black and trying to perfect the art of sarcasm. Prior to joining The Fool as a contract writer, Catherine was climbing the corporate ladder in marketing roles and dabbling in too many side hustles. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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@catherinejbrock

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11 Best Passive Income Ideas