How to Make Passive Income

What Is Passive Income?

Passive income is money you earn without actively working. There's usually some initial setup required and there may be upfront costs, but once your passive income stream is up and running, you can keep income flowing in with minimal effort.

For instance, if you're a graphic designer who sells premade designs online, you're earning passive income every time someone purchases a design. If you're a consultant, creating a course people can purchase rather than working with clients one-on-one is one path to passive income. Earnings from investments or renting out property are also considered passive income.

Tip: Passive income may be taxable, depending on the source and how much you earn. To avoid overlooking any obligations or deductions, consider working with a tax expert when it's time to file.

How to Make Passive Income by Investing

Investing can generate passive income over time if your investments increase in value. Just keep in mind that all investments involve risk, some more than others.

Explore Dividend Investing

Some companies issue dividend payments to stockholders on a regular basis as a way of sharing profits. Dividends can provide an ongoing income stream without the need to sell the stock. Companies usually pay dividends each quarter, but not all at the same time, so you can set up your investments to receive dividends every month.

You can purchase individual dividend stocks or invest in a mutual fund or exchange-traded fund (ETF) that purchases a variety of dividend stocks. This can be easier than picking stocks on your own, and also helps diversify your dividend stock portfolio. You'll need a brokerage account to buy dividend stocks, and may want help from a financial advisor.

Learn more: How Do Dividends Work?

Invest in Bonds

When you buy a bond, you're loaning money to a company or government entity that promises to pay you back when the bond matures, typically in anywhere from one to 30 years. In addition, most bonds issue recurring interest payments every six months based on the bond's coupon rate. The coupon rate is usually fixed during the bond's term, making bonds a reliable source of predictable income. Government bonds are often exempt from certain income taxes.

You can invest in bonds individually or through a bond mutual fund or ETF.

Become a Peer-to-Peer Lender

Peer-to-peer (P2P) lending is typically done using lending platforms such as Prosper, which find and vet borrowers, handle the money and collect loan payments. You usually invest as part of a pool of lenders, sometimes with as little as $25. As borrowers repay the loans, you earn a portion of the interest. However, if the borrower defaults, you could lose the money you've invested.

Become a Silent Partner in a Business

Do you know a friend, family member or associate who's starting or growing a promising business? You can invest money as a silent (or limited) partner and share in the profits without being actively involved in day-to-day operations. Work with an attorney to create a partnership agreement that details how you'll be repaid, which may include equity in the business, profit sharing or both. Although you risk losing your investment, you could also see significant income if the business takes off.

How to Make Passive Income Through Real Estate

Real estate is a popular way to generate passive income, with a wide range of options depending on your financial resources.

Buy a Rental Property

Purchasing a rental property in a popular vacation area or an in-demand neighborhood can be a great source of income. Research the market thoroughly beforehand, including the average rent on similar properties. You'll need to be able to charge enough to cover your mortgage payments, maintenance, repairs and other costs while generating some profit. Keep in mind that down payments and mortgage rates for investment properties are generally higher than for owner-occupied properties. It's also important to consider who will maintain the property and address tenant needs, especially if you don't live nearby.

Rent Out a Room to Travelers

If you have a spare room in your home that's rarely used, you can earn passive income by fixing it up and renting it out through a short-term rental service such as Airbnb. You'll generally have the best luck if you live in or near a popular tourist destination and your space has a private entrance and bathroom. However, some guests enjoy interacting with their hosts, so be sure to set expectations upfront for privacy, noise, meals and other issues.

Get a Roommate

To make long-term passive income from a spare room, consider taking in a roommate. You'll get ongoing financial help paying your rent or mortgage—and maybe make a new friend too. As with short-term rentals, it's ideal if the room has a private entrance and bathroom. You can list your room for rent on local social media, promote it through friends and family members, or list it on a site like Diggz or Roomster.

Real Estate Investment Trusts

Real estate investment trusts (REITs) offer a way to invest in real estate without the upfront expense or management hassles of being a landlord. REITs invest in commercial and residential real estate, receive rental income from tenants and share the income with shareholders, typically as quarterly dividends. If you have a brokerage account, you can invest in individual REITs or REIT mutual funds and ETFs. Because REITs can be risky and choosing them can be complex, you may want to work with a financial advisor when investing.

Learn more: Should You Invest in a Real Estate Investment Trust (REIT)?

Real Estate Crowdfunding

Real estate crowdfunding platforms like Fundrise and Realty Mogul allow you to invest in property in ways typically open only to wealthy individuals. You pool your money with other investors to buy property ranging from single-family or apartment rentals to commercial and industrial buildings and then earn returns based on your investment.

How to Make Passive Income With No Money

Even if you don't have any money to invest, there are still ways to make passive income.

Use a Cash Back Rewards Credit Card

Use credit cards that offer cash back rewards to earn money while you shop. Look for a card that offers rewards in categories you often use, such as groceries or restaurant meals. That way, you can accrue extra cash every time you use the card. Just make sure you don't overspend or buy things you normally wouldn't purchase to earn rewards.

Sign Up for Cash Back Apps

Cash back apps such as Rakuten, Ibotta and TopCashBack let you earn cash back when you shop online or in store. After creating an account, check the app's requirements. Earning cash back may require uploading photos of receipts from in-store purchases, linking your store loyalty program or installing and using the app's browser extensions when shopping online.

Take Advantage of Introductory Bonuses

Are you planning a big purchase, such as new kitchen appliances? Consider applying for an introductory bonus credit card to cover the cost and earn some cash in the bargain. Intro bonus credit cards reward you with cash back, miles or points if you spend a certain amount on the card within a set time. If you pay off your balance before interest accrues, introductory bonuses let you generate extra cash for purchases you would have made anyway. Just don't spend more than you planned simply to earn a bonus,

Rent Out Your Car

Is your car gathering dust in your driveway? It could be making you money instead. List your vehicle for rent on sites like Turo or Getaround, and make it available as much or as little as you like. Car-sharing sites typically offer auto insurance you can purchase to cover your car while it's rented. However, you should also check with your car insurance company to make sure renting out your car won't cause problems with your coverage.

Learn more: How to Make Money With Your Car

Rent Out Your Garage or Parking Space

If you have extra room in your garage or driveway, you can rent it out. Use an app like Vanly, Neighbor or Spacer to find renters and begin earning passive income on your unused space. According to Spacer, the average garage can bring in $200 to $300 per month.

Other Ways to Make Passive Income

You can also generate passive income by saving money and earning interest on your savings.

Open a High-Yield Savings Account

To earn more interest on your savings than a traditional savings account offers, consider opening a high-yield savings account. Currently, you can find high-yield savings accounts earning an annual percentage yield (APY) of 4% or more. Plus, your cash is liquid and readily accessible if you need it to cover an emergency expense.

Open a Certificate of Deposit

A certificate of deposit (CD) is a type of savings account available from banks, brokerages and credit unions. CDs typically earn higher APYs than traditional savings accounts and offer fixed interest rates. In exchange, though, you must leave the money in your CD until maturity, which can range from one month to 10 years.

Withdrawing funds before maturity triggers a penalty that could wipe out your earnings. The lack of liquidity means CDs are best for longer-term savings goals such as a down payment on a house.

Take Advantage of 401(k) Matching

Does your employer offer a 401(k) plan? Some companies match your contributions up to a certain amount. For example, your employer might match your contributions up to 4% of your salary. Contribute at least enough to earn the maximum match and you'll sock away extra money for your retirement without any work.

Look for Ways to Save Money

While it's not exactly income, finding ways to save money can bring in extra cash without much effort on your part.

Review your recent bank and credit card statements to tally up your spending and look for places you could cut back. For example, you could cook at home more often and eat out less; negotiate your utility, cable or cellphone bills; and cancel streaming services or downgrade to cheaper plans.

Shopping around and comparing quotes for your home, renters or car insurance is another way to find potential savings.

Learn more: Ways to Make More Money Without Asking for a Raise

The Bottom Line

Establishing passive income streams can help you achieve your long-term financial goals and become financially resilient. You can use the added income to add to your retirement savings, pay down debts or put toward a down payment on a house.

Keeping an eye on your credit is another important step toward financial health. Having good credit can make it easier to buy a rental property or finance other passive income plans. Start by checking your Experian credit report and FICO^® Score^Θ, which you can do for free. Good financial habits like paying bills on time and minimizing credit utilization can help boost your credit score and expand your financial options.