8 Income Streams for Financial Freedom
Dear Rich Lifer,
Today we’re going to talk about eight different passive income streams all retirees can take advantage of.
We’ll explain how to start each one. How much work it takes to make an extra $100 to $1,000 per month. And how easy it is to maintain each of these new passive income streams.
If this past year has taught us anything, it’s that having multiple streams of income can be a smart way to weather economic uncertainty.
Whether you’re working full-time or are retired, passive income will give you the freedom to enjoy life on your terms.
What is passive income?
Also known as “residual income,” passive income is money you earn after making an upfront financial or “sweat equity” investment. Examples of passive income include:
- A musician who receives royalties after writing a song
- An entrepreneur who buys several storage lockers, and collects money every time someone chooses to rent one of the lockers
- An investor who buys dividend stocks
- A real estate investor who rents out a house for a profit every month
Even your cashback credit card qualifies as passive income. The little money you earn on cash reward purchases is enough to be considered residual income.
What Is Active Income?
The opposite of passive income is active income, which is money earned when you work full- or part-time.
The major difference between passive and active income is this: with the former, you can literally make money while you sleep. The latter, if you’re not working, then you’re not making money.
How Uncle Sam Views Passive Income
The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which you don’t actively participate.
According to Uncle Sam, you need to be “materially involved” in a business to earn active income. If you’re not materially involved with a profit-making enterprise then you’re making passive income by the IRS’ standards. Passive income is taxable so you will still need to report earnings.
However, there is a taxable upside to passive income. If you lose money, the IRS allows you to write off passive income as a tax deduction, which in turn is another form of passive income.
If passive income is something you’ve always dreamed of having but never really knew where to start, today we’ll show you how to get it without wasting your time chasing unproven or risky ideas. Here are eight passive income streams anyone can start today.
- Dividend-Yielding Stocks
If you owned stock in Coca-Cola last year, you would have yielded a dividend payment of 3.38%. February 2020 was the 58th consecutive year Coca-Cola increased its annual dividend.
That’s better than the 1.6% yield you can expect from the average S&P 500 stock. But it’s not the only high-yield dividend stock you can buy. Royal Bank of Canada returned a 4% dividend to shareholders last year and Verizon 4.3%.
There are tons of companies that pay cash dividends on a quarterly basis like Coke, RBC, and Verizon, all you need to do is own the stock. The more shares you own, the higher your payout.
How hard is it to get started? Because the income is generated from owning stocks, your work upfront is really just researching which dividend-yielding stocks you want to own and then purchasing them.
The risk: Sometimes it can be hard to pick the right stocks. If you wanted to generate $100 in passive income from a dividend stock, you’d need to own approximately 55 shares of Coca-Cola at around $54 per share. If Coke pays out 3% per share, you’ll make around $100 just holding the stock.
- Invest in REITs
Real estate investment trusts (REITs) are companies that own and manage properties. REITs are structured in a way that they pay little to no corporate income tax, which they’re able to then pass along to shareholders.
How to get started: REITs can be bought and sold on the stock market. You earn whatever the REIT pays out as a dividend. The best REITs offer steady dividends that typically grow on an annual basis.
The risk: Similar to dividend-yielding stocks, individual REITs can be riskier than owning an ETF that contains multiple REIT stocks. It’s up to you to choose the best REITs, which means you’ll have to do research and track a number of REIT prices over time.
- Rent Your Home
A lot of retirees travel south during colder winter months, often leaving behind an empty house. Why not rent out your vacant home while you’re away?
Websites like Airbnb make renting your whole home or even a room in your house easy. You decide how much to charge renters and get to set the terms. Platforms like Airbnb take care of the transactions.
Aside from keeping the house clean and in the condition you’ve agreed to rent it to prospective tenants, there’s really not much upfront work. The benefit is you simply collect a check every time someone rents your home.
The risk: The biggest risk is letting strangers into your home. However, you can mitigate a lot of this risk by vetting prospective renters and reviewing their profiles and reviews on Airbnb.
- Earn Cash Back With Apps
Mobile apps like Ibotta let you earn cash rebates on purchases from retailers, restaurants, and movie theaters.
You can also earn cashback through shopping portals like:
These websites offer you the chance to earn cashback on purchases from thousands of online retailers. The risk: Like most cashback rewards programs, the tradeoff is you’re sharing valuable data with these companies that is then sold to other brands and agencies. As long as you’re okay with sharing consumer data, cashback apps and shopping portals are easy ways to earn passive income.
- Build an Online Course
If you think you have useful knowledge, you can monetize it through sites like Udemy and Teachable. These online course platforms will help turn your knowledge into a course that can be sold to someone looking to learn the skills or knowledge you have to offer.
Online courses can range from baking cakes to investing in foreign stock exchanges. Here are a few ideas of courses you could build:
- Digital scrapbooking
- Drone cinematography
- Foreign investing
- Novel writing
- Job hunting
- Building a pet-care business
Your options are really endless. The risk: If you decide to build a course, you’ll need to invest a considerable amount of time upfront to build the course. So long as your course is something others will find value in and your pricing is competitive within the specific niche, you should be able to make a sizable return on your time invested.
- Rental Properties
Earning passive income from rental real estate is a tried and true method, but it requires more work than most people realize.
If you’ve never invested in property before (the house you live in doesn’t count), it’s best to seek guidance from someone who has successfully invested in rental real estate before.
They will help you figure out things like:
- How much return you can expect to make on your initial investment
- Estimate the property’s total costs and expenses
- Walk you through the financial risks of owning the property
For example, if your goal is to earn $1,000 a month in rental cash flow and the property has a monthly mortgage of $2,000 and costs another $200 a month for taxes and other expenses, you’ll have to charge $3,200 per month to reach your goal.
The risk: If you find someone experienced in rental property investing that you can learn from, you can mitigate a lot of risk upfront. But questions you’ll have to ask before buying are: Is there a market for this property? You may need to charge $3,200 a month in rent to make back your investment, but is that monthly rent on par with other similar rentals in the same area?
Can you cover the costs if a tenant pays late or damages the property? What if you’re unable to rent out the property? These are all questions you must ask before investing in a rental property. As long as you cover all your bases, rental properties can make for a great source of passive cash flow.
- Peer-to-Peer Lending
Not everyone qualifies for traditional financing and some people even prefer to seek out alternative funding. Peer-to-peer (P2P) lending is a great way to earn up to 10% in returns by lending to individuals, small companies, and organizations.
Platforms like Lending Club and Prosper make it easy to get you started. You can lend as little as $100, $1,000, or more. You make money off the interest on the loan — which can typically be higher than what most banks receive.
How to get started: Open up accounts at Prosper.com and Lending Club. Start with small investments across multiple loans to diversify your risk. Make sure you review the historical data on the prospective borrowers to make informed picks.
The risk: Because the loans are unsecured, you face the risk of default, meaning you could end up with nothing. P2P lending involves a bit more work than some other passive income opportunities because you’ll need to carefully vet borrowers and pay close attention to payments received.
- Bond Ladders
Bond ladders are a classic passive investment, especially for retirees and soon-to-be retirees. How they work: You start with a number of bonds that mature at different dates. For example, you may have bonds of one year, three years, and five years.
After one year, your first bond will have matured and you’ll be left with two remaining bonds of two years and four years. You can take the returns from your matured bond and buy another one-year bond or extend the ladder by buying a six-year bond.
The risk: Bond ladders are great because they remove a lot of the risks with buying bonds in the first place. The risk you run when your bond matures is you have to buy another bond when interest rates are not as favorable. By diversifying your investments across multiple bonds, you eliminate a lot of the risk.
Building passive income takes time. Try one or two of these eight ideas and see what works. Reinvest your passive income and build another stream. Before you know it, you’ll have multiple streams of passive income.
To a richer life,
The Rich Life Roadmap Team