When we think about passive income ideas, we’re looking for cash flows that are ongoing with minimal effort once the source of passive income is set up. Mailbox money.
I recently talked about my four current types of passive income (and another four I’ll tap in the future) as I realized the increased prominence and importance that these income streams now play in my semi-retired lifestyle.
Fred Leamnson, a financial advisor and author with Your Money Geek, reached out recently, offering up a few additional ideas for passive income that I had not considered.
Read on to discover a dozen ways you can start earning passive income this year.
12 Passive Income Ideas for 2020 and Beyond
Unless you’ve been asleep for the last few months, you realize the world is in the midst of one of its most challenging crises in history. Though the cause, origin, and response to COVID-19 are the topic of much debate, there is no debate that it’s caused irreparable damage to many lives.
Whether you are one who has contracted the virus or one impacted by the financial consequences of the economic shutdown, the results can be severe.
For professionals and high-income people, the economic impact has been much less devastating. It has, nonetheless, affected all of us.
Many physicians had their hours cut back. With patients postponing elective surgeries and treatments, physician incomes have dropped. For the savers and investors in the professional crowd, the cushion they’ve built provides financial security. For those who have given into lifestyle creep, the financial hit is much worse.
Most professionals and those seeking financial independence have created sources of passive income. Building passive income streams is an effective way to protect your income during difficult economic times. There are many ways to build passive income.
Some investors are earning passive income with significant holdings in high dividend stocks. Stock dividends offer a great way to generate a passive income stream. But what happens when the stock market crashes, as it did in March 2020? What other sources of passive income should we have?
In today’s post, that’s the topic we want to spend some time reviewing. We’ll highlight what we feel are the best passive income ideas for 2020 and beyond. Some of these are not new. Some you may be new to you.
We’re confident you will find opportunities in these passive income ideas that will increase your income and provide an extra layer of cushion during times of market or economic uncertainty.
With that, let’s dive in.
Passive Income Ideas
For readers of this blog, it should come as no surprise that we would talk about real estate. Not only is real estate not correlated with the stock market, but it can also be a source for consistent income. In many cases, investors enjoy the best of both worlds in real estate – income and growth of capital.
The most significant advantage of real estate investments is the opportunity to diversify beyond the traditional stock and bond portfolios that represent the foundation for most high-income professionals.
Many of these real estate offerings are for accredited investors. Others are not. We will tell you which are only available to accredited investors and which are not.
Here are some of the best choices to generate passive income from real estate investments in 2020.
CrowdStreet is available to accredited investors. They have a marketplace where investors can review their current offerings and decide what is best for them.
CrowdStreet launched in 2014 and has published over 447 commercial real estate offerings. They have raised over $1.22 billion for their deals with an average internal rate of return of 23.1%. Also, they have distributed over $135 million to their investors. The average holding period of those deals was 2.2 years. It’s important to understand that the shorter holding period is not what investors should expect.
When you look at the current deals in their marketplace, you’ll see the targeted holding periods range from four to ten years. Properties get sold when conditions warrant, and the returns are in line or exceed projected returns. Investments in commercial real estate should always be viewed as long term investments.
2. Alpha Investing
Alpha Investing offers accredited investors access to private real estate offerings of institutional quality. They build a private network of investors and pool their money to provide access to private deals with higher minimum investment requirements. They invest in both equity and debt investments.
The three primary types of real estate include multifamily units, student housing, and senior housing. Alpha Investing has built a strong network of investors and sponsors that allow them access to deals not ordinarily available. They do this by aggregating investors’ money into one LLC. That LLC then invests in the various sponsors’ investments. Their approach to sponsor and deal selection revolves around finding value add opportunities in growing markets. The three types of properties they target provide good positive cash flow with excellent growth potential.
Deals range from $5 million to $50 million. Again, the concept of pooling investor money into one LLC allows Alpha access to the institutional quality deals not ordinarily available, even to accredited investors.
3. Realty Mogul
Realty Mogul is a name with which you are likely familiar. We bring them to your attention again because we like how they operate and invest. Passive income is the primary goal of Realty Mogul investments. With that said, when they sell a property, investors can expect to receive a capital gain from their investment as well.
The team at Realty Mogul has three selection criteria for their properties.
- The real estate company – They will only work with quality sponsors. They look into their background, track record, and check with references. If the company gets selected, they proceed to the next step.
- The market – They analyze the location of the property. What are the demographics and trends of the area? How do comparable properties perform? Understanding the market is critical when choosing a real estate investment.
- The property – The final step is to evaluate the investment property. The team looks at the income generated, the costs, the type of tenants, and the rates they can pay. Finally, the team makes a site visit.
Once a property is approved, negotiations begin on the terms of the agreement. That includes the fees and expenses and the management of the property.
Realty Mogul is primarily for accredited investors. However, nonaccredited investors may invest in one of their two real estate investment trusts (REITs).
Passive Income from Publicly Traded REITs
The four real estate investments highlighted above are all private real estate deals. In other words, they do not trade on the open market like stocks or ETFs (exchange-traded funds). As such, most of these investments have higher minimums to start, and investors must be higher-income and higher net worth accredited investors to participate.
Publicly traded REITs are available to anyone with money to invest. Though growth is a secondary goal of most of these REITs, income is what most investors look to receive from these investments. We’ll highlight three that are low cost with high dividend payouts.
Unlike private real estate deals that do not trade in public markets, these REITs can have large price swings over shorter periods. Because they trade on public exchanges, investors receive statements that reflect these price swings. Though not closely correlated with stocks, volatility is more visible than with private real estate investments.
4. Vanguard Real Estate ETF
Vanguard is the largest and, arguably, the most recognized names in the mutual fund industry. The Vanguard REIT (VNQ) is one of the largest and most popular. Investors looking for consistent income should consider this ETF.
One of the things Vanguard is known for is its funds’ low expense ratios. VNQ is no exception. It has an expense ratio of 0.12%. The investment yield (income) provided is around 4%. With savings accounts paying 0.03% or so, that’s nice income. Of course, I’m not suggesting investors pull money out of their savings accounts and invest in a REIT. The point is simply that with interest rates so low, a 4% dividend is something worth considering.
Like the vast majority of Vanguard’s funds, VNQ is an index fund. That means its returns would closely mirror the performances of the MSCI U.S. REIT Index.
5. iShares Core U.S. REIT
iShares is another of the most recognized names in the investment world. iShares is part of the behemoth investment company Blackrock. With around $7 trillion of investments, Blackrock has hundreds of investment choices available.
They have a vast selection of ETFs covering most market sectors across the globe. The iShares Core U.S. Reit ETF (USRT) mirrors the return of the FTSE Nareit Composite Index. It has over 150 holdings, including the largest 50 REIT companies within the FTSE Nareit Index. Expenses come in at 0.08%, which is lower than the VNQ of 0.12%.
Like many of the U.S. REITs, income is the primary benefit of USRT.
6. iShares Global REIT ETF
For further diversification into the publicly traded REIT space, check out the iShares Global REIT ETF (REET). As the name suggests, REET invests in REITs around the world, adding another layer of diversification. REET tracks the FTSE EPRA/NAREIT Global REITs Index. The fund invests in publicly-traded REITs in both developed and emerging markets.
The expense ratio comes in at 0.14%. For funds investing internationally, that is a very competitive expense ratio.
A recent allocation showed that over 67% of the REITs were U.S. based companies. The next three highest percentages are Japan (9%), Eurozone (5%), Australia/Asia (4.5%), and the United Kingdom (4.2%).
International REITs often offer a potentially higher income yield than their U.S. counterparts. That makes adding a percentage in a global REIT beneficial.
7. Dividend-Paying Stocks
We already mentioned these in the beginning. Let’s dig a little deeper into how to invest in dividend-paying stocks.
Historically, dividend-paying stocks have outperformed the market as a whole. The reason is simple. In addition to the increase in the price of the stock, you get the added benefit of dividends. Combining these two elements can offer higher than average growth.
For example, let’s look at two hypothetical stocks, ABC and XYZ. We will assume ABC pays a 3% dividend, and the stock price grows at 5% a year.
XYZ doesn’t pay a dividend and returns 7% a year.
Which investment do you think provides the highest long term growth (assuming they continue to grow at these rates)?
The answer is ABC. When you add the 3% dividend to the 5% stock growth, you have an 8% rate of return. And if ABC company increases the dividends over the years, your rate of return will only continue to go higher. I realize this is not news to many of you. However, we often get sidetracked into chasing the next shiny object and forget about the obvious things that work.
Even the S & P 500 index pays a dividend of just under 2%. If you’re a long term investor and can handle the risk of stocks, consider increasing your holdings in dividend-paying stocks.
8. High Yield Savings Accounts
Describing savings accounts as high yield in this environment may seem silly. However, it wasn’t that long ago when these savings accounts paid over 2% interest. Most of the high yield accounts are available at online banks. With a few exceptions, the traditional brick and mortar banks pay substantially lower rates.
Here are a few examples to consider.
Betterment is best known as a robo advisor. A robo advisor is a low-cost digital investment manager. They also have a competitive savings account as part of their service.
The Betterment EverydayTM Cash Reserve savings account is currently paying just under 1%. That may not seem like much, but it’s substantially higher than what’s available at the traditional national banks.
There are several options available for a high yield savings account. Be sure to visit our high yield savings options page to learn more.
9. Credit Card Hacking
Earning points from credit cards is a great way to generate passive income. Some might say that credit card hacking is outside of what passive income means. And in the classic definition, that might be a reasonable argument. Working credit cards to generate points to use for travel or to earn cashback rewards sounds like work. Upon closer examination, that may not be the case.
Using a credit card to purchase things we usually buy (groceries, clothing, household goods, etc.) when done smartly can generate extra cash. Of course, the key to making this work is paying off the balance every month. That should be obvious, but we need to emphasize that point.
Credit card debt should be your enemy. If you pay for things on a credit card and have a balance on which you get charged a high-interest rate, you’re eliminating the benefit from any rewards the card offers. If, however, you pay off the card every month, you essential have the use of the credit company’s money for a month.
You can pay most of your monthly bills on a card. You can earn travel rewards (as good as cash if you’re a traveler) to pay for airfare, hotels, and rental cars. If you vacation or travel regularly, that’s as good as passive income.
In summary, pay for the things you would typically buy with a rewards-based credit card. For many, that means having multiple cards and doing card arbitrage to get the most points and rewards.
To learn more, and find the best credit cards, visit this page.
10. Make Money Taking Surveys
Surveys are a great way to generate some extra cash. Keep in mind that no one is going to get rich, taking online surveys. However, if you do this regularly, it can add a nice little bonus to your passive income streams.
If you’re a physician, there are medical surveys explicitly designed for you that can generate some fun money. Physician on Fire, an avid craft beer connoisseur, calls this income beer money. Maybe for you, it’s something else. Check out his list of the best medical surveys on this page.
For the nonphysician readers, here are some excellent survey options to consider.
- Vindale Research
11. Sell Photos Online
Are you a photographer? Even if the answer is no, I’m guessing you have hundreds, if not thousands of photos you’ve taken. These days, anyone with a smartphone has a high definition camera as part of the package. These newer phones take pictures that rival the quality of a good camera. With each new generation of the smartphone comes a new and improved phone.
There are numerous places to sell your photos online. Here is a partial list of some of the better options:
Selling stock photos can turn your hobby into cash. In this digital age, this is a great way to generate some cash.
12. Make Money Online
Many of the more popular recommendations to make money online stretch the definition of passive income. Popular ideas like starting a blog or podcast are anything but passive to start up. After you have established a blog, you might see some residual income rolling, but that’s two or three years down the road at best.
If you a looking to generate a little free cash flow online without the “hustle,” your best are apps that pay you money. Whether you enjoy playing video games on your phone, renting out unused items, or want to get paid to get in shape, there’s an app for that. Some of our favorite apps to earn passive income are MobileXpression, which pays you gift cards for letting the app run in the background on your phone and FetchRewards that pays you for scanning your grocery receipts.
These apps won’t make you rich, but they are a great way to score some extra cash for the things you already do every day.
If you haven’t thought about how to generate passive income, there’s no time like the present. Most of those seeking financial independence achieve it by replacing W2 income with passive income. Diversifying your income sources, like diversifying your investments, is one of the best ways to protect yourself.
Even if you’re not one who seeks financial independence, protecting your income by diversifying its sources makes sense. If we’ve learned anything during the recent pandemic, it’s how little control we have over what happens to us. Many have lost their jobs. Most of you reading this post are the fortunate ones. But no one is immune to problems.
Developing passive income streams can help protect you when the stuff hits the proverbial fan. Making it a part of your regular investing activity will set the stage for you to withstand even the worst financial stresses life might throw at you.