Nothing on this list or this blog is intended as investment advice. Do your own due diligence.
As with any passive income ideas, what counts is the long-term expected return. I always compare an investment to the stock market, where the long term expected return is generally believed to be around 7%.
When judging an investment's return, it should always be compared to its volatility i.e. risk. Additionally, the volatility of the investment should be considered in context of your other investments. When you add investments to your portfolio, use modern portfolio theory to consider how it affects your overall volatility, not just expected returns.
If there were passive income ideas that would produce higher returns, investors would flock to those ideas, driving eventually down their profits. Thus, a similar rate of return is to be expected.
It also means that to generate truly passive income you'll need to invest capital. Other forms of income are not passive, including other quoted side hustles like blogging, stock photography, creating Etsy products etc.
7 truly passive income ideas anyone can do
- Stock market
- Bonds
- Finance consumer loans
- Become a landlord
- Buy solar cells and sell the electricity
- Lend to small businesses
- Lend to real estate development projects
- Lend to pawned crypto currency
1. Stock market
There are a lot of ways to invest in the stock market, but in case this area is new to you, you probably don't want to hear about investing in direct stocks.
Exchange Traded Funds are a great first step into the stock market. Some of the most popular ETFs are so called index-ETFs, through which you can diversify efficiently across a large number of companies.
To buy ETFs though, you need a brokerage account. I personally use Interactive Brokers for their unparalleled global reach and lowest costs.
2. Bonds
Now that you already have an interactive brokers account, you can also buy bonds.
Bonds provide fixed passive income with lower risk. The US treasury bond rates are a good indicator for what you can expect as return. Current yields are around 2%, and this is considered risk-free, but when you include also inflation, your real returns are practically 0.
3. Finance consumer loans
Consumer loans have become hugely profitable in the previous years, yielding more than 10%. Most of my capital is in consumer loans. Some of these platforms I've reviewed on the site:
- Mintos review: 11% peer lending return with no risk?
- Bondora review: why Bondora shouldn't have a buyback guarantee
- Robocash review: The easiest peer lending platform in Europe
The peer lending risks are definitely much higher than bonds. The biggest unknown is how this industry will behave in an economic downturn.
4. Become a landlord
One of the oldest ways to generate passive income is through becoming a landlord. If you know the market well enough, then this strategy can create a steady income in the form of rent, but also the apartment can appreciate in value.
You might also be able to leverage a low-interest mortgage, which further improves your return on investment.
The yield for a rental property varies by country and by region. I own an apartment in Finland that yields a 4.4% interest when fully paid (including all upkeep), but since it is completely financed with a loan, the internal rate of return for the first year is actually 41%.
5. Buy solar cells and sell the electricity
Interesting alternative investments exist, but they're difficult to find. One such alternative investment idea is buying solar cells and leasing them to a customer.
One innovative company that is doing this is Sun Exchange. Sun Exchange allows you to buy solar cells and lease them to customers such as schools in South Africa, where electricity is in high demand. Such sustainable investing also means your capital is working for the good of the planet.
6. Lend to small businesses
It has never been as easy to invest in small, unlisted companies. Once a company is listed and its stock can be freely traded, it becomes much more liquid as an investment. Prior to that, it's a very different story.
Now however, there's no shortage of platforms that help crowdlend to small businesses. While Crowdestor is my favorite in this group it is with high risk:
7. Lend to real estate development projects
If you're not ecstatic about becoming a landlord but like the idea of having exposure to the real estate market, lending to real estate development projects might be more your thing.
By investing through platforms such as www.crowdestate.eu and www.bulkestate.com, you lend money to companies that develop large real estate properties. These can be for example old, forgotten properties at high value locations or development of completely new residential houses. These require large amount of capital, local knowledge and lots of time, but can yield very generous returns.
Crowdestate and Bulkestate both yield passive income returns of over 15%.
8. Lend against pawned crypto currency
One of the long time drawbacks of crypto currency investing was, that your principal did nothing useful. It's like sitting on a pile of gold - what use is it? Sure, you can expect the value of crypto currency to go up, but it's not paying interest if the value isn't moving.
What you can do with gold, though, is that you can pawn it for cash, or use it as collateral for a loan. You couldn't do that safely with crypto currency until the market was mature enough, and now with Nexo it seems it is.
What did you think of these passive income ideas?
Have I missed something?
If you have a passive income idea that I should include in this list, please let me know! You can reach me on twitter on @thewealthyfinn.
