What Is Passive Income, and How Do I Build It?

Dreaming of early retirement? Maybe earning enough money to cover your needs and a few more of your wants? Yeah, those are some great dreams—and they’re well within reach if you can start thinking bigger than just the income that comes along with your 9-to-5.

Now, you could take on another job—that’s always an option. But what if there was a way to make money without having to spend hours mowing lawns or delivering pizzas on nights and weekends? That’s where passive income comes into play!

What Is Passive Income?

Passive income is a way to earn steady money with little to no daily effort. Note that we didn’t say no effort at all. Earning passive income is not a sit-on-your-butt-and-make-fast-money gig. You’ll need to put in the work—at least on the front end.

Some passive income ideas—like building a blog or an app—take time (and sometimes money) to get up and running. But if you play your cards right, they could eventually earn you money while you sleep.

Why Build Passive Income?

Your income is your greatest wealth-building tool—a tool that typically requires you to clock in five days a week. Even if you love your job, we’re willing to bet you wouldn’t mind earning some extra income without the blood, sweat, tears and time commitment of another job. Here’s what building a passive income can do for you:

• Increase your wealth
• Allow you to retire early
• Protect you from a complete loss of income if you lose your job
• Provide an additional source of income in retirement

How Much Money Can I Make?

Passive income won’t make you wealthy overnight, so forget about any get-rich-quick schemes you’ve heard of. But steady and profitable passive income options can build some serious money over the long haul. We’re talking anywhere from a few thousand dollars to hundreds of thousands of dollars—depending on which option you go with and how hard you work at it.

How to Build Passive Income

If we listed all the ways you can build passive income, you’d be here all day. The possibilities are endless. So, we’ve narrowed it down to nine solid options:

1. Invest in real estate.
2. Rent out your house.
3. Store people’s stuff.
4. Rent out useful items.
5. Start a blog or YouTube channel.
6. Sell digital products.
7. Use affiliate marketing.
8. Advertise on your car.
9. Invest in funds.

One way to build passive income (after you’re debt-free and have some cash saved up) is to buy real estate and rent it out to tenants. But before you buy rental property, pay off your own home first and purchase your investment property with cash. Don’t ever go into debt to buy rental property.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

It’s also worth saying: A rental property can be a great source of extra income, but it isn’t the most passive choice. You’ve got to market it and keep up with maintenance and cosmetic updates if you want it to pan out as a source of income. It takes time and effort to decide how you’ll rent out the property and how to manage it—unless you hire a property management company, but that would mean less income for you.

We suggest buying a property somewhere that’s convenient for you to visit so you can personally keep an eye on it. Find a real estate agent who knows your area well and knows what will attract renters.

If you go the rental property route, you need to be in control of your property. Steer clear of real estate investment options—such as a real estate investment trust (REIT)—that pool your money with other investors’ money to buy properties. A REIT (pronounced “reet”) is basically a mutual fund that buys real estate instead of stocks. And while that might sound like a good idea, there’s no way for you to know if the people in control are making smart decisions with these properties (and your money). It’s extremely unpredictable and overall not a smart way to invest in real estate.

If you still have some debt to pay off or can’t afford to take on a whole rental property, consider renting out a spare room. Having a roommate or the occasional Airbnb guest is a great way to sit back and add extra money to your budget—if you don’t mind sacrificing some privacy.

And hey, just because you only have one house doesn’t mean you can’t still rent out the whole darn thing. If there’s a big concert, convention or sports event coming to your town, people are more than willing to fork out crazy money for hotel rooms and rental properties nearby.

If you plan ahead, all you have to do is clean up the house, go hang out with family up the road for a night or two, and come back in a few days. We’re talking hundreds or even thousands of dollars! So next time a popular event comes to your area, give it a shot!

People have a lot of stuff—and they’re always looking for cheap ways to store it. If you have some space in the basement or the garage, what could be easier than having people pay you to store their stuff? You’ll just need to make sure their items are safe and secure.

Check out websites like Neighbor, iStoreit or Store At My House to get started. These are services that can put your indoor or outdoor space to work. Will people pay a ton to have you store their off-season wardrobe? Maybe not—but it can add up over time! And if you have a barn, garage or even just carport space to store vehicles, boats, campers and other high-dollar toys, people will pay more to keep them safe and weatherproof. Set it (safely) and forget it—talk about passive income!

Do you have any items you don’t use all the time that others would like to borrow? Things like a truck, trailer, trampoline, kayak, or even your own yard or backyard pool could earn you passive income as rental items. Explore popular rental websites like Fat Llama (yes, that’s really the name). All you have to do is upload pictures of your items, set a price, and tell the world they’re ready for rent.

If you’re not quite ready to tell the world, consider starting with just your neighborhood. Got a chainsaw, pressure washer or lawn aerator? Larger tools can rent anywhere from $30–70 or more for just a half day at retail stores, so there’s a lot of potential cha-ching there.

Hop on your community’s social media sites and start posting, or distribute flyers the old-fashioned way. Hit it during the right season, and your flyers could get a premium spot on your neighbors’ refrigerator doors, and that leads to phone calls. Just remember to set up some rules so you don’t end up with ruined tools you have to replace from your own pocket.

The more traction the peer-to-peer rental scene gets, the more sites are out there. Here are just a few worth looking into:

• Have an extra car or truck sitting in your garage? You can list your car on Turo—which lets folks rent out their vehicles to locals or tourists who need a ride for a few days.
• If you’ve got more sports gear than you could ever use all in one week, rent it out on Spinlister (not just for bicycles).
• Check out Boatsetter to make some extra passive income with your pontoon boat on a weekend when you won’t be on the water.

If you have a brilliant idea that appeals to a specific audience, you could create something like an educational blog or a YouTube teaching series that doesn’t require constant new material to generate online traffic.

If your content is engaging and gets enough daily traffic, you could sell ad space on your blog or ad spots on your channel. After you put in the heavy lifting, you can sit back, relax and enjoy streams of passive income for every set of eyeballs that watches your content. Not bad!

Now, keep in mind, some forms of passive income are less passive—aka more work—than others. There’s a lot of competition out there in the digital space, so even though you don’t have to go out and spend a million dollars on cutting edge technology and advertising to get attention, you do need to update your content on a regular basis to keep getting looks.

That could mean adding brand-new videos and posts, or you could just update the keywords and outdated details from time to time.

If you’ve figured out how to create content that gets enough traffic to host ads, think about how you could turn that content into a product. It could be anything from a simple e-book or meal-prep guide to a complete online course or an app.

With learning sites like Udemy, you can use your know-how to create a course on their platform. Once it’s published, it doesn’t require any additional maintenance from you, and you get paid when people take your class. It’s a low-output way of making some extra cash and helping people. That’s like a win-win . . . win.

You could also sell something that taps into your creative skills. For instance, if you’re a good photographer, sell stock photos on sites like Foap or create preset photo editing filters for people to download. If you dabble in music production, license your tunes and sell them to YouTubers and podcasters to use for their content.

And writers: There are self-publishing options everywhere, and several of them, including Kindle Publish Direct (KDP), are free. If you have some marketing skills and good pals who’ll spread the word, plus (sorry, but this just needs to be said) your books are actually a decent read—then go for it! You could still see royalties trickle in years down the road. Yay, passive income!

Have you ever bought something really awesome and gushed about it to your friends, family, coworkers and the store cashier? You think to yourself, Man, I should get paid for all this advertising. Well, it’s a thing! And it’s called affiliate marketing.

To put it simply, affiliate marketing is when a company pays you money to publicly brag about their products. If you’re on social media, you’ve probably seen hundreds of people doing this by posting a special link or discount code under a photo of them using a certain product.

Now this doesn’t mean that you can just hashtag your favorite running shoes on Twitter and expect to get paid. The companies you know and love have to have an affiliate marketing program for you to get paid for it, and you would need to apply to become a part of it.

Sites like LinkShare can help you find and connect with those affiliate marketing programs. Amazon, eBay and Target are just a few of the hundreds of companies that offer affiliate marketing programs.

While you don’t have to be an influencer with thousands of followers to be an affiliate marketer (although, that would help you make more money), there are criteria for you to get into the programs. For example, Target says that to become an affiliate, you must be a “website operator, blogger or influencer that runs a family-friendly website and has mainly US-based viewership.”¹

Getting paid to drive your own car? It doesn’t get any easier than that! If you don’t mind slapping a giant logo on your car (or maybe wrapping the entire car or riding with one of those big cans of soda on the top), sites like Wrapify will set you up to get paid for using your car as a mobile billboard.

Sure, you might lose some cool points for driving a slightly ridiculous-looking vehicle, but you’ll win easy money—without sacrificing time, effort or investment. The average person who does a full wrap on their car makes about $264–452 a month for driving to places they already need to go to. That’s not half bad!²

Car-wrapping pro tip: If you live in a subdivision, check to see if it’s okay with your homeowners association (HOA). Getting fined might outweigh the potential profit. Bonkers, but true.

When some people hear “passive income,” they tend to think of investing because it can produce the largest results with the least amount of work. And that’s true! Compared to the other options on this list, investing may be the easiest way to kick back, relax and earn. But we want to be clear about one thing: Investing is a long-term strategy.

Investing in a 401(k)—with a company match—in addition to other tax-favored plans like a Roth IRA is a great option for earning passive income . . . for retirement, not for cash in your pocket today. With these types of investment accounts, the idea is to let your money grow and stay in it for the long haul. If you take money out early, you’ll possibly be faced with heavy taxes and fees.

If you’re in your 20s or 30s, the idea of waiting until you’re 65 to touch your money might sound terrible. But remember, with the right investment strategy, you can build up enough wealth to retire well before 65! In fact, in our National Study of Millionaires, 8 out of 10 millionaires said they reached a million-dollar net worth through their employer-sponsored retirement plan, like a 401(k). Hard to argue with that!

If you’re out of debt and want to start investing, work with a trusted investment professional. Don’t get all wrapped up in investing in cryptocurrencies when you have no idea what you’re doing—that’s a fast way to lose all of your cash.

Passive Income Tips

Like we said, the list of passive income ideas could go on forever. As you search for the best fit for you, you’ll want to ask yourself these questions:

• Do other people make money doing this?
• Which passive income strategy would I be best at?
• Does this idea show a positive long-term track record?
• Has this idea ever come back to bite someone who tried it?
• How much time will this actually take me after the initial setup?

Don’t fall for any passive income ideas that promise a quick return or require huge amounts of money up front—like vending machines or opening a laundromat. Things like that require way too much time and money to be considered passive and could ultimately sabotage your financial goals. Look for ideas that are steady, profitable and trustworthy. Do your research. And never go into debt!

Don’t fall for any passive income ideas that promise a quick return or require huge amounts of money up front.

Build Wealth That Lasts

Did any of these ideas for creating passive income spark your interest? Want a clearer picture of how to build wealth? Connect with an investment professional who will help you create a game plan for your specific goals. Having a financial pro in your corner is the best way to make a plan that meets your specific needs. 

Find a SmartVestor Pro today!