Passive income ideas (2024)

You’ve heard the phrase, “Let your money work for you.” Well, in this day and age, it’s no longer just a pipe dream.

There are plenty of passive income business ideas that allow young adults and experienced investors alike to invest money and generate passive income.

What is passive income?

Passive income refers to earnings generated with minimal effort or direct involvement on your part. For example, say you have a job tied to hourly wages or a salary. You have to put in the hours to get paid for that.

But passive income works differently. Passive income streams can include money you receive from a rental property, stock dividends, royalties or interest from bonds. They may also include blogging, which you can monetize through ads or affiliate marketing, or selling digital products, like e-books.

What passive income is not

If you’re thinking about developing passive income streams, you’ll also want to understand what it isn’t.

• Passive income is not a guaranteed source of income that doesn’t involve any effort. In fact, a successful passive income strategy almost always means putting in significant work up front.
• Passive income is not a path to overnight riches. As with any other way of generating income, some patience is in order.
• Passive income is not completely hands-off. While it may eventually require less active participation compared to a traditional job, you’ll almost certainly have to manage any passive income sources regularly.

“It’s crucial to distinguish between true passive income and activities that require ongoing effort or active participation,” said Taylor Kovar, CEO and founder of Kovar Wealth Management in Lufkin, Texas.

“Examples of what is not passive income include traditional employment income, freelance work and any endeavor that requires continuous time and energy input to generate earnings,” he added. “While these activities can be great, they do not qualify as passive income because they rely on active involvement rather than generating earnings passively.”

The benefits and challenges of passive income

Benefits of passive income

• Provides an additional source of income to supplement existing earnings.
• Offers diversification and protection if other sources of income are lost.
• Occasionally comes with tax advantages, such as with certain dividend payments.

While some online marketers tout “financial freedom” as the chief benefit of passive income, it’s frequently an additional inflow that can supplement other earnings rather than a path to an early retirement.

But there’s nothing at all wrong with supplemental income, and many business consultants advise having multiple ways of earning money. That strategy offers protection: If one source of income disappears for some reason, you won’t be completely left in the cold.

Challenges of passive income

• Requires effort and upfront money to get started.
• Calculating how different sources of passive income are taxed.
• Varies from year to year depending on markets, new technology and business trends.

However, investors or business owners seeking passive income should have a realistic sense of what developing an additional income stream entails.

Any form of passive income requires some work upfront, even if it’s just earning the money to buy income-producing bonds. But for most people, the addition of another income stream, especially one that doesn’t require much toil and trouble, is welcome.

Of course, figuring out the taxes is challenging with any form of income, including those considered passive.

Taxation of passive income varies based on the source, said Kovar. For example, rental income is taxed as ordinary income, but expenses and depreciation can offset some tax liability.

“Dividends and interest from investments are subject to different tax rates, with qualified dividends often taxed at a lower rate than ordinary income,” he added.

Before investing in a new passive income idea, be sure it aligns with your goals, time horizon and risk tolerance. The passive income ideas rewarded in 2023, for example, may not be the same passive income ideas 2024 rewards, and that’s sure to constantly change over time.

Passive income ideas for 2024 and beyond will depend on not only the bond and equity markets but also new technology and business trends.

A guide to growing your passive income

There are plenty of ways to add passive income to your portfolio of money-making ventures. From real estate investments to online businesses, it’s a matter of what appeals to you and what leverages your skill sets and your available time. Not all passive income ideas suit everyone, so it’s wise to choose carefully.

Ways to generate passive income

1. Invest in dividend-paying stocks
2. Invest in fixed index annuities
3. Invest in bonds or bond funds
4. Invest in real estate investment trusts (REITs)
5. Invest in robo-advisor portfolios
6. Create digital content
7. Operate an e-commerce store
8. Perform affiliate marketing via social media
9. Operate rental properties
10. Invest in private equity funds (if accredited)

Passive income ideas for young adults

For young adults, passive income streams can be an early step on the path toward wealth accumulation. Investors in their 20s may think bonds are boring assets only their grandparents own, so, fortunately, they have other options.

1. Invest in dividend-paying stocks

Investing in dividend-paying stocks is a way to get a regular payout, usually quarterly. An investment in real estate provides rental income, although many financial advisors and seasoned real estate investors recommend minimizing the debt load for rental properties to reduce risks, such as extended vacancies.

Gabriela Cheng Mechem, CEO of NIM Retirement Group in Irvine California, said young adults should realize that the stock market, over time, significantly outperforms bonds, certificates of deposits (CDs), high-yield savings accounts and money market funds.

“Young people would do much better by investing in the stock market or even real estate than by putting their money into a conservative savings vehicle such as CDs or money market funds,” she cautioned.

2. Invest in fixed index annuities

However, young adults who want passive income might consider a fixed index annuity, she said. These provide a regular income stream, and they require minimal attention from the annuity owner, making them appropriate vehicles for passive income.

Passive income ideas for young adults are varied, but it’s imperative to choose the ones that are best suited for your situation, interests and available resources.

Investment-focused passive income ideas

One common way for investors of all ages to generate passive income is through investments, such as bonds or dividend-paying stocks. These investments provide a consistent income stream without the account owner having to do very much at all, beyond rebalancing the account on occasion, if necessary, and making sure the taxes get paid.

3. Invest in bonds or bond funds

Investment-grade corporate bonds offer predictable and stable income streams, making them ideal as passive investments. Because these bonds are debt issued by financially sound companies, they regularly make their interest payments and carry a low risk of default.

Most investors aren’t nearly as familiar with the bond market as they are with the stock market, so rather than trying to pick individual securities, a bond mutual fund or exchange-traded fund (ETF), such as the Vanguard Total Bond Market ETF (BND), may be a better way to make a passive investment.

Investors should understand the distinction between those high-quality corporate bonds and those with lower credit quality, called high-yield or “junk” bonds. A company that gets into financial trouble and can’t service its debt receives a lower credit rating. That’s also true sometimes for newer companies with a shorter track record of financial stability.

Interest rates are higher on those lower-credit-quality bonds because investors demand to be paid more to take on the additional risk.

Here again, investors interested in passive income from high-yield bonds are generally better off turning to a fund rather than individual bonds. For example, one of the largest high-yield bond funds is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).

4. Invest in real estate investment trusts (REITs)

For investors who like the idea of passive income through real estate but either don’t have the cash to purchase property or don’t want the hassles of being a landlord, REITs could be the answer.

REITs own properties such as office buildings, medical facilities, senior living centers and apartment complexes. They collect rent from tenants and by law are required to pass along at least 90% of their taxable income to shareholders in the form of dividends. That’s a good deal for investors who want a steady stream of passive income.

5. Invest in robo-advisor portfolios

For a passive approach to investing, robo-advisors, which are federally licensed and registered asset management platforms, automatically invest and rebalance client portfolios based on the risk tolerance and financial goals clients specify.

This hands-off approach ensures your investments align with your objectives without requiring constant monitoring.

Creating digital content for passive income

6. Create digital content

For young adults, or even those who have been around the block a few times, developing digital content can become a source of passive income, although it requires some work upfront to create the products and build an audience of potential customers.

Fortunately, there are plenty of ways to generate income online through digital content.

7. Operate an e-commerce store

Matt Willer, managing director and partner at Phoenix Capital Group in Denver, Colorado, said younger adults can benefit from passive, or largely passive, income by taking on side hustles.

“Whether that’s as an influencer, a social media voice that can monetize content, or through establishing their own e-commerce store, there are many ways that younger individuals can leverage technology and their generational expertise to generate passive cash flow with minimal time and minimal capital deployed,” Willer said.

8. Perform affiliate marketing via social media

Building an online presence through blogs or affiliate marketing can also create passive revenue.

Would-be digital content creators should do some research into what avenues would be most lucrative and which are best suited to their existing skill sets and interests. For example, while some food bloggers make six-figure incomes from their websites and YouTube channels, that’s probably not the best choice for a person who can barely boil water.

Passive income from rental properties

9. Operate rental properties

Plenty of people dream about owning rental property, but be aware: While it’s nice to have that rent check coming in every month, owning real estate isn’t always passive. When there’s a leaky roof or overflowing toilet, or a tenant who stops paying, that passive investment suddenly becomes active.

“While the IRS considers income from rental properties as passive income, rental properties involve more work, time, maintenance expenses, the payment of bills such as property tax bills and repair bills than almost any other investment,” said Mechem.

“The only people who should consider owning rental properties are people who have the time, energy and finances required to manage these investments,” she added.

But if investors understand the possible pitfalls, they generally find that real estate becomes an appreciating asset.

Ray Prospero, a partner advisor at AdvicePeriod in Riverside, California, said in addition to collecting rent, real estate owners may benefit from a property value appreciation over time.

“However, there are some issues that real estate owners have to navigate carefully through such as property taxes and acquisition costs, including interest rates,” he said. “The property owner has to do the due diligence to make sure the lease will generate enough income to be cash-flow positive for it to make sense.”

Passive income through private equity and bonds

10. Invest in private equity funds (if accredited)

Private equity involves contributing funds to professional fund managers who actively manage and make strategic decisions on investors’ behalf. This allows an investor to benefit from opportunities without direct involvement in day-to-day operations.

Private equity funds frequently back young, high-growth technology companies, getting their payout when the company goes public or is sold to a larger firm.

But private equity investing isn’t suitable for everyone, said David Hollander, founder and CEO of Liberty Group, an estate law, wealth management and tax planning firm in Oakland, California.

Hollander pointed out that private equity funds are typically open only to accredited investors, or individuals with a net worth of $1 million or more, not including their homes, or an income of $200,000 a year for the past two years.

“It is also important to keep in mind that your money may be locked up for a number of years in a private equity fund and that the sponsor of the fund typically charges a 2% management fee each year and takes 20% of the profits which can significantly reduce the investor’s returns,” Hollander added.

How passive income is taxed

Taxation on passive income isn’t a one-size-fits-all scenario. As you’ll typically find with the United States tax code, there are a range of nuances, rules and regulations to consider.

For example, dividend income can be taxed as ordinary income or as qualified dividends, which may receive preferential capital gains tax rates. The tax treatment also depends on factors like the type of dividend, the investor’s tax bracket and the holding period of the underlying shares.

Income from a rental property is taxed at ordinary income rates, although property owners generally find plenty of deductible expenses.

If you opt to create digital content as your source of passive income, that’s generally going to be treated as ordinary income to you personally or to a business entity you form, such as a limited liability company.

As with all things tax-related, it’s best to consult a tax professional rather than trying to navigate the maze yourself and make the guess correctly.

Determining the right method for passive income

With so many opportunities for passive income, choosing the right one, or ones, may feel daunting.

Not all forms of passive income are right for everyone. Start by reviewing your interests and skills. If you are comfortable investing in the stock market, dividend-paying equities may be right for you. If you’re up for the challenge of maintaining property and dealing with tenants, then you may be well-suited for real estate.

It also depends on how much time you have upfront. For example, if you have a full-time job and a family, bond investments or REITs may be preferable to real estate or digital content creation.

How many passive income streams do you need?

There’s no right or wrong number of passive income sources. Multiple streams of income reduce dependency on a single source, which can be a tremendous advantage if something goes awry with one of them, so having more than one source of passive income is often a good idea.

However, if you’re just beginning to explore the idea of passive income, it may be wise to start slowly, rather than taking on too many projects at once.

An easy way to get started is by using investments such as a bond ETF or a dividend stock ETF. These income sources require nothing from the investor beyond opening and funding a brokerage account and choosing a fund.

As with most investments, a successful outcome depends largely on a person’s unique goals and situation. One or two passive income streams may be exactly right for one person, while another is looking for more ways of diversifying his or her income streams.