What Is Passive Income? (Plus 20 Passive Income Ideas)

Do you dream of financial freedom? The key might just lie in the power of passive income. Passive income is more than a buzzword; it’s a strategy that can lead to a greater degree of financial independence and prosperity.

But what is it exactly, and how can you create it? This article will offers an in-depth explanation – with suggestions and business ideas you can implement to generate passive income.

woman on laptop

What is passive income?

Passive income refers to money that you earn with little or no effort on a regular basis, beyond the initial upfront investment of time, money, or both. It includes earnings derived from a rental property, a limited partnership, investment income, subscription services you provide, ongoing royalties from creative endeavors, or other enterprises where you don’t have to play an active role.

Passive income differs from active income, where you are paid for the work you do, like a regular nine-to-five job. When you earn active income, you trade time for money. With passive income, you trade your upfront investment of either time or money for an ongoing revenue stream.

Benefits of Passive Income

Passive income streams come with a host of benefits, making them a popular choice for individuals looking to diversify their income and secure financial freedom. People who aspire to join the “FIRE” movement (Financial Independence, Retire Early), frequently seek to set up passive income streams to support themselves in retirement.

  • Achieve financial freedom: Passive income can supplement or replace active income, paving the way to financial freedom. It allows for quicker debt payoff, increased savings, or even early retirement.
  • Diversify income streams: Passive income diversifies your income, reducing the risk associated with relying on a single source. It provides financial stability even if you lose your primary income source or see your active income diminished.
  • Create a safety net: Passive income acts as a safety net for unexpected expenses or financial emergencies, reducing financial stress and providing peace of mind.
  • Gain time and freedom: Passive income frees up time traditionally spent earning active income, allowing for increased flexibility to pursue hobbies, spend time with family, or start new ventures.
  • Build wealth: Through compound interest, regular amounts from passive income streams can grow into substantial wealth over time, accelerating the journey towards your financial goals.
  • Lower stress levels: Passive income reduces financial stress by providing a steady income stream that doesn’t require constant effort, giving you greater control over your financial future.

Types of Passive Income

Passive income comes in various forms. Let’s explore some types of passive income that you could potentially tap into.

Investment Income

Investment income includes dividends from individual stocks or mutual funds, interest payments from corporate bonds, or capital gains from selling securities at a profit. With the power of compounding, these investments can significantly grow over time. Remember, investing involves risk, and your initial investment might increase or decrease in value.

Rental Income

Income derived from rental properties can be a solid passive income source. When managed well, you can earn rental income that covers the mortgage, taxes, maintenance, and other expenses and nets you a tidy profit. A property manager can help handle the day-to-day affairs, transforming it into a truly passive income business.

REITs and Crowdfunded Real Estate

Real estate investment trusts (REITs) and crowdfunded real estate platforms allow you to invest in commercial real estate without having to buy properties yourself. You receive net rental income in the form of dividends without the hassle of property management.

Peer-to-Peer Lending

Unlike traditional bank loans, peer-to-peer lending allows you to lend money directly to individuals or small businesses in return for interest income. Platforms that facilitate peer lending make it possible for you to diversify by lending small amounts to many borrowers.

Business Income

Business income can become passive when you’re not materially participating in the operations. For instance, you might invest in a business venture, like a restaurant, where others run the day-to-day operations, and you receive a percentage of the profits.

Royalties from Intellectual Property

Creating a book, music, or online course can provide you a steady stream of royalty income long after the initial work is completed. It’s the ultimate “create once, sell many” scenario.

How to Create Passive Income

Creating passive income requires an upfront investment of time, money, or both. Whether it’s researching dividend paying stocks, buying rental property, or creating an online course, you’ll need to put in some effort upfront. The idea is to put the work in now so you can reap the benefits in the future, leading to the financial freedom passive income offers.

Assess Your Personal Skills, Interests, and Resources

Start by assessing what you’re good at, what you like to do, and what resources you have available. Someone with a knack for picking stocks might invest in the stock market, while a creative individual might generate passive income by selling their digital art (so it can be reproduced multiple times), books, or intellectual property.

Identify Your Potential Passive Income Sources

After assessing your skills, interests, and resources, research potential passive income opportunities. You might consider high-yield savings accounts, dividend stocks, rental properties, peer to peer lending, or creating an online course.

Implement Your Passive Income Strategy

Once you’ve identified a promising passive income stream, it’s time to make your move. This might mean opening a brokerage account, purchasing a rental property, writing a book, or producing an online course. Be prepared for a period of active work as you make your initial investment in your passive income source.

Sustaining and Growing Your Passive Income Streams

Once your passive income stream is established, there’s still work to do. You’ll need to manage your investments, ensure your rental properties are occupied and well-maintained, and market your online courses or other products. This maintenance can often be outsourced or automated, keeping your involvement to a minimum.

20 Passive Income Ideas to Build Wealth

Building wealth isn’t always about working harder; sometimes it’s about working smarter. Let’s look at 20 passive income ideas that can help you build wealth over time.

1. Invest in Dividend Stocks

Dividend stocks belong to companies that distribute a portion of their earnings to shareholders in the form of dividends. The beauty of this passive income strategy is two-fold. First, you can earn a regular stream of income from the dividends, which can be quarterly, semi-annually, or annually.

Second, if you choose to reinvest your dividends, you can benefit from the power of compound growth over time. Dividend stocks thus offer a potential avenue to earn money and grow your wealth in the long run.

2. Peer-to-Peer Lending

Peer-to-peer lending has revolutionized the lending industry by eliminating the middleman – the financial institution. Instead, it connects individual investors directly with borrowers via online platforms.

As an investor, you get to play the bank’s role, lending your own money directly to borrowers. In return, you receive the interest paid on those loans. Peer-to-peer lending platforms generally offer higher returns than traditional savings or investment accounts, although they do involve a greater degree of risk.

3. Rental Properties

Owning rental properties is one of the oldest forms of earning passive income. By buying a property and renting it out, you can generate a consistent stream of rental income. Furthermore, you also stand to gain from potential appreciation in the property’s value over time, thereby building wealth.

Of course, rental properties do require a significant upfront investment and ongoing maintenance; hiring a property manager can turn it into a more passive venture.

4. REITs

Real estate investment trusts, or REITs, provide a way for individuals to invest in income-producing real estate without having to buy and manage properties themselves. REITs are companies that own, operate, or finance real estate that produces income.

As a shareholder, you earn a share of the income generated through real estate investment – without having to go out and buy, manage, or finance property. Most REITs are traded on major stock exchanges, offering a way to invest in real estate with the liquidity of a publicly traded stock.

5. High-Yield Savings Account

A high-yield savings account is like a regular savings account but with a higher interest rate. This makes it a simple, virtually risk-free way to earn passive income. While the returns aren’t as high as other passive income strategies, there’s virtually no risk as such accounts are often insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain amount.

If you have some extra cash that you don’t need to access in the short term, a high yield savings account could be an excellent option. Here’s a list of the best high-yield savings accounts right now.

6. Create an Online Course

The rise of the internet and digital platforms has opened up new avenues for sharing knowledge and expertise. One such avenue is through online courses. If you possess expertise in a particular field, you can create an online course and sell it on platforms such as Udemy, Coursera, or your own website.

The upfront investment involves the time and effort to create the course, but once it’s ready, each new sale is nearly pure profit. Plus, it’s scalable. There’s no limit to how many people can purchase and learn from your course.

7. Write a Book

Writing a book can be a significant upfront investment of time and effort. However, once published, it can become a source of long-term passive income through royalties. Every time a copy of your book is sold, you earn a certain amount.

Self-publishing platforms like Amazon’s Kindle Direct Publishing make it easy to publish your own ebook and paperback. If you have another business, you can write a book that supports those business interests, promoting your company while you earn residual income from your book or guide.

If you prefer, you can hire a ghostwriter to produce your book. You would pay an upfront fee in exchange for not having to write the book, but you’d collect all the revenue from sales.

8. Affiliate Marketing

Affiliate marketing is a revenue-sharing venture between an affiliate (that’s you) and an online retailer. As an affiliate, you promote a product or service on your blog or website. When visitors click on your unique affiliate link and make a purchase, you earn a commission.

This passive income strategy requires a well-established platform with significant traffic. That could take the form of a website with a blog or a social media account with a lot of followers. Once established, affiliate marketing, can provide a decent income with little ongoing effort.

9. Rent Out a Room on Airbnb

If you have an extra room or property, you can consider renting it out on platforms like Airbnb. This can be especially lucrative if you’re located in a popular tourist area or a city with a high demand for short-term rentals.

Airbnb allows you to list your space for free. You’re in control of availability, prices, house rules, and how you interact with guests. You can earn a decent income with little or no effort, as Airbnb handles the booking process.

10. Start a YouTube Channel

YouTube has grown into a platform that can generate substantial income for content creators. If you have a unique skill, expertise, or an interesting life that people might be interested in, starting a YouTube channel can be a viable source of passive income.

After the initial time and effort to create and upload videos, you can earn money through ad revenue, sponsorships, and fan funding. Like other forms of passive income, the income from a YouTube channel can be scalable and substantial over time.

11. Invest in Mutual Funds or ETFs

Investing in mutual funds or exchange-traded funds (ETFs) is a tried-and-true method for building wealth passively. These investment vehicles pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets.

They are managed by professional investment advisers, reducing the effort on your part. Mutual funds and ETFs often pay out dividends and capital gains which can be reinvested to grow your wealth over time. Remember, while these investments offer the potential for higher returns, they also come with risks – the value of your investment can go down as well as up.

12. Create an App

In the digital age, app creation can be a lucrative passive income source. If you have a unique idea and the technical skills to bring it to life, you can create an app and sell it on platforms like Google Play Store or Apple’s App Store.

After the initial effort to develop and launch the app, each download or in-app purchase represents a source of ongoing income. You may need to update the app or provide user support occasionally, but the income can be quite passive and scalable.

13. Invest in a Business

Investing in a business as a silent partner is another way to generate passive income. In this arrangement, you provide capital to a business, and in return, you receive a share of the profits. However, you’re not involved in the day-to-day operations or decisions of the business.

This kind of investment can be risky, as the success of your investment relies on the success of the business. Therefore, it’s important to thoroughly vet any business venture before investing.

14. Sell Stock Photos

If you have a knack for photography, selling stock photos can be a great source of passive income. There are numerous online platforms such as Shutterstock or Adobe Stock where you can upload your photos.

Each time someone downloads your photo, you earn a commission. It’s a great way to monetize a hobby, and once your photos are uploaded, they can continue to generate income with no further effort.

15. Build a Blog

Starting a blog can be an excellent way to generate passive income, but it requires considerable upfront work. You’ll need to create valuable content regularly and build an audience. Once established, a blog can generate income in several ways: advertising revenue, sponsored posts, affiliate marketing, or selling products or services.

A successful blog can become a significant income source and provide financial freedom, but it requires dedication, patience, and a knack for creating content that resonates with your audience.

You can hire a Web designer, SEO expert, and professional writers to help you blog achieve the visibility it needs. To launch a successful blog, you’ll need to have a lucrative niche and either the money to pay a team of experts or the time and knowledge to do it all yourself.

16. Rent Your Car

If you have a car that spends a lot of time parked, consider renting it out using services like Turo or Getaround. These peer-to-peer car rental platforms allow you to list your car and rent it out when you’re not using it, providing an additional source of passive income.

17. Sell Digital Products

If you’re a creative person, consider selling digital products. This can be anything from graphic design templates to digital planners, low-content e-books, music, or digital art. Platforms like Etsy, Amazon, or your own website can be a great place to sell such products. Once created and listed, these products can generate income every time they are downloaded or purchased.

18. Real Estate Crowdfunding

Real estate crowdfunding allows you to invest in real estate projects without the need to manage the property. Platforms like Fundrise or RealtyMogul allow you to invest your money alongside other investors to fund real estate projects. The profits from these projects are then shared among the investors. It provides a way to diversify your investment portfolio and can offer attractive returns.

19. Dropshipping

Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when you sell a product using the dropshipping model, you purchase the item from a third party and have it shipped directly to the customer.

This can be a profitable model since you don’t have to worry about inventory or shipping logistics. However, it does require you to have an e-commerce platform and attract customers.

20. Start a Podcast

Similar to blogging or starting a YouTube channel, building a podcast can generate passive income once you’ve built an audience. This involves creating engaging audio content on a topic you’re passionate about and releasing episodes regularly. Once you have a solid listener base, you can monetize your podcast through sponsorships, donations, or advertising.

Risks and Considerations

While the idea of earning money with little or no effort is appealing, it’s important to understand the potential risks. For instance, stocks may not always pay dividends, rental properties can sit vacant, and online businesses can fail. Taxes on passive income also need to be taken into account, as the Internal Revenue Service (IRS) treats passive and active income differently in some situations.

Investing involves risk, and you should consider consulting a financial advisor or tax professional before making major decisions. There may be minimum investment requirements or fees associated with advisory or brokerage services. Make sure to factor in these considerations as you build your passive income strategy.


While passive income might not be the golden ticket to instant wealth, it can significantly enhance your financial stability and independence. By diversifying your income streams, putting in the upfront work, and being strategic about your investments, you can leverage the power of passive income to reach your financial goals. So why wait? Start exploring your passive income opportunities today.

Dawn Allcot
Meet the author

Dawn Allot is a personal finance writer and content marketing expert specializing in finance, travel, real estate, and technology. In addition to her work at Crediful, Dawn regularly writes for Bankrate, GoBankingRates, and The Balance.