If you want to earn more money, passive income is one of the best ways to do it. Earning money through a job or side hustle is great, but if you can set up a passive income stream that generates money even when you’re not actively working — well, that’s kind of the dream, isn’t it?
If you’re currently trying to set up a passive income stream—because you’re working towards financial independence, chasing that 4-hour workweek, or simply hoping to earn a little extra cash—you’ve probably figured out that earning passive income takes a lot of work.
But how are you going to earn that passive income? Do you want to create a product that “sells itself”? Get into dividend investing or peer-to-peer lending? Buy some real estate?
Sam Dogen at The Financial Samurai has an excellent overview of all the passive income options out there — and how to choose which one is right for you. Each option is given a numerical score based on risk, return, feasibility, liquidity, and more. Plus, you get unique insights based on Dogen’s personal experience with each income stream.
Here’s what Dogen has to say about real estate, for example:
In order to generate $10,000 in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50,000 property with an unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental yield, or a more realistic $200,000 property with a 5% net rental yield. When I say net rental yield, I’m talking about rental income minus all expenses, including a mortgage, operating expenses, insurance, and property taxes.
In expensive cities like San Francisco and New York City, net rental yields can fall as low as 2%. This is a sign that there is a lot of liquidity buying property for property appreciation, and not so much for income generation. This is a riskier proposition than buying property based on rental income.
It’s no surprise that when Dogen tallies up all of the numerical rankings, real estate comes in second to last.
Real estate crowdsourcing, on the other hand, is ranked second from the top, in terms of the best ways to earn passive income. If you’re not familiar with real estate crowdsourcing, here’s Dogen’s explanation:
Real estate crowdsourcing allows you to surgically invest as little as $1,000 into a residential or commercial real estate project for potentially 8 – 13% annual returns based off historical data. Such returns are much better than the average private equity, CD, bond market, P2P lending, and dividend investing returns. With P2P lending, borrowers can sometimes default and leave you with nothing. At least with real estate crowdsource investing, there’s a physical asset that’s backing your investment.
You should read the entire Financial Samurai article to get a full understanding of all your potential passive income options—and if you’re trying to decide which passive income stream is right for you, ask yourself how much time, money, and risk you want to invest into your passive income project.
If you have a lot of time and money and are willing to take some risks, real estate might be the way to go.
If you have less time and money, real estate crowdfunding through Fundrise or dividend investing might be better options.
If you are creative and have a lot of extra time, creating and marketing a product might be the best way to generate a passive income stream.
There’s no passive income source out there that doesn’t require at least some investment, in both money and time, before it yields any returns. But understanding which passive income stream to pursue will help you find the best investment for your current level of income and availability — which can make the difference between getting that passive income stream to the level at which it begins producing income, and giving up before the stream really gets a chance to get started.