Generate a passive income

Make money while you sleep by generating passive income. Passive income lets you make money without having to work for it. It can give you more financial freedom and even provide the opportunity to leave your job and work for yourself. So how can you make passive income?

What is passive income?

Passive income is money you earn without having to actively work for it. You can make money while you sleep. Sounds too good to be true? Well, it does take time and upfront work to set up passive income streams, but once in place, you can earn money even when you’re not working. The key to success is diversifying your income streams. This means having several sources of passive income, so you’re not relying on just one. That way if one income stream dries up, you’ll still generate money from the others.

Potential income streams

Passive income can be achieved in various ways, but all require some upfront effort and time. Some options to consider for generating passive income are investing in dividend paying stocks, investing in REITs or property funds which generate income from rent and property appreciation. Other alternatives are online businesses, websites, and digital products. Online options can generate income through advertising, affiliate marketing and product sales. Riskier options are peer-to-peer funding and crowdfunding, which offer higher potential returns but are higher risk.

Investing in the stock market

Investing in the stock market requires patience, research, and spare funds that you don’t need to access in a hurry. You will need to commit time to researching companies and understanding market trends. Analysis of companies will help you identify companies that pay consistent dividends and have the potential for long-term growth. Stock market investing is very accessible via online trading platforms, which require only a small initial investment. Investing in established companies that pay regular dividends will provide a steady passive income stream.

Our investing article provides an overview and advice for aspiring investors:

Property

Investing in UK property as a private landlord is becoming less profitable due to changes in taxes, legislation and rising costs. Buying a property outright as a cash buyer is likely to be more profitable than purchasing with a buy-to-let mortgage. Mortgage interest is no longer tax deductible, increasing the taxable income of landlords. Rental income is taxed at either 20% or 40% based on your tax band. Increased interest rates, property maintenance costs, and the upcoming energy efficiency standards for rental properties are making being a private landlord increasingly unappealing.

REITs

Real Estate Investment Trusts (REITS) offer an alternative, hassle-free way to invest in property. REITs work by pooling the capital of multiple investors and investing in a diversified portfolio of commercial or residential property. One of the benefits of a REIT is not having to worry about managing and maintaining the properties. REITs are required to distribute 90% of their rental income to shareholders as property income distributions (PID). Basic rate taxpayers receive the property income net of a 20% withholding tax.

Online business with digital products

Building an online business with digital products can be a good source of passive income. You will need to create a website and attract visitors to your site through SEO and digital marketing. From an e-commerce store, offering online courses, e-books, and selling photos, to affiliate marketing, there are various online options.

Risky but potentially rewarding

Peer-to-peer lending and crowdfunding offer potentially high returns but do carry significant risks. With Peer-to-peer lending, you lend money to individuals or small businesses and earn interest on the loan. Crowdfunding platforms allow you to invest in start-ups or small businesses, hoping for returns as the business grows. These are risky options as if the business fails, you lose your investment. Peer-to-peer lending can be done via an ISA, meaning the interest is tax-free.

Diversifying your income streams is the key to building a regular and consistent passive income. Explore the various options and make sure you approach the ventures with planning, research and a long-term perspective. This way you should be well on your way to building a great passive income stream.