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How To Create Passive Income

yacht on lake

Key Findings:

  • Passive income from a property is a great way of supplementing other assets in later life
  • With due diligence and given time, income from a property can become a steady stream of profit once mortgage terms are paid off
  • Diversification with multiple streams of income can help quickly expand a portfolio

Creating passive income is one of the most common goals for investors and often the sole reason for investing. Whether you’re looking to build security in your later years, provide for your family or supplement your pension, passive income investing can be a great way to achieve these goals.

So what is passive income investing exactly? It’s money you earn through minimal effort. Income delivered by secondary streams and created ‘passively’. These second streams are usually delivered by investments such as property, stocks, bonds or pensions. If you have the option of utilising what you’ve earned passively during your retirement years, there’s no reason you can’t live as well as you did during your working years, maintaining the lifestyle without the work.

Some basic examples of passive income investing include rent from property investment, profits from a business where you have no daily responsibility or role, dividends from stocks, the interest from owning bonds or your pension.

Passive income investing is so attractive because it allows you to simply enjoy your time, particularly once you retire. If you find yourself unable to work or you retire, normal employment income will most likely cease to exist. For people in high-paying roles, this is vital to consider, especially with the ‘death’ of final salary pensions brought about by economic upheaval.

Building Passive Income

The most common way of building passive income is to utilise the money earned from your main work role and use that to make passive income investments that will generate returns over time. Investors often consider investing in a start-up, app or buying shares. For property investment, buyers may either buy outright or utilise a mortgage to purchase the property which can then start generating rental income.

While this method can take a while to start generating income that would truly change your day-to-day life, it’s one of the surest ways to start building a source of income and relatively low-risk as long as the property research is performed and maintained.

In the example of using property investment to generate income, investors aim to pay the mortgage, taxes, insurance, maintenance and property management services with the rental income. This leaves a small margin from day-to-day and a guaranteed source once the property is fully paid off.

It’s worth noting that property growth experiences the same market cycles as all investments, in bull markets most investors win but in bear markets you need to be prepared to ride out the storms and in some cases, fill gaps and voids where they arrive.

Passive Property Investment

Creating passive income from a property can be ideal because it doesn’t rely on you being in the area locally. Although you should always visit your potential investment site or seek professional advice, the day-to-day can be run by other people, leaving you to enjoy the benefits. By having several tangible investments spread out around various locations, you can build a diverse portfolio that can deliver significant returns.

Building rental income streams can be made easier by investing in a ready-to-rent development. Although these opportunities are typically rarer than standard Buy-to-Let investments, they generally come pre-tenanted and furnished – giving you an immediate source of rental income.

Other ‘passive assets’ can include dividend-paying stocks, royalties for creative work, app development, renting out space in your home, bonds, high-yield savings accounts, peer-to-peer lending and of course, pensions.

Whilst all of the above are viable, it’s important to remember none of these will make you an overnight success. There is no such thing as 100% passive income and some legwork will be necessary throughout – smart passive income compounds and must be re-invested to maximise returns.

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