What is Passive Income?
Passive income refers to earnings that can be acquired with minimal or no continuous exertion. For instance, earning dividends from shares or rental income from an investment property are examples of this. This stands in contrast to active income, like a salary or wages, where you receive compensation for performing work or services.
Ways to Generate Passive Income
There exist two primary avenues to generate passive income in Australia: through shares and property. Within these categories, various investments and approaches are available for consideration. A common aspect among them is the necessity for an initial cash investment to get started.
In terms of building wealth, having the initial capital is crucial. It can be challenging to initiate the process without a certain amount of disposable funds to propel yourself forward.
The following are several popular concepts aimed at assisting you in earning passive income. Also, for those lacking immediate spare cash, we’ve included ideas that may not mandate significant upfront capital but do require more active involvement.
Shares
To accrue passive income through shares, it’s advisable to consider long-term and stable investments.
Focus on shares that are inclined to offer consistent, modest growth over time rather than opting for high-risk investments. Building wealth is not a quick pursuit.
Apart from the potential for your shares to appreciate in value, you might receive passive income through dividends if the company you’ve invested in distributes them, usually twice a year. The dividend amount hinges on the company’s performance.
An advantage of holding shares for passive income is that ongoing expenses are typically minimal, usually consisting of brokerage fees incurred while buying and selling shares.
Managed funds
Another viable method to generate passive income involves investing through a managed fund. In this arrangement, your funds are combined with those of other investors, and a team of proficient investment managers allocates them into various assets like stocks, bonds, real estate, or cash. Usually, investors are subject to fees for participating in a managed fund.
By investing in a managed fund, you acquire ‘units’ within the fund. These unit values fluctuate in tandem with the market worth of the fund’s invested assets. Some managed funds not only offer potential capital growth if unit prices rise but also provide income called distributions.
Exchange traded funds (ETFs) are a type of managed fund that can be purchased and sold in a manner akin to trading individual company shares.
Bonds
Investing in bonds can provide a consistent passive income stream. By investing in bonds, you essentially loan money to either a government or a corporation. In return, you receive interest payments, or ‘coupons.’ While bonds are often deemed as a relatively lower-risk investment according to the Australian government’s Moneysmart, they still carry certain risks.
Initially, bonds have a set value, also known as the face value. Holding onto the bond until it matures allows you to redeem it for the face value. However, if you decide to sell it before maturity, you may receive its market value, which could potentially be lower than the face value.
Freestanding property
Passive income via investment properties might be attainable, offering various options, including investing in standalone properties like houses.
Opting for a freestanding property is appealing since the land, rather than the structure, holds the primary value. This also grants more autonomy in property management compared to investing in apartments or townhouses.
If the property generates positive cash flow – if you own the house outright without a loan – rental income becomes a source of passive income. However, if a home loan is still in place, the rental income would typically be directed towards loan repayment before becoming personal income.
Unlike some other investment types, owning and managing an investment property typically involves continual expenses like maintenance, repairs, home insurance, and potential fees for property management if seeking a hands-off approach.
Moreover, property investors often face additional taxes such as increased stamp duty, land taxes, and other governmental charges. Maintenance responsibilities can also increase; for instance, maintaining gardens or other property features might be necessary.
It’s important to note that not all properties appreciate in value over time, underscoring the importance of careful selection of an investment property. If the property does appreciate, capital gains tax may be applicable on the profit.
Strata property
Another property investment option involves investing in strata properties like units, apartments, or townhouses. One advantage is the reduced maintenance responsibility since common areas are typically managed for occupants.
In a strata arrangement, your involvement might primarily revolve around participating in the body corporate for management. However, since ownership pertains to a portion of the land, the appreciation in value for strata properties could be limited depending on the economic conditions.
Generating passive income hinges on various costs linked to property ownership, such as paying back an investment loan.
Similar costs applicable to standalone properties are also relevant when investing in strata properties, but additional fees towards the body corporate are also necessary.
Holiday let
Many aspire to own a holiday home, a space for personal getaways and potential rental income. However, like any investment, there are advantages and disadvantages to consider.
A holiday rental operates akin to a business — generating income while incurring expenses. Management fees are among the necessary costs. Rental earnings can vary based on demand fluctuations. Also, if the property isn’t fully owned, any loan must be repaid using rental income.
Renting out your assets
If lacking the necessary funds to invest in stocks or real estate, an option is to lease out your assets. For instance, renting out a room in your residence to a tenant or engaging in short-term rentals via platforms like Airbnb.
If you possess a car that isn’t used daily, you could explore renting it out through a car-sharing service. For example, shared cars can usually earn an average of $300 per month, while full-time shared cars like utes and vans can earn between $1,000 to $2,000 monthly.
If you have an unused parking spot in a central location, you might also consider renting it out. However, ensuring that your car insurance and home insurance adequately cover this arrangement is important.
Use your set of skills and knowledge
Use your set of skills and knowledge to create passive income streams. Although it may demand initial effort, the goal is to reduce your workload gradually, enabling you to earn passively.
Consider options such as crafting and selling an online course or eBook, managing a YouTube channel or website centred around your passions and expertise. Building a dedicated audience may open doors for revenue via advertising or affiliate marketing.
DISCLAIMER: This article is for informational purposes only and does not constitute official financial or investment advice. QUICKLE is not associated with any Australian investment fund or investment advisory service. Please consult an ASIC-approved financial advisor.
