Passive income is money you can earn with little or no ongoing effort. It’s unlike an active income, such as your salary, where you receive income in exchange for doing some kind of work. Passive income includes earning dividends on shares or earning rental income from an investment property.
“Passive income is the income that you can make when you are asleep or busy doing other things and it accumulates in the background,” wealth educator Leah Oliver, director of Minnik Chartered Accountants, explained to Canstar.
Shares and property are the two main ways to make passive income in Australia.
“When it comes to wealth, you need to have the capital to start with,” Ms Oliver said. “It’s going to be difficult to get off on the right foot if you don’t have a certain amount of spare cash to project yourself forward.”
Shares
Ms Oliver stated that the best way to generate passive income is through shares in long-term, stable investments rather than high-risk investments. In addition to the potential for capital growth, shares may also provide income through dividends. Dividends are usually paid out twice a year by the company, and the size of the dividend will depend on the company’s performance.
Ongoing costs relating to shares are generally very low, although you will typically pay a brokerage fee for buying and selling shares.
There’s no guarantee with shares though, always remember that the value of your investment could decrease at any time.
If you’re unsure whether investing in shares is right for you, you may want to look at getting financial advice.
Read: No one-size-fits-all when it comes to retirement income
Managed funds
A managed fund is a type of investment where your money is pooled together with other investors. A fund manager then buys and sells assets, such as cash, shares, bonds and listed property trusts, on your behalf. Managed investment schemes and Corporate Collective Investment Vehicles (CCIVs) are different types of managed funds.
You don’t own the underlying investments, you own ‘units’ in the fund or ‘shares’ in the CCIV. The value of the units or shares will rise and fall with the value of the underlying assets. Some managed funds also pay income or ‘distributions’.
Bonds
When you invest in bonds, you’re lending money to a company or government. In return, you get regular interest payments, called coupon payments.
Bonds are generally viewed as a defensive asset and considered to be lower risk. But they are still exposed to:
- Interest rate risk – the risk that a change in interest rates could reduce the market value of the bond. If interest rates rise, bonds offering lower coupon payment rates become less attractive investments.
- Credit risk – the risk that the issuer could default or go insolvent.
All bonds have a set value, called ‘face value’, when first issued. If you hold the bond until maturity, you get back the face value (or principal) of the bond.
If you sell a bond before maturity, you’ll get the market value. This could be lower than the face value.
Freestanding property
Another way to earn passive income is through investment properties. “The freestanding option is wonderful because you own the land and the value is in the land not in the building,” Ms Oliver said.
You have greater control over how you manage the property than if you were to buy an investment apartment or townhouse. However, freestanding properties tend to have higher maintenance costs.
If you own a property outright with no mortgage, any rent you receive would be passive income. However, if you have a home loan, the rent will need to be diverted to paying that before you could claim any income as your own.
For this to be a truly passive experience for you though, you would likely need to pay a property manager to let the property on your behalf.
There are other ongoing costs associated with owning an investment property including maintenance, repairs and home insurance.
Not all properties increase in value over time, and if a property does, you may have to pay capital gains tax on any profit.
Read: Five ways you could increase your retirement income
Strata property
Another option is investing in strata property, such as a unit, apartment or townhouse. One benefit is that there’s less maintenance, as common areas are usually taken care of for you. This could be particularly appealing to people prioritising a passive income from their investment.
“With strata, the most that you might have to do is join the body corporate and manage it that way,” Ms Oliver said. “However, you only own a portion of the land so there is less value increase in a strata-type property depending on the economic position at the time.”
Holiday home rental
The idea of owning a holiday home that you can escape to at the drop of a hat and rent out for extra income sounds like a dream.
But, like all investments, there are pros and cons to weigh up.
“A holiday let is like a business that makes money but costs money,” Ms Oliver said.
For instance, you’ll often need to pay for management costs. Rental returns can also fluctuate depending on demand. And, if you don’t own the home outright, you’ll need to repay the mortgage from any rental proceeds.
Rent out your assets
If you have a spare room, you could look into renting it to a tenant or as a short-term rental through sites such as Airbnb.
Car sharing company Car Next Door says users can make $3396 on average each year by renting out their car.
If you have an empty parking spot in a desirable location, you could consider renting this out too. Just ensure that your car or home insurance covers this.
Read: Low-income homeowners feeling the pinch of rate rises
Using your existing skills
If you don’t have the capital to start with, look at your skills and knowledge. This will take some effort upfront but will likely become passive as time goes on.
Some ideas include writing and selling an online course or ebook, sharing your knowledge on a particular subject or starting a podcast or YouTube channel. If you are able to build an audience, you could potentially earn money through adverts or affiliate marketing.
What do you think of these passive income ideas? Why not share your thoughts in the comments section below?
Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
