8 passive income ideas to help you build wealth

Passive income allows you to earn money without putting in much extra work. If that sounds like a good idea for you, we’ve looked at eight ideas that could help you to earn passive income in Australia.

What is passive income?

Passive income is money you can earn with little or no ongoing effort. For example, you could earn dividends on shares or rental income from an investment property. This is compared to active income, such as your salary or wages, where you receive an income in exchange for doing some kind of work.

Leah Oliver, Director of Minnik Chartered Accountants and wealth educator, said: “Passive income is the income that you can make when you are asleep or busy doing other things and it accumulates in the background.”

How to make passive income in Australia

There are two main ways to make passive income in Australia: shares and property. Within that, there are a range of different investments and strategies you can consider. A common thread is that you’ll generally need some cash upfront to get started.

“When it comes to wealth, you need to have the capital to start with,” Ms Oliver told Canstar. “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.”

We’ve had a look at some popular ideas that could help you to earn passive income in Australia. If you don’t have spare cash at the moment, we’ve also included some ideas that don’t necessarily require a lot of upfront capital, but do require more effort.

1. Shares

To generate passive income through shares, Ms Oliver says it’s best to consider long-term, stable investments.

“Focus on the types of shares that are likely to offer stable, moderate growth over time, rather than high risk investments. With wealth there is no fast game,” she said.

As well as the potential for capital growth if your shares increase in value, you may earn passive income through dividends. If the company you’re invested in pays dividends, it’ll usually do this twice a year. The size of the dividend you may get will depend on how the company performs.

A benefit of holding shares with the aim of earning passive income is that the ongoing costs are generally very low. You’ll typically pay a brokerage fee for buying and selling shares.

If you do invest in shares, remember the value of your investment could go down and there’s no guarantee that you’ll earn an income. Past performance is no guarantee of future performance.

If you’re not confident in selecting your own investments or deciding whether share investing is right for you, it could be a good idea to get some independent financial advice.

2. Managed funds

Another potential avenue for earning passive income is to invest through a managed fund. With a managed fund, your money is pooled with other investors and a team of professional investment managers invests it in assets, such as shares, bonds, property or cash. Investors are usually charged fees for investing in a managed fund.

When you invest in a managed fund, you own ‘units’ in the fund. The value of the unit will rise and fall with the market value of the assets in which the fund has invested. In addition to capital growth if the unit price increases, some managed funds also pay income (called ‘distributions’).

Exchange traded funds (ETFs) are a form of managed fund that can be bought and sold in a similar way to trading shares in individual companies.

3. Bonds

Bonds could help you to receive a regular passive income. When you invest in bonds, you’re lending money to a government or company. In return, you’ll receive regular interest payments (called ‘coupons’). The Australian Government’s Moneysmart website says bonds are considered to be less “lower risk” type of investment, but there are still risks.

Bonds have a set value (called the ‘face value’) when first issued. If you hold the bond until maturity, you can get back the face value of the bond. If you sell it before maturity, you’ll get the market value (which could be lower than the face value).

4. Freestanding property

You may be able to earn passive income through investment properties. There’re a few different options to consider, including investing in a freestanding property such as a house.

“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 also have greater control over the management of the property, compared to buying an investment apartment or townhouse.

If the property was positively geared – if you own the house outright, without a loan to help pay for its purchase – then you’d receive the rent as passive income. If you still have a home loan on the property, the rent would need to be diverted to paying off that before you could claim any income as your own.

Unlike investing in some other asset classes, such as direct shares, there’re usually ongoing costs to owning and managing an investment property. These costs can include maintenance, repairs, home insurance and the fees you would need to pay any property manager to let the property on your behalf if it’s to be a truly passive undertaking for you.

Added to this, there’re usually extra taxes to pay for investors, such as an increased amount of stamp duty, land taxes and other government fees and charges.

Another potential downside is added maintenance, Ms Oliver said. For example, you may need to maintain gardens on the property.

Remember too that not all properties increase in value over time, so it’s important to choose your investment property carefully. If the property does increase in value over time, you may have to pay capital gains tax on any profit.

→ Learn more: Property investment tax deductions, depreciation and stamp duty

5. Strata property

Another type of property 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.

“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.”

How much you could claim as a passive income would depend on the costs associated with owning the property, such as repaying an investment loan.

Many of the costs that apply to a freestanding property apply to investing in strata property, but you’ll also need to pay the body corporate.

6. Holiday let

Owning a holiday home is a dream for many people, the idea of having a place where you can go on vacation but also rent it out when you’re not using it. 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 example, you’ll need to pay for management costs. Rental returns can also fluctuate depending on demand. If you don’t own the home outright, you’ll need to repay any loan from any rental proceeds.

7. Renting out your assets

If you don’t have enough capital to invest in shares or the property market, another option is renting out your existing assets. For example, renting out a room in your home to a tenant or a short-term rental through Airbnb.

If you’ve a car you don’t use everyday, you could rent it out through a car sharing company. For example, Car Next Door says cars shared occasionally can earn on average about $300 a month but the top-earning cars, utes and vans shared full-time can earn on average between $1,000 to $2,000 per month.

If you’ve an empty car parking space and live in a central location, you could consider renting this out too. But it’s important to make sure your car insurance and home insurance covers this.

8. Tapping into your existing skills and knowledge

You could use your existing skills and knowledge to generate passive income. This will require more upfront work, but the idea is that your effort will decrease over time and you can then earn passively.

Some ideas include creating and selling an online course or an ebook, or running a YouTube channel or website based on your interests and skills. If you can build an audience, you could potentially earn money through advertising or affiliate marketing.

→ Read more: 10 ways to make money from home and online

These are just some ideas to consider. If you’re thinking about investing in shares or property, it’s important to do your research first and consider getting professional advice to help you. Make sure you understand the risks and that your investments suit your risk tolerance and investment timeframe.

You should also consider any additional cost you may incur if you need to use an accountant to help with your passive income in your annual tax return.

Original reporting by Tamika Seeto

Cover image source: De Visu/Shutterstock.com