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Types of Passive Income
There are many different types of passive residual income that you can potentially earn.
In this article, I want to provide you with an overview of how passive income can be classified into different types or categories so you can better understand the concept.
Passive income can be classified into the following categories:
- How much time you need to put in to generate passive income
- How much money you need to put in to generate passive income
- How the IRS views passive income
- Different types of passive income streams
Before we get into these passive income types, let’s first understand what is passive income.
“Passive income” refers to a stream of income generated with little to no involvement of the business owner or the recipient of the income.
For example, a real estate property offering its owner a steady stream of rental revenue cash flow is said to offer its owner passive income.
You can also earn passive income by blogging or affiliate marketing (I know as that’s how I earn passive income).
What’s key with passive income is that once you set up the passive income source or acquire the passive income asset, you can expect to receive residual income flowing in without having to put as much effort to maintain the cash flow stream.
You can generate passive income by putting in your time to create a passive income asset or using your money to acquire one (or both).
Types of Passive Income Requiring Capital Investment
Perhaps the easiest way to get started with passive income is to use the money that you have available to you and invest it into assets that can produce a constant stream of income.
The most notable example is the investment in real estate properties generating rental income.
Essentially, you are using your money to purchase a real estate asset that can generate income without your “active” involvement.
This type of passive income investment is great as you are using your money to help you create your wealth over time.
Any type of investment in financial assets or investment instruments can potentially generate passive income.
Let’s take another example.
If you invest your money to purchase shares of stock in companies that regularly pay you dividends, you are using your capital to purchase an asset (dividend stocks) producing a passive source of income (dividends) without your active involvement.
Later in this article, I will provide you with a list of different types of passive income ideas requiring some initial capital investment on your part, so be sure to keep reading.
Types of Passive Income Requiring Time Investment
You can also create passive income by spending your own time and effort to create it.
This is a great type of passive income for those who have little money to invest in order to build a passive source of income.
For example, if you can start a blog by putting in your time and effort in building a website, hosting your blog, writing interesting articles, and driving traffic to your blog, you can earn advertisement income or affiliate marketing commissions passively.
Although you may need to put in a little bit of money to get going, most of your passive income source is created through your time investment as opposed to capital investment.
I have personally built various blogs and websites that I’ve monetized allowing me to earn a nice stream of passive income.
If you are serious about building yourself a source of passive income by investing your time, you need to dedicate yourself to your project and mission.
You must work hard, be patient, and persevere.
I can say that my journey to building a passive source of income of thousands of dollars a month has not been easy and took me years.
However, now, I am very grateful for having built different types of passive income streams allowing me to reap the reward of all the time and hard work I put into my project.
I have put together a list of different types of passive income ideas where you can create a steady stream of income by investing your time, so keep reading to see what I have on the list.
IRS Types of Passive Income
So far, we’ve looked at different passive income types that you could invest yourself into to generate an income passively.
Our views of different passive income types are not necessarily the same as what the IRS considers as various types of passive income.
Although you should consult a tax professional or financial advisor, from a tax perspective, you can have passive income from self-charged interest, rental properties, or businesses in which you are a silent partner.
Self-charged interest is when you, as a business owner, loan money to your corporation or partnership that acts as a pass-through entity.
In such cases, the interest income that you earn on the loan can qualify as passive income.
For example, imagine you have an S-Corporation (a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code as a pass-through entity) to whom you have given a $10,000 loan at a 5% rate of interest.
Your company will therefore have to pay you $500 in interest on the loan.
The interest income of $500 will be considered as passive income.
In most cases, money earned from rental properties will be considered as passive income (with a few exceptions).
For example, you purchase a real estate property earning you $2,000 a month in rent.
You are effectively earning $2,000 in passive income.
An exception to this rule is when the person generating $2,000 in rental income is himself or herself a real estate professional.
In such a scenario, the rental income will be considered as active income rather than passive.
Another way you can earn passive income according to the IRS is by investing in a company or business where you earn an income without your material participation in the business operations.
For example, if you invest in a private company as a silent partner where you are entitled to receive a portion of the company earnings without participating in the company operations in any way, you are effectively earning a passive income.
However, if you participate in the business in some way, you will no longer be seen as earning a passive type of income by an active one.
Types of Passive Income Ideas
Now that you understand the different types of income, let’s look at how different ways you can make money passively by either investing some money upfront, putting in your time, or both.
With Monetary Investment
Here are some ideas of how you can generate passive income by investing upfront:
- Dividend stock investment
- Purchasing rental income properties
- Investing in high-yield savings accounts
- Investing in money market funds
- Investing in Certificate of Deposits
- Purchasing annuities
- Investing in the stock market
- Investing in a REIT (real estate investment trust)
- Investing in a business as a silent partner
- Peer-to-peer lending
With Time Investment
Here are some ideas where you can create a source of passive cash flow by putting in your sweat, time, and energy (with a little to no upfront cash investment):
- Selling ebooks online
- Creating an online course to sell on sites like Udemy (online learning)
- Selling stock photos
- Earning royalty on your music
- Creating an app
- Earning commissions through affiliate marketing
- Selling your designs online
- Selling digital downloads online
- Selling digital files on Etsy
- Starting a blog to earn advertisement income
Semi-Passive Investment Ideas
Here are some passive income ideas where you’ll need to put in some time and some capital:
- Operating vending machines
- Operating a laundromat
- Starting a YouTube Channel and have a professional make film and edit your videos
- Creating software by hiring a developer to develop it for you
- Creating a mobile app by hiring a developer to build it for you
- Hiring a freelancer to create digital downloads for you
- Hiring a freelancer to create an affiliate marketing website for you
- Starting an online e-commerce business
Type of Passive Income Takeaways
So, there you have it.
As you can see, depending on the angle at which you look at passive income, you can classify them into different types.
In this article, I have looked at passive income types by grouping them into how you can build them, either by purchasing the asset giving you a passive income stream, either by putting in your time to create the asset giving you continuous cash flows, or putting in some money and cash (semi-passive type of income).
I have also looked at the “types of income” as understood for tax purposes and the IRS such as self-charged interest, rental properties, and “no material participation” in a business.
Making money, building wealth, and living financially free is truly a rewarding experience.
Go ahead and take your life to a new level!
My Passive Income Blog
By the way, on this blog, I focus on generating passive income in order to build wealth over time.
I have built myself a portfolio of passive income sources generating me a constant, continuous, and reliable source of cash flow every month (it is awesome!!).
My mission is to teach you and show you how you can make it to.
To those that are looking to get rich fast or make money without putting any work into it, you’ll be disappointed as I only focus on tried and true methods for making money and they take time, patience, perseverance, and a lot of hard work.
Now, if you are interested in making money through actionable, real, and concrete strategies to earn a steady stream of cash flow over time, you can reach out to me, read my free blog posts, purchase my guides or online courses!
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Types of Passive Income
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