Making passive income is something every entrepreneur strives to achieve. The prospect of building a business up to the point where it can generate revenue on its own is an enticing one, even if you happen to prefer a more hands-on approach to running businesses.
While passive income streams may seem tempting, finding reliable ways to build them can be a tricky proposition. In this article, we'll discuss some of the most effective ways to create a passive income source and outline the pros and cons of each method.
What Is Passive Income?
Passive income refers to any revenue that can be generated on a consistent basis without requiring a full-time commitment or frequent operational tasks. In contrast with active income, most of the work is done upfront rather than throughout the life of the business.
Passive income takes many forms and can range from interest earned from high-yield savings accounts and peer-to-peer lending to borrowers to income generated from dividend stocks and other stock market assets. Naturally, building passive streams of income offers many benefits to entrepreneurs:
- Businesses that generate passive income are easy to manage once you've done the upfront work.
- Passive income helps stabilize your personal finances and gives you the financial freedom to pursue other interests and business ventures.
- The extra cash you accumulate over the years can help you secure early retirement.
8 Small Business Passive Income Ideas
Now that you're familiar with the benefits of passive income, let's delve into some business ideas that can help you generate it. The following is a non-exhaustive list of businesses that yield consistent income without requiring active work on your part.
Affiliate Marketing
Affiliate marketing is an advertising model in which a business pays a commission to different parties for impressions or sales generated from their referrals. A good example of this is the Amazon Associates program. Under this arrangement, bloggers, publishers, YouTube video creators and website owners can monetize their traffic by directing visitors to Amazon through an affiliate link and earning a commission on every purchase they make.
In the case of Amazon, your affiliate business can become passive the moment your content generates consistent traffic on its own. For instance, ranking your website for competitive keywords or growing the subscriber base of your YouTube channel will ensure constant impressions, and more importantly, a steady conversion rate for your affiliate links.
Pros
- Very low startup costs
- Doesn't involve any customer-facing tasks
- Can be scaled with ease
Cons
- You have no control over the affiliate program, which means the commissions you earn are subject to sudden and unpredictable changes.
- Due to increased competition in the digital marketing space, it might take some time before you start generating consistent cash flow.
Create an App
While creating an app might sound like a difficult undertaking, it's not as hard as you think. In fact, you don't even need to be a developer to create your own app! As long as you have a great concept idea, you can outsource all development tasks to a company or team of freelancers.
There are several steps involved in generating passive income from an app. First, you need to identify a niche. Ideally, your niche should have low competition or subpar apps that you can improve on. Next, you'll have to come up with a concept for an app, work with a company to develop it and then market it to your target audience. After the initial marketing efforts, your user base will organically grow as more positive reviews come in, and the app's ranking continues to improve.
Pros
- Apps are in high demand, and the market is still growing.
- Besides developing the initial idea, the project requires very little input from you.
- Due to the barriers to entry associated with app development, you'll face less competition than in other passive income ventures.
Cons
- Startup costs are significant.
- Outsourcing to the right people might be tricky if you have no experience in the field.
Start a Blog
Starting a blog has long been a reliable way to make money online. Not only is getting started relatively simple, but blogs also offer a wide range of monetization options to choose from. Entrepreneurs can use a blog to promote affiliate products, sell Kindle e-books, display banner ads or put premium content behind a paywall.
Much like the Amazon affiliate strategy discussed above, making passive income from blogging is predicated on ranking on Google and generating consistent traffic. To achieve this, you need to conduct keyword research, analyze your competition and adhere to search engine optimization (SEO) best practices.
Pros
- No technical prerequisites are needed.
- There are plenty of monetization options.
- Running a blog can be a great way to explore your interests and passions.
Cons
- The amount of money you will make depends on your ability to rank on Google, which is not always easy to achieve.
- Delivering high-quality content on a frequent basis is both difficult and time-consuming.
List Your Home on Airbnb
The advent of short-term rental platforms like Airbnb has created a great income-generating opportunity for homeowners. In fact, Airbnb hosting is one of the easiest side hustles you can try to earn some extra money.
To get started, you simply need to create a listing for your home or spare room on the platform and fill out all the details that pertain to the property. For an even more passive approach to managing your rental property, you can hire a property management company to handle all rental management tasks for you.
Pros
- No minimum investment is needed, and you can get started right away.
- Short-term rentals generate higher rental income than traditional rental properties.
- You have the flexibility to choose when you want to rent out your property.
Cons
- Short-term renters are more likely to cause damage to your property.
- Airbnb is tightly regulated in certain jurisdictions.
Invest in Real Estate Investment Trusts
Real estate investing is an effective approach to generating passive income. There are a myriad of strategies that investors can implement, and the relative stability of the real estate market ensures that the risk is always manageable.
One attractive option that has gained traction in recent years is real estate investment trusts (REITs). In simple terms, a REIT is a company that owns and manages several income-generating real estate assets, such as apartment buildings, warehouses, hotels and commercial real estate properties. Once you've invested in a REIT through a brokerage, you'll receive dividends in the form of monthly payments.
Pros
- REITs allow you to diversify your investments.
- You can further increase your income by investing in REIT index funds or mutual funds.
- Investing in REITs is a great way to hedge against inflation.
Cons
- Income is subject to dividend taxation.
- REITs can be negatively affected by rising interest rates.
Create and Sell an Educational Course
Creating your own online courses and uploading them to a course platform like Udemy can generate passive revenue in the long run. Online courses that cover topics like personal development, digital marketing, web design, social media marketing and personal finance are essentially evergreen digital products that will always be in demand.
Pros
- Online courses are easy to create if you happen to be an expert on a few topics.
- Offering educational courses can help you build a follower base within your niche.
- Creating courses will help boost your understanding of the topics you cover.
Cons
- You have to do some marketing legwork to get the ball rolling.
- It's difficult to protect against unauthorized sharing.
Start a Vending Machine Business
A vending machine is another profitable business that can earn residual income over a long period of time. Unlike most businesses, a vending machine relies on foot traffic in the area to drive sales. This means that very little marketing is required to get the business up and running. Moreover, recurring tasks like restocking and maintaining the machines can be delegated to a vending management company.
Pros
- High sales volumes are easy to achieve.
- You have full control over every aspect of your business.
- The business is easy to scale.
Cons
- The initial expenses are high.
- The machines are often the target of vandalism.
Dropshipping
While not fully hands-off, certain e-commerce business models allow you to generate income without requiring any traditional operational tasks. Dropshipping is a perfect example of this.
Whether you're running a store on Amazon, eBay or Etsy, dropshipping makes it possible to sell products without holding inventory or handling shipping. Under this model, all fulfillment tasks are carried out by the supplier.
Pros
- Low startup costs
- Dropshipping allows you to test multiple products at no cost to your business.
- You don't have to deal with the logistical challenges of storing physical items and shipping them across the world.
Cons
- Managing product returns and credit card chargebacks can be challenging.
- The profit margins are slimmer.
Manage Your Small Business Finances With Ease Using Skynova
Regardless of which passive income idea you choose, one thing remains applicable to any type of small business: You need to stay on top of your business finances. Luckily, Skynova has the software products to help you achieve that.
Skynova's accounting software is an all-encompassing solution that streamlines most of your financial management tasks and simplifies the tracking of expenses, income and sales tax. Let us help you start a small business today and generate passive income with ease.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.