Top 8 Passive Income Investments in 2021

What Is Passive Income?

It's important to understand the distinction between active and passive income - especially since even the IRS taxes these two differently. The former refers to earnings derived from the performance of services - akin to a job. The latter, on the other hand, refers to earnings in which the person is not actively participating.

Thus, earnings that demand little to no effort on the part of the individual receiving them are referred to as passive income. It is, in essence, a type of residual income rather than a second job. Interest income, equities, and bonds are all examples of passive income. Some activities can be considered active or passive income depending on the level of involvement, such as real estate. Some investors deal with real estate in a very active way, while others just enter with the money. It is not the investment itself that will define if it is active or passive income, but how much a person had to work for it to produce earnings.

Although some of these activities may take some work during the setup phase, the main distinction between active and passive activities is the amount of work and commitment required. This is one of the most important factors that attract investors towards passive income. Nevertheless, there are various additional advantages to consider, including high returns, low risks, and avoiding inflation depreciation.

Top 8 Passive Income Investments in 2021

Once you understand what a passive income investment is, it is time to go through the top 9 options in 2021. Each one of these alternatives has its own advantages and challenges. Yet, in the end, they all have something that makes them one of the best investments to earn passive income. Some might have higher returns, others require barely any effort, while others are the safest options. Regardless, there is a passive income investment that fits your financial needs. So finally, here are the top 8 passive income investments.

Dividend Stocks

• Effort: Low
• Risk: Moderated - High
• Returns: Medium - High

Investing in dividend stocks is one approach to generate an income stream. Dividend stocks pay a portion of a company's earnings to investors on a regular basis, such as quarterly. The greatest ones boost their dividend over time, allowing you to maximize your future earnings. The volatility of dividend stocks is lower than growth stocks, contributing to the diversification of your portfolio. Dividends can also be reinvested by investors.

Dividend Index Funds

• Effort: Low
• Risk: Moderated
• Returns: Low - Medium

Instead of handpicking specific stocks to buy, you can invest in index funds or exchange-traded funds which hold dividend stocks. Index funds invest in a diverse range of companies with the goal of mirroring the performance of a certain index, such as the S&P 500. A dividend index fund will invest in a group of dividend-paying stocks. Because market fluctuations are less volatile across an index than throughout particular stocks, index funds can manage to balance portfolio risk.

Bonds and Bond Index Funds

• Effort: Low
• Risk: Low
• Returns: Low

Instead of buying shares of a company you can buy bonds. Bonds are a mechanism for investors to lend money to enterprises, as well as federal, state, and municipal governments, and get interest. Bonds are regarded to be a safer investment than stocks, although they often yield a smaller return. Investing a portion of your portfolio in bonds can be a smart decision. They tend to be less volatile and relatively safer when contrasted with stocks. The closer you are to your retirements, the more bonds as a passive income will fit your lifestyle, since you don’t want to risk losing your life savings when you are about to finally stop working.

High-Yield Savings Accounts

• Effort: Very Low
• Risk: Very Low
• Returns: Low - Medium

A high-yield online savings account is another option that makes passive income. In a savings account, the interest earned from the money deposited is credited to your account balance. The interest rate in savings accounts, even the high-yielding ones, is usually not as high as some of the other alternatives of this list. Yet, this is a relatively safe investment that generates passive income followed by great liquidity of your money. To get higher returns, you can explore more innovative options of savings accounts, such as online and crypto-based savings accounts. Savings account interest is credited to your account balance.

Rental Properties

• Effort: High
• Risk: Moderated - High
• Returns: Medium - High

Despite recent volatility, real estate remains the favorite alternative for investors seeking long-term profits. Rental properties, in particular, can provide property owners with a steady stream of passive income. Yet, long-term rentals can only be a solid source of income if they are located in a strong rental market. The problem is that they also come with long-term pressures such as property maintenance, multiple mortgages, property tax payments, and other expenses.

You might alternatively focus on short-term rentals via a platform like Airbnb. Just keep in mind that these are reliant on a regular stream of visitors to your region. Both of these formats are long-term investments and demand some sort of commitment. They are probably one of the passive incomes that most demands effort from the investor. Thus, evaluate if you have some time to invest, especially at the set-up phase.

Peer-to-Peer Lending

• Effort: Medium - Very Low
• Risk: Moderated - High
• Returns: Medium - High

Peer-to-peer lending is a strategy to explore if you wish to generate income and cash out your investment in less than five years. Peer-to-peer lenders provide an alternative to conventional bank loans by matching investors ready to give loans to borrowers. Those taking debt in this format are screened for creditworthiness by the platforms. It's riskier than placing money in a high-yield savings account or money market fund, but it might provide you higher returns.

Real Estate Investment Trusts

• Effort: Medium - Medium
• Risk: Moderated - High
• Returns: Medium - High

REITs can be a great investment if you want to generate passive income from real estate without the hassle and worries of acquiring and managing properties yourself. Not to mention that you won't have to deal with the usually large down payments of properties. REITs are companies that hold commercial property, such as office buildings, retail spaces, apartments, and hotels, and are similar to mutual funds. REITs have a reputation for paying big yields, but their complexity and accessibility vary. Some are listed on stock exchanges, while others aren't. New investors generally stick to publicly-traded REITs, which you can acquire through a broker.

Being a Silent Partner

• Effort: High
• Risk: High
• Returns: Medium - High

Another typical type of passive income is funding a private company you consider has the potential to create future earnings. This is perhaps the original form of peer-to-peer financing. Private equity funds, which are normally only available to accredited investors who fulfill specific net worth or income requirements, may be an option for high-net-worth people. However, it is important to understand that investing in a single business, no matter how large or small, is fundamentally a risky, long-term commitment. Never put more money into this than you can afford to lose because there is a chance you will. The good thing is, with risks come high returns. If the company you invested in thrives, you can have very high future returns in the long term, but it is ultimately a bet.

The Bottom Line

An investor's life can be substantially simplified by passive income investments. The selection above indicates various levels of risk and diversity. It's crucial to assess the expected returns associated with passive income prospects against the possible losses, just as you would with any other investment. Always do your own due diligence and research too, making sure you are investing with trustable companies or organizations. If you do everything right, a passive income can improve your financial life.