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- Financial planners say that dividends from the stock market are often overlooked for passive income.
- Renting out a room in your home, or a separate unit, is another way to earn passive cash.
If you want to start generating passive income, it might be easier than you think.
Insider spoke with certified financial planners about how their clients generate passive income, and what they recommend to clients who want to start earning it. While these suggestions may require some effort up front, they'll keep generating money over time.
Here are three ways financial advisors suggest getting into passive income.
1. Buy dividend-paying stocks
Dividends, or payments made to investors who own shares of some publicly traded companies, can bring in cash periodically. While dividends can be re-invested, they can also just be taken as cash income.
Financial planner Akeiva Ellis said this is something she sees often.
"Dividend income is definitely one major source of passive income that a lot of my clients have," she told Personal Finance Insider. "Of course, there's the appreciation and the capital gains that everybody is familiar with. But selecting companies that also give dividends to their shareholders on a regular basis is another part of the whole investment portfolio where you're able to get income."
The more shares of a stock you own, the more passive income you'll receive in dividends. Not all stocks offer dividends — if you want to earn passive income, you'll need to buy shares of stocks that offer them.
2. Rent out a room in your home
House hacking, or renting out a room or spare unit in your home, is a popular way to cover a mortgage and reduce housing expenses. It's a great option for generating passive income, too.
Brent Weiss, a financial planner and cofounder of Facet Wealth, has noticed this trend among his clients. "A fair number of clients are buying new homes and are thinking about, 'How can I rent out the in-law suite?' They go and buy a house, have a mortgage of a couple of thousand dollars a month, and then they find a renter," he said. "All of a sudden they're paying half their mortgage and creating additional income for their family, and flexibility and freedom."
While this method does involve management as a landlord, it can be a way to start investing in real estate.
3. Buy a small business that's already established
Building a small business can be daunting, but Weiss said he's seen clients have success with buying a business that's already running.
"I've actually seen a lot of people buy an existing small businesses in their local community. It's actually quite amazing what you can do. If you buy it, you have existing customers, you already have revenue and cash flow, and there's recurring revenue," he said.
While it does take a bit of work up front, it's possible to scale down the amount of work needed in the future. "Yes, you have to run the business. But you can ultimately hire people to do it," he said.
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This article was originally published in June 2021.