Passive income allows you to earn money without putting in extra work. We’ve looked at eight ideas that could help you to make passive income in Australia.
What is passive income?
Passive income is money you can earn with little or no ongoing effort. For instance, earning dividends on shares or earning rental income from an investment property. This is compared to active income, such as your salary, where you receive income in exchange for doing some kind of work.
“Passive income is the income that you can make when you are asleep or busy doing other things and it accumulates in the background,” Leah Oliver, Director of Minnik Chartered Accountants and wealth educator, explained.
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 upfront cash 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, you may also earn passive income through dividends. If the company you are invested in pays dividends, it will usually do this twice a year. The size of the dividend you may get will depend on how the company performs.
A benefit to holding shares with the aim of earning a passive income is that the ongoing costs are generally very low, although you will typically pay a brokerage fee for buying and selling shares.
Remember that if you invest in shares, the value of your investment could go down and there is no guarantee that you will 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 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 income. When you invest in bonds, you are lending money to a government or company. In return, you will receive regular interest payments (called ‘coupons’). Bonds are considered to be less risky than assets like shares and property, ASIC’s Moneysmart notes.
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 will get the market value (which could be lower than the face value).
4. Freestanding property
Another way that you may be able to earn passive income is through investment properties. There are a few different options to consider, including investing in a freestanding property like 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. A potential downside is added maintenance, Ms Oliver said. For instance, you may need to maintain gardens on the property.
In terms of rental returns, the latest Domain Rental Report found that Aussie renters were paying an average of $515 per week to rent a house in a capital city. In Sydney, house rents were $620 per week, while in Melbourne they were $460 per week.
If the property was positively geared – if you own the house outright, without a loan to help pay for its purchase – then you would receive this rent as a passive income. However, if you have a home loan, the rent would need to be diverted to paying that before you could claim any income as your own. And, unlike investing in some other asset classes such as direct shares, there are 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 a property manager to let the property on your behalf if it’s to be a truly passive undertaking for you. Added to this, there are usually extra taxes to pay for investors, such as an increased amount of stamp duty, land taxes and other government fees and charges.
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 also have to pay capital gains tax on any profit.
5. Strata property
Another 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. This could be particularly appealing to people prioritising a passive income from their investment.
“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.”
For units, the average rental income was $460 for capital cities. In Sydney, unit rents were $525 per week on average. In Melbourne, it was $410 per week on average. 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 same costs apply to investing in strata property as freestanding property, in addition to the regular fee you’ll need to pay the body corporate.
6. Holiday let
Owning a holiday home is a dream for many people and the idea of having a place where you can go on vacation and also rent out is often appealing. But, 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 instance, you’ll often need to pay for management costs. Rental returns can also fluctuate depending on demand. And, if you don’t own the home outright, you’ll need to repay the mortgage 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 instance, renting out a room in your home to a tenant or a short-term rental through Airbnb.
If you have a car that you don’t use everyday, you could rent it out through a car sharing company. For instance, Car Next Door says users can make $3,396 per year on average for casual sharing. If you have an empty car 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
Is there a way you can 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 more creative ideas include creating and selling an online course or an ebook, or making a YouTube channel or website based on your interests and skills. If you are able to build an audience, you could potentially earn money through display ads or affiliate marketing.
Source: Canstar