Passive income is income which you don’t need to actively go out everyday and go earn. This type of income will continue to drop into your account, day in day out, rain, hail or shine. You don’t need to wake up early, put on a suit and tie and go work for someone for this money. Sure, it usually requires a heap of effort and energy to set up in the first place, but once it is set up it should ideally be easy to maintain with little to no effort.
Passive income is income that requires little to no effort to earn and maintain. It is called progressive passive income when the earner expends little effort to grow the income. Examples of passive income include rental income and any business activities in which the earner does not materially participate.Wikipedia Definition
Why you should care about earning Passive income in Australia
There is no such thing as job security. Surely you can see with the COVID-19 impact across the world and associated restrictions, that employees are all questioning their perceived job security, with unemployment rates rising.
Businesses, government departments and employees have all had radical shifts to their working conditions, with the majority of office workers shifting to more flexible, work from home arrangements.
So if your working from home, why does it matter if you are a PAY-G employee working for a bank or running your own business? Why not do both? Side-hustles and working second and third jobs used to be something only ‘weird’ people who didn’t have job security did, but now it is the norm.
The Side-hustle and gig economy is the new job security, as people realise that a diversified income stream is truly the only way to guarantee financial security. Gone are the days of slaving away for 40 years chained to a desk or a trade, to receive the golden handshake from your employer and retire happily ever after.
With ruthless pay and working conditions, and an ever increasing preservation age to access your retirement superannuation as the government shifts the goal post, retirement packages just aren’t what they used to be anymore.
You cannot rely on anyone for your financial health and support.
You cannot rely on your employer.
You cannot rely on your superannuation.
You cannot rely on the aged pension.
You cannot rely on anybody except yourself for your finances, especially your retirement. Got it?
Did you know the majority of people who work as an employee for their whole lives and then retire are actually at one of the highest risks of death? Who on Earth would want to work as a modern slave their entire life only to die of boredom when they finally got the key to unlock their golden handcuffs?
Because that is exactly what a wage is – a set of golden handcuffs. Some peoples handcuffs seem nicer than others – they might earn a much higher wage than you, but odds are if they are anything like the average person in western society, then they waste not only all of it but also resort to debt to fuel their lavish lifestyle of excess. High income earners are responsible for some of the most horrendous and heinous levels of credit card and other personal debt.
If you ever wish to break free from the PAY-G slip wage slave madness, then two things you really have to care about is 1. Living below your means, which will allow you to do the second thing which is 2. Create Passive income streams!
Passive income ideas in Australia
Australia is slightly unique to some other countries you might be reading about Financial Independence in, due to our unique tax laws and other regulatory constraints as we have touched on above. Below I have collated a list of ideas that I either personally use or have used, or which I have thought sounded promising for potential passive income.
House hacking for passive income
Renting out a room in your House is a great idea to generate some extra passive income if you have the ability to. Obviously this isn’t an appropriate option for a lot of people (i.e. those with children or those with no spare rooms), but if you are able to then it can be quite lucrative.
Businesses like AirBnB and Stays can be used to list your spare room or areas, but don’t forget you can also list them on free listing classifieds like Gumtree and Facebook Marketplace, as well as good old fashioned word of mouth through social networks.
Just be careful with doing this and make sure you understand the bigger picture; as I was recently explained, there can be some implications when it comes to insurance and taxation on renting out rooms in your place.
For example, in some countries (such as the USA) renting out a room can be considered a business rather than simply cohabitation – this means you are liable to pay tax on the income, as well as potentially voiding your personal (PPOR) home and contents insurance. This might even mean you will need to go out and purchase extra public liability insurance, should your boarder find themselves in a pickle and want to sue you. Furthermore, you may be invalidating your primary place of residence from your capital gains tax exemption, resulting in a hefty future tax bill should you ever sell the property.
Accordingly, a much cheaper and less risky option may be to seek approval to sub-lease empty rooms on a property to you rent – since rent-vesting is usually a better (more profitable) option than buying your own home, your probably doing this anyway. Just make sure you have written approval, since otherwise this might violate the terms of your lease and you could find yourself with an eviction notice.
Finally, consider the issues with communal living. After spending a good portion of my life in communal living arrangements such as dorm rooms and moving back in with family to look after them during periods of serious illness, I’m pretty bloody excited to have my own place to call home.
Why I don’t do house hacking at the moment
It doesn’t matter if I want to fry up some eggs at midnight, walk out of the shower in the nude, or not do the dishes until tomorrow. A man’s home is his castle, and at the moment I don’t want to sell away this luxury privilege.
I understand though that this privacy is an ultimate luxury, and I am paying accordingly for it. If I wanted to cut down on my expenses to boost my savings rate even higher, I could easily ‘house hack’ to live for free or even turn a profit.
Growing food for passive income
Growing food is such an easy way to make passive income. It is another thing that if you properly set up and automate, that you can ‘set, forget and collect’ fresh fruit, herbs and vegetables.
I have personally set up a fantastic food garden on my Sydney apartment’s balcony, high above the ground. Sure, the winds can be damaging, so I have to provide shelter by strategic inter-cropping, staking and wind barriers. I call this the ‘Frugal Garden’, and to date I have spent about $600 and 5 hours setting up.
The Frugal garden has a 200L water reservoir on a gravity drip timer, which I pour a fertilizer / nutrient mix into and it feeds my plants with just enough to keep them going. When I am home sometimes I give them a bit extra from my watering can, which I transfer out of the bathtub after I have had a soak (rather than pouring it down the drain).
Whilst I don’t ‘Sell’ the produce from the Frugal Garden, I get up to $20 a week of fresh herbs, fruit and veggies from the dozen of dwarf fruit trees and hundreds of other plants inter-cropped in the 100 pots. This takes up a space of about 1m by 7m square along the length of the balcony rail. I eat most of it, but also give away, trade and barter this produce within my neighborhood community and receive things like eggs, cooked meals, security (folks keep an eye on my place when I am gone) and help with my chores.
Growing these plants drastically lower my cost of living, provide me with fresh organic produce to eat or barter, provide a lovely green space and natural privacy hedge, and an easy way to compost and dispose of my food scraps. Best of all, a dollar saved is better than a dollar earned, because you don’t have to pay any tax on this. You can ready more about this in growing financial Independence
Investing in ETF and LICs for passive income
This is my favorite way of creating passive income. I have written extensively about index fund ETF and LICs, and what kinds of index funds are recommended by financial investing gurus like the Barefoot Investor.
These are the true ‘Set, Forget and Collect’ Investments, and once you have purchased them they are truly passive. All you need to do is spend a bit of time setting up your brokerage account with Selfwealth, your tax accounting account with Sharesight, buy your ETF and then fill out the details the share registry asks for. After that, all you do is buy more whenever you have spare cash, and enter the details into your sharesight account to keep track of it all.
They just churn out reliable dividends into your account, and in Australia most index ETFs are around 80% franked, and the good LICs are 100% franked. This is incredibly tax effective income, and is easy money.
The only catch is you need the capital to invest in the first place, so you had better get out there and earn more and start saving more of your income so you can afford to invest more. The snowball effect of compounding interest means if you reinvest your dividends, and invest aggressively enough (80% saving rate or more) you can retire in around 5 years if you do this.
Owning an Investment Property for passive income
Owning an Investment property is almost like a religion in Australia. They can be lucrative in certain circumstances, but in general the Australian property market is mostly full of traps for investors, set to extract the maximum amount of fee’s and charges, and slowly siphon off your investment return whilst you are blissfully unaware. What a Joke!
To make money in property, you need to be very savvy. You need to understand your investment, management costs and cash-flow and watch it very closely. Unfortunately, there are many hands trying to sneak into your cookie jar here!
The trick to success in property is not to gamble on capital growth hopes, but rather find properties which stack up and make good financial sense. Divorce yourself from emotion, and focus on the cash flow. A good property in the right area, with the right size and construction, can be a nice little earner.
For example I have an investment property currently under construction on the East Coast of Australia, which is valued at approximately $30 cash flow positive per week at the moment with good opportunity for capital growth (but I don’t bet on the capital growth).
Now on paper this is cash flow positive, but because it is brand new duplex it is also a tax effective investment; for $600 an assessor will provide me a tax depreciation schedule, allowing me to depreciate over $10,000 of the properties physical value per year. Of course, this number decreases every year, but it does a good job of reducing my taxable income for the time-being.
The loan is an interest only set up, which maximises cash flow. As the property appreciates in capital value, my equity position rises from 20% onward. When it gets to around 40%, I will try to do a ‘cash-out’ refinance in order to extract the equity and bring it back down to 20% – this theoretically free’s up 20% of equity which I can use as a down-payment on a second investment property.
Cash out refinances are getting harder and harder to do thanks to APRA’s lending restrictions, but its not impossible – and passive income from investments can be combined with your earned income when assessing servicability.
The reason why an investment property can be a better option than shares in some instances is due to the use of leverage: the cash-on-cash returns are much higher than you can get with the more conservative ownership of stocks. For example, investing in index fund shares will usually return you 10%, wheras it is fairly common to be able to achieve cash-on-cash yields in property of above 15-20% – check out this article on stocks v property for more information.
Starting a website for passive income
Starting a website is a great way to generate passive income. Whether you are interested in blogging and sharing your knowledge, experience or opinions, or whether you provide a detailed review service or some other form of e-commerce, websites are all incredibly varied and are also a lot of fun to design, build and maintain.
There is literally a website for almost every purpose, and ultimately to be successful you need to find out what problems or pain-points people online are having, and then offer a constructive solution. Unfortunately the ‘Build it and they will come’ approach to website design and construction doesn’t really work.
You can build a website from scratch, registering a unique domain name and then renting a hosting service (try Bluehost if you are looking for a registry and domain hosting). This takes the most time (including the most time to rank) but gives you incredible freedom to design your site exactly how you want it.
You could also buy a pre-existing website from someone, and renovate it for your purposes. This might mean changing the content, home page, images and backlinks. Fixing an old website is often a much easier and quicker way to establish your site; akin to buying a sapling or seedling, wheras starting your own website is more like planting a seed.
With a small knowledge of SEO (Search Engine Optimisation) and some great content, your website can quickly rank and bring in viewers by the hundreds of thousands or even millions. For example, I established this Captain FI domain just over 6 months ago and with awesome personal finance, self-sufficiency and investing content there is now it is starting to rank well with over 15,000 unique page views per month. Really, this is still a relatively small number, but I am amazed at how quickly the site continues to exponentially grow.
Once you have built your site and it is ranking, ways to monetize the site include
- Google Adsense (Google pays you to place ad banners on your site),
- Selling your own products such as eBooks or online courses (eCommerce)
- Affiliate marketing such as reviewing products for sale on Amazon, and
- Direct sponsorship deals with companies.
Initially your income level from the sites are very small, maybe only a few cents per day. However building a portfolio of unique websites within competitive niches can provide a serious level of passive income as they mature and rank competitively. I have friends who are making over $10,000 per week from a diversified portfolio of sites from everything from Vegan cooking to men’s fashion!
Writing a book for passive income
If you have a knack for writing and have specialist knowledge, then you could try your hand at writing literature. Most writers start off with small articles or writing contracts, and slowly build up to larger pieces.
In fact, quite a lot of bloggers use their websites to put their thoughts out to the wider masses, and continue to massage and refine them with public input. Then one day, when there is sufficient content, they are able to translate this into a comprehensive book which they are able to self publish and sell as an eBook or even in print copy.
Depending on the quality of the book and its popularity, demand for information in that niche, and your ability to market the book, it may be possible to sell quite large numbers of books. Starting prices for eBooks range from $1 all the way to $200+! Although, the most common price I have seen is usually around the $10 price point. Print copies usually sell for around $20-30 per copy, however there is the additional costs of printing and distribution, meaning authors typically make less than $10 per book anyway.
If you are able to make $10 a book, and sell 5 copies per day, that is $18,250 of annual income! This is actually incredible, and is equivalent to having around $400,000 invested in ETF or Aussie LICs in terms of the dividend yield / income they can produce!
Social media influencing for passive income
Who hasn’t heard of social media influencers? Are they the most hated demographic in the conventional media these days?
Essentially, influencers use their large followings to promote certain products, services, campaigns or courses in exchange for payment or free goods from the suppliers. It is a form of affiliate marketing and no different to the ads pitched by ‘trusted’ celebrities you see on TV or on billboards, except it is a little more pervasive, invading your social media channels and private life with a high degree of success (conversion rate) and sometimes you won’t even realise your being advertised to.
Obviously the more followers you have on platforms such as Instagram, Facebook, Twitter and Tick-Tock (vines), the more reach you have and the more likely someone will pay you for your ‘shout-out’, or the more likely you are to get conversions from your audience.
Some of the worlds biggest celebrities like Kylie Jenner are paid incredibly well for this, and according to the BBC, she earned a record (USD) $1.2 Million per Instagram post making her the highest paid social media influencer.
Of course, us mere mortals could only hope to achieve such a status, and a more realistic table is shown below – this is an average of multiple non-authority sites, and its worth noting that it depends heavily on the niche and target audience as to what a digital marketing company would be willing to pay its contracted influencers.
|Number of followers||Price per post or ‘shoutout’|
Creating a YouTube Channel for passive income
YouTube is increasingly popular, and a great way to learn information, find entertaining videos or even to listen to music or podcasts. If you have specialist knowledge or an interest in a particular topic and are able to produce great video content, and find this process fun, then becoming a YouTube content creator could be for you.
Some of the worlds top YouTubers are multi-millionaires, such as Pew-die-pie who makes well over $1M per month by posting an assortment of humourous gaming videos.
Just like starting investing, or a website, it is incredibly difficult and laborious to start with. You could produce 2-3 high quality vidoes per week for a whole year and still see very little growth in your channel, making only a few dollars per video. The reason why 99% of people are unsuccessful on Youtube is they give up even well before this point.
If you are able to push through and continue to make great content that people want to watch, then eventually you will make it big. Like other forms of online content such as websites, youTube make their revenue by selling advertising space to digital marketers and businesses wanting to promote their services.
YouTubers are paid a certain percentage of this ad revenue, which depends on how many viewers they reach and for how long. There are also certain thresholds for video length and cumulative views (hours or minutes per month) before a YouTuber can be recognised for their account to be monitized.
The income per 1000 views is called the ‘CPM’, and can vary drastically depending on the niche that the YouTuber is creating content for. For example politics and automotive are not highly profitable niches, whereas gaming, unboxing reviews, personal finance, credit card and computer/technology reviews are much more profitable
This is due to the higher conversion rate on the advertising, meaning advertisers will pay higher bids to have their ads placed on your videos. These revenue rates are difficult to source, but for example in the personal finance niche, the CPM is approximately $10, but the average CPM over the platform is much lower, at around $3. To put this into context, YouTube makes an average CPM of around $18 from its advertisements, so you get somewhere between 20-60% of its total advertising revenue.
Once a YouTuber amasses a sizable following, just like for social media influencers, they are able to arrange direct sponsorship with companies or affiliate deals in order to produce more passive income.
Whilst this is no means passive at the start, after thousands of hours worth of effort and hundreds of videos, it begins to organically grow and rank by itself, drawing in more and more viewers. Once the effort of the video has been completed, it is permanently added to the channels library, where it ticks away in the background and continues to provide advertising or affiliate revenue for the creator.
Designing T-shirts, Stickers and Merchandise for Passive Income
There are actually some great and relatively easy ways to generate passive income online creating merchandise like t-shirts, stickers and mugs. Companis like Teespring and Redbubble allow you to create an account and design your own artwork and logos to be sold on a multitude of different types of products.
I dabbled with these products for a while. I sold a few hundred stickers, and a few dozen mugs and t-shirts. I didn’t earn a lot of money from it but it was a fun little experiment at the time, and kept motivating me on my journey to financial independence. I reckon I’d put this in the bracket of the little 1%ers you could do if you were really desperate to improve your bottom line
Selling the rights to your photographs for passive income
This one is another 1%er. If your skilled with a camera and have some amazing photos, you can actually be paid for the rights for them to be used as stock photos for websites, businesses or advertising campaigns.
Of course, it all depends on the niche and the demand for the type of photo, as well as the quality and usefulness of the shot. You can expect to earn around 50% of the revenue on sites like Shutterstock and Dreamstime.
I am certainly no master photographer, but I uploaded a few thousand of my shots to these databases. Of these, only around 200 got accepted, and I see an annual passive income of around $100 for these. I probably spent 10 hours uploading, categorizing and tagging all the photos, so, its not really a great return on investment. Although $100 per annum is still equivalent to having $2,500 invested in index funds, so if you see it that way, then it feels a bit better.
Brewing Alcohol for passive income
Now this is a very fun one. I am not advocating you bootleg alcohol and start selling it dukes of hazard style, but what I am suggesting is that you brew your own alcohol for your own private consumption by you, and your friends and family.
Alcohol is taxed to the sky in this country, so avoiding commercially brewed beverages is a massive way to save money and accelerate towards financial independence. Sure its cheaper to abstain all together, but I quite enjoy a crisp beer after a hard days work, and sharing a bottle of red wine over a nice meal is one of my favourite social activities.
Just like growing a garden, investing in shares or building an investment property, brewing beverages is something that can semi-passively tick away in the background whilst you go about your day to day activities. It doesn’t take up much time or space, and is quite a lucrative hobby if you do it smartly.
There are many ways you can increase your passive income, and this is by far not an exhaustive list. Get creative – the sky is the limit! If you have specialist knowledge, skills or even just an interest in a particular area or hobby, you can turn it into an income stream. Have fun, and enjoy the journey!
Captain FI is a Retired Pilot who lives in Adelaide, South Australia. He is passionate about Financial Independence and writes about Personal Finance and his journey to reach FI at 29, allowing him to retire at 30.