William Huston, AIF®, AIFA®

Best Passive Income Investments

As per the guidelines set forth by the IRS, passive income includes earnings that don't require active labor and are earned from various sources such as investments, real estate holdings or side ventures. Passive income represents a consistent inflow of funds that doesn't involve conventional employment or running a full-fledged business.

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

Passive income isn't synonymous with money obtained effortlessly; rather, it is financial gain achieved with comparatively less effort. Certain passive income tactics, like owning dividend-yielding stocks or bonds, demand considerably less engagement than other money making means such as managing rental properties.

The beauty of passive income lies in its capacity to enable individuals to work less and earn more. Whether you're engaged in a full-time job or enjoying retirement and in search of supplementary income, you can explore these passive income ideas to increase your cash flow.

Key Takeaways
  • Passive income investments are accessible to individuals from diverse financial backgrounds, and they offer an alternative path to financial freedom and security.
  • Passive income options include bonds, crowdfunding, dividend stocks, high-yield savings accounts, index funds, money market funds, peer-to-peer lending, private equity, and real estate investment trusts (REITs).
  • With the help of a financial planner, you can choose the right investment vehicles based on factors like expected return, risk, liquidity, cost, time to goals, and tax considerations.

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here.

What it takes to earn passive income

woman researching passive income ideas

The power of passive income investing is not limited to the affluent and high net worth individuals and families. To earn passive income, one typically needs to make an initial investment, whether it be in the form of capital or time.

Once you make the necessary upfront investment and have everything set up correctly, your effort and involvement will gradually reduce while the income continues to flow in. By dedicating a reasonable amount of time and capital, nearly anyone can create a passive income stream.

Best passive income investments

As an investor interested in earning passive income, it is important that you assess your risk tolerance and be clear on your investment goals. Here are some of the best investment vehicles to enable you to generate passive income and reach your financial goals.

growing passive income
Bonds and bond funds

One way of earning passive income is purchasing a piece of ownership in a company through stocks. But for those who do not wish to incur the liabilities of growth stocks, bonds provide investors with a means to lend money to various entities, including companies and government bodies, in exchange for interest income.

Bonds are generally viewed as a safer investment compared to stocks, although they typically yield a lower return on invested capital.

Financial experts recommend allocating a portion of your investment portfolio to bonds due to their lower level of price fluctuations and their relative safety as compared to stocks. As you approach your investment goal, such as retirement, where you will need more stable passive income streams, it's advisable to have a higher proportion of bonds in your portfolio.

Check here to access a range of bonds and bond funds, or to receive personalized advice on choosing the right ones for your financial needs and investment aspirations.


Crowdfunding investment platforms offer individuals the opportunity to invest in various ventures like farmland, real estate projects, art, and more, allowing them to receive continuous passive income.

However, it's important to note that investing in crowdfunding platforms comes with additional risks. Some platforms may make you wait a while before you can get your money.

Additionally, they might not have the same level of regulatory oversight as traditional financial assets. And with newer platforms, there's an increased possibility of assets facing defaults and businesses shutting down.

Dividend stocks

One sure way to build a passive income stream is to invest in stocks, particularly dividend stocks. Dividend stocks are stocks of companies that distribute part of its earnings to investors on a regular basis. Companies with good dividend stocks usually increase their payout with time, and this can help you grow your passive income.

As a bonus, dividend stocks typically are less volatile than growth stocks, so they can help diversify and stabilize your investment portfolio. Investors can also choose to reinvest dividends back into the stock, potentially increasing their investment if the stock does well.

To choose the right dividend stocks, investors should look for companies with a strong track record and growth projections ranging from 5% to 15%. These companies should have robust cash flow capabilities to sustain their dividend payouts. It's advisable to steer clear of companies that have debt-to-equity ratios exceeding 2.00.

For your convenience, click here to invest in dividend stocks, or to receive expert guidance on selecting the perfect options that align with your financial situation and investment goals.

High-yield savings accounts

Another method for generating passive income (although typically at a lower rate than stocks and bonds) is through a high-yield savings account, which can be particularly beneficial for building your emergency fund. The interest you earn from these savings accounts is added to your total balance.

High-yield accounts fall under the category of federally insured savings accounts, and they typically offer interest rates considerably higher than the national average. The annual percentage yield (APY) on these high-yield accounts might vary slightly, but over time, even these minor variations can accumulate to a substantial sum. Therefore, it's wise to explore these options for passive income streams.

Feel free to click here for investment advice tailored to your unique financial situation or to open a high-yield savings account.

Index funds or ETFs

In place of handpicking individual stocks, another investment avenue for passive income involves putting your money into index funds or exchange-traded funds (ETFs) that contain dividend-paying stocks. This represents a form of passive investment for those who prefer a more hands-off approach.

Index funds consist of a well-rounded collection of numerous stocks, designed to replicate the performance of a specific index, such as the S&P 500. A dividend ETF or index fund, on the other hand, includes a collection of stocks known for paying dividends.

These funds can help manage portfolio risk since market fluctuations are typically less erratic when you have a diversified mix of stocks as opposed to holding individual ones. Dividend ETFs offer the diversification advantages of index funds while providing the convenience of trading stocks.

To invest in dividend stocks, index funds, ETFs, or any other publicly traded assets, you'll need to establish a brokerage account if you don't already have one. Check here and explore your options to find the perfect fit for your financial situation and investment goals.

Money market funds

Money market funds are mutual funds that put your money into safer investments like short-term government debt or corporate bonds, which generate income.

Similar to high-yield savings accounts, money market funds offer attractive interest rates, some even exceeding 4%. Occasionally, this income might be exempt from taxes.

It's important to note that money market funds differ from money market accounts, which resemble savings accounts and usually come with FDIC insurance coverage.

Peer-to-peer lending

If you're looking to potentially generate income and recoup your investment within a shorter time frame, you might want to explore peer-to-peer lending.

Peer-to-peer lending, an alternative to conventional bank loans, involves platforms that connect investors willing to lend money with borrowers who are screened for their creditworthiness.

While it carries more risk compared to depositing funds in a high-yield savings account or money market fund, it also has the potential to yield higher interest rates, potentially reaching 5% or even more.

Private equity

A well-known method for passive income, which might be considered one of the original forms of peer-to-peer lending, involves financially supporting a private business that you believe has the potential to generate future income.

For individuals with a high net worth, this could mean investing in private equity funds, typically accessible only to accredited investors who meet specific net worth or income criteria.

Another approach is to provide financial support to a family member, friend, or trusted partner to help fund their business, with an agreement to receive returns from any forthcoming profits.

However, it's essential to exercise caution. Whether it's a large or small investment, putting money into a single business entails inherent risks and is generally a long-term commitment. Always ensure that you invest an amount you can afford to lose. As a result, this may not be a top option for investors who are not high net worth individuals.

If you're ready to invest money in private equities, schedule an appointment with a fiduciary financial advisor today. And you can learn more about private equity investing here.

Real estate investing
miniature real estate icon

Real estate investing which generates rental income is another method for constructing passive income. Long-term rentals can offer a dependable source of income, particularly when they are situated in a robust rental market.

Real estate investments are typically long-term strategies for creating passive income. However, they also come with enduring responsibilities like property maintenance, managing multiple mortgages, handling property tax obligations, and covering various expenses.

Alternatively, you might consider short-term rentals through platforms like Airbnb, which depend on a steady stream of visitors to your location. You could also start on a smaller scale by renting out a room in your home to begin building your rental property portfolio.

You can begin your real estate investing journey by speaking with a Realtor to provide tailored guidance for you.

Real estate investment trusts (REITS)

If your goal is to establish passive income from real estate without the complexities, hassles, and substantial upfront costs associated with purchasing and overseeing properties independently, Real Estate Investment Trusts (REITs) could be the solution.

REITs operate similarly to mutual funds. They are firms that possess commercial real estate assets, including office buildings, retail spaces, apartments, and hotels. REITs typically distribute substantial dividends, although they vary in complexity and accessibility. Some are traded publicly on stock exchanges, while others are not.

To learn more about REITs here. And you can speak with a Realtor to provide tailored guidance on REITs investing.

Who should consider passive income streams?

Passive income investing is not restricted to wealthy people since anyone with dedication and a few thousand dollars can set up sources for residual income streams.

A great way to think about passive income is as a replacement for the income that you earn from your salary. For example, for someone who earns $55,000 a year from their full-time employment, then that should become their aim; to make $55,000 each year from my passive income sources.

However, many people will strive to have strong passive income streams. That's because, at the end of the day, almost everyone wants to retire sooner or later, and passive income makes this possible.

It can also come in handy in the event of a medical crisis, disability, family emergency, or other such event that would cause a worker to leave their employer abruptly. Passive income makes it possible for people to retire early or explore other passions and aspirations.

Remember, the required effort is greater in the beginning and diminishes as time passes.

Choosing the right investment vehicle

When it comes to investing, your primary objectives are safety, income, and capital gains. These three pillars will guide your journey towards financial growth and stability.

To make the best decision, make sure you look at different aspects of each investment option. Consider these factors in particular:

financial advisor guiding client

Assess the level of risk associated with your investment. Different vehicles come with varying degrees of risk. Some are more stable, while others are prone to fluctuations. Balancing risk with your risk tolerance is critical.


Investment comes with expenses. Evaluate the costs associated with managing your investments. High fees can eat into your returns, so choose an option that is cost-effective.


Liquidity refers to how quickly you can access your invested funds. Consider your short-term and long-term financial goals. Ensure that your investment vehicle aligns with your liquidity needs.

Time to Reach Goals

Your investment timeline matters. Depending on your financial goals, you may have different time horizons. Choose an investment vehicle that matches your desired time frame.

Expected Return

The expected return on investment (ROI) is a fundamental metric. It's often seen as a cornerstone when building your portfolio. Understanding the potential return on your investment is essential to align your financial goals.

Tax Considerations

Taxes can significantly impact your returns. Investigate the tax implications of your chosen investment. Some investments offer tax advantages that can boost your overall gains.

By carefully weighing these factors, you can make informed decisions when selecting the right investment vehicle to help you achieve your financial objectives and secure your financial future.

Steps to passive income investments

Investing for passive income involves predicting investment returns, based on the investment amount. The best passive income investments require striking a balance between your capital and time.

man monitoring his passive income investments
Step 1: Set your investing goals and risk tolerance

Be clear on your investment goals and risk tolerance when choosing investment vehicles. Your decision should align with your income objectives and how much risk you are comfortable with.

Step 2: Choose your preferred investment vehicles

You can choose to invest in financial markets which involves putting money in stocks and bonds. Alternatively, you could opt for banking products like certificates of deposit and high-yield cash accounts which carry less risk but offer lower profit potential compared to investing in financial market assets.

For example: If you invest $10,000 in a bond or bond fund with a 4% yield, you can expect to receive $400 annually in passive income, and you would not have to worry about suffering a loss.

On the other hand, a $10,000 investment in a stock portfolio with an average annual growth rate of 8% has the potential to generate around $800 per year in passive income. However, there is a higher risk of losing earnings with stocks.

Step 3: Select an investment platform that fits your needs

If you're looking for passive investment income, you can pick from numerous financial brokerage firms, apps, and banks that are available to meet your investment needs. In the end, it is advisable to collaborate with a financial planner to assist you in selecting suitable investment choices.

Unlock your financial freedom

As you set out to create passive income streams, keep in mind that all you need is a good plan and the right investments. And to make things easier and increase your chances of success, consider working with a financial advisor.

Start a conversation today to set yourself on the path to financial freedom.

Bay Street Capital Holdings

Bay Street Capital Holdings

Bay Street Capital Holdings is a renowned wealth management firm that specializes in delivering comprehensive financial planning, investment advisory, and risk management services. The firm distinguishes itself with its unbroken focus on managing overall risk and market fluctuations, rather than solely over-emphasizing profit maximization.

Bay Street was founded by William Huston, a three-time consecutive honoree on Investopedia's list of Top 100 Financial Advisors, and the firm emerges as one of only two Black-owned enterprises among the nineteen distinguished firms recognized in California.

Their partnership with Resthaven Properties in the real estate sector earned them a finalist spot in the prestigious category of Asset Managers: Diversity, Equity, and Inclusion at the 2023 WealthManagement.com Industry Awards.

Bay Street not only showcases its steadfast commitment to diversity but also lends support to emerging fund managers and entrepreneurs. Their recognition as a finalist in the Corporate Social Responsibility (CSR) category for Asset Managers in 2021, following a rigorous selection process involving over 900 firms, underscores their unwavering dedication to fostering positive social change.





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