The average American IT professional works 52 hours a week. The average physician works 59.6 hours a week. The average attorney works around 55 hours a week, but can easily work 70 hours a week, depending on caseload. During busy season, external auditors can easily work 80 hours a week, eating cold pizza in a one-star motel thousands of miles from home. With long hours required for success in just about every career path, it’s easy to see why people want to know how to generate passive income.
Who wouldn’t want to make money in their sleep? You want more income so you can afford a vacation or achieve FIRE (financial independence retire early). But you have a household to care for, too, and you simply don’t have any more time to trade for money. Besides, do you really have the flexibility in your schedule to work a part-time job for a pittance? Whether you do or not, here are five methods for how to generate passive income in 2020 and beyond.
5 Methods for How to Generate Passive Income in 2020
1. Invest in Low-Fee Index Funds
One of the best methods for how to generate passive income in 2020 is investing in low-fee index funds. Unlike other “passive” income methods, this method is completely passive. For instance, you can throw $3,000 into VFIAX, or a few hundred dollars into VOO and forget about it. Each share you own will pay you $5.58 per year if 2019 dividends and capital gains distributions are anything to go by.
If you invested $3,102.10 in 10 shares, you could receive a passive $55.80 in 2020 while your initial investment grows through unrealized capital gains. If you invested $30,000, you could receive nearly $138.95 a quarter and treat your partner to a nice dinner.
2. Invest in Municipal Bonds
Unfortunately, you will have to pay taxes on the dividends and any realized capital gains from your low-fee index funds. If you’re wondering how to generate passive income, the answer is to have a healthy mix of taxable and tax-free investments. There are several advantages to municipal bonds over corporate-issued bonds.
First, the interest is tax-free. Second, the interest and return of your invested capital, is guaranteed. Third, you’re helping your local community, assuming you invest in a local county’s bond. For instance, your county may be issuing bonds to raise money for a new public library, road maintenance, or road construction. There are several ways to make money investing in municipal bonds. But the most passive method is to buy the bond and receive your interest payments twice a year until the “loan period” is done.
3. Invest in Residential Real Estate
If you don’t have the capital to invest in commercial real estate yet, that’s okay. Be patient and make smart decisions with your residential real estate investments. One day, you will have the capital to invest in commercial real estate, and you won’t have to pick up a second job to do it.
So, what do you look for when investing in residential real estate? The first three things to look for are location, location, and location. You want to find a home in a safe location. You want to find a home in a good school district. You want to find a home in a neighborhood where property values are increasing near a major university or employer.
Leverage a Property Management Company
For rental income to be passive, you need someone doing the management work for you. If you live a few counties away, you don’t want to wake up at 2 AM because your tenant didn’t drip his water in sub-freezing temperatures, and now his pipes have burst. Property managers are responsible for everything you could need, including:
- Collecting rent from tenants
- Listening to maintenance requests
- Addressing property maintenance issues
- Handling defaulting and delinquent tenants
- Marketing the property if a vacancy occurs
- Keeping detailed records of everything related to the property
4. Invest in Commercial Real Estate
Businesses need warehouse space, storefronts, and office space to operate out of. This is true, regardless of what the economy does. But the recession-resistant stability of commercial real estate isn’t what attracts people wondering how to generate passive income. It’s money. Commercial real estate generates much more income every year than residential real estate. Even accounting for utilities, property taxes, and property insurance, this means greater monthly cash flow per year. There is less competition in this space because most people don’t have the capital to invest in.
The leases on commercial real estate are a lot longer, so there’s a lower risk of vacancy. The best part is business owners make the best tenants because they usually handle maintenance problems themselves, rather than waiting for someone to schedule the contractor to fix the problem. Moreover, they need this space to run their business so they can make money. Therefore, they are much more likely than your grandparent’s friends to pay their rent on time. They’re also less likely to damage the property.
5. Invest in an REIT
If you want to invest in real estate now, but you haven’t found the perfect investment property yet, invest in an REIT. An REIT, or Real Estate Investment Trust, is a company that bankrolls, manages or owns income-producing real estate. Rental income generated from these properties is disbursed to shareholders via dividends.
Equity REITs make up roughly 90% of all REITs. This type of REIT is in the business of acquiring, managing, building, remodeling, or selling real estate. This includes both residential real estate, like single-family homes, duplexes, apartments and condos, and commercial real estate. The diversity of an equity REIT makes it a pretty safe bet for generating passive income. Just do your due diligence and make sure you’re not paying too much in fees and expenses.
Final Thoughts
There are many safe, effective methods for how to generate passive income in 2020 and beyond. Everyone should invest in local municipal bonds for their 100% return guarantee. Low-fee index funds are Warren Buffett’s investment vehicle of choice and provide dividends, which will probably increase in the future, without too much risk. But real estate investing is one of the biggest opportunities you can seize this year.
