In the past year, I have intensively dealt with the topic “passive income“. Maybe you have already read some of my posts on my blog. At the beginning of my considerations I made a list about passive income. It contains 10 possibilities to generate passive money. In this article I would like to share my list with you and briefly discuss the advantages and disadvantages of each of these possibilities.
Maybe you are now wondering why you should be involved in this topic as a freelancer. I recommend the article “Confounded revenue planning: 3 strategies for a plannable base income“ Here you can find out what passive income actually means and how you can better plan your income as a freelancer by passive income.
1. Sale of digital products
Digital products such as e-books, apps, stock photos, graphics, music etc. are offered for sale online.
- no logistical effort
- very well scalable
- Product improvements can be implemented easily and quickly
- when selling via an online marketplace, high margins (of over 50%) are not uncommon
- Processes for the release of digital products through online marketplaces are sometimes lengthy and annoying
- Product pirates can easily copy and illegally distribute the products
2. Affiliate marketing
Recommend products from other companies and earn commission for them.
- no costs for product development. You profit through affiliate marketing from a product that already exists and is on the market.
- no logistical effort. The manufacturer or its fulfillment partner handles the logistics if the products are physical.
- for significant income you need many page visitors, followers etc.
- Defects in the recommended product can damage your own reputation. (That’s why, for example, on my blog I only recommend products that I have tested myself and find good)
3. Passive income from book sales
In addition to the e-book there is also the possibility to have a book printed by a publishing house. The book sales then also generate passive income.
- A book publication raises the own expert status
- when writing a book, you almost automatically expand your knowledge and become an expert on a certain topic
- low margins per book sold, as the publisher retains a large part of the printing costs, distribution, etc.
- Compared to e-books, printed books can only be updated by a cost-intensive new edition
4. White label products
Purchase of larger product quantities in the Far East, e.g. via Alibaba. Products are labelled and sold with a corresponding margin, e.g. via Amazon.
- logistical effort can easily be outsourced to already established companies. Amazon, for example, offers storage, packaging and shipping as part of a fulfillment service
- Production facilities for white label products are already in place.
- larger quantities of the products must be purchased in order to achieve a profitable margin. The initial investment may be high and risky
- Products can usually be easily copied or given their own label by other companies. Thus there is no unique selling proposition apart from a strong brand.
5. Investing in the stock market
Invest in shares or funds and generate profits through dividends and price gains
- Share price gains also occur when you are not actively working on the company yourself
- Tax advantages: Investment income is taxed at a flat rate of 25% while income is subject to a tax of up to 45%. With a taxable income of EUR 50,000, the tax rate of 25.27% is well above the flat tax rate for investment income. (Status 11/2016)
- Good risk diversification for funds. This means that the capital is not only invested in one business concept (even if it is your own), but for example in 30 business concepts for a DAX fund.
- The invested capital can be reduced by price fluctuations (total losses are possible)
- This form of passive income offers hardly any scope for structuring with low levels of company participation. Who can afford more than 50% of the company shares of a DAX company? 🙂
6. Investing in P2P loans
Example: You are a lender and would like to invest a total of 1,000 EUR. Your capital will be divided into 25 EUR each and invested in 40 different loans. Conversely, a loan of e.g. 1,000 EUR is given by 40 lenders with 25 EUR each.
- significantly higher interest rates compared to government bonds, fixed-term deposit accounts, etc. (on average 5-6%)
- Default risk is spread over many borrowers. If a borrower defaults, the invested capital is not immediately lost completely.
- The lending of money to borrowers can be automated. This saves a lot of time when distributing the total capital.
- Liquidity is significantly limited compared to shares. Shares can be sold again at any time. P2P loans usually have a term of 5 years. Some platforms therefore offer a secondary market. This means that lenders can trade loan agreements among themselves. The secondary market makes a P2P investment much more liquid again.
7. Passive income with licensing
Rights to an asset such as patents, trademarks, graphics or programs are assigned to a third party for further use.
- the licensee usually takes over completely the operational tasks (distribution, marketing, sales etc.)
- the licensee also has a strong motivation to distribute the licensed products, as he also benefits from the sale
- detailed contracts are often necessary to take both interests sufficiently into account. This may result in high legal and consulting costs. At the same time, the conclusion of the contract is not guaranteed.
- Licenses are usually purchased by larger companies. These have a much larger budget for legal advice than freelancers. This can lead to disadvantageous negotiation results.
8. Selling advertising space / AdWords
Fade in of advertising e.g. on your own website, blog or YouTube Chanel
- Simple integration of the advertisements
- Large selection of advertising partners via Google AdWords
- Ads are not necessarily relevant with the topics on your own page. This can compromise authenticity.
- Remuneration per click is relatively low. Significant sales are only generated when there are many visitors, followers.
9. Passive income from rented properties
The classic. Buying and renting a condominium.
- High degree of design freedom. Rented property can be renovated and extended according to your own ideas.
- Rented property can bring tax advantages
- Currently favourable interest rate environment for borrowing (as of 11/2016)
- Extremely high transaction costs for notary, broker etc.
- To purchase the property, capital is almost always required from the bank. The investment is leveraged by a loan. This means that losses have a greater impact on equity.
10. Passive income from renting equipment
When it comes to rental income, many people think directly of renting out apartments. But there are also the possibilities to let less capital-intensive tangible assets. For example cars, photo equipment, event equipment or even toys
- significantly low initial investment compared to real estate
- can be implemented relatively easily (e.g. posting your own car)
- Workload for output, return and function control
- Storage rooms may be necessary for larger equipment
- This type of passive income does not fall within the category of freelance work. Additional trade tax may have to be paid.
I hope my list of 10 ideas for passive income has inspired you. Which option is your favorite? Do you have any other ideas how to generate passive income?