How to generate additional streams of income
Going to work and earning a wage isn’t the only way you can make money. Passive income can be a great way to generate extra cash flow and over time, grow enough that it can help fund your living expenses and lifestyle.
What is passive income?
Passive income describes a cash flow that takes minimal time and effort to maintain, like money generated from investments, properties, shares or side hustles. This contrasts with the active income you earn from wages paid to you from employment.
What are some types of passive income?
Rental income: investing in properties and renting them out to tenants is an example of passive investment income. Whether it’s residential or commercial properties, rental income can provide a steady stream of cash flow with relatively little ongoing effort, particularly if you employ a property manager to maintain it.
Dividend income: investing in shares allows you to earn dividend income which are a portion of the company’s profits that are periodically (typically twice a year) paid to shareholders. As a shareholder, you receive dividends without actively participating in the day-to-day operations of the business.
Interest income: high-interest savings accounts, bonds, and other interest-bearing investments can generate passive income through regular interest payments. These investments offer a relatively low-risk way to earn passive income.
Side hustle income: leveraging a skill or talent you have into an online course or other business idea that requires minimal effort by creating a marketing tool that sells your product online. For example, a course on how to do something, a PDF instruction manual or artwork, which can be automated, purchased and delivered online, requiring no effort on your behalf.
When deciding on which passive income stream you want to pursue, think about how much time and money you can put into it right now and the level of risk you wish to take.
Part of the Wealth Maximiser process is to assess which Wealth Strategies are most appropriate for your needs, goals and risk level.
Steps to generate a passive income stream
The traditional way to create passive income is via growth assets such as shares and property.
Income from shares
Investing in shares and regularly adding to them over time pays dividends, which is a regular income typically paid twice a year. The average dividend yield for S&P/ASX 200 (ASX: XJO) shares is 4.1% per annum1, however if you invest in shares that are higher yielding companies, there is the potential to earn more income.
Let’s see how the passive income works using the average 4.1%.
A shareholder owns $10,000 of listed shares, and over the course of 12 months earns 4.1% or $410 p.a. This dividend income is in addition to any capital gains/ losses the shares incur.
The same shareholder has their initial $10,000 but now also contributes $1,000 per month to their share portfolio for the next 10 years, accumulating $130,000 as their investment. The value of the shares will fluctuate depending on the share price which may go up or down. The average dividend of 4.1% is now creating a passive investment income of $5,330 p.a (or $444 per month) income paid into their nominated bank account, that is not dependant on them working.
The more you invest in shares, the more income you can potentially generate over time.
Wealth Maximiser can provide you with more information, steps and tools to start or enhance your share investing journey.
Let’s now look at using property for passive income.
Income from property
For property investors, achieving positive cash flow (rental income less expenses) can be a longer-term proposition. Purchasing an investment property typically involves taking out a loan, costing about 6-7% in interest costs. In the current environment, it’s difficult for an investor who has borrowed 80% of the property value to produce a positive passive income.
This is because the loan repayments alone often exceed the rental income. According to the Australian Tax Office, 2.25 million property investors are negatively geared. 2
Let’s look at a case study to see how to create a passive income with property.
Buying in a cheaper property market such as Adelaide is one strategy you could employ to generate positive passive income sooner. According to CoreLogic, regional South Australia has a median property value of $411,513 and has a rental yield of 4.80% on apartments.3
A property purchased for $410,000 using $80,000 cash deposit and a mortgage of $330,000, might generate $20,500 p.a in rental income. Deducting annual expenses of $5,000 holding costs, mortgage repayments of $21,450 (based on an interest only 6.5% loan) and management fees of $2,000 would leave you with $7,950 p.a negatively geared.
If, however, you had a deposit of $200,000 and a mortgage of $210,000, the same property could generate $500 p.a net investment income (or $42.66 p/mth).
Wealth Maximiser can provide you with more information, steps and tools to start or enhance your property investing journey.
Interest payments and holding costs on property are generally tax deductible. Shares also deliver a tax benefit via dividend imputation credits. These have been excluded to simplify the example as will vary depending on an individual’s other income.
Income from a side hustle
Newer methods for creating passive income can come from small business ventures and side hustles, including things like creating an online course, photography, apps, games or e-books which can be digitally automated to collect revenue.
Passive income can provide a path to financial freedom. Yes, it takes a bit of work, and you need to save to initially create a regular passive income, and with growth assets comes the risk of loss of your capital, but the effort can be worthwhile in the long term.
Each passive income strategy comes with its pros and cons so make sure you do your research to find one that suits you. Where possible reinvest your passive income so it keeps growing.
Disclaimer
This information is of a general nature only and does not take into consideration your objectives, financial situation, or needs. Before acting on this information, you should review the Wealth Maximiser Financial Services Guide and Wealth Maximiser Terms & Conditions and consider this information in light of your own objectives, financial situation, and needs. Wealth Maximiser is operated by NobleOak Services Limited ACN 112 981 718 AFSL 286798.
Sources
1. ASX200 long-term dividend yield – Australian Equity Market Facts: 1917–2019 | RDP 2019-04: A History of Australian Equities | RBA
2. What is negative gearing and what is it doing to housing affordability? | Western Sydney University
3. CoreLogic Hedonic Home Value Index – https://www.corelogic.com.au/__data/assets/pdf_file/0015/22533/CoreLogic-HVI-MAY-2024-FINAL.pdf