5 Types of Passive Incomes You Can Consider (Ranked from Easiest to Hardest)

What happens if you no longer have a salary, and can no longer work anymore? How will you pay for life’s necessities? Those are hard questions to answer, but important ones. In this article, we would like to introduce you to the world of passive income.

First, a distinction between active income and passive income: the former is the income derived from your labour, time and skills, while the latter is the income generated regardless of your activity, the one that generates your money ‘as you sleep’.

Here are some types of passive income in Malaysia. We have sorted them from the easiest to the hardest.

#1 - Low-to-medium-risk investments

What this entails: Grow your excess savings by putting them in various investments.

Some examples of safe investments: Mutual funds (ASB, ASW, etc.), fixed deposit, low-risk unit trust, stocks/shares from blue-chip companies (preferably the ones that give dividends), ETFs (Exchange-Traded Funds) and Real Estate Investment Trusts (REITs).

The (oversimplified) steps if you want to do this type of passive income:

? Choose the right investments for you—probably the hardest part. If you are not a DIY investor, it is a good idea to engage the services of a financial planner.

? Contribute monthly/yearly (you can automate this).

? Receive dividends*, usually yearly (*sometimes you don't get this if the company is not profitable that year, or if they made a loss).

Pro: Easiest type of passive income to get into; great for long-term investors as you can just forget about it.

Con: Not much control; have to learn withdrawal strategies so you don't withdraw too much.

#2 - Rent out what you already own

What this entails: Identify what you already have which are sought after by other people on a temporary basis. Some options include parking space, car, extra room (for tenancy or for storage), items for special occasions (like wedding dress and accessories), equipment and gear (camera, gaming and VR, to name a few), and more.

The (oversimplified) steps if you want to do this type of passive income:

? Research what people are looking to rent.

? Find trusted platforms to list your item (preferably with insurance).

? Earn passive income as the item is rented out.

Pro: No start-up cost as you already own the item.

Con: Not all renters will be responsible for the items (thus choosing the right platform is important).

#3 - Property

What this entails: Buy and rent out property spaces to tenants. To make this profitable, the amount of rent must exceed the amount of monthly/yearly payments you make (not just mortgage, but also insurance, taxes, etc.).

The (oversimplified) steps if you want to do this type of passive income:

? Research locations and demand.

? Buy/lease the property.

? Renovate it (optional, but common in order to attract tenants).

? Hire property agent to handle rental inquiries and prepare contracts.

? Hire property manager to look after the property (optional, but not uncommon. Who wants to deal with leaked toilets?).

? Receive rental checks monthly or according to agreed schedule.

Pro: If you get tenants for the whole duration of the mortgage, you are essentially getting the property for free by the end of the term; tax benefits.

Con: Tenant woes; high start-up cost; renters’ market.

#4 - Intellectual property

What this entails: Create/make software, apps, websites, books, songs, graphics, photographs and sell them on online platforms (either directly or via advertising revenue).

To be clear, this is the least ‘passive’ option among all. To make this profitable, networking/marketing/advertising efforts must be ongoing so you can expose the product to new audiences. However, you can outsource and/or automate this to make it less labour and time-intensive.

The (oversimplified) steps if you want to do this type of passive income:

? Research what's in demand (commonly overlooked).

? Register intellectual property to your name or trademark it as proof of ownership (stealing happens).

? Package it to the right target audiences.

? Choose selling platforms.

? Market/advertise the heck out to the target audiences.

? Receive royalties when people buy/use it.

Pro: Lower start-up cost; infinite income potential.

Con: Most IPs don't make much money due to too much competition; piracy; lack of marketing/advertising.

#5 - Keep valuable items

What this entails: Some items make great passive income as their value grows. However, this can be a risky passive income strategy as there is no guarantee that the worth will remain the same after some time. For example, tulip bulbs and Beanie Babies used to be sold/traded for high profits, but not anymore.

That said, if you are extremely knowledgeable and know where to buy and sell the item for the best price, this may be a worthwhile (and also fun!) venture. Some examples of valuable items that tend to appreciate in value include gold coins, Rolex watches and Birkin bags. There are also many items considered valuable within its communities, for examples cryptoassets, Lego sets, rare stamps and more.

The (oversimplified) steps if you want to do this type of passive income:

? Do research on supply and demand, and know everything about it and the market price (be expert-level, preferably).

? Purchase said items.

? Keep said items safely and in good condition.

? Sell when the timing is right to the right buyer (to be fair, it's incredibly, incredibly hard to get the timing and buyer right).

Pro: Suitable for already hobbyists and experts in the field.

Con: Kind of risky; you won't know if you'll make a profit until you sell it.

Conclusion

There you have it. Five different ways to generate passive income in Malaysia. We would like to end this article with a warning, as the term ‘passive income’ is sometimes used misleadingly or unethically by scammers and opportunists: unlike what they tell you, there is more than one way to generate passive income. Do not fall into ‘FOMO’ (fear of missing out) for not taking their opportunity, because there are plenty of options out there.

Lastly, we also advise you to be realistic in your passive income expectations. Except for Option #1, passive income is not really passive - it will require massive upfront research, effort and/or capital and some ongoing maintenance or review. However, if implemented well, your passive income will be fairly predictable and stable.

This article is contributed by Suraya Zainudin—writer, speaker and digital marketer for one of Malaysia’s top personal finance websites.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of Credit Counseling and Management Agency (AKPK).