For many Australians, accumulating enough cash during their working years to achieve financial security in retirement requires making savvy investments that generate passive income. Given our time-poor modern lifestyles, it’s common to think, “if only there were more than one of me!” But while cloning remains the stuff of science fiction, generating income through passive investments can be a great solution for time-poor people, acting as a complement to salary earnings.
Passive income is money earned from assets you own, rather than from the hours you work. The overarching principle of passive income is that your capital from an upfront investment does the work. If executed appropriately, passive investments have the potential to generate an income stream that supports your lifestyle, buffers against uncertainty, or grows wealth over time.
For those wondering how to make passive income from investing, this guide explores a variety of techniques, from traditional income tools to market-linked strategies and asset-backed options.
What Counts as Passive Income?
True passive income sources are generated by assets that work independently of your labour. This is the critical distinction between generating passive income through investing and having a “side-hustle.”
Active Income vs Passive Income
Active income is a direct trade: you provide your time and skills, and you are paid a wage. The moment you stop working, the income also stops.
In contrast, passive income from investments accrues whether you are at your desk, on holiday, or retired.
Examples of investments with the ability to generate passive income include:
- Interest from a savings account
- Stock dividends from shares that regularly pay dividends to shareholders
- Distributions from managed funds
- Rental income
- Interest returned from mortgage-backed investment funds
- Other income-producing assets, such as royalties on intellectual property (selling stock photos, online courses, YouTube channel ad revenue, etc.)
Each of these strategies can be an income-producing asset, though returns, risks, and liquidity differ.
Many investors also consider capital gains tax (CGT). If the asset grows in value and is later sold, you may have a CGT liability. This is why seeking advice from a tax professional is important to structure passive income streams efficiently. In most cases, you must also pay tax on the income received.
Key Ways to Earn Passive Income
The following are among the simplest options to earn passive income from investing, often forming the basis of a conservative investment portfolio.
High-Interest Savings Accounts
Easy to understand and quick to access, savings accounts are often a first step to earning passive income. However, returns are typically modest and may not keep pace with inflation even when interest rates rise, decreasing your real purchasing power.
Bonds and Bond Funds
When you buy a bond, you are lending money to a government or corporation for a fixed period in return for regular interest. Types of bonds include:
- Government Bonds: Backed by governments, these are generally considered very low-risk.
- Corporate Bonds: Issued by companies, these offer slightly higher yields to compensate for a higher risk of default.
Bonds have the potential to provide a regular income stream but are subject to interest rate risk; when interest rates rise, existing bond prices typically fall.
Market-Based Passive Income Investments
These options are linked to the performance of the stock market, offering the potential for higher returns alongside higher volatility.
Dividend-Paying Stocks
Australian investors have long favoured dividend stocks. These are shares in established companies that pay dividends (a portion of their profits) to shareholders.
- Pros: Can provide a strong income stream and offer the potential for capital growth. Franking credits can offer significant tax benefits by acting as a credit for the tax the company has already paid on those profits. This offset can reduce your personal tax bill and, in some cases, may even result in a cash refund.
- Cons: Dividends are not guaranteed and can be cut, especially during economic downturns. Your capital is subject to market volatility, and investing in individual stocks requires significant research.
Exchange Traded Funds (ETFs)
ETFs offer a simple way to gain exposure to a wide basket of stock market assets. An ETF might track the entire ASX 200, a group of high-dividend companies, or even international bond funds. Investors often reinvest dividends (distributions) over time to grow capital and build passive income more efficiently through compounding.
Real Estate Investment Trusts (REITs)
For those who want exposure to property without being a landlord, Real Estate Investment Trusts (REITs) are a common choice. These are companies that own and manage large portfolios of property (e.g. shopping centres or office towers). You can buy shares in an REIT on the stock market and receive a share of the rental income as dividends. However, their prices still move with equity markets.
Property-Based Passive Income
Buying property and leasing it out–generally in the form of residential rental properties–can deliver long-term capital growth and certain tax advantages. However, this strategy is rarely truly “passive.” Rather, it generally requires significant money upfront, ongoing management fees (if you use an agent), and exposure to vacancies, repair costs, and rising interest rates on the mortgage.
Alternative Passive Income Opportunities
A range of newer, often digital, investment opportunities also exist. However, they often blur the lines between investment and active income.
Peer-to-Peer Lending
Peer-to-peer lending (P2P) platforms allow you to lend your money directly to individuals or small businesses, often at higher interest rates. This model has gained significant traction in Australia recently, with early platforms like SocietyOne attracting interest from major institutional investors.
However, this is a high-risk strategy. As noted by Australia’s corporate regulators, many P2P loans are unsecured, and a default can mean losing your entire upfront investment. Unlike a bank deposit, there is no government protection for your capital.
Digital & “Hustle” Income
Many popular passive income ideas are actually small businesses in disguise. This “side hustle” economy is now a major part of the Australian workforce, with recent ABS data showing nearly a million Australians work more than one job.
The most visible part of this so-called “side hustle” era is the “creator economy.” Far from being a hobby, this ecosystem is now a powerful economic force. A 2023 report from Google found that YouTube’s Australian creator ecosystem contributed over A$990 million to the nation’s GDP. The report cited success stories like Hobart-based illustrator Mimi Purnell, who turned her channel into a full-time career, and a NSW business that grew to 15 staff by using its channel.
This confirms what financial bodies like CPA Australia have previously stated: these creators are entrepreneurs. While these types of strategies can generate income, they require immense upfront work, digital marketing skills, and ongoing management. As such, they are not “set and forget” passive investment opportunities.
Building Your Passive Income Strategy
A successful passive income strategy isn’t just about picking assets; it’s about building a portfolio that matches your financial goals and risk tolerance. Therefore, before you begin investing, it’s worth considering the following points:
- Define Your Goal: How much passive income do you ideally need? Are you seeking extra income, or enough income to replace your salary?
- Assess Your Risk Tolerance: Can you handle the volatility of the stock market, or are you looking for investments with lower volatility? Your risk tolerance will determine if corporate bonds, individual stocks, or mortgage funds are more appropriate for you.
- The Power of Reinvestment: To truly build wealth, many investors choose to reinvest income (distributions or dividends) back into their investments to utilise compounding over time. This is the power of compounding, turning a small upfront investment into a significant asset over time.
- Consider Tax: Very few income sources are tax-free. Plan your investments for tax purposes by speaking to your accountant or financial advisor to ensure you are being as efficient as possible.
Mortgage Funds: An Income-Focused Approach
For those looking for investments that generate passive income and are not priced daily on a securities exchange, mortgage funds provide an alternative path.
A mortgage fund pools investor capital to provide loans that are secured by registered mortgages over real estate. From there, the passive income stream is generated from the interest payments made by borrowers—not from speculative growth. This approach seeks to generate income from borrower interest payments rather than capital growth. As a result, returns are primarily driven by loan performance rather than daily movements in listed markets.
Generate Passive Income With the ASCF Approach
At ASCF, our mortgage-backed investment funds are designed specifically for investors seeking income-focused returns generated from a portfolio of loans secured by registered mortgages over property. Investor capital is pooled into a diversified portfolio of short-to-medium term loans, each backed by a registered mortgage over Australian property.
Our focus is on managing risk while aiming to deliver a passive income stream through targeted distributions. Because our funds are unlisted, their unit prices are not determined by daily movements in listed share markets. This structure also means management fees are not paid for simply tracking a market, but for active, professional lending and risk management.
Interested in learning more? Contact our team or get started with the application process today.
This article provides general financial product advice only. It is always recommended that you seek personal advice from a licensed financial adviser. They can assess your financial situation and objectives. Before making any further investment decisions, you must read the relevant Product Disclosure Statements (PDS) and Target Market Determination (TMD) documents in full.
