Ask most people and they will tell you that earning passive income is the holy grail of making money. I mean, who wouldn’t want to make money while you eat, sleep or even Netflix and chill! However, earning passive income is easier said than done, especially when your funds are limited. Fortunately, with debt, earning passive income becomes much easier so let’s now go over four ways to make passive income with debt!
Debt is arguably the most contentious financial instrument there is today. Ask people like Dave Ramsey and he will tell you that debt is literally the devil and that carrying around a credit card in your wallet is a sin. Grant Cardone on the other hand will tell you to borrow as much money as you can to help finance your future prosperity. With people of wealth giving two very different pieces of advice about debt, it’s no wonder that people don’t know how to feel about it.
However, generally speaking, I think that most people are somewhat averse to debt and I really can’t blame them. We’ve all heard stories of people ruining their finances by getting into high levels of credit card debt and others who will be paying back their student loans until they’re 50! In short, we’ve been conditioned to believe that debt is bad but if you ask me, it’s all in how you use it.
I like to think of debt like a car. In the wrong hands, driving a car can be dangerous and if you get into an accident it can be downright fatal. However, if you use the car properly, it can offer many benefits like being able to get from point A to B, making you money if you use it as a tool in your ridesharing business and in the back seat of your car you can ugh…nevermind. In short, debt, just like cars, can be good or bad, it’s all in how you use them. So, what are four ways you can use debt to earn passive income? Let’s get into that right now!
Number 1: Investing in Real Estate
I believe that everyone, at some point in their life, should have the experience of using real estate to earn passive income. Now, when I say that, I particularly mean owning a physical property yourself and renting it out because there are in fact many ways to earn passive income with real estate but we will talk about some other options a bit later.
You see, when it comes to earning passive income, residential real estate is hard to beat and here’s why. First, it’s super easy to understand how to use it to make money. We all grew up in some sort of household and as such we are very familiar with the day to day process of living in a home. As such, when investing in real estate, part of its workings will come naturally to you. Moreover, like I just said, we must all live somewhere and when you own an asset people don’t just want but need, then this asset class becomes even more fruitful to own.
Now, you may argue that if people need to live, they can just buy instead of rent from you but the privilege of buying a home is becoming less accessible to the masses every single day. I know where I live, last year alone, home prices skyrocketed by more than 20%. That means that a house that was $500,000 in 2019 rose to over $600,000 in 2020 and these large price increases are making buying less and less accessible to the average income earner. Therefore, if you ask me, the amount of people who will not just want to rent but need to rent, is only going to increase over time.
So, how does debt play into making money with real estate? I’m sure you already know the answer but for the slower people in the back of the classroom I will explain anyways. Unless you are rolling in cash, and even if you are, most people tend to opt to finance part of the purchase of their property with debt. This debt almost always comes in the form of a mortgage which is a low-interest debt instrument bestowed upon people with sufficient income and credit.
Let’s face it, basically no one would be owning a home if it weren’t for debt. Being able to save up hundreds of thousands of dollars for the average income earner would take a lifetime and I would assume living in your parents basement until you’re 50 isn’t exactly ideal for the life you want to live. Fortunately, debt saves the day and offers a means for people to buy homes or rental properties they can use to make passive income through the rental income it can earn them.
Beyond physical properties however, there are two other ways to make passive income with real estate. The first is through real estate ETFs. These are baskets of funds invested in real estate companies and when the funds pay out a dividend, you collect a dividend proportional to your level of ownership in said fund.
The second way you can earn passive income without owning a physical property yourself is by investing in REITS. REITS are large holdings of physical properties that a fund owns that you can pool your money into and collect your share of the income said properties generate. Both of these alternate means of making passive income with real estate typically require much more cash invested to see noticeable returns. As such, to increase your position and ultimately your cash flow, you can take on debt to gain more access to capital but I just warn you that this is a financial move that I rarely ever suggest people use.
Number 2: Building Up A Dividend Portfolio
Making dividend income is seen by many as the holy grail of earning passive income and I can totally see why. Who wouldn’t want to do absolutely nothing and get paid for it? I know I could certainly get used to that lifestyle! Now, if you’re unfamiliar with what a dividend is then you may be wondering what all the hype is about so let me briefly explain what dividends are and how debt can be used to earn greater amounts of them.
Dividends are distributions of company profits to shareholders. When a company pays out a dividend to an investor, it’s basically thanking you for supporting the company via the compensation they provide. Sometimes, these dividends come in the form of more shares but generally speaking these dividends will be distributed as cash instead. So, how do you start acquiring these dividends? Simple, you start investing in dividend producing companies!
Now, up until this point, my explanation of how dividends work and how they earn you passive income must sound like a dream scenario. Simply invest your money and collect paychecks every quarter or year, who doesn’t like the sound of that? However, when you open that check and you see that your investments only yielded a measly $14, your level of excitement may take a bit of a dip.
The harsh reality is that to earn any significant amount of money from dividend stocks, you need to have a large amount invested. Even with $100,000 invested in a high-yielding dividend stock like AT&T, you would still only be collecting roughly $7,000 a year. This is certainly a far cry from the income you would need to earn to live a life of dividend freedom let alone be able to speed up your path to wealth by any measurable means.
The key to winning in the dividend investing game comes down to two elements: picking the right stocks and maximizing your position. I won’t get into how to pick good dividend stocks here but as you can see from the last example, you will need to have a strong position to be able to collect substantial dividend checks. This is where debt comes into play. If you invest on margin, which means you are using debt to acquire extra cash to invest with, you can increase your position and reap the benefits that come with having more money in the market.
This will lead to bigger dividend checks over time however part of these returns will be offset with the financing costs you’ll pay to invest in this way. Not to mention, if your position gets called because you lack sufficient funds in your portfolio, you may be forced to sell, which is another reason why this approach should be used with caution. However, I’m just here to tell you the options you have accessible to you, not the ones you should necessarily pursue.
Number 3: Productizing Your Skills
Whether you realize it or not, every day you work, you are exchanging the skills you have for money. For some, they are exchanging their expertise with cars when they work as a mechanic or their expertise with financial statements when they work as an accountant. The problem with these two examples, and with most jobs in general, is that the only way you get paid for your expertise is by actively putting in effort.
Now, what if I told you that there was a way to use debt to earn passive income through the skills you have, would you be interested? Of course you would! That’s why you’re here. Well, the good news is that half the work has already been done because chances are you have already used debt to acquire a skill or set of skills via the post-secondary education you have. Right now, there are roughly 42 million Americans who have some amount of student debt to pay off and while I won’t get into how sad it is that the average student graduates with nearly $40,000 worth of debt, the good news is that the skills they do acquire from going to college can be used to make passive income.
You’ve probably never thought about turning your knowledge into a product before but when done right, this is an excellent way to make passive income. One example of this that comes to mind are people who use their knowledge in fitness to sell meal plans and workout programs. Simply set up a site, generate traffic and you can exchange all your knowledge and wisdom via the programs you sell.
Alternatively, you may have gone to school as a hardware technician and know computers like the back of your hand. In this case, you can build a course or write a book around how to build your own computer from scratch, which is knowledge I know a lot of people could benefit from. In short, ask yourself what skills or knowledge you possess, create a product around it then market it and when you do, you’ll be one step closer to starting to make some of that sweet passive income everyone keeps talking about!
Number 4: Building and Running A Business
I may be narrow-minded but I believe that the only way people can become wealthy in this day and age is to start their own business. Businesses are amazing vehicles of wealth because they allow you to leverage greater levels of knowledge, scale and distribution to earn revenue which is the biggest issue that people struggle with on their quest to personal financial prosperity. Now, we are blessed to live in a world where many businesses can be started with very little capital. For instance, I started my YouTube channels with roughly $100 and I would hope that you wouldn’t need to go into debt to gain access to that kind of money.
However, over time, businesses need more money to grow and depending on how profitable the business you run is, you may need to go into debt to see the growth you desire. For example, you may need to access business loans to hire more staff or acquire the equipment you need to run your operations. I don’t think that the fact that a business needs money to operate is a new concept to anyone so let’s get into how you can use debt in a business to earn passive income.
Generally speaking, most tasks that get completed in a business need to be done by someone. Most of the time, that someone is you, the business’s founder and operator however it doesn’t always have to be. I know in my own businesses, I have now outsourced many of the core functions to managers so that I can free up my time to start working on other endeavours that will allow me to increase my income further.
Now, if you don’t have cash to pay people to run your business for you, what do you do? You guessed it, you take on debt. Low-interest lines of credit can be a viable means of financing your workforce as long as your profit margins can support the interest costs that come with it.
Again, this is probably not the most beginner friendly means of making passive income with debt but it’s important to point out because you as an individual will only ever have so much personal capital to deploy and as such if you want to ignite your growth, deploying other people’s cash is often the way to go!