Building Wealth Through Passive Income: The 4 Most Reliable Sources

Passive income is when you make more money with less direct effort – who doesn’t want that? In 2024, there are more ways than ever to build passive income streams, providing numerous attractive benefits. Passive income used to be the domain of ultra high net worth individuals (UHNWIs), but it is now doable for almost everyone.

Options range from the quirky, like renting out baby gear or buying and selling domain names, to the completely legitimate and time-tested, like real estate. We are here to walk you through the top five most reliable sources for generating passive income.

There is nothing wrong with more variable sources like building digital assets, such as starting an Etsy shop or a podcast, even though those markets are oversaturated and hard to break into. But the opportunities we are presenting below are reliable and not reliant on building an audience or customer base.

“If you don’t find a way to make money while you sleep, you will work until you die.” — Warren Buffett

1. Private Debt

Private debt refers to loans made by non-bank entities to firms and is often used to finance buyouts, new property, or new capital. Firms turn to such entities because they can obtain better loan conditions and expertise, and it’s also cheaper for the company than releasing a new stake of equity.

The private debt market has skyrocketed over the past decade, from USD 250 billion in 2010 to USD 1.4 trillion as of December 2022. Growing uncertainty over economic conditions has also given it a recent boost. According to Preqin, a record amount of private debt capital was raised in 2022 – USD 226 billion. This amount was reached with approximately 30% fewer funds, indicating investors were using more discernment with their allocations while making larger commitments.

There is a simple explanation for the growth of private debt. The Becker Friedman Institute (BFI) for Economics suggests that “Like water, financing tends toward the path of least resistance. Likewise, when regulations are erected to restrict or otherwise guide the flow of financing, money often finds its way through more amenable pathways.”

Globally, it is a time of uncertainty. And for those seeking reliable passive income streams, private debt is an excellent option for diversifying portfolios. For starters, it sits higher than other alternatives like private equity, in the capital structure, has a low correlation to the public markets, and is also a viable alternative to traditional fixed-income investments.

Private debt has quite impressive returns compared to publicly traded bonds, which is the exact reason that sets it apart and keeps it ahead of the game in terms of generating passive income.

Along with its impressive returns, coupons on private debt are paid monthly or quarterly in contrast to traditional bonds, which pay their coupons semiannually or annually. This gives private debt an additional advantage for those looking for passive income sources. And, as we all know, the frequency of coupon payments can impact an investor's ability to further grow their wealth by reinvesting those payments and benefit from compounded interest.

And now, the democratization of access to such highly profitable investment opportunities enables more individuals to participate from as low as CHF 10’000 while earning impressive returns of 6-15% p.a.

2. Dividend Stocks

Dividend stocks are a straightforward way for investors to generate passive income. When public companies generate profits, a portion of that is given back to investors in the form of dividends. Investors then have the option of pocketing the cash or reinvesting the money for additional shares.

Dividend yields can vary significantly. These are dependent on the amount you invest, the company you invest in, and economic conditions to name a few. The performance will fluctuate from year to year.

If you’re an investor unsure of where to start with dividend-paying stocks, stick to so-called dividend aristocrats. Any stock with this label means the company has consistently paid annual dividends for at least 25 years. This can also mean they increase the size of their payout. As you might imagine, dividend aristocrat stocks are somewhat rare, but you can research them and turn them into reliable sources of passive income.

3. Asset Sharing

Let's now turn to asset sharing – the only true non-investment option on our list.

This method takes advantage of what you already own; you can generate income from your assets by renting them out to others. It is low-cost, provided you already own the assets. It is also a growing market thanks to the development of facilitating web platforms like Airbnb and Turo. The downside, as you might expect, is that you probably won’t make much money with this method.

Examples of what you can lease out include land, tools, parking spaces, cars, and even bikes (Spinlister). Instead of letting your gear collect dust, you can use it to collect money!

Asset sharing is an easy way to use your resources and make extra (albeit rather limited) income while perhaps saving towards one of these other higher-return alternatives.

4. Real Estate

Rental properties are the first of three different real estate-based passive income streams we will now look at.

Generally, when people talk about real estate, most probably think of rental properties. We have included it on this list, even though it is not always that passive.

Rental properties usually require a large amount of capital upfront, and then there are high overhead costs to manage these. You can either go the commercial route, renting to businesses, or the residential rental route, renting to families or individuals. Both options require repair and maintenance and, as mentioned previously, can cost significant time and money.

How can you get around the headache and upfront cost of managing rental properties? There are 2 options available:

1) REITs

REITs, although not issued in Switzerland, might be an excellent course to take, being traded on stock exchanges around the world. Similar to mutual funds but with a pure real estate focus, REITs are funds that own, operate or finance commercial real estate. This includes office buildings, factories, storage facilities, shopping malls, and hotels.

REITs are truly passive. You do not actually manage or operate the properties yourself, thereby saving you time and unexpected direct costs. REITs can vary in complexity and accessibility. For new investors, it might be best to go for publicly-traded REITs, which you can purchase through an online broker.

However, publicly-traded REITs had their worst year in 2022 since 2008, with the FTSE All Equity REIT finishing 2022 at -24.95%. Of course, they were not alone in their poor performance, with the entire market struggling due to the uncertainty surrounding the possible upcoming recession. Yet many real estate fund managers are bullish on REITs heading into 2023, believing that the recession has already priced into REIT stocks, meaning these are well-positioned for a comeback.

Comparison of REITs vs stock and bond markets performance
Source: Nareit

2) Real estate business

This is something similar to direct ownership, except that investors are buying a share in a limited liability company (specifically set up to invest in real estate) or a project curated by that company. This presents a way for you to lessen legal liability, diminish property upkeep tasks, avoid dealing with troublesome tenants, and so more on.

Le Bijou is one of these options. Its operational model uses tech-enabled real estate to address the problems of vacancies, significant upfront capital, and high overhead costs.

You can explore three of their active offerings below:

Lucerne Portfolio - Switzerland's tourist hotspot; this portfolio benefits from all of Le Bijou’s perks, like diversified revenue, no rental caps, and an “inflation-ready” business model.
Zurich Portfolio - This portfolio already includes operational locations like Bahnhofstrasse 18, Lintheschergasse 23, Limmatquai 80, etc. It has a strong track record netting close to 12% ROI per year and the portfolio is growing. For reference, Switzerland’s performance benchmark is around 3-4% (net).
Schauplatzgasse 22, 3011 Bern - A development project connecting the main train station with the Swiss government. The top floors will be used as an apartment hotel while the ground floor will be operated as a high-end coworking space.

Conclusion

There are many good options for generating passive income. This includes private debt, dividend stocks, asset sharing, and real estate. Evaluate your particular circumstances and make your decision based on your personal goals, whether that be building wealth, lowering your portfolio’s risk by diversifying, or something else. But remember, “You can only be financially free when your passive income exceeds your expenses” – T. Harv Eker.