There's no fast track to passive income - our guide outlines everything you need to know about building a strong financial position with 10+ proven ways to generate money with minimal work
Updated 30 April 2023
Passive income is often misunderstood as something that doesn’t take a lot of time to create. The reality is that passive income is the product of years of taking calculated risks and decisions, sacrifices and hard work. However, once achieved, passive income can be an enormous long-term benefit. Beyond providing a constant stream of income, it can be a lifeline in times of need.
Know this:The reality is that most New Zealanders are not saving enough for their retirement. While this isn’t an issue while people are working, it has severe effects later on when paydays drop from $3,000 or $5,000+ a month after tax to $1,400 (by way of the state pension). Without any ability to earn more income, retirement can be a challenging time without passive income.
Generally, the idea of passive income is creating a flow of money that comes regardless of how much work you do.In this guide, we outline:
- What is Passive Income?
- 10 Passive Income Opportunities for Creating and Sustaining Wealth
- Bonus: Saving for Passive Income Opportunities
- Passive Income Frequently Asked Questions
Important:
- This guide does not cover income-generating activities that require an ongoing and fixed commitment of time. See our guides to side hustles, making money onlineand paid surveys for more relevant information.
- We’ve also excluded unrealistic passive income ‘opportunities’ promoted on YouTube and social media, such as ‘authoring e-books’, ‘record music’ or ‘take photos and sell them online’ as we don’t believe these are lucrative or sustainable.
- Instead, we focus on passive income opportunities that are genuine, sustainable and generate a flow of money that can improve your wealth in the long-term.
What is Passive Income?
In a nutshell, passive income is money you receive from sources outside of your employment. While the Inland Revenue Department (IRD) doesn’t define passive income, the reality is most, but not all, income is taxable. In this guide, we explore passive income opportunities such as rental income, dividends, business profit sharing and interest income from loans and investments.
Passive income is not a “get rich quick” offering – it requires work, which must be provided upfront. It also requires continuous management – i.e. your rental property must stay tenanted, your dividend-producing investment must be optimised, and your income-producing business must stay managed and staffed. Neglecting what generates passive income will, almost certainly, eventually stop the dollars flowing.
What is the difference between active income and passive income?
Active income is earned when services are performed. This includes salaries, wages and income from any activity where you regularly participate. Passive income is money you make with little to no involvement – for example, rental income, dividend payments and advertising income from a website/blog.
10 Passive Income Opportunities for Creating and Sustaining Wealth
Our list below outlines potential passive income streams, how to achieve them and the pros, cons and risks of each. Underlying every passive income opportunity is the reality that generating income takes time and hard work up front. MoneyHub’s founder, Christopher Walsh, explains:
“I set up a business with a friend in 2013 with the aim of it being a passive income business. It achieved that in 2017, but it took a lot of work, and there were highs and lows along the way. I continue to be involved, supporting staff and implementing new procedures where required. Any type of passive income requires this – the exception being investing a pile of money and living off the dividends and interest income. However, you would need about $1,000,000 to make $4,000+ a month of passive income at current term deposit interest rates”.
“The original passive income stream has helped me to invest in income-producing assets, such as managed funds, property and term deposits. The flow of money starts small, but with continued focus, sacrifices and nurturing, it can quickly grow”.
Important – the key to any stream of passive income is to diversify what you invest in. Having one rental property or $100,000 in shares in one dividend-paying company is risky – the house may become vacant, or the company may run into financial difficulties. The more diversified your investments, the more secure your long-term passive income streams will be.
| Rental incomeRental income, i.e. receiving rent money from a property you own, is one of the most popular and sustainable forms of earning passive income. However, it’s not without its risks, and many New Zealanders have lost some of their original investment chasing rental property. Passive income potential: $200 - $800+ per week, depending on the market rental income for the particular property. However, this amount excludes the ongoing costs, which even after your mortgage is paid off, are several thousands of dollars every year. This excludes any capital gains, i.e. increase in the property’s value, which can provide a tax-free, lump-sum benefit later on if you sell your rental property at a profit. How to get started: Rental property is best purchased when you have a robust plan and commit to the long-term. For example, you can buy a house in Hamilton or Christchurch for around $600,000 with a 30% deposit ($180,000) and rent it for about $400 to $600 a week. However, there’s a lot of ongoing costs involved – mortgage repayments and interest, insurance, maintenance, repairs, rental management fees, accounting fees, tax, and rates are just some of what you’ll face. Risk: Rental property is challenging – if you get a problematic tenant who pays late, damages the property or doesn’t pay at all, the sustainability of your investment is at risk. If your property is vacant for a few weeks or even months, you have all the costs without the revenue. Cost to get started: We estimate that anyone with around $100,000 in cash, or is prepared to risk taking out a first or second mortgage against their primary home, can invest in residential property. The best approach is to research the market, talk to agents and have a plan. This guide from Opes Partners provides extensive detail about purchasing a rental property to generate passive income. |
| Shares that pay high dividendsWhen a company makes a profit, it can choose to pay dividends (cash) to its investors (i.e. shareholders). Investing in profitable companies can provide a passive income stream, but there’s no guarantee a company will always pay dividends. Passive income potential: A good dividend-paying share may return around 4% after-tax, which means if you have $100,000 in dividend-generating shares, it’s about $80/week on average. Dividends are paid annually or every six months into your bank account. How to get started: Reliable New Zealand companies that routinely make profits and pay dividends include Spark, Contact Energy, Meridian Energy, Chorus, Infratil, Mercury, Ryman Healthcare, Genesis Energy and Goodman Property Trust, among others. To learn about New Zealand dividend shares, analyse what the Smartshares NZ Dividend ETFor KernelDividend Aristocrats fund invests in. Risk: The primary risk is that the share price falls in the long-term. For example, the Warehouse Group was a reliable dividend payer throughout the 2000s, but its share price has since fallen from around $4 to $2.20, meaning investors would lose 40% of their investment had they sold at the bottom. While current dividend-generating shares specialise in more robust industries such as telecommunications and electricity generation and retail, nothing is certain. Cost to get started: Thanks to platforms like Sharesies and InvestNow, investing in dividend-producing shares or ETFs is next-to-free. However, to earn a passive income of any significance, $5,000 or $10,000 is a good starting point for growing your investment. Read more: Our guide to dividend investing expands on this important wealth creator. |
| Peer to Peer lendingPeer to peer lending offers a higher interest rate alternative to leaving money in term deposits and savings accounts, but it’s not without its risks. In a nutshell, you use a peer-to-peer lending platform to lend out your money to borrowers. This will usually be from three to five-year terms, on secured or unsecured terms. Passive income potential: Around 5% to 8% p.a. (before tax, less any bad debts). If you are prepared to lend $100,000 to borrowers (and re-lend the capital you’re repaid to other borrowers), you could earn around $100 after tax. How to get started: Our guide to peer-to-peer lending explains what you need to know in detail and describes the pros and cons of Lending Crowd and Squirrel, the most active platforms in New Zealand. Risk: The primary risk is that borrower defaults on a loan you’re owed. While the platforms spread the risk among lenders (so a default won’t disproportionately affect one lender), your capital and income can always decrease. Fortunately, peer to peer platforms carefully screen the applicants to ensure only the highest-quality borrowers are funded. Cost to get started: The platforms are free to join, and fees to administer the loans are deducted from the net proceeds. Your repayments will include the capital you originally lent, so it’s not so straightforward to see the passive income. However, you can always withdraw funds at any time. |
| Invest in a high-yield term deposit or savings accountPassive income potential: With interest rates stuck at around 1%, there’s little money to be made in keeping cash deposits. That being said, a savings account or term deposits provide risk diversification and is, arguably, the ultimate passive income. A $10,000 cash deposit, however, will only pay around $2/week in passive income. How to get started: Our guide to the best term deposits, PIE term deposits, call accounts and savings accounts outline the top offers from trusted financial institutions. Risk: There’s (almost) no risk if you deposit money with a New Zealand bank. While the future can’t be predicted, to date, no New Zealand bank has gone bankrupt and lost depositors their money. However, the same cannot be said for finance companies and alternative lenders, which often offer ‘secured debentures’ or ‘first-rate deposits’ but don’t have the financial strength of a bank. In 2009, New Zealanders lost billions in finance company failures – the best way to protect a passive income stream is to choose low-risk cash-generating investments. Cost to get started: Most term deposits require around a $500 or $1,000 minimum deposit, but savings accounts do not. As mentioned above, with record low-interest rates, you’ll need about $500,000 in cash to earn around $100/week in passive income from term deposits. For this reason, the earning potential for most people is low. |
| Income-producing Managed Funds that Pay Out in CashMany managed funds accumulate dividends and buy more units, but others give you the option of either having distributions paid as cash into your bank account or reinvested. By taking the bank account option, managed funds can provide both capital growth and passive income opportunities. This extensive list of fundsoutlines what funds offer passive income, and how frequently you’ll receive it. Passive income potential: Every fund is different, but 2% to 4% of your original investment is a reasonable range for passive income generation. How to get started: InvestNow has New Zealand’s most extensive range of managed funds which offer cash distributions, so it makes a good starting point. With the minimum investment fixed at $250, InvestNow avoids the larger thresholds set by the funds if you went directly. The Booster Private Land and Property Fund is another example of an income-producing fund that pays out returns in cash. Our guide to managed funds lists popular options. Risk: As with anything underpinned by the performance of the sharemarket, your original investment can fall if the share price drops. Cost to get started: As little as $250, although to enjoy any decent amount of passive income, $50,000 is a popular starting point. However, regularly investing small amounts is better than nothing, and every dollar invested will, in the long-term, enhance your financial freedom. |
| Rent out a room in your houseDespite record-high housing costs, many New Zealanders don’t want to compromise on their lifestyle by opening up their home to strangers. However, renting out a spare room (or two, or three) is tax-free and can seriously boost your finances. If you’re prepared to share the fridge, TV remote and bathroom, there’s a lot of upsides. Passive income potential: $100+ per room per week. While your power bills will incrementally increase, there are minimal costs otherwise. How to get started: Think about whether or not you’re willing to share your home. If you think you can do it, listing on Trade Me Property is an excellent place to start. If you prefer to offer a room on your terms, renting a room using Airbnb for one-off stays may be more suitable. Risk: There is a risk of non-payment and damage, but your bond or Airbnb’s insurance will usually cover this. The Tenancy Services New Zealand guidehas more details. |
| Start a BusinessIt’s risky; you have to be dedicated and willing to work hard, but starting your own business has the potential to provide a long-term passive income if you can outsource its operation while retaining ownership. Businesses, where this is most likely to succeed, include professional services, consumer products and website design services. Passive income potential: It’s impossible to estimate, but a stable business can generate over $10,000 a month in dividends or drawings for a silent (or inactive) shareholder if managed correctly. How to get started: Look for arealproblem to solve – this almost always is the safest way to start a business. Many ‘problems’ aren’t significant, so building a business around a solution will be like laying bricks on sand. Our guide to starting a business has more details. Risk: Significant. Most new businesses fail, and if you leave a safe job to start your venture, you’re sacrificing a stable income. If you take on debt to launch, there’s added risk. Cost to get started: You can set up a business for as little as $50. While this won’t get you a restaurant, café or business with a fixed location, you can do a lot with very little. MoneyHub founder Christopher Walsh explains his experience: "Revenue came quite late to the business because my focus was user growth, but I’m confident anyone motivated with the right product or service could quickly turn a $500 investment into a sustainable business. Once there’s enough traction, you can hire people and train them to take over the day to day operations. The passive income streams once you’re comfortable with trusting others to run the business”. |
| Advertise on your carThis is for anyone willing to earn passive income at the expense of their car’s appearance. In 2014 an agency offering to place adverts on cars launched in New Zealandand it appears to still be active. How to get started: Google services offering advert placements and see if you qualify; this companyis one example. Risk: No risk; the concept is passive income in its purest form. Cost to get started: None |
| Start a websiteNew Zealand has a small population, so the chances of making a significant passive income from running a website is low. Despite that, if you build enough of a following, then there is money to be made. ‘Influencing’ in any form is as far from passive income as you can get, so don’t the two confused. Starting a website is a long-term commitment, and there are no shortcuts. Passive income potential: As a general rule, you’ll need to attract around 1,000 people a day to make approximately $10 if your model is advertising. How to get started: Website builders are the best place to start - Squarespace and Weebly keep costs down and allow you to build a website very quickly. Risk: If the website doesn’t gain traffic, then it will be hard to generate any passive income. Cost to get started: $50 for a domain name and a couple of months of website hosting is all you need to create a website. |
| KiwiSaverKiwiSaver’s passive income potential is often unknown, but its benefits are significant. Firstly, the government will contribute around $500 a year into your fund if you’re an active contributor. Secondly, your employer is legally obliged to contribute 3% of your gross income. The only downside is that all of this passive income can’t be used until you either buy a home or retire. Passive income potential: If you earn $50,000 a year, your employer and government contributions add up to $2,000+ a year. Over thirty years, that adds up to over $30,000 (and this is before the growth of the fund). How to get started: If you’re not a KiwiSaver member, or you’ve currently suspended your payments, you may want to revisit your situation. Our guide to our favourite KiwiSaver funds has some helpful ideas about what to invest in. Risk: The fund you invest in may drop in value, but, in the long-run, KiwiSaver funds are designed to increase in value. Best of all, the only cost to being in KiwiSaver is the 3% contribution you make from your gross income. Cost to get started: Nothing – some funds charge an annual membership fee, but this will seldom be more than $30. You’ll pay yearly fund fee, usually a percentage of your investment balance. |
Bonus Tip: Make sure your credit cards and everyday expenses are optimised
Beyond our passive income ideas, there are plenty of ways to save money which can help you have more cash flow on a weekly basis. Our top three ideas are listed below:
- Cashback and rewards on credit cards: Many people have the wrong credit card, either by paying too much in card fees and interest, or not receiving the right rewards. Our guide to cashback cardsexplains how some cards return around 70 cents for every $100 spent. Better than that, Air New Zealand-linked credit cards offer 1 to 1.80 Airpoints Dollars per $100 spent, which can be as useful as cash if you fly often.
- Save money on everyday household bills: The best way to have more money to invest in passive income-generating assets is to cut down on daily expenses. This involves comparing insurance and switching, cancelling unused subscriptions and cutting down on wastage. Our dedicated guide has 20+ ideas that are easy to action.
- Rent out a holiday home:COVID-19 allowed New Zealanders to discover what’s around the country. If you have a holiday home, you can rent it out effortlessly on websites like Airbnb.
Passive Income Frequently Asked Questions
How many streams of passive income should you have?
There’s no optimal number, but the more you have, the more robust your passive income will be for the long term. This diversifies your risk and lets you sell or dispose of assets (i.e. spending a term deposit or selling a rental property) without a significant hit to your total passive income.
How much passive income can someone earn in New Zealand?
There is no limit, but everything takes time and commitment. There is no short cut to passive income; you have to build the foundations firmly and look at the long-term. Some people can make a living from a single stream of passive income, but this is rare. In most cases, those relying on passive income have multiple streams.
Earning $1,000 a week is a great goal to have, but you’ll need to own an investment property mortgage-free, have dividend-earning shares and/or managed funds, as well as cash in the bank earning interest. For most people, passive income will be a few hundred dollars a week at best.
How do you create passive income with no money?
Passive income generation traditionally relies on having money to invest or allocate from day one. If you don’t, the best way to work towards passive income is to start a business with a long-term goal of outsourcing the management.
How is passive income taxed?
It depends on the income; dividend income is taxed at source; rental income needs to be declared while payment from boarders is generally tax-free. Every source has a different treatment; this guide from the IRD explains more.
Is rental income passive income?
Yes – we are of the view that rental income is passive income, especially when a property becomes mortgage-free. This is because your asset, the property, generates income without you having to actively work. If you have a property manager looking after your investment (choosing tenants, collecting rent and organising repairs and maintenance), the money generated is passive income.
Related guides
- Best Term Deposits
- Mortgage Calculator
- How to Start a Business in New Zealand
- Make Money Online
- Compound Interest Explained
