Last Updated on 6th March 2025
Passive income refers to an income you receive on a regular basis, with minimal effort required to maintain it. This means that a stable, ongoing passive income is one of the optimal ways to gradually improve your overall wealth – because it means your capital is earning more money in the background.
Of course, the larger the percentage return, the faster your wealth will increase, particularly when those returns are being reinvested to create more income of a continually larger value.
We’ll clarify some of the types of passive investment you may wish to consider, explore the compelling advantages of low-effort wealth accumulation, and share tips on incorporating passive investment into your portfolio.
Understanding the Value of Creating Passive Income Streams
One of the easiest ways to demonstrate the benefit of passive income sources is to showcase how a modest deposit or initial investment value might grow in just a few years. In our example, we’ll theoretically invest £1,000 a month over ten years, with a total capital investment of £120,000.
If the returns linked with those deposits were 3%, at the end of the ten years, your return would be £20,091 – a total of £140,091—and you would generate ongoing earnings of £4,202 a year. An investment with a more generous 7% return would earn a considerably higher £54,097 in returns and create income worth £12,186 per year.
As the name suggests, passive investments require minimal intervention or effort. As long as you keep the capital invested, your returns will continue to arrive as a monthly income for as long as you decide to keep the account active.
There are, though, always caveats, and we’d recommend any investor proceed only after a full portfolio review, ensuring they have a good balance of assets, investments, and products that maximise their immediate returns, contribute to their long-term investment goals, and represent a risk appetite they are comfortable with.
However, the ability to earn a passive income of a continually higher value for a potentially unlimited period makes this a simplified way to make some aspects of your wealth work harder.
Types of Passive Investments and Investment Funds to Consider
The most obvious and immediately accessible way to attract passive income is through a savings account – while noting that interest rates tend to be low, and even high-yield savings account products have a limited earning potential.
That said, there are scenarios where investing cash reserves that you need to be able to tap into to cover unexpected costs or outgoings may be best placed into a savings account with the highest available interest returns. However, those with more attractive rates usually have limitations or notice periods placed on withdrawals.
Other passive investments have average returns in excess of those offered through conventional savings accounts, some of which we’ll explore below.
Real Estate Investments and Property Funds
Property portfolios are often considered an appealing passive income stream, although that may depend on whether investors are purchasing commercial or residential property purely from a value accumulation perspective or as part of a rental property portfolio – with greater regulation and controls enforced for the latter, which may reduce the net returns achievable.
The advantage of adding real estate to your portfolio is that, in most areas, property offers fairly consistent and easily forecasted returns. When market fluctuations impact average values, these tend to course-correct fairly quickly.
Real Estate Investment Trusts, or REITs, are an alternative that bypasses the complexities of owning and managing a property portfolio or collaborating with a management firm to manage a rental property.
REITs generate passive income by collectively investing funds in property acquisitions, using shareholder capital to purchase properties that are often used as rental assets or leased business spaces. The trust then distributes income to the shareholders after deducting administrative and portfolio management costs.
While these passive investments tend to become less popular following drops in property market values, they are often more profitable in specific segments or areas, such as those with commercial space-sharing opportunities in high demand.
Index Fund and Dividend Stock Investment
Dividend stock investment involves the selection of stocks with strong growth potential and future capital gains that also provide passive income through shared dividend distributions, usually quarterly.
While picking high-quality and high-return dividend stocks can be a complex process and something we’d not advise doing without specialist guidance from an experienced investment or senior wealth adviser, the returns can be significant – without any contributions from you, aside from your shareholding.
Index funds are a similar prospect, with opportunities to benefit from compound interest, consistent returns, and stability over the long term, even when considering market fluctuations. A good level of diversification and reinvestment of dividend payouts can help to maximise the net returns made on these passive investments.
Business Ownership Investment
Finally, investors looking for passive income opportunities can consider commercial investments. They often act as behind-the-scenes investors, providing capital to enable companies to become established, expand, or achieve greater market share without any expectation of time commitments on the investor’s part.
Of course, selecting investment opportunities can be difficult. Although profit shares and dividends can be lucrative, equity investment carries a greater level of risk, especially if the capital invested is higher, the business is younger, or there is less likelihood that the organisation will achieve its long-term aspirations.
Deciding on the Right Passive Investment Approach for Your Portfolio
Every investor has different circumstances that will impact their passive investment decisions. Although we’ve summarised some of the potential options or most popular passive income-generating routes here, this is far from an exhaustive list.
You may also have other passive income ideas that make sense due to your profession, experience, or access to more niche investment options, such as peer-to-peer lending or affiliate marketing, that can build passive income over time.
If you’d like to find ways to generate income without putting pressure on your time, ensure your cash savings work harder to earn money, or transform static savings into an efficient aspect of your portfolio, please get in touch with our team at Chase Buchanan.
Our experienced investment management and wealth advisory teams can discuss your expectations, circumstances, wishes, and requirements and ensure you make clear, informed decisions about the right way forward.
*Updated March 2025