Passive income is a type of income that requires little or no effort to maintain.J Studios/iStockPhoto / Getty Images
Shan Lodhi has unclogged toilets, fixed leaks and evicted a squirrel from the attic of the rental property he owns. And while collecting rent is one of his passive income streams, he describes the reality as “anything but passive.”
Mr. Lodhi, a Toronto financial services professional in his 30s, sees passive income as a key part of his financial plan, particularly as a buffer against economic downturns.
But he estimates it’s less than 10 per cent of his total income, and it’s not money that he spends. “Right now it’s just something I’m using to generate additional income, and it’s going back into growing my pot of investments.”
Passive income is a type of income that requires little or no effort to maintain, such as investment or rental income. And while generating it is hardly a new idea in the personal finance world, it’s particularly in vogue, partly stoked by social-media “finfluencers” for a subset of millennial and Gen-Z Canadians trying to get ahead in an economy that increasingly feels stacked against them.
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“A lot of where that drive comes from is definitely the cost of living going up, from what I see in my business day to day,” says Cody Weber, a certified financial planner with Basic Financial Services in St. Catharines, Ont.
Mr. Weber, 29, says passive income comes up in “100 per cent” of his conversations with young clients, and he’s also generating his own income streams to make him financially resilient to future downturns.
“People feeling like they’ll never get ahead, never buy a home, so they’re moving to passive income streams to try to make a better life for themselves, buy that house or go on those trips.”
But financial advisers and passive income proponents say that those hoping for a shortcut to wealth generation may find themselves disappointed: There’s a whole lot of active work, time and investment that goes into creating passive income.
According to data from TikTok, more than 3 million videos have been posted using the hashtag #passiveincome, 74,000 of which were posted by Canadian users in the past 12 months. Forty-four per cent of viewers were between 18 and 24, 26 per cent were between 25 and 34, and 30 per cent were 35 and older. The hashtag #sidehustle also has a total 4.7 million posts.
There are plenty of low-effort ways to start building a foundation for passive income, such as opening a high-interest savings account or a chequing account that pays interest on the balance, or investing in dividend-paying stocks. Dividends, Mr. Lodhi said, have the additional benefit of being taxed preferentially in some cases.
Mr. Lodhi said he’s also invested in high-interest savings account ETFs, or exchange-traded funds, which trade on the market and earn money by investing in a number of high-interest savings accounts and paying the earned interest to investors.
In the past, he’s also engaged in leveraged investing through a margin account, a sophisticated and risky investment strategy that involves borrowing money to purchase stocks or other securities with the goal of generating outsized returns. Canada’s tax rules also allow investors to deduct the interest paid on their loan from their annual income.
Zainab Williams, certified financial planner and founder of Elleverity Wealth Management in Milton, Ont., noted that these types of investments will pay off, but likely on a much longer time horizon if someone is starting from scratch or with a small amount to invest.
As an example, young people who come to her educational seminars often ask her about how to earn $1,000 a month in investment income. If those earnings came from an average 5-per-cent dividend yield, Ms. Williams said, the person would need to have invested roughly $240,000 into the market.
“Getting to [that point], you have to work hard to save up all that money. You have to be dedicated enough to invest diligently, reinvest your dividends, to snowball to $240,000,” she said.
Another form of passive income can come from developing a side hustle or freelance business, said Lin Sok, a Montreal-based independent financial security adviser.
She has numerous clients who work in online industries, such as website designers or social-media content creators, who are generating passive income through affiliate marketing or paid residual advertising.
Mr. Weber is in the midst of building his own side hustle. He’s currently developing a YouTube channel and blog focused on financial education content that he hopes will eventually generate advertising revenue, and is also building an online course on retirement planning.
Buying and renting property is likely at least temporarily out of reach for many because of the large upfront costs, which include not just the purchase costs but potentially renovation expenses.
Mr. Weber was able to get into the rental income market by getting creative in purchasing properties. He bought his first property with a friend, which they now rent out. He bought his second with his cousin and her husband; they live in the home’s top floor unit, he lives in a basement, and they have a tenant on the main floor.
He estimates he spent about a year converting each home into apartments and finding tenants before he was able to earn any income.
Despite the solid income stream, not everyone is suited to be a landlord, he said.
“If you’re not passionate about it, a lot of people will fall off. They’ll say, ‘You know what? I did it, it wasn’t for me.’”
