The quickest way to start making passive income today is by investing. Contrary to popular belief, it doesn’t take a ton of money to do it. In this blog, I’m going to share with you five ways to invest $1,000 so that you can start collecting dividends, profits, and interest in your sleep. Building a passive income stream takes one of two things; it takes time or it takes money. Frankly, the second option is a lot easier than the first and you can get started with as little as $1,000.

Passive Income = True Freedom

Today I want to talk to you about passive income. Passive income is true freedom. It’s everybody’s dream. In fact, it’s the one thing that differentiates wealthy people from non-wealthy people. I first started realizing the importance of passive income in my mid-twenties when I wanted to leave my job at the time, and I thought how great it would be if I could just quit my job but still collect a paycheck. I know, as if, right? That’s the thing with income that you actively have to earn such as a paycheck when you stop working, the money stops coming in. There’s just no way around it.

That’s why over the last few years I’ve been very passionate about building passive income streams, everything from starting a business to real estate, to options trading, to investing. What I’m realizing is that there is no such thing as an easy way to earn passive income. If you ever see an ad where someone’s trying to sell you on some magical program that’s going to teach you how to make $10,000 of passive income with no money and no effort, it’s a total scam. You know that’s not how life works, otherwise, everybody would be doing it.

You either have to put in your time or you have to put in your money. If you put in your time, you could maybe start a business or start a YouTube channel and these are all things that could turn into huge passive income streams, but I guarantee you’ll have to put a ton of time into it. The quickest way to start making passive income today is by investing. Contrary to popular belief, it doesn’t take a ton of money to do it.

REITs

The first way to start making passive income with $1,000 is to invest it in a REIT, or a real estate investment trust. When you buy a REIT, you become a shareholder of a company that owns income-producing real estate. A REIT is basically a stock but it’s stuck in a company whose business is specifically owning and operating real estate. REITs are legally required to pay out 90% of its income to you in the form of shareholder dividends. Because the value of real estate also tends to go up over time, owning a REIT can give you a nice combination of passive income and long-term capital appreciation. Compared to making a down payment and buying a property, investing in a REIT is a much less capital intensive way to own real estate.

There are many REITs out there that you can buy at less than $1,000. For example, SPG, Simon Property Group, is one very well-known REIT that owns shopping malls and retail property throughout the United States. If you look it up on Google, you can see that SPG right now pays a dividend yield of 5.82%. That means that if you buy $1,000 worth of SPG right now, you’ll get $58.20 deposited to your account every year.

In reality, dividends are actually paid quarterly, usually, so you’ll get 58.20 divided over four quarters, which is about $14.55 every three months. Now, I know that $58.20 of passive income a year isn’t exactly life-changing, but you have to keep in mind that the vast majority of people don’t make any passive income at all, like not even a single cent. I don’t know about you, but $58.20 is a lot better than zero passive income.

Back when I bought my first stock ever as a teenager, I had no idea what I was doing, but getting my first dividend payment was a really powerful experience. I’m pretty sure it was just a couple of cents but still,getting your first dividend payment is a feeling that you never forget. Once you make passive income a part of your identity, no matter how small that first payment is, you can always increase the amount that you invest and just keep growing your dividend streams from there. That being said, there is one passive income investment I want to tell you about where I made my $1,000 back in just one month and continue to make passive income off of that. Stay tuned for that story because it’s coming up soon.

Municipal Bond Funds

Okay. The next passive income investment idea that I have for you is to invest in a municipal bond fund. First of all, what is a municipal bond? Municipal bonds are loans that you make to local governments in order to help them fund public projects like building new schools, hospitals and highways. What’s awesome about municipal bonds is that they’re generally quite safe because it’s a bond and bonds are known to be safer than stocks, and they are tax-free. That means that any interest payments you receive as a municipal bond investor is going to be 100% free of federal taxes. If you’re a resident of the state that issues the bond that you bought, it’s also going to be free of state and city taxes.

If you live in an expensive city like New York City, where federal, state and city taxes combined can go as high as 40% total, municipal bonds is a pretty sweet deal. To invest in municipal bonds, you can buy them individually or you can buy a bunch of them packaged together as a municipal bond fund. I like the bond fund option better because if you get unlucky and you pick the wrong bond, if you were to go the individual bond route, then there’s always a risk that the borrower won’t be able to pay you back. Investing in a municipal bond fund eliminates this risk because your investment will be diversified across many different borrowers.

If you live in NYC, one municipal bond fund that pays a nice yield is the BlackRock New York Municipal Opps Fund, or MANKX. At the moment this fund yields 1.73%. That doesn’t sound like a lot, but this is 1.73% of tax-free income. That means that if your total tax rate is 40%, you would need to find investments that yield at least 2.8% to get the same after-tax income as this New York City municipal bond fund. So, if you’re looking for a super safe way to make passive income with $1,000, investing in municipal bond funds can put up to $17.30 of tax-free income in your pocket every year, or at least that’s the case with this bond fund.

Dividend Stocks

The third way to start investing for passive income with $1,000 is to buy dividend stocks. This is going to probably yield a little more passive income than the previous municipal bond fund option, but of course, buying dividends stocks come with their pros and cons. One example of a dividend stock right now is Macy’s, which at the moment pays a dividend yield of 9.95%. That’s almost 10%, pretty high. That means that with $1,000 worth of Macy’s stock, you can collect almost a hundred dollars in dividends just for owning that stock. Of course the catch is that there’s always investment risk with dividend stocks. Unlike bonds, where you’re collecting interest and then you’re essentially contractually guaranteed the return of your principal back, with dividend stocks you’ll get those dividends, but if the company goes bankrupt or just goes under, you’re not going to get your original investment back.

There’s a lot of companies out there that pay quarterly dividends. On the outside they give the appearance of being financially stable, but if you dig a little deeper into their books, you may find that the company’s actually struggling. Sometimes companies like these would be better off not paying dividends at all and instead reinvesting it back into the business. I looked into Macy’s a little bit to see what’s going on there and just with a quick glance, I can tell that even though they’re paying a high dividend at almost 10% dividend yield, I can tell that this company’s in trouble. Over the last few years, you can see that Macy’s revenue has been declining steadily, so it’s a downward trend. Normally that’s not a problem in and of itself because the company can always also reduce its expenses.

If declining revenue is accompanied with declining expenses, then the company essentially remains in the same position as before, profit-wise. But what we can see here is that Macy’s operating margin, in other words its profit margin, has also been steadily declining. What this tells me is that Macy’s revenue is going down but its expenses are not going down, they’re staying constant. After doing a little digging I realized that Macy’s is locked into a lot of longterm leases at those major shopping mall locations, they’re basically locked into high fixed costs even though their sales are falling.

It doesn’t take a genius to realize that that is going to be a problem. That just goes to show Macy’s is an example of a high dividend stock that isn’t necessarily a good idea to invest in, because if the company’s in trouble, you’ll get the dividends, but again, you might not get your principal back. While I love dividend stocks, I don’t recommend buying stocks just to get its dividend. You should always do your own research on the company to make sure that it has good financials and that it’s actually a good stock to own.

For example, Apple is a company that pays a really good dividend and it’s quarterly and, according to Warren buffet because it’s the top holding in his portfolio, seems like a good stock to own. If you’re going the dividend stock route, you always want to buy quality stocks that also pay a good dividend. Of course, looking for good stocks can be a lot of work and that is why this next passive income investment idea that I have for you might be a more attractive option.

Index Funds

My next idea for you is to invest in index funds. The whole point of an index fund is to not have to do any of that work of researching individual companies like we were talking about with Macy’s, and you don’t have to look at financial statements. If you’re a beginner at investing, owning index funds is a safer way to collect dividends than owning individual stocks. I’ve been investing in index funds for a couple of years now and there is nothing that I love more than seeing those dividend payments roll in. What’s cool about this is that I set it up so that my dividends get reinvested automatically. Rather than spending my dividends, even though it is passive income, I keep it all in my brokerage account and then I just use those dividends to buy more shares of the index funds.

This means that every month my dividend payments get bigger and bigger, even though I’m not putting any additional money in, because I’m accumulating more and more shares of my investments through dividend reinvestment. Right now, an S&P 500 Index fund yields about 1.76% in dividends. That means that on a $1,000 investment, you’ll make $17.60 per year in passive income. Again, that isn’t a life changing amount of money, but it’s still $17.60 that you didn’t lift a finger to earn. It’s money that gets deposited to your account even if you sleep in till noon every day. And also, you have to remember that when you invest in a good stock market index fund, you’ll also get longterm capital appreciation. Longterm growth is the number one reason I invest in index funds and to me the passive income, in other words the dividends, is really just the cherry on top.

Airbnb

Okay. Last but not least, the fifth $1,000 passive income investment idea I have for you is to Airbnb your bedroom, or your apartment. This is the $1,000 investment that I mentioned earlier where I made back my $1,000 in just one month. Back when I was living in New York City, I was living in a really nice, big, two bedroom apartment with a roommate. We had a huge living room that neither of us ever used. What we did was we hired a company to put up a temporary wall to turn that living room into an extra bedroom. The wall costs $980 to install. We got some free, used furniture from a friend. With less than a $1,000 investment we had this cute little room up and running to advertise on Airbnb.

We had a good location in Brooklyn, so we started getting bookings immediately and then we made back the $1,000 in the first month. Over the course of the next two years we made over $20,000 from that Airbnb. Now running an Airbnb isn’t entirely passive, but once I got the system down, it only took about an hour or so of my time per week. That’s about as passive as it gets. I had a bunch of standard host responses that I would just copy and paste when guests messaged me with questions. Since we were already living in the apartment and the Airbnb was just an extra bedroom, whenever we did cleaning and laundry for the Airbnb, it was really just a part of our regular household chores, stuff that we would do anyway. Running an Airbnb out of your house is actually a really low cost, easy way to become a landlord, and then you start making that passive rental income.

Okay, so that’s it for my five passive income investment ideas that you can start with $1,000 or less. Let me know in the comments which of these you’re going to try, or if you have any other ideas, I’d love to hear them as well. Thank you so much for watching and I’ll see you next week. Same time, same place! Remember to invest early and often, and to boldly and courageously go after the life that you want. I’ll talk to you again soon.