How to Generate Passive Income (10 Simple and Effective Ways)

10 Ways to Make Passive Income 10 Ways to Make Passive Income

Want to find out how to generate passive income? 

Then you’ve come to the right place. 

In this post, you will learn about 10 simple and effective ways you can start making passive income today in the UK. 

But that’s not all, you will also learn about: 

  • How to generate passive income with no initial funds 
  • The best passive income ideas 2021 UK 
  • Beginner passive income ideas 
  • Passive income UK defined 

And more! 

For each of the 10 methods listed, you will see a rating out of five assessing the effectiveness of each strategy. This rating is intended as guidance only, and should not be considered advice specific to your needs. 

This will help you know exactly what you’re getting yourself into. 

So, let’s get started!

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    10 Ways to Generate Passive Income 

    Invest in real estate
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    1. Invest in real estate

    Buy stocks on the stock market
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    2. Buy stocks on the stock market

    Try Index Funds
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    3. Try Index Funds

    How Much Stamp Duty Do I Need to Pay?
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    4. Invest in a Real Estate Investment Trust

    When Do I Pay Stamp Duty Tax and How Do I Do It?
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    5. Start peer to peer lending

    Rent out a room on Airbnb
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    6. Rent out a room on Airbnb

    Earn interest on savings
    View More

    7. Earn interest on savings

    Try Robo-investing
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    8. Try Robo-investing

    Use cashback reward websites
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    9. Use cashback reward websites

    Switch bank accounts
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    10. Switch bank accounts

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    What Is Passive Income What Is Passive Income

    What Is Passive Income? 

    So, what is passive income, and how do you define passive income? 

    Passive income is money you generate without directly working for it.

    This could mean putting in the time to write a book and earn royalties or buy a property and earn rent.  

    For the sake of simplicity, we will not be including any methods on this list that require a huge time investment. 

    While other lists on the internet will include methods like writing a book, starting a business, or making YouTube videos, these strategies are simply ineffective in generating passive income as they require a huge time investment at the start. 

    This is why all methods on this list will be simple to do, and will require very little time investment, but may require some finances to get the ball rolling. 

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    Invest in Real Estate Invest in Real Estate

    1. Invest in Real Estate 

    Financial Investment:   ★ ★ ★ ★ ★

    Return Potential:  ★ ★ ★ ★ ★

    One of our first passive income examples and one of the best forms of creating passive income is investing in real estate. 

    Real estate investment, otherwise known as property investment or buy to let investment, is the process of buying a property to rent to tenants. 

    As a form of generating passive income, real estate is incredibly ideal as it can give investors monthly passive income through rent. 

    Better yet, rental property is subject to capital appreciation, which means its value increases over time. 

    UK Property Prices Since Lockdown UK Property Prices Since Lockdown


    This will allow investors to sell the property further down the line for a sizeable cash pay-out. 

    In 2021, real estate is one of the best investments you can make. 

    This is for two reasons. 

    1. Capital appreciation is soaring with property prices set to rise nationally by 21.5% by 2025. 
    2. The average UK rent is the highest it has ever been – over £1,029 per month according to HomeLet. 

    Another important factor is that real estate can also be completely passive. 

    You can do this by hiring a property management company, which will handle all landlord duties for you. 

    Perhaps the biggest stumbling block for many will be the entry point. 

    After a record-breaking two years, property prices are now £265,688 on average, according to the Land Registry. 

    However, you can get property for far below this price, especially if use the services of a property investment company or buy off-plan property. 

    Using these methods, you can start investing from as low as £34k. 

    This means whether you have £50k to spare or want to know how to invest 500k, real estate is an excellent option to consider. 

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    Why Invest in Real Estate? 

    So, why is passive income from rental property so ideal? 

    Well, rent is one of the more truly passive forms of passive income you can get.  

    By investing some cash, you can quite simply sit back and relax while you earn monthly income for no work. 

    You can earn thousands each year on a single property, and if you buy more than one, you can double and even triple this income. 

    A significant number of millionaires often own multiple pieces of real estate to earn passive income.  

    The reality is, if you own enough properties, you could replace your primary sources of income with property investment. 

    Pros of Income From Rental Property

    • Easy to understand.
    • Massive capital growth predicted for the future.
    • Cam earn two forms of returns through rent and capital appreciation.
    • Can be completely hands-off if you hire a property management company.
    • Performs strongly in times of uncertainty.

    Cons of Income From Rental Property

    • More of a long-term strategy to allow the property to rise in value.
    • May lose out on income during void periods (not earning rent if home is vacant).
    Buy Stocks on the Stock Market Buy Stocks on the Stock Market


    2. Buy Stocks on the Stock Market 

    Financial Investment:  ★ ★ ★ ★ ★

    Return Potential:  ★ ★ ★ ★ ★

    One of the biggest creators of millionaires, the stock market is an unquestionable asset worth considering if you want to know how to generate passive income. 

    The ultimate high risk/ high reward passive income strategy, buying stocks can make you filthy rich one day and cause you to lose it all the next. 

    Stocks, sometimes known as equities, allow investors to purchase fractions of a company.  

    You can buy multiple stocks in a company which will then increase your overall income via dividends. 

    For passive income, there are few things better at generating money than stocks and shares.  

    How and Why You Should Invest in Stocks 

    There’s a tonne of tools helping you get on the stock market in the modern day.  

    With several easy-to-use investment apps like Robinhood, Acorns, and Round, there’s an app for every skill level allowing you to get started in the stock world. 

    Perhaps the best route for creating passive income is by investing in high-dividend stocks. 

    By investing in several high dividend stocks, you can make substantial passive gains every year. 

    Like property, you can make two types of income here, too, through both dividends and capital gains. 

    It can be complicated, though, as you will need a brokerage account to purchase and sell the dividend stocks, with research being paramount to identify the best stocks worthy of investment. 

    And that is perhaps the biggest stumbling block for stocks and shares – it can be difficult. 

    For every success story in the stock market, there are a million failures. That’s because it is tough to predict when stocks will rise and fall and when it’s the right time to sell. 

    Stocks are notoriously tricky to predict because they constantly and consistently fluctuate.  

    While property prices change slightly per month, stocks change heavily per minute, making it impossible to know what’s next. 

    This is why, in the battle of investing in rental property vs stocks, many opt for buy to let property as the ultimate investment choice. 

    If you want a passive income strategy with as little risk as possible, the stock market is unlikely the best choice for you.  

    However, if you have some money to spare and feel confident, this could be the best way to generate passive income. 


    • Flexible and liquid asset so can leave investment at any time.
    • Two forms of returns with dividends and capital appreciation.
    • Can earn huge capital growth returns.


    • Incredibly volatile.
    • Difficult to identify the right stock to invest in.
    • Will need to monitor the stock market to maximise success potential.
    Try Index Funds Try Index Funds

    3. Try Index Funds 

    Financial Investment:  ★ ★ ★ ☆ ☆

    Return Potential:  ★ ★ ★ ☆ ☆

    Another type of stock, Index funds are a more passive version of the millionaire maker without the hassle of consistently monitoring stocks. 

    In layman’s terms, an index fund is a collection of stocks that mirrors the stock market’s overall performance in a particular sector, such as energy, banking, and emerging markets. 

    It mirrors this performance through what are known as indexes.  

    Indexes monitor the health and performance of a market. They do this by monitoring a set number of prominent company stocks as a representative of the entire sector. 

    Examples of index funds include: 

    • American Vanguard 500 Index Fund – tracks the S&P 500. 
    • iShares Core FTSE 100 UCITS ETF – tracks the FTSE 100. 
    • Russell 2000 
    • Bloomberg Barclays US Aggregate Bond Index 

    In theory, index funds are ideal as you are essentially investing in a market rather than an individual company.  

    While companies rise and fall consistently, the market typically outperforms a single investment in the long run. 

    Warren Buffet is a big fan of index funds and has argued it’s one of the better investment forms for those retirement planning. 

    So, what are the benefits? 

    Fundamentally, index funds are easier to get started with, cheaper to purchase than normal stocks, and incur fewer fees than actively managed funds. 

    You won’t have to choose specific stocks, when to sell and buy company stocks, or rebalance your portfolio.  

    Instead, you can just sit and back and relax and let the stocks earn you passive income. 


    • Lower risk than normal stocks as investing in a market rather than a company.
    • Lower entry fees than normal stocks.


    • Not flexible as can’t choose what companies to invest in.
    • Less chance of earning big gains compared to managed funds.

    Should You Invest in Stocks or Real Estate? Find Out in Our Beginners Guide for 2021 

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    Invest in Real Estate Invest in Real Estate

    4. Invest in a Real Estate Investments Trust 

    Financial Investment:  ★ ★ ★ ☆ ☆

    Return Potential:  ★ ★ ★ ☆ ☆

    Blending the world of real estate and the stock market, REITs are a fantastic way of investing in property without the required fees and knowledge. 

    A real estate investment trust is a company that owns rental properties on behalf of the shareholders.  

    Private investors contribute finances to the company, which is then pooled into a fund used to purchase a property. 

    Investors then earn money through dividends.  

    Trusts must give out around 90% of the rental income earned to shareholders each year, meaning plenty of cash will be circulated amongst investors for an excellent passive income stream. 

    Like investing in regular stocks, REITs are a great way of generating passive income.  

    However, they perform like any other company listed on the stock market, meaning share prices can fluctuate based on external factors. 

    Income also isn’t as high as buy to let property, albeit with a smaller entry price. 

    Perhaps the best method to understand how to generate passive income is to diversify your portfolio.  

    This means you could buy stocks in a REIT, Index funds, and purchase a buy to let property. 

    This selection of methods will help you generate multiple passive income streams, and hence achieve financial freedom even sooner– all while doing absolutely nothing. 


    • A liquid asset.
    • Can easily diversify your portfolio.
    • More affordable than traditional property investment.


    • Prices are volatile.
    • Less regular income than buy to let property.
    • Less capital growth potential than real estate.
    Start Peer to Peer Lending Start Peer to Peer Lending


    5. Start Peer to Peer Lending  

    Financial Investment:  ★ ★ ★ ☆ ☆

    Return Potential:  ★ ★ ★ ☆ ☆

    One way to build passive income and get more streams of passive income is peer to peer lending. 

    Peer to peer lending, otherwise known as P2P lending, is the process of individuals providing loans to other individuals or businesses. 

    They do so through online peer-to-peer lending websites, such as: 

    • Prosper 
    • Lending Club 
    • Upstart 
    • Peerform 
    • Funding Circle 
    • Payoff 

    P2P Lending has become popular over the last few years and is often seen as an excellent alternative to savings accounts and banks. 

    This is because it has netted investors a very healthy profit and offers better returns and interest rates than a traditional savings account. 

    The process is beneficial for the borrower, too, as those borrowing can also earn better rates than a bank could offer. 

    How Does Peer to Peer Lending Work?

    Using the sites mentioned, an investor can open an account and deposit money into it, which can be used for loans. 

    Then, any potential borrowers will follow five easy steps to apply for loans. 

    1. The borrower completes an online application on their chosen P2P lending platform. 
    2. The platform then assesses the application and evaluates risk potential and credit rating of the borrower. Based on this risk, the borrower is assigned an interest rate. 
    3. The borrower sees available lenders based on the provided credit rating. 
    4. The borrower chooses lender. 
    5. Upon acceptance, the borrower will then pay back the lender through monthly interest payments, with the platform taking a fee from both lender and borrower. 

    Almost like a financial tinder, P2P platforms are an excellent way to invest. 

    Keep in mind, though, that there’s a chance the borrower could default on payments. 

    To reduce the risk of this happening, be sure to diversify your portfolio by loaning small amounts to various loanees and research your loanee’s profiles thoroughly to make an informed decision. 

    While there’s a learning curve reducing the level of passiveness, once you get the ball rolling, you can be investing and seeing returns regularly on autopilot. 

    This is another good answer for how to make passive income in the UK and is worth considering if you’re looking for more passive income streams and second income ideas in the UK. 


    • Higher returns for investors than savings accounts.
    • Widely accessible for borrowers.
    • Better rates for those borrowing.


    • Potentially risky with a chance that borrower’s default on payments.
    • No government protection.

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    Rent Out a Room on Airbnb Rent Out a Room on Airbnb

    6. Rent Out a Room on Airbnb 

    Financial Investment:  ☆ ☆

    Return Potential:  ★ ★ ☆ ☆

    The increasingly popular Airbnb platform is primarily used for holiday goers trying to find a more affordable living escape in destinations worldwide, but did you know you can use it to generate passive income? 

    Through the platform, you can rent out part of your home to tourists, or as a more permanent residence for a long-term tenant. 

    This way, you can earn some rental income on the side without having to buy a new property. 

    There are also some tax-saving schemes involved, so you might even be able to save money while renting out a room. 

    For instance, the Rent a Room scheme lets you earn up to £7,500 per year tax-free if you rent out furnished accommodation. 

    Of course, if you are explicitly aiming to house tourists, you may go long periods without earnings in the winter and autumn months. 

    Also, if you don’t live in a popular tourist area, you may go even longer without finding a tenant. 

    For this reason, renting a room out isn’t suitable for everyone. 

    However, if you find yourself in a popular tourist area, there’s no harm in signing yourself up to start renting out a room in your property. 

    If you are suited and have the facilities, renting a room can be a decent way of making passive income in the UK. 


    • Easy way to boost your income if you already have the facilities.
    • Tax benefits in the UK.


    • May go long periods with no income.
    • Will need to ensure the house is suitable for extra inhabitants.
    • Could encounter mortgage issues to see if your lender allows a lodger.
    • Potential security risks renting to a stranger.
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    Earn Interest on Savings Earn Interest on Savings

    7. Earn Interest on Savings 

    Financial Investment:  ★ ★ ☆ ☆

    Return Potential:  ★ ★ ☆ ☆

    Another truly passive form of creating passive income, savings accounts are one of the easiest methods to start building personal finance. 

    The last 12 months have been a rocky period for many, and the Bank of England’s base rate has been decimated from the covid-19 pandemic, sitting at an all-time low of 0.01%. 

    However, if you shop around, you’ll find savings accounts far higher than this. 

    Choosing the right savings account can be hard, and there are several things you need to keep in mind while browsing. 

    1. Up to £85,000 per person is protected in the UK. 
    2. Interest from the savings you earn is tax-free for most people.  
    3. You don’t just have to put all your eggs in one basket and all your money in one bank – you can split across different accounts to get benefits. 

    Notably, with savings accounts, your returns will correlate with how much money you put in. 

    However, with interest rates so low, it’s unlikely you will make anything sizeable regardless of the investment size. 

    It’s still a wise move to put some money away. Who doesn’t want to earn money while saving? 

    For a full list of the best savings accounts with the best interest, be sure to check out your options online. 


    • Easy to open and can do so online.
    • Cash is protected up to £85,000 in the UK.
    • Interest is tax-free for most people.


    • Low interest rates in 2021.
    • Some accounts charge you for taking money.
    Try Robo-investing Try Robo-investing

    8. Try Robo-Investing 

    Financial Investment:  ☆ ☆

    Return Potential:  ☆ ☆

    For many, the idea of generating passive income means doing absolutely nothing for money.  

    And while all contenders on this list require some effort to get the ball rolling, investment apps are probably the most hands-free investment experience possible. 

    Sometimes referred to as Robo-investing or a Robo advisor, apps like Acorn and Moneybox round up your spending and invest the difference.  

    They’re a great answer for how to create passive income. 

    Let’s say you’ve just bought your lunch and it comes out at around £2.50. Well, apps like Acorn will round the purchase to the next pound and invest 50p. 

    Due to these small outgoings, though, you likely won’t be earning a lot of income. 

    Plus, with apps like Acorn, you get charged for the privilege, with three different subscription methods starting from $1 a month to $5. 

    That may not sound like much, but when you invest pennies here and there, it can eat out of your overall profit. 

    Regardless, investment apps are a neat way of earning some cash on the side and are a great method for creating passive income. 


    • Incredibly affordable entry point.
    • Great at diversifying a portfolio.
    • Flexible, with different platforms offering different specialities.


    • Not always financial planners so can’t give advice.
    • Can’t choose your own investments.
    • Low entry point which means low return potential.

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    Use Cash Rewards Websites Use Cash Rewards Websites

    9. Use Cashback Rewards Websites

    Financial Investment:  ☆ ☆

    Return Potential:  ☆ ☆

    We all like buying stuff, right? 

    It’s nice to splash the cash every so often, but wouldn’t it be great if we could earn money while spending it?

    Well, lucky you, as you can get some great savings through cashback rewards websites.

    Cashback sites are a great method if you’re asking how to create passive income.

    These sites will give you cash rewards if you use their affiliate links to buy products.

    That means you can go onto these sites, click on a link to a shop, and then purchase as usual on their website.

    This is an incredibly easy way to make some money, as you will likely already want to make a purchase from a particular website. 

    Using these websites will simply save you money by clicking on a link – it’s a no-brainer.

    Sites like Quidco and TopCashback can also give you some freebies, with you earning cashback for mundane tasks like surveys.

    It doesn’t even have to be restricted to the world of online shopping. 

    For instance, Quidco has an app that lets you earn money on the high street. All you have to do is buy a product and take a picture of the receipt.

    One thing to keep in mind, though, is that some cashback sites can incur fees, with some requiring a premium membership.

    Overall, though, these sites are a fantastic way of making passive income in an incredibly easy way.


    • Incredibly easy way to get free money.
    • Clarity over exactly what rewards you will receive.


    • Some sites can require premium memberships.
    • Will need to research the best websites.
    • Payment thresholds mean you won’t get rewards until you reach a certain amount in cashback rewards.
    Switch Bank Accounts Switch Bank Accounts

    10. Switch Bank Accounts  

    Financial Investment:  ☆ ☆

    Return Potential:  ☆ ☆

    When you think of passive income, it’s likely bank accounts and saving accounts come to mind. 

    Both are fantastic forms of saving and earning passive income, but one thing you might not have realised is switching bank accounts can be incredibly beneficial. 

    Brand loyalty doesn’t get you anywhere these days, with rival banks offering cash incentives for you to switch to them. 

    HSBC’s Advance account can get you a free £125, with additional access to a 1% regular saver account, which can help you save up to £250 each month. 

    On the other hand, First Direct gives a free £100, with access to a 1% regular saver, too. 

    And finally, if you like a weekly wine, Virgin Money gives 12 free bottles from Virgin Wines, £50 for charity, and 2.02% interest on up to £1,000. 

    Now, there are specific parameters you need to follow to get these bonuses. 

    HSBC is fairly simple, requiring you to apply and switch within 30 days with at least two direct debits. 

    First Direct is a bit more complex, requiring you to open the account and pay £1,000 within three months. 

    Likewise, Virgin Money requires you to apply online, switch within 31 days, including two direct debits, register for a mobile banking app, and then add £1,000 to the account. 

    Be sure to shop around for the best options for yourself and do some research to figure out which bank is giving you the most… bank. 


    • Easy to switch.
    • Free benefits for no work.


    • Some research needed to find the best option.
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    The Prestige

    Prices From £144,950

    Liverpool Prices from £144,950

    Completed and Tenanted Project

    Luxury and Locality Combined

    Best Prices in Liverpool

    Central Park

    Prices From £164,950

    Liverpool Prices from £164,950

    6% NET Rental Return

    Located in Liverpool’s Coolest Neighbourhood

    Invest With £69k

    Merchant’s Wharf Duplexes

    Prices from £429,950

    Manchester Prices from £429,950

    Projected 6.5% rental returns

    In-demand Manchester location

    What Is the Best Way to Make Passive Income? What Is the Best Way to Make Passive Income?

    What’s the Best Way to Make Passive Income in UK 2021? 

    We hope you’ve enjoyed our guide to 10 ways you can start making passive income in the UK today.

    However, the question remains, what exactly is the best way to make passive income in UK 2021?

    Fundamentally, the best method for you will depend on exactly how much cash you have, and how much you want to see in returns.

    In general, investment strategies that offer the highest returns usually require higher entry costs.

    However, if you want high returns and have the cash, the best bet would likely be investing in real estate.

    This way you can enjoy sizeable monthly rental income of potentially over £1,000, while also seeing your property grow continuously in value.

    No matter your entry cost, there is likely a property out there for you.

    If you have £50k£100k, or even £1 million to spend, we have the guide for you.

    Just click on the links to read the free investment guides today.

    How to Generate Passive Income With No Initial Funds How to Generate Passive Income With No Initial Funds

    How to Generate Passive Income With No Initial Funds? 

    As you can tell from our top 10 list, most strategies involve investing cash to see huge returns, but is there a way to generate passive income with no initial funds? 

    Well, if you truly have no money to invest in an asset, the likely best options for you are robo-investing or switching your savings account. 

    Both of these strategies are excellent passive income ideas in 2021, and are ideal for beginners looking to make passive income. 

    This is because both strategies are incredibly easy to do, and require hardly any cash needed to get the ball rolling. 

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