What is passive income? How “passive” is passive income, really? What are some passive income ideas outside of real estate? How can I use passive income to plan for retirement, gain financial independence, and get more control over my cash flow?
Passive income ideas, in terms of real estate, often mean tenants, rent checks, and maybe the occasional 2 a.m. plumbing emergency. But let’s get real — passive income isn’t just about real estate. It’s about creating reliable, diversified income streams that support your lifestyle, reduce risk, and give you freedom — without chaining you to a single asset class.
Whether you’re planning for retirement, seeking financial independence, or just want more control over your cash flow, it’s time to think beyond rental property.
Disclosure: This article is for educational purposes only and is not financial, investment, or tax advice. The examples provided are hypothetical and for illustration only. Investment decisions should be based on your individual goals, risk tolerance, and financial circumstances. No investment strategy or financial product mentioned herein is being recommended or endorsed for any specific individual. Past performance does not guarantee future results. Before making any investment or financial planning decisions, consult a qualified Certified Financial Planner™, tax professional, or financial advisor.
What Is Passive Income—Really?
Passive income is money earned with minimal ongoing effort — but it’s not “set it and forget it.” It still requires strategy and smart planning.
You’ve likely spent years in the accumulation phase: working, saving, paying off debt, and funding retirement accounts. But as you approach or enter retirement, the focus shifts to distribution — turning assets into reliable income streams.
The challenge? Many people are real estate rich and cash poor — sitting on appreciated property but struggling with liquidity.
The solution is to diversify. Real estate is great, but it’s just one of many ways to create sustainable passive income.
Real Estate: The Classic Passive Income Option (with Caveats)
Owning property can provide rental income and long-term appreciation. But it’s not always the golden goose people imagine. After factoring in property taxes, maintenance, insurance, and vacancies your Capitalization Rate (cap rate)— how much money you actually keep after expenses — might only be 2–3% of the value of the property. And when the kitchen needs remodeling or the roof leaks, that passive income quickly disappears.
Are you ready to stop the landlord headaches? For many longtime investors, real estate passive investments have been a great ride — but managing tenants and toilets isn’t exactly the dream retirement.
If you’re sitting on appreciated property and wondering how to get out of property management without triggering a massive tax bill, there’s good news: you have options. Specifically, two powerful tools — the 1031 Exchange and the Delaware Statutory Trust — can help you move from hands-on landlord to hands-off investor.
Step 1: Use a 1031 Exchange to Defer Taxes
A 1031 Exchange allows you to sell your investment property and reinvest the proceeds into another “like-kind” investment — all while deferring capital gains taxes. You’re essentially trading one property for another, tax-deferred.
Here’s how it works:
- You sell your property, and the funds go to a qualified intermediary (not your checking account).
- Within 45 days, you identify your replacement property (or properties).
- Within 180 days, you complete the purchase.
By following these rules, you avoid paying capital gains taxes now — and keep your money working for you. But what if you don’t want another property to manage? That’s where one of the best passive income investments, managed real estate comes in.
Step 2: Transition Into a Delaware Statutory Trust (DST)
A Delaware Statutory Trust is a professionally managed real estate trust that owns one or more large, income-producing properties — such as apartment communities, medical buildings, or industrial centers. By using your 1031 Exchange to invest in a DST, you can defer taxes, collect passive income, and eliminate day-to-day management.
Think of it as institutional-grade real estate — with none of the landlord duties. You don’t fix roofs, collect rent, or deal with tenants. You simply receive regular passive income distributions while the property is managed by professionals.
Let’s look at this passive income example: you sell a $1 million rental property. Instead of paying $300,000 in taxes, you use a 1031 Exchange to invest in a DST earning 4.5% — that’s $45,000 per year of passive income — no tenants, no toilets.
Still, real estate shouldn’t be your only source of income. Let’s explore what else could belong in your portfolio.
What are Some Passive Income Ideas Beyond Real Estate?
- Dividend-Paying Stocks
- Municipal Bonds
- Brokered CDs
- Annuities
- Interval Funds
- Real Estate Investment Trusts (REITs)
What are Dividend-Paying Stocks?
Dividend-paying stocks are the workhorses of passive income. These are shares of companies that pay you a portion of their profits, usually every quarter. Many established companies — think Procter & Gamble, Johnson & Johnson, or PepsiCo — pay steady dividends, even during market volatility.
A well-structured dividend portfolio can provide 4–5% income while offering potential long-term growth. Unlike a CD or bond that pays a fixed interest rate, dividends can grow.
Unlike real estate or annuities, dividend stocks are liquid. You can buy or sell with a click, and you can customize your strategy — choosing ETFs, mutual funds, or individual blue-chip stocks to fit your goals and risk tolerance.
What are Municipal Bonds?
Municipal bonds (or “munis”) deserve a spot on your radar if you like the idea of steady, predictable passive income — and you don’t want to share a big chunk of it with the IRS.
A municipal bond is essentially a loan to a city, county, or state government — often used to fund public projects like schools, roads, and water systems. In return, the government pays you interest, typically every six months, and returns your principal at the end of the bond’s term.
That interest is often tax-free at the federal level, and if you buy bonds issued in your home state, the income may also be free from state income taxes.
For high earners, tax-free municipal bonds can be incredibly powerful. For a municipal bond passive income example, a $1 million California municipal bond portfolio could generate up to $44,500 per year in tax-free income. If you’re in a 45% combined tax bracket (federal + state), you’d need to earn about 8.2% from a taxable investment to keep the same amount after taxes.
Here’s the catch: It’s surprisingly easy to screw up the tax-free status — by holding the bonds in the wrong account, buying out-of-state issues, or misunderstanding your tax bracket.
That’s why it’s crucial to work with a Certified Financial Planner™ who understands municipal bond strategy, tax implications, and how to build the right ladder for your income needs.
What are Brokered CDs?
Brokered CDs can be a smart piece of your passive income plan if you’re looking for steady, low-risk passive income without the rollercoaster ride of the stock market. They’re not flashy, but they’re dependable.
With a brokered certificate of deposit (CD), you deposit money, earn a fixed interest rate, and get your principal back when it matures. Instead of being tied to just one bank’s rates, a brokered CD is purchased through a brokerage account, which gives you access to hundreds of banks — and often better rates.
Let’s take a look at this passive income example: you want to invest $500,000 safely.
Through a brokerage account, you could buy two CDs from two different banks — each paying a competitive interest rate — and keep all of it FDIC-insured, up to the $250,000 limit per bank. That’s diversification and safety in one move — without juggling five separate bank accounts.
Many DIY investors accidentally exceed insurance limits or miss reinvestment opportunities. A financial advisor can help design a CD ladder that’s safe, efficient, and aligned with your cash flow needs — without the paperwork headache.
What are Annuities?
Think of an annuities as contracts with insurance companies: you give them a lump sum, and in return, they promise to pay you a stream of passive income — sometimes right away, sometimes later — often for as long as you live.
It’s one way to turn a pile of money into a pension, especially if you don’t have one, which makes it attractive to certain investors.
Let’s look at an annuity passive income example. You invest a lump sum — say $300,000 — and the insurance company pays you on a regular basis, usually monthly, for the rest of your life (or for a set period).
Annuities come with fees, surrender charges, and complexity. The guarantees are only as strong as the insurance company’s claims-paying ability. And not all annuities are created equal — some are oversold, overpriced, or just plain misunderstood.
That’s why it’s critical to work with a good Certified Financial Planner™ — who can evaluate whether an annuity fits your specific income plan, not just someone chasing a commission.
What are Interval Funds?
Interval funds are a type of mutual fund that gives individual investors access to less liquid, institutional-grade investments — things like private credit, commercial real estate, infrastructure projects, or private equity — while still providing opportunities to cash out (called “repurchase offers”).
The fund typically makes repurchase offers quarterly (every 3 months), allowing you to redeem a portion of your shares — often 5–25% of the fund’s assets at a time. In exchange for locking up some of your money, you may earn higher yields — often in the 6% to 9% range, depending on the underlying assets.
Think of it as a middle ground between a fully liquid mutual fund and a long-term private investment. These funds are professionally managed, designed for investors willing to trade daily access for potentially better returns.
What are Real Estate Investment Trusts (REITs)?
REITs let you invest in real estate without owning property directly. A REIT is a company that owns, operates, or finances income-producing real estate — think apartment buildings, medical centers, data warehouses, self-storage units, or shopping centers.
By investing in a REIT, you become a shareholder in a professionally managed real estate portfolio and receive a portion of the income in the form of dividends.
They’re required to distribute 90% of taxable income, and many pay 4–6% dividends. REITs can provide diversification across sectors — plus partial tax advantages.
So instead of collecting rent checks, you collect dividend checks.
What’s the Key to Financial Freedom? Diversification
No single investment is perfect. Each has trade-offs in risk, liquidity, taxes, and returns. The real magic happens when you blend multiple streams — combining dividends, bonds, annuities, REITs, and real estate into a coordinated plan that aligns with your goals.
That’s where Certified Financial Planners® come in — fiduciaries who design holistic strategies integrating taxes, investments, and estate planning.
What are Your Next Steps to Build Your Passive Income Plan?
Building a portfolio of passive income streams isn’t just about collecting rent checks or chasing the next “hot” investment — it’s about designing a plan that supports your life goals, protects your wealth, and aligns with your tax strategy.
At CunninghamLegal, we help clients take a holistic approach — coordinating estate planning, asset protection, and tax-smart investing to create a plan that works today and holds up tomorrow.
Whether it’s:
- Turning your rental properties into truly passive income through a 1031 Exchange and Delaware Statutory Trust,
- Creating tax-free income with municipal bonds,
- Securing dependable cash flow with annuities, or
- Building a diversified income mix with dividends, REITs, and interval funds —
The key is strategy, structure, and smart execution.
Our team works hand-in-hand with trusted financial advisors to design coordinated, tax-efficient income strategies.
If you’re ready to stop guessing and start planning for passive income, reach out to us. We’ll connect you with one of our trusted financial advisors to help you evaluate your options, build a custom income strategy, and ensure your plan fits seamlessly into your estate and tax planning.
Because true financial freedom isn’t about luck — it’s about smart planning.
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Warm regards, Jim
James L. Cunningham Jr., Esq.
Partner, CunninghamLegal
At CunninghamLegal, we guide savvy, caring families in the protection and transfer of multi-generational wealth.
