Over the past 50 years, some of the world’s most valuable companies have been built on the back of software products. Think about Microsoft, Apple, Salesforce, or Oracle. This is no accident. Software as a business is remarkably scalable and remarkably profitable. As a result, the individuals who have the skills needed to program software applications are in high demand and earn very high salaries. But, this is also an incredibly time consuming job. So, when it comes to building wealth, software developers have a unique challenge – lots of disposable income, but no time to figure out how to invest it.
In this article, we will present ten passive income ideas for software developers. We will describe what they are, how they produce passive income, and the risks/benefits of allocating capital to them. By the end, the hope is that readers will identify at least one or two options that are suitable for their own investment preferences.
At First National Realty Partners, we are a private equity commercial real estate investment firm that specializes in the purchase and management of grocery store anchored retail shopping centers – which are excellent passive income producers. If you are an accredited investor and would like to learn more about our current commercial real estate investment opportunities, click here.
Investment Considerations
Each investor is different and, before allocating capital to a passive income opportunity, it is first important to think about five things:
- Risk Tolerance: All investments have some degree of risk, but some have more than others. For example, a US Treasury Bond is at the low end of the risk spectrum while something like cryptocurrency is at the high end. Each investor must decide for themselves how much risk they are comfortable taking and look for investments that fit the bill.
- Time Horizon: Some investments, like publicly traded stocks can be bought and sold at will so they are considered to be extremely liquid. Others, like a bond, may require investors to lock up their capital for five or more years. Each investor must decide for themselves what time horizon they are comfortable with and look for investments that fit the bill.
- Return Objectives: Risk and return go together. The higher the risk, the higher the potential return. The lower the risk, the lower the potential return. Investors must decide for themselves what returns they want to achieve and then choose the least risky option that could achieve it.
- Debt Levels & Emergency Funds: As a general rule, developers and programmers should seek to eliminate all consumer debt (car loans, credit cards, etc) and build an emergency fund with three to six months worth of living expenses before even thinking about investing any significant sums of money.
- Capital Available To Invest: Finally, some opportunities have high minimum investments, $25,000+. Others may not have any minimum. Each investor has to determine how much capital they have available to invest and then look for opportunities for which they can meet the minimum requirements.
The point of these considerations is that they can act as a filter of sorts. In the list below, there are no investments that are objectively better than another, but these considerations can be used as a filter to find those that are most suitable given individual investment objectives and preferences.
Now, let’s get to those ideas.
Idea #1: Private Equity Real Estate
Real estate is a classic passive income opportunity. For web developers and programmers who qualify as accredited investors, it is possible to work with a private equity firm to facilitate them. In such an arrangement, the private equity firm does all of the hard work of finding, underwriting, financing, and managing a commercial asset while the investor contributes capital and receives periodic distributions in return.
Private equity real estate earns side income because tenants pay rent to occupy the property and if there is any money left over after operating expenses and debt service, it is distributed to investors on a regular basis – usually quarterly. Again, the private equity firm does all of the hard work so this is a truly passive investment.
The benefit of this strategy is that investors can earn passive income and may achieve even higher returns through capital appreciation. In addition, they may benefit from certain tax deductions.
The downside of this approach is that it can require a lengthy hold period, which makes it somewhat illiquid, and the fees charged by the firm may eat into returns.
As a general rule, private equity real estate investments are a suitable fit for high net worth investors with a lengthy time horizon.
Idea #2: Real Estate Investment Trusts (REITs)
A real estate investment trust is a company that owns, operates, or finances commercial real estate. An investment in one allows individuals to purchase a fractional share of a commercial real estate portfolio, which can be broadly diversified or specialized in a particular sector like multifamily or office.
REITs have a tax advantaged structure that requires them to pay out a high percentage of their income as dividends, which is how they produce passive income. For example, National Retail Properties is a popular publicly traded REIT that pays a dividend of 4.91% annually. So, a $100,000 investment would pay nearly $5,000 in annual dividends.
The benefit of investing in a publicly traded REIT is that they are liquid, pay high dividends, and have certain tax advantages.
The downside of a REIT investment is that investors don’t have any say in which properties their funds are used to purchase. In addition, their prices could get caught up in broader negative market sentiment, even if nothing has changed with the fundamentals of the property portfolio.
REITs tend to be a good fit for beginners who have a smaller amount of capital to invest and a shorter time horizon.
Idea #3: Build & Sell Software as a Service (SaaS)
Software as a service or SaaS is an acronym used to describe a piece of software that is sold as a service to consumers, over the internet. Often, SaaS is sold as a subscription, which means recurring revenue.
Although SaaS requires an upfront investment of time, it can be a great side hustle/passive income producer because of its subscription revenue model.
The benefit of a SaaS product is that, once it is complete, it can be sold over and over again, which gives it tremendous scale and profit potential. In addition, it is a good fit for a programmer’s skill set.
The downside of a SaaS product is that it may take a lot of time on the front end to develop and there is ultimately no guarantee that it will end up producing passive income. In addition, there are startup costs, web design needs, and it can be incredibly expensive to acquire an audience of paying subscribers.
Software Engineers have the knowledge needed to build a software tool, which can make this a good choice to develop a passive income stream, but there is some risk inherent in this strategy that must be considered.
Idea #4: Chatbots
A chatbot is a piece of software that uses artificial intelligence to “chat” with users and direct them to certain places. For example, it could direct them to a help section of a website or to the purchase page for another product. Essentially, it has the ability to replace certain support staff.
Chatbots can create passive income through a number of channels including affiliate marketing, advertising, or developing sales leads that others are willing to pay for.
Again, the benefit of a chatbot is scale. It takes some time and effort to set up, but it can be deployed at tremendous scale, which gives owners the chance to earn income without much effort.
The downside is that it takes specialized knowledge to build and deploy a chatbot and paying customers to buy it. For example, a developer may need to know specific programming languages (html, css, javascript, python, etc) and may need to have some advanced coding skills to make this work. It isn’t accessible for everyone.
Idea #5: API Bridges
An API bridge is a software tool that allows two applications to communicate with each other. For example, if a company has an accounting system and a separate billing system that don’t communicate with each other, they may be willing to pay for an API bridge that integrates these tools
An API bridge earns passive income because companies are willing to pay for software tools that allow manual processes to be automated. Once complete and deployed into full time service, an API bridge can develop a steady stream of extra money for its owner(s).
The benefit of this approach is that API bridges can be deployed at scale and they solve a very thorny business issue so companies are willing to pay for them.
The downside is that this isn’t a purely passive way to develop a secondary income source. Once the initial work is completed to build it, it may take some part time effort to maintain and sell it.
Idea #6: Flip Niche Websites
A niche website is one that appeals to a niche audience. Flipping niche websites means identifying a potentially profitable niche – a particular sport or game – and developing a website about it and then selling it to someone willing to buy it. When done correctly, this can be a lucrative business model.
Niche websites generate income from the sale, but this isn’t necessarily passive. In the beginning it is more like active income because there is a lot of work that goes into developing the site and marketing it for sale.
The major benefit of this approach is that it can be quite lucrative, especially if it is optimized for SEO and generating a material amount of traffic.
The downside is that it takes a lot of time and effort to build, which developers may not have.
Flipping niche websites may be most suitable for those with the time needed to build the site and the know-how to market it.
Idea #7: WordPress Themes and/or Plugins
WordPress is one of the most popular website development platforms in the world and many of their sites run on “themes” or with WordPress plugins” that allow them to be developed quickly and with a beautiful interface. Those with the know-how to develop these digital products can create and sell them to those who need them.
Once these templates have been created, they can be marketed and sold to other developers or companies who will pay to use them in the development of their website. The revenue generated from these sales can be a lucrative passive income stream.
The benefit of this approach is that the themes/plugins can be developed once and sold hundreds or thousands of times, generating significant revenue.
But, this is a competitive space, which means it takes a high degree of excellence to stand out. In addition, there can be a significant amount of work required upfront to complete the project.
This strategy may be most suitable for those with an eye for design and a detailed knowledge of the WordPress ecosystem.
Idea #8: Flip Domain Names
A domain name is the address that companies and brands use to establish their online identity. For example, our domain name is FNRPUSA.com. Since domain names are often considered to be “digital real estate”, it is possible to buy and sell them for a profit. This is most commonly done when expiring domain names are snatched up for a good price and then flipped to a willing buyer for a profit.
Flipping domain names generates income from the profit made on the difference between the cost and sales price.
The benefit of this approach is that it can be quite lucrative for those who find success.
The downside is that it can actually be quite time consuming to constantly monitor expiring domain names and marketing them for sale. This is a very specific skill set and it can take a while to learn.
Idea #9: Create & Sell an Online Course
An online course is a great example of a way to earn passive income. With this strategy an expert in something develops a tutorial that imparts wisdom in a subject matter that someone is willing to pay to learn about. For example, a programmer could create an online course about how to develop a mobile app and sell it to those who want this knowledge.
Passive income is generated from the sales of the course, which can be sold on a branded website or through a learning platform like Udemy or Skillshare. Or, it could be hosted for free on a youtube channel where revenue can be earned from selling advertising against the video.
The benefit of this strategy is that the developer only has to create the course once and then they can sell hundreds or thousands of times. There is great scale.
However, it can be incredibly time consuming to develop a high quality course and it can be expensive to establish an online presence from which to sell it. For example, it may take expensive ads on social media or through paid search to get learners to discover the course.
This strategy will likely be the best fit for those who have an area of expertise that can be monetized and/or those who have the know-how to develop and sell a course through an ecommerce platform.
Idea #10: Start a Blog
A blog is a website that specializes in a specific topic or theme. For example, a blog could be about movies, a sports team, or traveling.
Successful bloggers can generate passive income through advertisements, an affiliate program with Amazon, or through paid sponsorships. For example, one common strategy is to create a review site for clothing or electronics that includes links to where these items can be purchased. Every time someone uses a link to buy something, the blogger earns a small commission.
Like many of the other items on this list, the benefit of this approach is scale. A blog could have worldwide readership and those who find success building an audience can make a significant income.
The downside is that it is not fully passive. Maintaining a blog takes consistent effort and a lot of time.
So, Which is Best?
As we mentioned in the beginning, there is no “best” strategy in this list. But, there may be options that are more suitable than others depending on an individual programmer’s return objectives and risk tolerance.
For this reason, individuals should consider their own unique preferences and choose that option that is a suitable fit for their needs.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
