What is Passive Income?

Passive income is any income that requires little to no effort to earn or maintain. It is usually income you earn on the side away from your full-time job or contract job but many use passive income channels as a primary source of income.

If you’re nearing retirement having passive income channels can be a great addition to your monthly income and may offset a lot of savings you’ll have to use. Your income is your wealth building tool and typically requires active participation to obtain.

If you’re building a passive income plan you can use passive income to:

Your passive income can be built in multiple ways but there are a few common passive income streams, such as investing, real estate, online stores and other digital products.

Investing is one of the first things people think of when they hear the words “passive income”. It also is a great way to build passive income over time but it can be one of the most volatile. You shouldn’t confuse investing and investments with passive income and these should be kept separate.

A long-term investment plan isn’t meant to be a passive income plan. It is meant to build retirement savings. You still want to make sure you’re investing in a company sponsored 401(k) plan and other funds, like a Roth IRA.

If you’re still considering “investing” as a way for passive income you’ll want to look at low-effort income that can be accessed at any time. These typically are dividends. A dividend is a regular payment of profit made to investors who own a company’s stock. You usually get paid each quarter if your stock provides a dividend and you can use this money to either invest back into the stock or as supplemental income.

It is a little misleading but real estate can be a great way to build passive income. There is an active component as you will have to manage tenants, paperwork and any repairs that pop up. You can also hire a property management company to do all of this for you but it will come at a cost.

If you’re in debt or don’t have a larger savings you shouldn’t put yourself in debt trying to buy homes. You should be buying homes that are relatively cheap, compared to the market, and in prime areas where people want to live. You shouldn’t join any real estate investment trusts (REIT) that pool your money into properties under its control, you want to maintain full control over your property.

The only true way to make good passive income money with real estate is to pay for your properties in cash. If you have a mortgage on any of the properties you’re going to barely break even in the long run. You’ll want to take the total purchase price of the house and divide that by how long you plan to maintain the house.

For example, if you bought the house for $75,000 and expect to pay around $7,500 per year in maintenance and tax fees your total “all-in” cost for the house is $150,000 for a 10-year period. The goal is to cover all costs for the year and make money on your investment over time. You should expect to make back at least your initial investment when you sell the house in 10 years so the main focus should be to cover the cost of owning the home. The $7,500 yearly cost translates to around $625 a month so you’ll want to pad onto that to increase your income. The rental fee is subjective to the local area and supply for the area but typically you want to charge 20-30% more than what you need to build a savings in the event some catastrophic happens, like the furnace going out. A 30% increase in the above would put the monthly rent around $800 per month which means you profit $2,100 per year. At the end of the 10-year time frame you only need to recoup $54,000 from your initial investment. There are other factors at play here but most houses increase in value over time somewhere around 3-6%. The house would be worth somewhere around $110,000 at the 10-year mark.

To summarize, your “all-in” cost is $150,000 for the house for 10-years. After finalizing all the income and sale price of the house you profited around $55,000.

This is a popular channel for many investors as when they want to step away they can sell off their houses for a large lump sum of money to add to their retirement savings and build out their cash on hand to cover any expenses they may have.

In the digital age starting up a website or even a YouTube channel takes little effort. If you have a niche or great content idea that could be sold you can generate online traffic. This traffic then translates to ad revenu, affiliate revenue or even product sales. If your content is engaging enough and you see daily traffic you can make anywhere from a couple dollars to thousands in a single day.

There are tons of products out there you can sell or promote. These range from digital products, like e-books, to physical products like something you’ve made. If you’ve mastered social media or how to build websites you can stand to make a large amount of money.

A popular method to selling products online is called “dropshipping”. This means you set up the storefront and use third-party suppliers to fulfill the purchase order. You’re essentially selling someone else’s products for them and all they have to do is process the orders. If you have a winning product and know how to manipulate social media and ads you can make thousands of dollars in minimal time.

You can search for list after list of passive income ideas but there is one thing you have to keep in mind. Many of these passive income ideas are fairly difficult to get off the ground. It takes a considerable amount of effort to start a passive income channel.

If any passive income idea promises a quick return or requires huge amounts of money upfront it is probably too good to be true. You should research all ideas prior to spending any time or money on building it. You should never go into debt trying to build a passive income stream.