How “passive” is passive income?
People who are serious about passive income already know that passive income isn’t a magic formula that will earn you money while doing nothing. On the contrary, passive income requires a huge amount of dedication, consistency and plain hard work, at certain times even more than a regular active income 9 to 5 job. More on what passive income is here.
So how “passive” is passive income?
Not all passive income streams are the same. Some stream are definitely passive, very passive, requiring maybe only a handful of hours of maintenance per year, while others will require several hours of your attention every week. At the end of the day is up to you to draw the line on the sand that will divide passive income from active income.
Let’s take a look at some of the most common examples of passive income revenue streams sorted from the ones that are more passive (meaning they require fewer hours of maintenance) to the ones that are less passive (meaning they require more hours of maintenance).
Of course each business is different and depending on how well managed (or not) your business is you might think some examples belong to a different category. For instance, if you own some property and rent it out to a local family on a 5 year contract, that becomes a quite passive source of income. On the other hand, if you decide to rent that same property by days on Airbnb, that will probably require much more of your time. But let’s try to put our average hat on and look at these cases.
Examples of extraordinarily passive income (few hours per year)
On one side of the scale we have those revenue streams of passive income which most people will agree are extraordinarily passive because they require very little maintenance, to the point where a few hours per year could be enough, maybe not even that. These are the kind of revenue streams that will give you enough peace of mind to go travel the world without even checking your emails for a few weeks in a row.
This is by far the clearest example of an extremely passive source of income. Simply browse online or stop by a few different baking entities and find out what interest rate they offer on their savings account. Once you found your winner put some money into it and forget about it. Sure, you’ll earn a very small percentage on your capital, but you can literally go years without taking a look at the account and it will still be generating passive income for you.
Similar to opening a savings account, only with a higher risk (and also the potential for a higher reward). If you invest in the stock market for the long run you can be setting up a great source of very passive income for yourself. Once you build your stock portfolio you’ll start collecting dividends regularly. Now if you want to optimize this stream of income you should spend a few hours a year analyzing your portfolio performance and deciding if you need to sell some of your underperforming stocks to buy some other stock which you think might perform better. Other than that, relax and enjoy!
Examples of very decently passive income (few hours per month)
Moving down the line we find those sources of income which are decently passive, meaning if you do the average over the course of a year they’ll probably only require a few hours of your time per month. These are the kind of revenue streams which will still allow you to travel the world but might require an occasional call or two to keep the wheel turning.
Renting commercial property
If you own commercial property in a popular area you have an almost guaranteed source of passive income. The beauty about commercial property is you usually rent it out to companies (not individuals) which tend to be way less trouble. If a pipe breaks and they have to shut down the store they’ll call whoever they need and get it fixes immediately. They might ask you to pay for the repair, or at least share the bill afterwards, depending on what your contract says about that, but in most cases they’ll just fix the problem themselves without bothering you too much.
Also, finding a new tenant when needed should be easier than with residential properties as companies who are potentially interested in renting won’t care too much about the color of the walls or the lighting… most companies have their own brand identity and they’ll just come in and tear everything down to implement it, regardless if what was there before was plastic or gold.
Renting residential property
If you own residential property and rent it out you will be generating a nice, solid stream of passive income. In this case things can go extremely well or very wrong, and that will determinate how passive this source of income actually becomes.
Some tenants who might be quite handy will take care of most things themselves, others on the other hand will call you every time a bulb burns or they think the washing machine doesn’t spin as fast as it should.
A drop shipping on-line store
Once your on-line store is set up and running and has a proven record of sales you can start thinking in putting it into autopilot mode. By this time you already know how to drive traffic to your site and convert it, you also have a drop shipping service in place so that you don’t have to personally take care of logistics and customer support is being taken care off by a third party. All you need to do is set everything in place so that those things don’t change.
You probably still need to spend a few hours per month just making sure everything is still rolling, seeing how your SEM campaigns are performing, making sure your stock levels are good, etc.
Examples of what most people consider passive income (few hours per week)
Getting to what most people aim to achieve when they think about passive income. These are the kind of revenue streams which allow you to choose whether you want to work or not that day when you wake up in the morning, but will go downhill if you are not regularly overseeing and optimizing.
Most online businesses
Online businesses are hot these days, especially when it comes to generating passive income. They are indeed a great source of passive income, and with time they can become a very decently passive income revenue stream (see section above). However, for many years (if not forever), most online businesses will require at least a few hours a weekly of maintenance to try out different marketing campaigns, test out different featured products, experiment with new ways of driving traffic to your site, etc.
Apps, plugins and themes
Building apps, plugins or themes can be a very lucrative source of passive income. This path requires a lot of upfront work (building an app is not easy!) and has the potential of being huge. However, no matter if you become huge or stay average, the nature of these products is continuously evolving, and you’ll need to release updates, fix bugs, etc. if you want to stay relevant. We’ve all seen apps rise to the top only to be completely forgotten next month.
Examples of not-so-passive income (few hours per day)
Dont mistake self-employment for passive income. Self-employment does offer a certain degree of flexibility, but the truth is things will go wrong so quickly if you were missing that these revenue streams can hardly be considered passive. So try to stay away from these if you are just starting your passive income journey. And if you are already involved in any of the businesses described below, think about what changes you could make to your current business to move up this list.
So many people think about starting a blog when they first decide they want to pursue passive income. But make no mistake, most successful bloggers, those who make a living out of blogging, blog for 8 hours a day or more. Sure you can blog while traveling, sure you can blog at night after spending the day with your friends, but that’s called a flexible schedule, not passive income.
Being “the boss”
If you start your own brick and mortar business and grow it to the point where you can have a few employees, that will give you a lot of flexibility. You’ll be able to come in late to work, skip a few days here and there, etc. But remember, employees are only executing your vision, your ideas, they do what you ask them to do. The moment you disappear from the picture chances are your business will start breaking into pieces soon under no leadership.
Hopefully this quick overview will help you identify were you are in the passive income scale or decide at where you want to make your entry if you are just starting. All the examples mentioned above are very valid streams of income (more or less passive), you just need to figure out what your definition of passive income is and build a path that will take you there.
Don’t get frustrated if you can jump into the revenue streams you would like to be in right now. Some of these revenue streams require large capitals or very specific know how’s that you’ll learn along the way. Nobody has built a fully automated on-line store with drop shipping in place and a virtual assistant to take care of customer support overnight. Rest assure they were doing all the work themselves at first, putting in many hours to learn the ins and outs of their niche before they reached the point where they could start setting systems in place that could automate all that and take off much of their work load.