Most Passive Income Is Not As “passive” As You Think
What’s not to love about making money in your sleep? This is the idea of passive income , which is income that you regularly earn without putting in the extra effort to maintain it. You invest a certain amount of time or money in advance and then let the money roll in while you sit back and relax. Sounds cool in theory, but in practice it often doesn’t work.
The idea behind passive income is to create a system that automatically makes you money. This system usually requires significant up-front effort, but also requires periodic maintenance, which makes it not truly passive.
And with some of these methods, “periodic maintenance” takes a lot more effort than it sounds. We’ve already talked about some of these techniques , and while they are theoretically passive, many people who make money from them will tell you that there is quite a bit of work being done right now. This is not to say that these methods are not deserving of attention, but you want to know what kind of work they are doing.
Renting out real estate requires significant renovation
Whether it’s a room in your home or an entire home you’ve purchased, renting out properties is often cited as a popular passive income method. You invest in real estate, find a tenant and earn income month after month. Seems simple and passive, right? But any rental property owner will tell you: it’s not that easy.
As one owner explains on the finance blog Under The Money Tree:
Below are a few examples of what I do on a regular basis in order to generate so-called passive rental income:
- Deal with the imminent boiler breakdown bell on Saturday morning.
- Check your property regularly for “non-emergency” repairs that, if left unattended, could cost you serious money in the long run (eg leaking gutter = prolonged humidity)
- Optimize my mortgage overpayments
- Organize inventory / registration for incoming / outgoing tenants
- Checking potential new tenants
- Keep records and complete the property section on [your] tax return.
- Do detailed tax planning to decide when it makes sense to pay for your mortgage [buy to rent property]
- I constantly remind myself of the buying rules to afford
Even if you hire a manager, you will inevitably have to deal with service problems, vacancies, unexpected expenses, problem tenants, HOA meetings, and so on. And if you hire a property management company, it will take away most of your income.
The good news is that if you actively maintain your property, you can write off your work as an “ active income deduction ”. According to the IRS:
If you or your spouse were actively involved in passive rental real estate, you can deduct up to $ 25,000 in losses from your non-passive income from this activity. This special allowance is an exception to the general rule prohibiting losses in excess of passive income. Likewise, you can offset credits from activities against non-passive income tax of up to $ 25,000 after accounting for any losses permitted under this exemption.
So while rental income is technically passive income and is probably the most common example of this, it does take a fair amount of ongoing work. So much so that the IRS has a deduction for it.
Selling a Book Means Continuous Marketing
Another commonly cited way to generate passive income is by selling a book or other informational product, such as an online course or webinar. You write it once, put it up for sale and receive royalties for it for years to come. Of course, this will probably take a lot of time and effort. Most people are ready for this, but you might be surprised by the proactive service required to promote your book or product. As seasoned author Michael Ellsberg explains :
Of course, you can honestly make money off of information products on the Internet, affiliate marketing, or other similar fields where people tend to gravitate towards passive income fantasies. But to make real money in the long run, you have to treat it like you would any other business. In other words, you have to bring real value to real customers who have a real need.
And the only way to do it is actively. If you continue to see it as a “headache” that your customers want to interact with you, or that you must outperform and innovate to deliver more value to your customers, you are in the wrong business.
Unless you are a well-known author or writer whose work sells on its own, the more money you want to get out of your book, the more actively you can expect to work on it. Marketing your book means asking for reviews, connecting with other authors, and maybe even blogging and maintaining a growing list of email addresses. There’s also reader engagement, social media support, feedback responses, and more.Self-published author Joanna Penn goes so far as to say that earning passive income as an author means you’ll have to write multiple books to solidify your presence. and authority.
Keeping your blog or website up to date
It is true that you can make money from a website or blog through affiliate marketing or advertising. But this does not mean that there is no permanent job here.
First, you will only make money if people actually visit your blog. And people will only visit your blog if it is relevant and updated frequently with helpful information that they really want to read. It is promoted too. Sure, you can hire someone to write content for you, but then you become an employer and manager, as author and blogger Jonathan Fields put it . He adds that yes, there are a handful of bloggers who have such a huge library of evergreen content that they can provide ongoing attention and income. However, it took these bloggers years of work to create their content and their website.
When it comes to blogging, the line between upfront work and continuous on-going work is tricky, making it difficult to classify blogging as passive income. Making “passive” money from blogging usually takes years of hard work.
Some people consider blogging to be passive income because you do what you love and you will do it anyway, you just make money from it. It’s cool, but essentially, it just means it’s fun work. Work, whether you like it or not, is still necessary to generate income.
The idea of passive income is undoubtedly great, but in practice it is much more subjective and complex than in theory. A prime example of truly passive income is investing or earning interest in a savings account. You literally invest the upfront asset – in this case, money – and then you keep earning automatically, without doing anything else at all.
However, almost every other example, called “passive” income, requires much more active maintenance than we think. These are not bad options for earning income, but if you are going to take advantage of them, be prepared for both preliminary and permanent employment.