If you’re a regular reader then you know I’ve said a few times now that landlording is not passive income. Period. Anyone who tells you otherwise is probably trying to sell you something. Maybe they are just naive. Perhaps you should question the source.
Notice that I didn’t say real estate investing is not passive income. That’s because there’s a million and one ways to invest in real estate and many of them are hands-off.
But it turns out that most of the supposedly “passive” sources of income are not passive at all.
So, What Is Passive?
Well, I guess that comes down to personal opinion but since are reading this, here’s mine
Passive income is income which:
1) Requires an upfront investment of time or capital
2) And which continues indefinitely with little or no involvement
There’s some wiggle room in there since it’s hard to quantify a “little involvement” and we all likely have different work ethics and tolerances.
How Passive is Your Income?
What follows is a roundup of various sources of income, often touted as passive. Some are, and some aren’t. Of course, this is all based on my interpretation of what constitutes “work” so your mileage may vary.
The Passivest Income
That’s not a word but in my opinion, the truest sources of passive income are: savings account interest, certificates of deposit, and bonds. Anything else is “less passive income”.
Why? Because these three income streams take the absolutely least amount of research and time to setup, and the ongoing time commitment is the absolute minimum: all you have to do is count your money or set up a transfer to your checking account. Maybe you shop rates once in a while and move your money around. That’s it.
- Real estate partnerships are a great example of “pretty passive” income since you can structure the partnership such that your involvement is minimized. Maybe you put up the money, your partner does the work and you split the profits 50/50.
- Property ownership with a management company can be pretty passive. After you select and hire the management, all you have to do then is review the statements they send you. Of course, this assumes that you hired a good property manager. A bad one can be like a bad tenant and dealing with them is certainly not passive.
- Dividend-paying stocks are pretty damn passive. You have to spend time researching the companies, of course, but once you have determined that it’s a good buy, it doesn’t take long to manage.
- P2P lending is also very passive. You just have to log in every once in a while to reinvest your profits. If you live in Texas, then I’d probably put this in the next category since it’s a huge pain in the ass to find the best loans.
- Private Real Estate Lending can be very passive if you do it right. Sometimes called “hard money”, these are the kinds of loans that allow us to buy foreclosures and fix them up. We pay 14% interest for these short term loans and I’ll tell you that it’s worth every penny.
Not Very Passive
- Landlording is not very passive. It doesn’t take all that much work but you often have to leave your house or answer phone calls. Even if you do everything right, you’re pretty much on call all the time.
- I’m still pretty new at this but I think I can say with a high degree of confidence that blogging is not passive. You have to keep writing content or your readership, and therefore your advertising revenue, will dry up. In that sense, it’s more like residual income, like writing a book.
- Speaking of which, writing a book is not very passive either. Unless you wrote a best-seller, you will likely see a big drop off in sales over time. Authors go on book signing tours, appear in interviews and more. All of that sounds like a job to me.
- Any job or self-employment is obviously not passive. You’re being paid directly for the hours you put it and that’s it. Continuous involvement is the only way to maintain this income stream.
The Path to Passive
Many business activities can become more passive if you can find ways to take yourself out of the picture. This is like the difference between using a property manager and managing it yourself. You make more money if you self-manage but that comes at a cost of time.
A business is a set of systems and the more systems you put in place which don’t involve you, the more passive it is!
Photo by benmiller23
How about y’all? I’m sure I missed a few potential income streams so leave me a comment and I’ll update it!