Maxwell

What is Passive Income?

Believe it or not, passive income isn’t simply a buzzword or means of retiring early: the Internal Revenue Service distinguishes three kinds of income by defining income as active income (e.g., job income), passive income (e.g., affiliate marketing), and portfolio income (e.g., interest and dividends).

Some forms of passive income will require some initial effort, like getting a rental property or online blog up and running, but be self-sustaining at a certain point and help you to earn passive income consistently every month.

Two Distinct Types of Passive Income

The Internal Revenue service says that passive income can come from two, admittedly, broad sources: rental properties or a business in which one does not actively participate in the day-to-day operations. The latter is especially open-ended and can include selling information products and peer-to-peer lending.

Rental Properties

If you already have some cash saved up or money that you’ve earned from a business, then you might want to explore the possibility of consistent monthly returns in the form of passive income from rental properties.

The upside to passive income from rental properties is that there’s a very consistent return from one month to the next. The downside is that rental properties can straddle the fence of being passive income in the sense that some properties require active management and occasional maintenance.

The solution is to pick a property that shouldn’t need much maintenance for the next few years and selecting a property in a low-tax area. Another thing that you can do to increase your returns and lower your involvement is hire a property manager to take over control of the day-to-day operations of the property that you choose to invest in.

Consider hiring a real estate agent with experience in the area to connect you with a property that’s squarely within a thriving area. The more than the area thrives, the more that you’ll have potential buyers to snatch up the apartments or condos and help you with generating passive income.

A real estate agent can also clue you into developing issues about a particular property – e.g., escalating property tax or gentrification that may put you in touch with a different set of future renters. For more control, consider steering clear of a real estate investment trust. You’ll have more passive income by independently trailblazing your own course.

Sell an Information Product

An information product could be an online course or, more commonly, an app or e-book that you can host on your e-commerce website for years to come. There’s a lot of effort required upfront with course creation, but if you have something to say then you might want to consider hosting your content on a website like Coursera or Udemy. There’s an element of actually edifying whole communities in their learning process if you go this route.

Peer-to-peer Lending

This is a passive income option similar to the rental property route insofar as you’ll need some initial capital to make this idea work. Peer-to-peer lending is essentially as it sounds – a personal loan between you and an eligible borrower intermediated by a third-party website like LendingClub.com.

You can make this idea generate serious passive income by spreading around your risk and generating interest on multiple loans. Just make sure that you vet potential borrowers on a website like Prosper.com by scrutinizing the potential borrower’s history with the website. Too many defaults is a red flag. You might want to think twice about extending an unsecured loan to such a borrower.

Why Doesn’t Everyone Do This?

Why doesn’t everyone generate passive income? Most people assume that it will take more work than it does. While passive income could requite initial capital (e.g., rental properties) or effort on your part (e.g., creating a blog), the amount of subsequent effort can be minimal if, for instance, you employ a property manager or hire a digital marketing company.

When it comes to making money, there are two options. The first is active income. This is the money that people go out and earn through the sweat of their brow. In effect, active income involves trading time for money. On the other hand, it’s possible to obtain money passively. This is the money that invested time or capital can return. Here are five great passive income sources.

Certificates of Deposit

Few investments are as free from the risk of capital loss than CDs. To earn passive income from a CD, you’ll have to first obtain a bit of capital. Some banks require as little as $500 to open a CD, while others will want savers to put more money away. CDs come with variable terms, generally from 30 days to five years. A longer term will generally lead to a higher interest rate, but there is the risk of lost purchasing power if the interest earned does not keep up with inflation.

Bonds

Like CDs, investing in bonds requires some capital up front. Bonds come in a variety of denominations, and most brokerages have bond funds that have a lower barrier of entry. Bonds pay out a fixed amount of interest for a given period of time, and then the investor will get their principal back once the term is up. Bonds provide a steady stream of income, but when rates rise, the price of bonds goes down. In this instance, investors who want to sell before maturity could see a drop in the price their bonds will fetch.

Real Estate

The passive income that comes from real estate investing comes from the payment of rents to the property owner. Real estate investors can seek for residential or commercial properties. As long as an investor can find a good tenant, monthly rent payments should provide a steady stream of passive income. When the properties have a mortgage on them, the passive income will only grow when the property is paid off.

Dividends

Stocks can also be a great source for passive income. Many companies pay out quarterly dividends to their investors. These dividend payments hopefully come from the income that a corporation can generate. Some companies have been able to grow their dividend payments for 50 years or more. This growing stream of dividend income is a great offset against inflation, and companies that grow their dividends tend to grow their income. Growing revenue and income generally leads to higher stock prices, and the capital gains are another source of passive income.

Creating Products

In the world of the Internet, it’s possible to create products that people will buy. A couple of leading options are courses that teach people a marketable skill or e-Books. There is work required to create the product, but once the word gets out, it could return a steady stream of sales if the product is popular. Those sales require no additional work on the part of the creator.

Passive income is the best form of income around. It’s possible to replace a working income as passive income grows over time. While it takes quite a bit of work to create the product or the capital that’s necessary to build a passive income, the benefits are well worth the effort.

Investing in real estate can be exciting and lucrative. Unfortunately, some investments are the result of bad decisions. A bad real estate investment can be avoided if an investor thoroughly researches the market and approaches proprieties objectively. Knowing how the property will be managed is also important in selecting the right property.

1.) Learning The Market

Every city is different, and areas within a particular area of the city vary significantly. An investor should narrow the focus and learn as much as possible about the area of the property they are interested in. In doing so, the investor will know the true value of the property. Additionally, vacancy rates and rental prices will be reflected more accurately. Keeping the research of the market focused will also help avoid surprises. For example, some areas have big-scale future developments, and it’s important to know what impact if any they might have on the investment property.

2.) Professional and Systematic

It’s a challenge to expect a beginner investor to be a professional real estate. However, with a systematic approach and criteria in place, the investor will have a good system for screening properties. One of the risks for new investors is falling in love with a specific property and overlooking many faults. By having criteria that are applied to all potential properties, the investor will be positioned to make an objective decision. Simply devise criteria and apply them objectively to each property. This systematic approach will reduce emotions which can be exhausting.

3.) Property Management

There are two options for an investor with regard to managing the property. The first option is that they can manage it themselves, and the second option is to hire a property management company. Knowing who will do the managing is extremely important because it will have a big impact on the property. If the investor manages the property then they must be well-informed of what is required. If a property management company will manage the property then the investor must be aware of how much it will cost. The cost can be significant and can decrease the investor’s profit so it should be calculated when determining future investment income.

The real estate market undoubtedly has gems in it. Many people have made a lot of money by investing in properties. What they have in common is that they chose winners. The path to making a good investment begins with understanding the market. Once the market is understood thoroughly, the investor then should systematically scrutinize each property. Following these two steps, and knowing how the property will be managed will result in a good real estate investment.