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.
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.
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.