The Wikipedia definition for passive income is: “a rent received on a regular basis, with little effort required to maintain it.” Examples of passive income include, but are not limited to:
* Royalties from authorship,
* Rent payments from rental property,
* Earnings from a business that does not require your direct involvement, and
* Revenue generated from a website through Internet advertisements.
Setting up passive income streams early on in your life is a solid idea. The longer you have that stream of income the more you will get out of it. Those of us who are in our twenties and are without obligations (such as children or significant others) would have a lot more time to focus on building these streams than those that have more responsibility. Before you jump head first into a “passive income stream” you should realize that it is not truly “passive.”
Passive Income, Not So Passive
There are many weblogs, books and articles that address passive income. In my opinion, one of the most promoted forms of passive income is the revenue you can receive from Internet advertisements and rental property. Many sites will proclaim that a weblog is a form of passive income due to the fact that users click on the advertisements, which in turn generated revenue and require minimal effort on your part. Many people will also suggest that rental properties are a form of passive income because you collect a check every month for rent with out doing much.
Those who are making suggestions of what passive income is will often neglect to mention that there is effort required to get these streams moving. You will read in books about how great passive income is, how easy it is to pick up a fat check each month. Or, at least this is how I envisioned it after I read several books on the subject.
For me, Twenties Money Mag is a great example of “passive income” not being passive. For the past 6 months, I’ve spent an average of three hours per day writing, reading, commenting, tweaking, adjusting, and researching. For all the hours that I have spent each week, you would figure that we are making a nice stream of passive income! But to be honest, we are still negative on the business.
Our revenue stream barely had a heart beat until this morning when Kristin had an article featured on Smart Spending. Of course, the revenue that resulted from that exposure was great and we are ecstatic about what little we have made. But what has made us more excited is that most of the readers have enjoyed our articles and have provided some feedback.
It’s Not Reliable
(Well, at least blogging income isn’t.)
I’ve seen many bloggers report their earnings, but none are too solid. The revenue they receive from advertisements is like a roller coaster ride; it’s high one day and flat another. Unfortunately, the roller coaster is not necessarily limited to ad revenue: it can also be applied to other “passive income,” such as one that a rental property would produce. Everything is great when the checks are coming in and you have tenants, but what happens when a tenant breaks a lease or decides not to renew it? You are now in a position where you are no longer receiving checks and your passive income becomes active work while you attempt to find a new tenant.
Hard Work and Tenacity
There are many abandoned weblogs lurking in the corners of the Internet due to a lack of patience, tenacity and direction. It’s usually something to the degree of the following: You read a book get a grand idea for a new web log and start writing with little to no direction. Then, you constantly check your stats to find that the only people who are visiting your site are your grandmother, your sister and your girl friend. After a while your grandmother stops visiting, as does your sister. Then, your girlfriend only visits your site to make sure you are not writing about her. Suddenly, the frequency of your posts slows down. Your posts turn into apologies of why you have not had the motivation to write anything. And eventually, the weblog dies and you’ve generated no passive income from it.
A few of my close friends have attempted to start up a weblog or website for various reasons. Some of them want to generate income from the website, while others do it for the joy of spreading their knowledge to others. Many of these friends have found themselves in the situation described above. After a few months they quit posting their meager once-a-week article and turn away from the website or weblog. For many of the fallen blogs, this is the case and example. People do not have the patience to keep writing when they get burn out, or they just become apathetic.
Real estate can have similar requirements. There is a lot of initial work to obtaining a quality tenant; there is the contract work, advertising, interviews, et cetera. Of course, you can outsource some of that work to a real estate leasing company, but doing so will often eat into your revenue stream. In addition, every time that you exchange tenants, more work needs to be done. You will have to inspect the home, fix anything that was damaged, have the building painted, and prepare to find a new tenant. Rinse and repeat.
The Reality:
“Passive income” is a nice concept, but it doesn’t paint a pretty picture. It takes a lot of work in the beginning, the middle or somewhere but it’s not truly passive. Great fortunes are to be made on the Internet but it takes a lot more than simply throwing a website together and writing. There are hours of research involved with search engine optimizations, building relationships with other bloggers, writing content. Then there is the tweaking, the feedback. Keeping up with comments and writing people back. The hardest part is keeping motivation and coming up with new ideas for articles. Either way its hard work, sometimes fun sometimes not. Kristin and I write because we want to make money sure, but we also have found we both have a love of writing and teaching. We both fear our generation and those behind us are in trouble due to their financial educations or lack thereof.
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I have $0 in passive income. I’ve made a few hundred dollars from my blog in the past year and a half…but I don’t really consider it passive…I had to work a lot of hours to earn it!
I agree, passive income is possible, but it generally takes a lot of upfront work to make it happen. Just look at the examples given by wikipedia - royalties from book sales and music recordings are two examples. Those take a lot of up front work to achieve!
But passive income is a nice goal to strive for, and if you have a shot at it, I say go for it. Work once, get paid often.