What is passive income?

Active income is money earned from your labor and time. Passive income, on the other hand, is money generated from assets you own; the assets are doing the work, not you. To create passive income, you must own something of value that is generating income. Passive income is real and it is achievable by almost everyone, but it does require work on the front-end.

The glossy brochure focuses on the passive income, not the work required to get there. Let’s dive in and take a look at what exactly people are doing to generate passive income, in order from least passive to most passive, and how you can follow in their footsteps.

1. Start a side hustle

A growing number of Americans, now 40%, say they have a side hustle, according to a recent report by Zapier. Many of these side hustles are not very passive, though. The most common side hustles include online blogging/social media influencer, gig work (Uber, delivery driver), selling merchandise online, and freelancing.

While starting a side hustle may be a lot of work upfront, they can eventually generate passive income. A side hustle is also a reliable way to generate income; you are filling a need by providing a service or product. Chances are doing gig work or driving for Uber won’t ever generate passive income for you, but there are more creative avenues you can explore to turn a side hustle into a real passive income-generating activity.

I have several acquaintances that sell products online, from antiques and collectibles to handmade arts and crafts. The work is done on the front-end; sometimes products take years to sell, but they can now afford to take a break or vacation without losing that stream of income they worked so hard to create.

2. Create content

If you are great at creating content that provides value, it can be an asset that generates income long after it is created. Just because you have great content, though, doesn’t mean you can create income. You can shout high-value content into a void and never earn a dime. Building an audience and monetizing your content requires a tremendous amount of time and work. As many of you know, Brian started The Money Guy Show in 2006, but it was far from a passive activity and initially it was not even considered a revenue opportunity. It wasn’t until years later that the fruits of his labor really started showing. Years and years of sweat equity made the show what it is today.

The data shows that being a content creator is very difficult, especially starting out. 26% of self-described “content creators” make under $1,000 per year, and 52% make under $10,000. The majority of content creators, 53%, will make less than $1,000 in their first year. And those are just the numbers for those that are sticking with it: 75% of all podcasts are no longer in production and 95% of all blogs have been abandoned.

If you are going to create content, make sure you are doing it for more than just money. Commit to creating content consistently and don’t deviate from that schedule, whether it’s weekly, twice per week, or daily. If you are creating high-quality content that people resonate with, with enough hard work, you could eventually gain a following.

3. Real estate

Real estate could be higher on the list, as it isn’t necessarily passive, but it can be. If you are personally involved with managing a property, you’ll be doing a lot more than collecting rent checks every month. As owners of a commercial property, Brian and Bo would tell you that managing tenants, repairs, maintenance, and renovations has been far from passive.

There are a few different ways to do real estate passively. It is always possible to be a passive investor and let others handle managing the property, but that can eat into a large portion of your profits. Most property managers charge a monthly fee of between 8% to 12% of the monthly rent collected. Along with other factors that aren’t completely in your control, like building maintenance and repairs, vacancy rates, and unfavorable market conditions, making passive income through investing in real estate isn’t always a slam dunk.

Even more passive are REITs (real estate investment trusts), which are securities that allow you to invest capital in real estate without becoming personally involved. REITs can own commercial or residential real estate, ranging from office buildings, malls, hotels, apartments, homes, and more. If you are willing to sacrifice controlling decisions about the property for a more passive stream of income, REITs could be worth considering.

4. Portfolio income

Income from investment returns or dividends is our favorite form of passive income. Active income must be invested to create passive income, but returns are truly passive. Your money is working in the background while you work and even sleep. Over the last 50 years, the S&P 500 has annualized 11.24%, including dividends. There are many index funds that allow you to buy the S&P 500 for next to nothing or in a few cases, for absolutely nothing (meaning no expense ratio).

For younger investors starting out and wondering where to start, a target date index fund is worth considering. Depending on how old you are, the fund will have a portion allocated to large cap U.S. stocks (such as companies in the S&P 500), some small cap equities, international, and fixed income.

Once your money is working for you, growth and income generated is totally passive. You don’t even have to start a side hustle, create content, or dip your toes into the world of real estate investing. We love portfolio income because it is highly accessible (anyone can do it) and it doesn’t take much, if any, know-how.

“Passive” income isn’t ever completely passive, but some forms are more passive than others. Your financial independence journey will likely include a mix of active and passive income that fluctuates depending on what stage of life you are in. Starting out, true passive income is very difficult to achieve. In retirement, you may not be earning any active income at all. No matter what your journey looks like, and what streams of passive income you pursue, plan for the future, be prepared to put in the work, and have reasonable expectations.

If you want to hear more of our thoughts on passive income, watch our previous show on passive income here: “Passive Income Exposed: 3 Ways To Actually Make Money.” For access to all of our courses, free resources, and to learn more about what we do in our day jobs, you can visit us online at MoneyGuy.com.

Real estate investing can be a viable way to build wealth, but you need to have a plan and know exactly what you’re getting into. This episode of The Money Guy Show provides one of the most honest assessments of real estate investing you’ll find online. We’ll dive deep into strategic ways you can use this valuable asset to your advantage, but also, we’ll give you a dose of reality that’s not on the shiny brochure!

In this episode, you’ll learn:

• The pros and cons to 6 types of real estate investing
  • Home ownership
  • Passive via portfolio
  • Residential rental properties
  • Commercial real estate
  • Private real estate deal
  • Land development
• Why real estate investing should not be considered a passive income source
• How to strategically leverage the power of real estate investing instead of getting ripped off
• How to tell it’s the right time for you to invest in real estate
• Tax benefits to take advantage of when buying real estate

Research and resources from this episode:

• Influence & Lobbyist: Interest Groups (OpenSecrets.org)
• Influence & Lobbyist: Finance/Insurance/Real Estate (OpenSecrets.org)
• Net Worth by Age Calculator for the United States (DQYDJ)
• Asset Class Returns (Portfolio Visualizer)

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YouTube videos and articles advertising the money you can make through passive income are everywhere online. They all promise to reveal different ways you can earn money while doing nothing. Logic and common sense would normally tell us you can’t easily make money doing nothing, but in the age of the internet anything seems possible.

What are the different types of passive income?

On our most recent show, Passive Income Exposed: 3 Ways To Actually Make Money, we covered what are probably the three most common types of passive income: real estate, blogging/YouTubing/etc., and portfolio income. We didn’t have time to cover every potential stream of passive income on the show, and we won’t be able to in this article either, but there are a few more notable ideas that we felt deserved a mention.

Airbnb

Renting out a room in your house or your apartment has become very popular in recent years, and is another potential source of “passive” income. This might not be a bad idea for some people, but beware: renting your house or apartment on a service like Airbnb still requires effort. You’ll need to keep a clean home, maintain a presence online and attract potential renters, and share your space with others. Strangers staying in your home or apartment aren’t going to take care of it like you do because it isn’t their home. There are many horror stories online of Airbnb tenants who trashed their host’s home.

Believe it or not, some people also rent out their cars just like they would their home or apartment. This is appealing to car owners because they can theoretically make money when they aren’t using their car, and it’s appealing to the car renters because they can use a car for a short period of time without going through a rental agency. Renting out your home or apartment may be a good idea, but letting a stranger borrow your car seems like less of a good idea. Rental cars are notorious for being treated badly and “driven like they’re stolen.” The risk here is probably greater than the reward.

Royalties

Royalties are a great stream of passive income, provided you create something that can earn a decent amount of royalties. Many different things you create can potentially earn royalties, such as an invention, a book, music, or other creative works. You may be able to create something great, but that doesn’t guarantee you’ll make money; anyone can self-publish a book or music today, so the market is over-saturated with content. The biggest obstacle to overcome will be making your work stand out.

Make an app

There are now over 2 million apps available for download on the App Store, and over 6,000 apps are released on the Google Play Store every day. Apps on the App Store generate about $4,000 on average, while apps on the Play Store only generate $1,125. Creating an app can be very lucrative in some cases, but many who try to create an app have no development experience and don’t know how to go about creating the app of their dreams. The lion’s share of the profits go to the most popular apps, and the average app might not even make enough money to cover the development costs.

This is by no means a comprehensive list of passive income ideas. It seems like everyday someone is creating a new scheme to earn money with doing little or no work. In reality, even passive income takes work, at least in the beginning. If you haven’t watched our show about passive income, check it out now.

What sounds better than money you don’t have to work for? This is the daydream of anyone who hates their 9-5 job and has occupied headlines in many corners of the internet. Is passive income too good to be true?

In today’s episode, we expose the false claims of “making money for nothin'” and set the record straight on how you can actually make money doing real estate, content creation, and, quite literally, while you sleep!

In this episode, you’ll learn:

• The difference between passive and active income
• A reality check on popular “passive” income strategies
• How to maximize the potential of popular “passive” income strategies and actually make money

Research and resources from today’s episode:

• How Many of the 540,000 Podcasts Have “Podfaded?” (Amplifi Media)
• Historical Analysis of Bond Investment Returns Performance (Engineered Portfolio)
• REIT Industry Financial Snapshot (Nareit)
• The Average Annual Return for a Long Term Investment in the Real Estate Sector (Investopedia)

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If you have any questions (or just want to say hi!), feel free to reach out to us: brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on The Money Guy Show Facebook page or connect on Twitter @MoneyGuyPodcast.