The word “passive” as it pertains to income is relative. Not only are some income sources more passive than others; but what’s passive to one person might not be passive to another.
Some people think that in order for an income source to qualify as passive, it can’t require any work whatsoever. In reality, even the most passive of income sources require some maintenance, even if it’s just managing the manager.
The Passive Scale
The continuum to the left roughly illustrates how a few favorites of this blog stack up to each other on the passive scale.
It Takes Money…
One interesting thing to note is that the most passive income sources are also the most expensive. I’m sure you’ve heard that it takes money to make money, well it also takes money to make time.
For example, the most passive item on my imaginary scale is stock investing, while the least passive is getting a job. It takes a large investment to make significant money in the stock market while it doesn’t cost anything to get a job.
One Man’s Treasure…
It’s also interesting to note that the higher you get on the passive scale, the less appealing the lower income sources are.
If you are making a lot of money (with very little effort) in the stock market, getting involved in real estate might seem like too much of a hassle. At the same time, if you are a real estate mogul like Donald Trump, you would never bother with network marketing.
Along the same line of thinking, if you were making a killing in network marketing, you’d never think about starting an eBay business; and if you had a successful eBay business, you’d never go back to your job.
Ultimately, passive is in the eye of the beholder. I consider my bulk candy vending business passive because I only work it two days a month. Eventually, after I roll enough profits into real estate, those two days a month will be better spent on bigger investments; and I’ll drop the candy business.
How to Transition into Passive Income
If your job is your only source of income, the best way to reach time freedom at the top is to work your way up the ladder. Since the most passive sources require more money (which you don’t have), it’s best to start with the less passive sources to build capital while you keep your job at first and roll your profits into more passive investments as you go until you can eventually quit your job.
I wrote a detailed article called A Roadmap from Debt to Living Your Passion which breaks it down in detail.
Active and Passive Components
All passive income sources have both active and passive components. Ideally, the active component will be at the front during the setup phase, while the passive component will carry through the life of the investment; but that isn’t always the case.
Stocks
Stocks are the most passive of the group when you have a money manager looking over your portfolio. If that is the case, your active component will entail keeping an eye on your manager. From time to time you might have to replace your management to make sure that you are being taken care of.
If you are managing your own portfolio, stock investing can easily slip down a few notches on the passive scale. Method investing in mutual funds is the most passive of all, but still requires your attention.
Intellectual Property
Intellectual property is my favorite passive income source because it requires the most creativity on the list. It’s also the only one that breaks the trend of the most passive sources requiring the most money.
For example, if you are lucky enough to write, direct, produce, or act in a hit movie, it’s very possible that you’ll be getting royalty checks in the mail for the rest of your life for work done once.
Getting yourself in that position is another story. Having money can help you, but once again we’re back to needing money to make it.
Real Estate
The hardest part of real estate is the research and “farming” required to find a good deal. Once the deal is done, the improvements have been made, and a tenant is found; the rest is easy.
Bulk Candy Vending
Bulk candy vending is an interesting business because it is passive to some and active to others. My sense is that it is passive up to a certain level. I have about 40 locations at the time of this post, and it is still passive to me; but if I had 400 locations, I might not feel the same way.
The active parts of bulk candy vending include finding new locations, servicing machines, counting quarters, doing accounting, and driving around. The passive part is the fact that most machines can go two or three months without service.
Also, the more stable your locations, the more passive your route will be. I am lucky enough to have established locations that are likely to welcome my machines for at least the near future. If I had to spend all my time finding new locations to replace those who kicked me out, I might feel differently.
Unlike network marketing or real estate, which have an almost unlimited income potential, there is a cap on how much you can passively make in vending. Sure, you could expand and hire people to work under you, but that still sounds like a lot of work. For me, it’s an easy $1000 a month, but after that I’m looking elsewhere.
Network Marketing
In network marketing, the hard part is at the beginning as you build a base of networkers who will eventually take some of the weight off your shoulders. If the company has a high retention rate (and many do not), the passive component will kick in once your team is off and running. You won’t be able to completely walk away (that’s why it’s only semi-passive), but you will be able to do things on your own watch.
In effect, it is sort of the opposite of bulk candy vending. It starts out active and gets more passive the longer you work at it. I have vending higher on the scale, but these two can easily swap after some time in the business.
Blogging
At first, blogging seems like the ultimate passive machine. You write a bunch of articles like Steve Pavlina, and then sit back and watch the money flow. It seems logical that each article should draw a certain amount of search engine traffic on it’s own for as long as you keep your site.
In reality, there is a large active component involved in blogging. In order to keep up the search engine traffic, you have to keep fresh content on your site. In order to keep your regular visitors returning, you have to feed them a steady diet of posts.
That being said, it is much more passive than a job. If you write a few weeks ahead, you can take time off whenever you want. If you had to walk away for several months, you will still keep an income stream. It would probably diminish with time, but compared to what happens when you walk away from a job, it’s infinitely better.
Automated eBay Business
eBay is near the bottom of the passive scale because it can easily become a job. If you are getting your inventory from garage sales and constantly creating new listings, there is nothing passive about it.
On the other hand, if you can find a consistent supply of the same product, you can create the listing once and use automation software to keep it going. At that point, the only active part will be answering questions, packing, and shipping.
Job
When you are trading hours for dollars, your income is 100% active.
Great article. You may want to check out my new blog (http://residualist.com/) which is basically dedicated to exploring this exact question as it pertains to many different jobs and investments. My goal is to come up with a framework for evaluating a given opportunity/strategy in terms of a number of different factors and ultimately to use that framework to evaluate as many opportunities as I can to find the right path to passive income for myself. (While making the results of my work available to anyone who reads my blog).
Thanks John! I’m actually already a reader of your blog. Thanks for the positive write-up about Genius Types! (http://residualist.com/2007/03/16/a-quickie-collection-of-great-posts/)
Hey Brian,
Long time no see. I enjoyed this post, very crisp and to the point. Still going on about the candy business I see. I still enjoy hearing about it. Will catch up with you soon.
Crisp… hmm, I like that!
Thanks for the feedback, Alex.
Great write up Brian…you’ve been Dugg.
I am motivated by your success & happiness as of late, it’s inspiring to read about someone who followed their dreams. I have a similar dream and have started down my own road toward financial independence.
I have a great opportunity for a passive business that could earn me a great income. I’m writing up a business plan for it now (I need a little venture capitol for it). I’ll write more once I have things more concretely laid before me.
Anyway…great post.
Thanks Matt!
Your comments add great energy to this site!
Great image with the Passive Income Scale, I had never seen that before.
There are many other sub categories and other (in)activities that are not mentioned, like many corporations today are setting up passive income opportunities for their venture capitalist, those who help fund their initial start-up. Unlike many capital gains plays, where business owners pay out the initial investment with a healthy return after a few years, companies are paying incremental amounts over longer periods to help provide a passive income to their investors.
Real Estate too has taken a change with some innovation in brokering wholesale real estate. Unlike the farming techniques that keep most out of real estate, some brokers are offering these services and instead of paying REITs leftovers (as I call it) the brokers are paying actual profits on the deal, subject to appreciation and thus equaling 100% ROI in some cases.
Times are changing…investments are changing and it is good to see blogs like this keeping up with newer strategies like blogging, ebay etc.
Thanks for the discussion.
Jeremy
Get your money to work for you at http://www.selfwealthmanagement.com
Thanks for the input, Jeremy!
Great post. I see “passive income” becoming one of the big buzzwords the next few years. Or maybe it already is and I’m just behind.
You’re right, mb. I definitely see more and more people becoming conscious of it.
Brian, Great read! I’m glad I happened across your site. By the way, thanks for the nod.
No problem, Steve. Your input is greatly appreciated.
Imagine having one healthy passive income just from advertising on our blogs and websites. I have a small income from the net but dream of the day it takes over my life.
I imagine it every day.
I couldn’t leave that comment alone…I image it daily myself!
My goal is to be make $5,000 at the end of my first year of blogging.
I just wrote a post about my income goals mixed with the taxing ramifications. Check it out here and comment on what your blog income goals are.
Excellent article, though I have an observation that certain passive incomes (especially stock and real estate) carry a certain level of risk. While the worse case scenario for more active ventures would be “loosing a job” or “having your backup server burn down” will cut off your source of income, having your stock or house crushed will loose all of the initial investment as well.
Tony, you’re right on the money. The more risk, the more reward, the more passive.
Do you think it is better to build many forms of passive income or to focus on the best one?
I think it’s best in the long run to diversify your income by creating multiple streams, but it is important to focus on one at a time. Most passive income sources take a lot of work to get started, so you can’t be diluting your focus all over the place.
Pick one, set a goal, and focus on it until you reach the goal before you change focus.
Dude, I so want to get into candy vending machines.
Not passive at all
I had to work 12 hours/day.
I disagree that stocks or mutual funds are the most passive. First of all you don`t know your future return on investment and can`t predict exact cashflow.
What`s more important you MUST check it from time to time. I think stocks at least once a week, and funds at least once a month.
That Active to Passive scale is cool! You should get it protected!