Introduction to Passive Income

How do you produce money or an asset without working extensively to get it?  This is a question that many business and entrepreneurial-minded individuals have been exploring for years. The lure of getting money or assets with little more to no effort is an attractive one.  Any reasonable business person wants to generate income with the least amount of effort and this differentiates a successful business from a struggling one.   Below is a general definition of passive income:

Passive income is the income resulting from recurring cash flow that requires minimal to no effort to maintain after the initial work is completed. It is also the earnings an individual derives from assets such as a rental property, limited partnerships or other enterprises in which he or she is not primarily involved.

Passive income is one of the IRS’ principal categories of income, the others are active income and portfolio income.  As with non-passive income, passive income is usually taxable (according to the Internal Revenue Service of the United States).

Another way to think about passive income is that it is simply the income you incur by doing “very little or nothing” after the initial financial and/or time investment has been made. Unlike active income, which requires you to participate and be fully involved for the stream of income to continue coming in, passive income involves an automated system or process that will continuously generate revenues without a high level of commitment.

introduction to passive income

For example, passive income earned from advertising revenue generated by a website or blog must first attract a lot of traffic and regular ongoing visitors. Before a site can gain that kind of traffic, the owner must first determine the niche, have the site and content developed, and have a marketing plan.

The reality is there are different levels, types and ways of generating passive income.  Some require significant upfront work and/or investment to get the income stream started.  While others require various levels of ongoing effort to maintain and aren’t completely hands off.  But the goal is always pretty much the same for anyone who is looking at passive income options – to have recurring income that provides the ability for your time to be allocated to other activities.

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The Major Categories of Passive Income

There are numerous types of passive income sources with different strategies for success. In general, they can be classified into four major categories:

Digital and Internet

Digital products and services can provide a steady flow of passive income.  They have the potential to create a revenue stream that can pay off for many years after the initial effort. Moreover, once you get the right system in place, your digital products can essentially sell on auto-pilot, creating a source of passive income. Examples are the eBooks, mobile apps, affiliate sales, membership sites, etc.  Two of the more common types of revenue streams include advertising and affiliate income.

Advertising income: This is typically generated by blogs and websites. There are two types, which are direct advertising or third-party advertising. In third party advertising, platforms such as Google AdSense and other PPC (Pay per Click) advertising methods are utilized. A well-developed web or mobile app asset can continue to bring in income as visitors come to the site.

Affiliate income: This is also earned via the internet by promoting products and services rendered by other companies. You earn a commission for every successful sale made of the product or service. Email marketing, social media promotion and other strategies that don’t require their own sites are also ways to earn income without a web site or mobile app.  One of the more popular programs is Amazon’s affiliate central.

Digital Assets: Products such as e-books, mobile apps, stock photos etc. are another classic example of items that require an initial investment of time, and then have on-going sales.  There are many options to sell these products such as on Amazon, app stores, stock photography sites, e-book sites, and more.

Real Estate and Other Physical Assets

This is one of the most popular way of making passive income, and in reality, you don’t even have to directly own a brick and mortar property to be a real estate investor. Owning traditional brick and mortar properties is only a passive income source when all the right strategies are in place. The investment world has wide range of methods for owning residential or commercial rental properties with our requiring direct management.

Rental income: Owning real estate properties that you rent out will require some direct involvement to maintain the property and income stream.  But most of those tasks can be outsourced to property management companies, handyman services, etc.

Asset Rentals:  You can also earn income assets such as vehicles, speciality equipment and facilities which require little effort to maintain or can be outsourced.

REITs and Other Investment Methods:  With Real Estate Investment Trusts (REITS) you can have part ownership of properties such as malls, condos, industrial sites, etc. and all of the management is handled by others.

Financial Investment

Financial investments are the closest to truly providing a passive source of income of all the different types. Typically, they involve making an investment upfront with your money, and taking a risk that the investment will yield positive returns.  Once the investment is made, there is minimal maintenance required going forward. Examples are peer-to-peer lending, dividend stocks, annuities, certificate of deposits (CDs), etc.

Interest income: Interest is the earnings from the money you lend to your debtors or from the cash deposited in the bank. This type of investment is only for investors who have the extra capital.  Frugal savers can put their money in simple investments such as long-term CDs and fixed income bonds or even low risk dividend stocks.

Royalty income: It can be earned simply from publishing books (for authors), from making music (for singers), from using photos of a professional photographer, for licences or patents for using inventions or software produced and patented, from using trademark or franchising business, etc. This usually requires a great talent, skill or ability, and it requires a great deal of work put into creating these products up front.

Dividend Income: Dividends are earnings that come from investing in stocks and public companies or government entities. The entity uses your money to invest and get profits on their assets and services and this profit is shared with its investors.  Some might not categorize it as a passive income since it usually involves higher risk and may not provide a regular income stream. It also requires proper management for the investment and the risk involved.

Others & Miscellaneous

There are many other types of possible passive income sources.  Ideas include pension income, membership fees, licensing ideas, franchising, and many more.

Pensions:  One well known source of income is pensions which is typically a form of retirement income. Proactive workers, companies, and governments save money as they receive or pay salaries.  Then at a certain point in time the funds from the pension are allocated presumptively after having strong investment growth.

Membership fees: This is a feature of member-paying bodies like a fitness gym, a golf clubs, etc. Online membership sites are also very popular.  A lot of sites charge a low monthly fee for access.  The content for these sites can include software, games, web applications, programming scripts, s and videos.

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Next Steps to Getting Started

Most types of passive income are built over time and aren’t earned instantly.  Even direct investment income requires the initial investment to be earned.  Getting started with a successful passive income plan will require patience, hard work, consistency, and the right strategy.  You also have to ensure like any business endeavour that you proper resources to get started including time, money, and expertise.

Passion is an important factor in anything we do in life and that’s no different when building a passive income strategy. Consider choosing what you love to do and find a passive income source closely related to those areas of interest. Your interests and knowledge can help to energize and develop aa successful strategy for building your passive income stream.

Another important component of building a successful passive income is having an entrepreneurial spirit.  If you can determine new marketplace needs, innovate a new way of doing something and generally be creative in your approach you have a greater chance of success.

The idea of building sustainable wealth through passive income has a huge appeal. Small business owners, retirees, students, office workers, stay-at-home parents and really anyone can benefit from a sustainable passive income source that will continue to generate income.  Finding the right opportunities and developing the right strategy will be the key to success.