What's not to love about earning money in your sleep? That's the idea behind passive income, which is income you regularly earn without doing much additional work to maintain it. You put in a certain amount of time or money upfront, then let the money roll in while you sit back and relax. Sounds awesome in theory, but in practice, it often doesn't work this way.
With passive income, the idea is to build a system that automatically earns you money. That system usually takes a lot of upfront effort, but also even some occasional maintenance, which renders it not truly passive.
And with some of these methods, "occasional maintenance" is a lot more hands-on than it seems. We've talked about some of these techniques before, and while they're theoretically passive, a lot of people who earn money from them will tell you there's quite a bit of ongoing work. It's not to say these methods aren't worth pursuing, but you want to be aware of the work that goes into them.
Renting Out Property Involves Lots of Upkeep
Whether it's a room in your home or an entire home you've purchased, renting out property is often cited as a popular way to earn passive income. You invest money in the real estate, find a tenant and earn a return month after month. Seems simple and passive, right? But any rental property owner will tell you: it's not that easy.
As one owner explains at finance blog Under The Money Tree:
Below are a few examples of things I do regularly to earn my so called passive rental income:
- Deal with the inevitable 'the boiler has broken down' call on a Saturday morning
- Regularly check your properties for 'non emergency' repairs that if left untended can cost you serious money in the long term (e.g. leaking guttering = long term damp)
- Optimise my mortgage overpayments
- Arrange inventories/check ins for ingoing/outgoing tenants
- Screening potential new tenants
- Do your record keeping and fill in the property section of [your] tax return
- Perform some detailed tax planning to decide when it makes sense to pay down a buy to let mortgage [buy a property just to rent it out]
- Constantly remind myself of the buy to let rules
Even if you hire a landlord, you'll inevitably have to deal with maintenance issues, vacancies, unexpected expenses, problem tenants, HOA meetings and so on. And if you hire a property management company, that will take a big chunk out of your income.
So while rental income is technically passive income, and it's probably the most common example of it, it does require a fair bit of ongoing work.
Selling a Book Means Constantly Marketing It
Another commonly cited way to earn passive income is by selling a book or some other information product, like an online course or webinar. You write it once, list it for sale, and make royalties off of it for years to come. Of course, this will probably take a lot of upfront time and effort. Most people are prepared for that much, but you might be surprised at the active maintenance required to market your book or product. As experienced author Michael Ellsberg explains:
Of course, you can make honest money in Internet info-products, or affiliate marketing, or other such areas where people tend to get drawn to "passive income" fantasies. But, to make real money over the sustainable long-haul, you must treat these like any other business. In other words, you must provide real value to real customers with a real need.
And the only way you can do that is actively. If you keep viewing it as a "headache" that your customers want to interact with you or that you have to out-compete and out-innovate your competitors in providing more value to your customers, you're in the wrong business.
Unless you're a famous author or writer whose work sells itself, the more money you want to generate from your book, the more actively you can expect to work on it. Marketing your book means asking for reviews, networking with other authors, and maybe even keeping up with a blog and maintaining a growing email list. There's also interacting with readers, keeping up with social media, responding to reviews, and so on. Self published author Joanna Penn goes so far as to say earning passive income as an author means you'll have to write multiple books to establish your presence and credibility.
Keeping Your Blog or Website Relevant
It's true that you can make money from a site or blog through affiliate marketing or ads. But that doesn't mean there's no ongoing work involved.
For one, you're only going to make money if people actually come to your blog. And people will only come to your blog if it's relevant and frequently updated with useful info they actually want to read. There's promoting it, too. Sure, you can hire someone else to write the content for you, but then you become an employer and a manager, as author and blogger Jonathan Fields puts it. He adds that, yes, there are a handful of bloggers who have such a huge library of evergreen content, they're able to generate continuous attention and revenue. However, it took those bloggers years of work to build their content and their site.
When it comes to blogging, the line between upfront work and continuous, ongoing work is tricky, making it hard to classify blogging as passive income. It usually takes years of consistent work to earn "passive" money from a blog.
Some people consider a blog passive income because you're doing what you enjoy and you would be doing it anyway, you just happen to be earning money from it. That's awesome, but essentially, that just means it's fun work. The work, whether you enjoy it or not, is still necessary in order to generate income.
The idea of passive income is undeniably awesome, but it's a lot more subjective and complex in practice than it is in theory. A solid example of truly passive income is investing or earning interest in a savings account. You literally invest an upfront asset -- in this case, money -- and then you keep earning, automatically, without having to do anything else at all.
However, almost every other example cited as "passive" income takes far more active maintenance than we're led to believe. These aren't bad options for earning income, but if you're going to take them on, be prepared for both the upfront and ongoing work.