The other day I had a chat with a friend of mine who dreams about having a few apartments to rent out while enjoying his days…doing nothing.
Right of the bat, I realized that this life goal comes from a place of frustration, as his main goal is to do nothing. He didn’t like his job as he worked way too hard only to fail to accumulate any meaningful amount of money. Not to mention the lack of free time that he could have spent with his family.
In the internet marketing world, a passive income dream is used as a tool for boosting the conversion rate of a book or a course. It’s no wonder why the book 4 hours workweek sold in over 1.5 million copies.
Approaches such as Tim Ferris’s 4-hour workweek, in combination with the natural human tendency of wishful thinking, led to the popularity of belief that passive income does exist.
Many young people believe that they can be lazy, do a few clicks here and there, and money will pour in while they sleep. Not to mention the ones chasing the “set and forget” systems.
Many don’t realize what happens behind the scene.
Don’t get me wrong, sometimes you will make a good business decision where you earn disproportionately more money compared to the time you invested. Don’t be fooled by thinking that this is passive income, it’s called good business decision where you were in the right place at the right time. It happens only if you consistently read, listen and analyze markets while seeking these gaps in your industry.
This can happen if you get lucky and present an offer in an industry with high demand and low competition. But it can last only until the market gets saturated with other competitors offering the same thing, so technically, this isn’t a passive income.
The moment you stop working on growth, your business will start to decline.
So is it possible to do some quick hocus pocus magic on a laptop and expect to be financially for the rest of your life?
It does sound silly, doesn’t it?
Once you spend a whole day with a person managing a successful company, you will understand why they are successful and you will never question their success.
Two types of people seeking passive income
Whenever I talk about this subject, people usually fall into one of two categories:
1) Frustrated – Worked their whole life seeking to retire and live off of income coming in every month
2) Lazy – Focused on outcomes only and don’t want to invest a lot of time nor energy into growing a business
To be able to make the right decision about what you should do in your life in terms of financials, you have to define your goals and know yourself. Maybe you are for business, perhaps you will be better off and happier with a high paying job.
Passive people seek passive income, while active people seek exciting business ventures with growth potential.
Take a look at the Forbes top 400 richest list in America and you’ll see that these people made enough money to retire. While most of them are self-made billionaires, they still work and actively run their businesses.
This is because they are all entrepreneurs and their initial goal wasn’t just money for them to retire, which brings me to a point. To achieve this level of success, you’ll have to work a lot more than internet marketers tell you. Especially because the competition is fierce in almost every niche.
What is passive income?
Passive income is a type of income that doesn’t require effort to maintain or grow. Tax authorities recognize it and examples include rental income or any activity where the earner didn’t materially participate.
Passive vs. residual income
Although categorized as passive, in reality, it’s residual income. In order for something to produce income on a regular and predictable basis, it has to be put on “its feet”, so to say.
But let’s put aside how the IRS categorizes it.
Passive is money from the skies where you don’t have to lift a finger.
Residual is money from established systems, businesses, properties and assets that comes on a regular, usually, monthly basis.
Online passive income streams are often promoted as business opportunities. Whoever has tried to build a business from scratch understands how time and energy-consuming, and risky, the process is.
The best way to understand the passive income idea is to look at it from the perspective of the number of working hours.
Let’s take blogging as an example.
If you are the only person working on your business, you can potentially invest between 40-100 hours a week to develop an income-producing asset. This means that you could potentially produce 15 pieces of high-quality, well-researched content per week. At this pace, in two months, you will have 120 published blog posts. Keep in mind, that’s two months of hard work (writing, researching, editing, designing, link building, promoting…). Let’s say that these blog posts start producing 50$ per day from ad and affiliate income; that’s 1500$ per month. If you have done the SEO and promotion part correctly, you could enjoy this stream of income for months to come, or you can even consider selling the blog for 30x monthly profit.
Right of the bat, you can conclude that this is not passive since you have invested two months into building the asset. Not to mention that it could vanish suddenly.
Remember the infamous Google Panda update in 2011?
Amazon cracking down on paid reviews in 2016?
Facebook limiting organic reach by 42% in 2016?
Ad cost rising year after year?
Pinterest relentlessly flagging websites as spam?
Once you have an asset generating 1500$ per month, you can either:
a) Grow it
b) Wait until it dries out
If you wait until it dries out, and let’s say it will happen in 12 months, the total income for those two months of work will be 12 x 1500$ = 18.000$. Now you understand that 1500$ might seem as passive at first, but actually, it’s just money paid on a continuing monthly basis over 12 month period for two-month work. From this, you could also work out your hourly earnings.
Why would a business dry out?
Competitors outranking you, getting suspended on your main promotion platform, ad costs rising…it can be many different reasons depending on the type of business you are running.
If you want to grow it (which most entrepreneurs will choose), then it’s time to create a system. This means to gradually include other people into the income-producing asset so you can focus on high-value activities, and eventually, once you grow it big enough, step away from the business. Only then will you be able to work a few hours per day or week, while growing the system, as other people will handle the grunt and time-consuming work.
At first, you were able to invest 40-100 hours per week, but now that you have, let’s say 10 employees, the system will get 400-600 working hours per week.
To nurture an income-producing asset in this highly competitive enviroment, you have to put work into it. To make it passive, you’ll have to learn how to delegate.
But forget about the myth of having a sustainable income stream without anyone putting in any amount of work.
Growth of entrepreneurial generation
Do you have competitors?
Of course, you do. These days every niche is full of sharks.
As our attention is on social media, we are proof that entrepreneurship is heavily promoted, luring millions of people into starting their own businesses. We praise someone who decided to start a business just out of frustration or spike of motivation, without a proper business education. That’s why the majority fail. Too much wrong information out there. Many lack the basic understanding of fundamental business principles. If you think you are the only one who came with an idea of selling a plastic bottle with a creative print on Amazon, think again.
You’ll have to go above and beyond, focus on one business in order to successfully fight millions of hungry and desperate entrepreneurs.
Nothing is safe
My family and I are in the business of real estate investing and construction, and we all agree that a certain percentage of accumulated profits should be invested in low-risk income streams such as business space or apartment rentals.
When the economy stops, everything stops!
During these tough times of coronavirus, a lot of businesses closed their doors, which means that we had to stop collecting rent to avoid putting small companies out of business. Even the income type with the lowest risk is affected.
I like that a lot of people think that passive income exists. It opens more opportunities for hard-working people. Small fails don’t ruin the progress, stopping does.
Yes, in my opinion, passive income exists if you achieve financial success big enough to get out of the business and let the system (with employees) run without you. Combine that with smart low-risk real estate investments and you’re on your way to living a stress-free life.
My family taught me to always work on creating and building something, which is why I feel fulfilled during the process of building systems. But again, we are all different.
I am going to end this little rant with a quote from Elon Musk: “To improve the odds of success, if other people are putting in 40 hours work weeks, and you are putting in 100 hour work weeks, even if you are doing the same thing, in 4 months you will achieve what it takes them 1 year to achieve.”