Is Passive Income Real?

[AroundTheWorld]

When we first got started on the financial freedom road, we were pretty naive. One of the areas of naivety was "passive income." We read RK books and he talked about two types of income... earned and passive.

"Okay, great," we thought. "We want passive income." And so, the journey began. We now understand that many "passive" income businesses are not actually passive. We have also learned that income is on a spectrum.... with earned at one end and passive at the other. Most ventures fall somewhere in the middle. Or, more accurately, most ventures start at the "work your a$$ of for no pay" end of the spectrum, and as time goes on... settle somewhere in the middle of "earned" and "passive."

However, the ultimate goal is still to find that vehicle that delivers true passive income.

Here are a few vehicles that could be considered relatively passive.

Sell a business w/ a portion of the price as a note.

Collect money monthly. It doesn't get any more passive than that. Of course. It isn't passive at first. You have to build and run the business, which means working full time + for a while. Works with web businesses (ala MJ), B and M businesses, Service type businesses (if you position it so that the business is not "you"). Also works with real estate... self storage, etc. You must be very confident in the business as a going concern, and the purchaser. You must also have a willingness and understanding that there is a chance this person may screw up the business, run it into the ground, fail to make payments to you, and hand a disaster back to you. At any time, you may have to make the decision to step back in (repo the biz) and turn it around again.

Bonds, CD's, other "financial" products.

I'm not knowledgable in this area. I've seen other posts on the boards about this. A search should yield some ideas. Other than monitoring markets, this is relatively passive.

Private Placement Deals.

There are people out there that seek investors for their deals... apartment buildings, self storage, etc. The investors in these deals can get an excellent return, and it is relatively passive. It is very important to do your due diligence here. Check out the person making the offering, as well as the deal. Also understand that there is no guarantee. But, as far as passive income, this is a great option. Once your DD is done, it won't take too much time.

Self storage, with one employee.

Relatively hands off. Requires a check in twice a week. Requires a good employee and systems in place to be sure that employee is performing tasks as required.


Mobile Home Park.

There are "degrees of passive" here too. If you are going to expand, that will not be passive. It will take hours, time, and money, but it will also improve your long term cashflow and the value of the property. There are also management decisions. Will you self manage? If so, dealing w/ tenants and maintenance issues will be time consuming. Maintenance requests (and some tenant calls) can be reduced by switching to the "lonnie deal" method .... (sell the trailer on owner financing). Also, obviously, turning it over to a property manager would reduce a lot of the work at make it much more passive.

Web Businesses

Don't know much about this either, but some on this forum, such as Biophase and Jonleehacker seem to have achieved relatively passive income in this area.

B & M Businesses

Funny to add this to the list, because in my last post, I stated that there are much better ways to go than B & M. I stand by that, but there are ways to make these somewhat passive. It is just a lot of work, not something you can achieve immediately, and it is still more work relative to the options I listed above. However, it is less work than a J.O.B. once you have things set up appropriately, so it is worth adding to the list.

Understanding your biz and putting great people in place is key to making this work. You also have to have a system of checks and balances. Many employees work will deteriorate over time if they are not directly supervised and have no incentive to continue to keep the performance level up. Our answer to this was to restructure management, and hire a part time "general manager" to be the "owner" while we are away. Now, the regular staff has a boss that is known to swing by any day at any hour to check in on things. Makes a huge difference.

How to Get There​

When we started the journey, the mantra was "passive income, passive income, passive income."

What we didn't understand, at first, is that passive income is not something you achieve right away. There are a few steps to getting there.

Build Networth First.

What does that mean - in practical terms?

It means you have to build a valuable business, or you have to build a portfolio of real estate investments. Either of those options above means work, work, work. But that is how you get there…

Pick something that has "scalable" upside potential. Build it - with a focus on creating value.

Once it is built, then you convert to passive by:

1) Putting key people in place. This is the least passive option, but can still be relatively passive. You still need to check the map and turn the steering wheel. You also understand that at any time, market conditions may change and you may have to step back in to the "work your a$$ off for no pay" or even "work your a$$ off just to reduce the negative cashflow" mode.

2) Sell w/ a portion as owner financing. Much more passive, but you are also taking on the risk that the new owner may fail.

3) Sell and put your proceeds into something that is a passive income producer. (bonds, private placement, etc)

 

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[Jonleehacker]

I recently heard a great quote about the mythical beast of online passive income...

"I work 16 hours a day, so I can earn money while I sleep!"

Some days feel like that, a lot more so when starting out.

Now, however, all but one of my affiliate websites are what I consider highly passive... meaning I can run them and maintain current levels of income on less than 1 hour a week (total for all sites).

If I want to grow income, I'd be up in the 4 - 6 hour / week range.

 

[AroundTheWorld]

Mr. Hacker,

You summed up nicely what I took 1/2 a book trying to say.

"I work 16 hours a day, so I can earn money while I sleep!"

Some days feel like that, a lot more so when starting out.

lol. Yea, I think that is the big myth.

Passive is possible, but first you have to pay the dues. LONG HOURS and NO (or negative) pay!

Passive also comes in .... degrees. It still takes some time to monitor and tweek.

 

[Russ H]

Great post!

I gave you rep speed, and was going to joke that at 225 mph, what difference would it make . . .

But I noticed that when I did rep you, it bumped you up to 230 mph.

Zooooooom!

-Russ H.

 

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[tchandy]

This is a good post. You identified several means to receive passive income but it does take some due diligance to see what works for you. There are so many "gurus" out there promoting something but everyone needs to look at their own situation, find their one trick pony http://www.thefastlanetomillions.com/your-goals-your-fastlane-plan/523-one-trick-pony.html, and then just go for it.

Tom

 

[TC2]

Great thanks to AroundTheWorld.

Personally, I have learned that the best ways to get passive income is to provide useful information contributed by users. In other words, user generated content that provide valuable information will give you the best result.

You build a system (like YouTube), which allows user to contribute the content. I am not saying it's easy. Building a great system is a lot of hard word. Once the system is up and running, you need to build another system to distribute the information to the crowd.

Don't get me wrong. Information is not limited to just online information. There are tons offline/local information out there that need to be consolidated. You just need to be creative.

To me personally, earning passive income is not a question. The question is now much you can earn?

Once it is built, then you convert to passive by:

1) Putting key people in place.

I totally recommend people to read the book.
Millionaire Club Recommendations - Good to Great: Why Some Companies Make the Leap... and Others Don't

Don't be the bottle neck of your own company. You own it, but have someone to run it.

 

[TaxGuy]

Thanks Sonya!

A lot of people just getting started struggle with this as it relates to leaving your comfort zone, in addition, as Russ posted in Greg's thread about landlords that too many people are just quitting their jobs to start businesses without having anything established...

With that in mind, how long did you and Doug work a 9-5 while building up your businesses before you could comfortably quit and focus on the business full-time?

What our biggest road-block right now is the mirage of a comfort zone we're in is keeping us from being fully motivated to effectively use that 5-9 period to execute an action plan, but at the same time it would be suicide to just quit our jobs and expect to pay the mortgage/food bills in the period of zero or negative cashflow as it seems so many are doing right now who are just setting themselves up for failure.

The irony is the middle-class trap is the feeling that despite not really owning ANYTHING(most everything comes with a monthly payment, not a problem if those things are appreciating or cash-flowing assets :smxB, that having everything you need(food, shelter, clothing, healthcare) and a few luxuries you don't(car, furniture, electronics, etc) prevents us from pursuing the one item we truly need- FREEDOM!

 

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[Niche]

I read Kiyosaki's rich dad poor dad and a few more. Yes passive income is key but if it were so easy, everyone would be doing it. Took me a few months before I started making some money with my web business. Having said that once I got to grips with what it entails and probably with a large dose of luck, It has evolved to a significant source of income

So what am I saying

The passive income idea is solid, but initially will probably need a large amount of work... about 16 hours a day?

 

[AroundTheWorld]

With that in mind, how long did you and Doug work a 9-5 while building up your businesses before you could comfortably quit and focus on the business full-time?

We were a one income family. I went to school, raised the kids, and started a business while Doug brought home the money.

Once my biz income could replace his income, he quit.

I like that you are looking at both sides of the equation. You are so right about the middle class trap.

Another thing we did is live very frugally. Had only one car. Lived in a very, very small house. etc.

 

[hatterasguy]

If you have money and lend it, thats pretty passive. If I take a $150k note from a person, and pay them 10% on that over a year, thats $15k they literaly didn't lift a finger for.

The catch 22 is you need money first to lend. But money makes money.

 

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[Kung Fu Steve]

If you have money and lend it, thats pretty passive. If I take a $150k note from a person, and pay them 10% on that over a year, thats $15k they literaly didn't lift a finger for.

The catch 22 is you need money first to lend. But money makes money.

"First get thee an army of golden slaves to do thy bidding, then you shall enjoy much a fancy feast."

Interesting post Sonya. Passive income is only passive income until something goes wrong or needs to be changed... with the world changing so quickly with new technology and things happening every day - heck, industries are changing over night! Is passive income a myth now? Was is ever an entire truth? Even as a business owner, you still need to check in with your CEO to make sure that business is running smoothly!

The way I think I'm starting to see it now is one of two ways: Do what you love to do, or are extremely passionate about so the work doesn't feel like work, it feels like fun (I do it all day long because I love martial arts). Or two; do something to make money but automate it as much as possible so you don't have to spend so much time doing what you hate!

 

[Sparlin]

Thanks for the post ATW. I saw a few on that list that I've looked at recently and have a friend looking into the mobile home stuff. Great post. Thankyou.

 

[camski]

This is really a phenomenal thread! For me RK's book was a real eye opener and I also dreamed of truly passive income. What i realized was that IMO there really is no such thing as truly passive income. I have to agree with ATW that money is kind of on a spectrum, although I tend to classify it in 3 ways. HM (high maintenance) job or business where you work all the time, LM (low manintenance) maybe you have rentals or a web business that takes a little time to tend to weekly and MINM (minimal maintenance) this is where a totally automated website or financial investments might come in. Takes a fraction of the time that HM income does and a smaller portion than LM does.
I would think we all have to agree that when it comes to how you make your money and how you provide for yourself it must be checked on by you at least some of the time. I think the Madoff scandal would prove this out. Whatever vehicle you use to create income takes some effort so there is no such thing as just sitting back and watching the money roll in.

 

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[MJ DeMarco]

Sell a business w/ a portion of the price as a note.

I would like to stress the benefits of "passivity" via notes. You can have a business that has ZERO passivity, but the act of selling it, could create passive income via the standard method -- take the proceeds and invest it into fixed income instruments -- or via the carry-back note.

One of the offers I received on my business was $5M in cash and a $1.9 million dollar note payable monthly at 8%. When I received the loan amortization documents in due diligence, the monthly payment was > $35,000/mo. At the time although I was making 3-5X as much, my living expenses where just barely past $10K/mo ....

Forget the $5M, I was lapping my chops at the pure passivity of the note which I considered to be very safe since I was already familiar with the cash-flow of my business.

Unfortunately, this deal did not go through but to expand on your post, you can sell ANYTHING on a note -- you can sell labor intensive businesses and transform it into a passive business via sale on note. Just be sure the note can be paid and you have recourse -- don't skimp on the legalities.

Great post Sonya headed for Legendary status!!!!! :great:

 

[hatterasguy]

IMHO it should be called low maintenance vs high maintenance income.

Notes are passive until one goes south, than you have to work to recover your money.

Rentals are passive until something happens, than you work. Plus setting them up is quite labor intensive.

But its not a work I mind doing, better than a 9-5.

 

[Gymjunkie]

Great post!

It is definitely true that passive income comes AFTER working hard for a long time. I read someone saying that "you have to work more than anyone else for some time and only then you can enjoy the life others can't(passive income)".
Some options for online business passive income:

Forums (as already mentioned)
Affiliate sales (someone sells your product)
Memberships site (now this one is what I might do in the future..)
Automated Blog with AdSense

I want passive income too but it wont come without lots of work at first!

Cheers

 

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[GreenHouses]

Dividends are a form of passive income, although it pays to monitor the health of the businesses whose shares you hold.

I think the important distinction to make is that the income is recurring in nature... not so much that you don't have to do anything to earn it, but that you do something once and get paid over and over again for it. Whether it be researching real estate or stocks and then making a purchase, or it could be trailing commissions on mortgages or insurance that you've sold.

One thing I learned from the Cashflow game is to go for capital gains first. Then when you make a substantial profit this can in turn generate a substantial cash flow.

 

[hatterasguy]

Yeah thats the trick, you need the money first to generate cash flow.

Make a lot of money, than invest it for cash flow. Thats a good formula.

 

[CashFlowDepot]

Passive income is real!

But it won't be passive in many of the places you described.

A mobile home park is only passive once it is completely filled up with GOOD tenants. Until then, it will require a lot of your time and money. If you buy one that is already filled up, it will probably not cashflow. Same goes with storage facilities -- they are extremely management intensive.

Rental properties can be very passive IF you buy the right kind of houses in the right areas and get the right kind of tenants. I own many rental properties that I have not seen in 9 years and have not talked to the tenant in 9 years.

My average tenant has been with my 5 - 6 years. And because I have a really good management system in place, i don't need a property manager, don't have to deposit rent checks, and rarely hear from my tenants because they are authorized to call my preferred list of contractors directly if anything needs to be done. The tenant pays the 1st $50 in repairs so it cuts down on the calls.

If I owned Section 8 housing it would NOT be passive. I could expect much higher turn over and would probably get a house back that needed a lot more than paint and carpet when a tenant moved out.

I have two online businesses and they are both very passive - requiring less than 4-6 hours of my time per week on average. They each crank out money every single day.

The thing I really like about an online business is that you can run it from anywhere.

Only when I'm working on a new project does it take more of my time. The problem is I'm always working on new projects.

 

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[Russ H]

Passive income is real!

But it won't be passive in many of the places you described.

A mobile home park is only passive once it is completely filled up with GOOD tenants. Until then, it will require a lot of your time and money. If you buy one that is already filled up, it will probably not cashflow. Same goes with storage facilities -- they are extremely management intensive.

I realize you haven't seen Sonya & Doug's presentation on Self Storage, Jackie.

But there are some pretty cool high tech things out there to reduce the management (people) costs. Cameras that link to the internet (and you can monitor from anywhere), automated kiosks, etc.

You need the right demographics (low crime, reasonably trustworthy/responsible locals), but it can be very effective.

One example:

Self Storage Kiosk and public storage kiosks

You may want to PM her about it, if a PS deal falls in your lap.

-Russ H.

 

[AroundTheWorld]

But it won't be passive in many of the places you described.

You know, Jackie. You bring excellent experience and knowledge to this forum. For that, I am grateful. I hope that you may also be able to sense the level of respect the regulars here have for one another. We don't always agree, but most of the time, we can disagree in a respectful and polite way.

I respectfully disagree with the statement you made above. I'm honestly not even sure if you read the entire post, or just scanned the "vehicles" I mentioned. The reason I'm not sure of this, is that you said almost exactly the same thing that I did about mobile home parks.

I'm looking forward to getting to know you here, and I hope that you will take the time to know each of us, and the experience we bring to the table too. We all have something to give.

On to the discussion about passive income.

A mobile home park is only passive once it is completely filled up with GOOD tenants. Until then, it will require a lot of your time and money.

You've summed up nicely my point. Most of these "vehicles" require work upfront, but have the potential to be passive once you have payed the piper.

Same goes with storage facilities -- they are extremely management intensive.

That has not been my experience.

Building? yes. Developing? yes. Again... pay the piper. Managing? Hands off. You can use a kiosk, hire an employee, put your systems in place and have passive income.

 

[Kung Fu Steve]

Passive income is real!


I have two online businesses and they are both very passive - requiring less than 4-6 hours of my time per week on average. They each crank out money every single day.

I'm happy for your success, but the fact is if you have to work at it... It isn't passive.... So what is really passive? It sounds like the notes seem to be the least labor intensive in the long wrong. After the money has been made, if you can find the proper people to lend the money to... well now that I'm saying it, that also sounds pretty labor intensive.

 

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[AroundTheWorld]

After the money has been made, if you can find the proper people to lend the money to... well now that I'm saying it, that also sounds pretty labor intensive.

Yea, that is intensive... if you are doing it as a business... as in "hard money lender"

But, if you are selling an asset.

Business
Real Estate

Then... you are just finding one buyer, one time. (well, and of course, building the business or adding value to the real estate) Once you have done the deal, it is 100% passive for years.

 

[CashFlowDepot]

Around the World

Yes, you had some great points in your posts and I do respect your & others opinions.

My post about mobile home parks and storage facilities was based on personal experience and the experience of several good friends who are in the business.

Depending on how much turn around or construction is necessary, you basically buy yourself a JOB for a few years.

After that, with employees and/or management in place a mobile home park or storage facility can be passive.

A good friend bought a half full 150 space mobile home park for $425,000. Even though he had on onsite manager, he and his wife worked 10-12 hour days, 6 days a week and spent a TON of money ( his and others) to get the park filled up. Just as it got to the point where he could cut back to working 10 hours a month, he got an offer for $2,450,000 and sold it.

Good money? You bet!

Passive? No Way!

I've got similar stories for storage facilities -- they are a JOB in the beginning but can become more passive later IF you know what you are doing. Too many people jump in to these types of investments thinking they can hire a manager and just collect checks.

I don't like time bandits.

Having 1 - 2 years of my life tied up on a project is not my idea of fun or passive.

 

[camski]

Passive income is real!


I have two online businesses and they are both very passive - requiring less than 4-6 hours of my time per week on average. They each crank out money every single day.

To me this is not passive, this is low maintenance. Passive would be no work, but I guess it just comes down to interpretation.

 

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[Russ H]

Same goes with storage facilities -- they are extremely management intensive.

That has not been my experience.

Building? yes. Developing? yes. Again... pay the piper. Managing? Hands off. You can use a kiosk, hire an employee, put your systems in place and have passive income.

I've got similar stories for storage facilities -- they are a JOB in the beginning but can become more passive later IF you know what you are doing. Too many people jump in to these types of investments thinking they can hire a manager and just collect checks.

I don't like time bandits.

Having 1 - 2 years of my life tied up on a project is not my idea of fun or passive.

I don't think Sonya and Doug spend 1-2 years working as S's on their storage facilities (please correct me if I'm wrong here, Sonya).

Reminds me of a discussion (one might even call it an argument) we had a few years ago w/Robert Kiyosaki.

He considered the internet a waste of time, and (in his experience) could not see how anyone could spend time on the internet and make money.

Yet there were people in the room with him (some of them only teenagers!) who were pulling six figures out of the internet each year, with ease.

RK's experience was one thing

Ours was another.

Jackie, I hate to say it, but just because you have never known or met someone who knew how to run a public storage passively-- does not mean it can't be done.

Again, Sonya (Around the World) is a very sharing person.

Talk to her about how to make it passive-- you might learn something.

(Isn't that why we're all here? To learn and grow?)

-Russ H.

 

[AroundTheWorld]

I don't think Sonya and Doug spend 1-2 years working as S's on their storage facilities (please correct me if I'm wrong here, Sonya).

We went in spurts. Full time for 2 months while we built one building. The only reason it was full time is that we decided to general and do some of the labor ourselves. Could have just as easily been contracted out.

Then, "rest" time, while that first building filled up. We put systems in place that allowed much of the work of leasing up to be automated. It was no where close to full time work during this phase. Maybe 5 hours a week.

Then, another "burst" of full time work during construction.

Once we decided to be done with construction for a while, then you are back into "lease up" mode. There are several ways that you can set things up, and we have tried a variety of situations w/ our facilities....

* partnership arrangement in which one partner is tasked w/ management (and we are passive)
* kiosk and one partner manages. The work load is cut by 90% when you have a kiosk in place. No more running down to sign a lease, move someone into a different unit, or move them out. NO more running down to collect payments either.
* kiosk with one employee. This has turned out to be the most passive combo. Employee is there to do any landscaping, cleaning, and the light book work needed. (very light, because software handles 95% of it). We only have to check in a couple times a week to be sure things are clean, check the numbers, new activity, and make marketing decisions. Not a full time job. Not even close. And never has been full time.

 

[CashFlowDepot]

Storage facilities sound like a good business if they are well located and have good management in place.

With so many of them out there now ( one on every corner around here) do the numbers still work? Most of them in Texas are half empty. I guess it just depends on what you paid for it and the debt service.

Do you typically count on 50-60% occupancy to cover the expenses?

 

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[AroundTheWorld]

Success does vary dependent upon local conditions. Some local markets are over-saturated for sure. It is really important to do the dd before getting involved in a project.

You need to have the population base
and
You need to know how saturated that market is. If it is too saturated, move on to another market.

Occupancy depends upon the size of the facility. The larger the facility, the lower occupancy rate you can get by with. (as you are spreading the cost of land and fixed expenses over more square footage)

 

[Pete799p]

I know this is such an old thread but for anybody still interested in storage facilities I have some insight. One of the most important aspects that is often over looked in calculating the viability of a project like this is the price of steel (if you are going to build traditional steel units). If you are looking into building a new facility you need to make sure to closely follow steel prices as a small move can make the difference between success and failure. Since steel prices can fluctuate greatly in the time it takes to purchase, design, and construct a facility you must evaluate the risks associated with steel pricing. Many overlook the potential for building material fluctuations in the long term when calculating the viability of a staged storage development.

As far as passivity one of my IS college professors built a storage facility and then set up a remote network to run the entire facility. He has maybe two total employees running it and takes minimal amounts of his time to manage.