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“Passive income” is a phrase uttered by most modern entrepreneurs, as they seek to achieve the greatest amount of profit for the least amount of effort. It’s such a popular concept that it’s become a veritable buzzword, losing meaning each time it’s included in the title of an article or the foundation of a business plan.
And don’t get me wrong; passive income can be a path to building meaningful wealth. However, there are some serious problems with passive income, both in theory and in practice, that you’ll need to reconcile before moving forward with any plan.
Passive income in a nutshell
Passive income is any kind of income that you generate without the need for ongoing work. If you get paid a salary in exchange for full-time work, this is active, not passive. If you get paid hourly, you’re earning money in return for your efforts, so it’s active, not passive. Passive income hypothetically requires no time expenditure to make money. For example, if you invest in a dividend-paying stock, you’ll often earn a quarterly dividend based on the number of shares of stock you own. If you own 1,000 shares of a stock that pays $0.30 per share as a dividend, you’ll earn $300 in quarterly income by owning that stock, with no further effort required.
There are dozens, if not hundreds of strategies that purportedly allow you to generate passive income, and all of them have their merits. However, there are several problems with passive income that need to be addressed.
Passive income streams don’t start out passive
First, there are some income streams that require little-to-no effort from you on an ongoing basis, but even these require at least some effort to start. Take our dividend-paying stock as an example: Before you can start generating passive dividend-paying income, you’ll need to carefully research different dividend stocks, do your due diligence and purchase your shares.
The same is true of many other supposedly passive income streams. For example, if you’re hoping to generate rental income from a property, you’ll need to spend time finding the right property, fixing it up and attracting the right tenants. If you want to make money from advertising on a blog, you’ll need to spend time writing content and attracting an initial audience before you can build that momentum.
Many passive income streams still require upkeep
Some income streams fall into the “set it and forget it” category, but the majority of passive income streams still require ongoing upkeep. Within that set, some income streams can be downright disruptive in your life. For example, if you’re making money via advertising on a blog, you’ll need to create new posts on a regular basis and maintain your website. If you rely heavily on organic search traffic and you’re penalized by Google, you’ll have to quickly adapt your strategy if you want to survive.
The same dilemma applies if you own a rental property. Ideally, you’ll generate income via rent paid by tenants, but what happens if you have a tenant who refuses to pay rent, or one who destroys your property? You’ll need to manage an eviction, which can be both expensive and time consuming. In other words, it compromises both the “passive” and the “income” part of “passive income.”
Capital is a massive gatekeeper
You’ll also find that capital is a massive gatekeeper for many passive income strategies. Anyone can start a blog, more or less for free, and anyone can try to start a business selling stock photography. But if you want to make substantial income with strategies like managing rental property, collecting dividends from stocks or loaning money to peers, you’ll need tens of thousands of dollars in the bank.
If you’ve already got your finances together and you’re making a strong stream of revenue from an active source, this may not be a big deal for you. However, it compromises the accessibility of some otherwise universal strategies.
There’s no surefire formula
Even with a good plan and significant business experience, there’s no guarantee that you’ll be able to make money passively. Most approaches require you to put together a comprehensive strategy and be prepared to fend of competition, economic challenges and other threats. Too many people venture into the world of passive income believing they can follow a step-by-step approach and end up making money with little to no effort. They face a rude awakening when they encounter the first challenge that requires them to pivot their approach.
Passive income sounds fantastic on paper, because it offers entrepreneurs a chance to generate income with a minimal number of hours spent. However, there are many misconceptions surrounding passive income that lead people to overestimate its value and approachability. In many cases, passive income requires substantial upfront effort, initial capital and modest ongoing efforts; even then, there’s no guarantee of success.
Still, if you’re interested in diversifying your revenue streams or if you just want more opportunities to build wealth, passive income development could be right for you. Just be sure you treat it as a business strategy and not a get-rich-quick scheme.