Two words, passive and income, that shouldn’t knock heads in the same sentence. After all, the implications rise to phantasy levels. There you are, sitting under a tropical sun and sipping a Pina Colada, while money crowds into your bank account. It sounds equally surreal and enticing, but running a Truman Show reality check might dispel the spell. Passive income may not be as effortless as popularized.
Many have fallen through the cracks. Ideas might generate poor returns or their implementation might consume too much time. In that case, passive is no longer the term we should be using.
So, before you do anything rash like quitting your job and letting your boss know what’s on your mind, you need to understand what you’re getting yourself into. What is passive income? What should your portfolio for financial independence look like? And where do they serve the best Pina Colada?
What is Passive Income?
The American Internal Revenue Service organizes income into three major categories: active or earned income, passive or unearned income, and portfolio income.
The same authority only recognizes two types of passive income:
- Rental income.
- Trade or business activities in which you don’t materially participate.
The IRS doesn’t hold the final word when it comes to defining passive income. Other investors recognize sources such as:
- Intellectual property royalties.
- Lottery winnings.
- Guaranteed service payments- like earnings from Google Ads.
- Dividends and interest from stocks and bonds – these are usually regarded as portfolio income in the U.S.
So passive income uses assets as its main source. And assets are either rental property bought with money or other work-proof ideas will run by you in this article.
Aside from the initial investment in time, the important thing is that the money stream keeps running. You only have to turn on the faucet.
Four Ways to Construct your Passive Income Portfolio
1. Rental Property
Idle were the times of the landed gentry in the 18th century. It’s enough to leaf through a Jane Austen book to know that work always took second place to walking in the meadows, mastering the art of conversation, and falling desperately in love with the wrong person.
Alas, how fortunate we are that trends are in the habit of recurring so that we too indulge in the perks of tenure.
If you have a good amount of cash stacked somewhere under the mattress, you can buy a house and rent it out, while generating enough passive income each month to be one step closer to that promised land of financial freedom. For retirees, rental property is the crutch to support them in old age, especially if the pensions they receive from their former workplace.
However, don’t put all your eggs in one basket yet.
According to John Graves, author of The 7% Solution: You Can Afford a Comfortable Retirement, if what you’re after is a passive income from rentals, first ask yourself this:
- What are the initial costs and expenses?
- What is your targeted return on investment?
- What are the financial risks of owning the property?
- How do I choose the best tenant who will not throw Great Gatsby parties and ruin my lawn?
2. Development and Outsourcing
Do it entrepreneur style. Come up with a product or idea that’s in high demand. For example, you can build a website that will help people convert their childhood home videos to DVDs or USBs.
Money-making websites and blogs may push you into some active work since they do need to be set up and optimized. At the end of the week, you might sum up 80 to 100 hours of laptop laboring.
But once you make this first step, the rest of the legwork and maintenance can be outsourced to third parties. We are talking about leveraging a wide range of benefits like low-cost labor, improved service efficiency and added quality to the product.
You will need some upfront capital, but there are ways to fund your venture from external sources, like the crowd-funding website Kickstarter. Sell your idea to the world and find your sponsor.
3. Build up an Investment Portfolio
Take your pick of your average millionaire, and you’ll find out that most of their income streams from the wads of shares they own in companies that pay dividends. There are two ways for you to step in their shoes.
So, if you already have money, you might consider investing it in an index fund company with a good history of steady growth in dividend payouts over the years. Look at the sectors involving utilities, telecoms, or manufacturing.
This method yields a pretty optimistic risk-return ratio. So, you’ll still sleep like a baby and not worry about losing track of your retirement money.
The alternative to shares is to flow your portfolio in CDs, term deposits or bonds. Your monthly passive income is ensured and it will keep coming automatically for years without you having to do a single thing.
4. Buy and Sell SEO Optimized Domain Names
The domain name industry has made many rich, so it’s not surprising that more people are becoming interested in buying and selling domain names on a daily basis. How much passive income does such a venture yield is a tricky question.
If you were in the vanguard of computer technology in the 1990s, you might have caught tens of free domain names in the net. Prior to 1995, their value was that of water. They were completely free.
These days, high demand combined with a short supply spearheaded domain names into the commodity category.
So what kind of domain names are we looking for? First, it needs to be keyword strong, enough so it yields at least 800 monthly searches at a global level.
The baptizing part is the easiest step. Once you have what you believe is a valuable domain name, you can get it out there on the auction scene, set up a price and wait. It doesn’t get more passive than this.
Keep in mind that the majority of these domains never sell and just stack up, at least until the Internet decides to do some spring cleaning in the house.
The list above unveils some reliable sources of passive income. Still, you’re the one to compare and decide which will be the one to cut the financial strings that tie your income to active work. Can you walk the path to financial freedom through online work, dividends, outsourcing or stocks?
Last but not least, our sources tell us that the best fruity, rummy Pina Colada is to be found in the quaint, colorful village of San Juan, Puerto Rico. Where else but the Caribbean?
Image source: 1