Over the last three years, I’ve created over $3,000 per month in passive income through investing in real estate. These real estate investments allow me to make money without clocking in and out of a job.
But passive income investments are everywhere.
They are in the stock market. They are in business acquisition. And they are also in real estate, yes. So let’s take a look at what’s out there for investors, like me, that don’t want their earning potential capped by their ability to show up to a job 5 days a week.
Defining “Passive Income”
Kate and I have been creating passive income for a few years now. But the more time I spend increasing my investing knowledge, the more I have realized that “passive income” means different things to different people.
It seems many consider passive income to be money you make with ZERO engagement. Like you could just sit at home playing video games all day every day and never interact with your investments, and you would still be bringing in money.
This type of income sort of exists. Not quite to the point where you never have to think about it, but close. The problem is this type of income has a pretty low ROI.
Next, there are those who think of passive income as “make money while you sleep” type of income. I think this is a better way to think about it. It doesn’t eliminate the possibility of working on that income.
You may still need to put time and energy into that income, but the money you make isn’t directly tied to the time you put into it (like an hourly wage).
This is generally how I think about passive income. It’s earnings that are not limited by your time investment.
Then the last definition I see is that passive income allows you complete flexibility. Maybe the amount you make is in fact tied to how much you work. But you get to choose how much you work and you get to choose when you work. Basically like you get to be your own boss.
There is definitely crossover between these definitions, but I want to separate them out and look at the pros and cons of various investments that fit into these three categories.
“Sit At Home Playing Video Games” Passive Investments
There do exist some investments that allow you to make money with virtually no effort whatsoever. You pretty much just have to buy them and then wait. If you completely ignore them you should still continue to get paid.
The problem is that these types of investments generally don’t pay you very much, but that’s not me saying to avoid them. Many of these are actually part of my long term cash flow investing strategy.
Dividend paying stocks
I’ll start with the only “sit at home” passive income investment that I think is worth your while. I’m sure you’re no stranger to the idea of buying stock, if you have any sort of retirement account (401k, IRA, etc.) then you own stock.
Well some companies pay their stockholders dividends. When many companies have a profitable year or quarter they invest all that money back into the business in order to hopefully grow and becomes even more profitable. But when other companies are profitable, they share those profits with their stockholders.
Companies are open about whether or not they pay dividends, and you can see what their stockholders have been paid in the past.
But guess what?
You don’t even have to know which companies pay dividends. You can just buy index funds that allow you to hold stock in a large number of companies for less money. The most popular index fund, the S&P 500, has had an average dividend yield in the last 20 years of about 2%.
And that’s where the problem with dividends comes in. The most stable companies (those that you can safely ignore while playing video games), usually pay dividends below 4%.
Dividend stocks are, in my opinion, the best “sit at home” passive investment, because the value of your dividend stocks will increase in addition to you dividend payouts, but they just don’t compare to the more active passive investing options.
Next on the “sit at home” list is bonds. I don’t recommend investing in bonds. They’re just not profitable for the average investor.
When you buy a bond you are lending money to someone, usually a company or government. If you bought a government bond, then the government will pay you interest only payments until the bond’s term expires, then they will pay you back your original amount.
So if you buy a $100 bond with a 10 year term and 2% interest, then you’ll get $2 per year for 10 years, then you’ll get your $100 back.
I’ve written in more detail about why I don’t like bonds as an investment, but my core issue with bonds is they don’t allow you to enjoy compound interest, and the rates are usually lower than the rate of inflation.
High yield savings accounts
High yield savings accounts can also earn you money with no effort. The bank deposits money into your account based on how much money is in it.
While you do get the benefits of compound interest with a high yield savings account, the interest rates are so low (below 1%), that you simply won’t keep up with the rate of inflation.
Even though you’ll be earning money, the buying power of that money will decrease over time. Not a good investment in my opinion.
Other lending activities
This one may be one step beyond “sitting at home,” but it’s still quite passive. In the same way a bank gives you a home loan and you make monthly payments on that loan, you can become the bank and loan out money to others with similar terms.
There is more work up front for lenders, though. You have to find qualified applicants and write up terms, but as the lender you get to decide what your interest rate will be. And once the loan is in place, the payments will come in each month.
If this explanation sounds too simple, that’s probably because it is. Being a successful lender is probably not “sit at home” passive. But you may be able to lend money out on occasion to friends or family and make some extra money with very little effort.
“Make Money While You Sleep” Passive Investments
If you’re willing to put some work into your investments, you can significantly improve your return on investment. We’re no longer in “sit at home” territory, but these investments can all fit nicely into the 4-hour work week.
Your income from these investments won’t be reliant on how much time you put into them.
There are so many benefits to real estate, but one of the most magical parts is the appreciation of the property value. That’s where you get most of your return on investment.
But the hard part is making the investment cash flow positive. When you own real estate, you have to pay insurance, taxes, maintenance and probably a mortgage. You may also have holding costs like utilities, vacancy costs and a number of other potential expenses.
When you buy a property, you’ll have to put quite a bit of work in up front to start making money.
You may have to spend time cleaning and renovating the property. If you’re doing a short term rental then you’ll have to furnish it as well. If you’re doing a long term rental you’ll have to spend time finding a qualified tenant.
But once you get everything up and running, you’ll have an asset that pays you and appreciates in value with very little work.
In my experience, I spend less than 2 hours per month on our long term rentals and usually more like 3-4 hours a week on our short term rentals (which make a lot more money).
There are two ways to own a business. The first is by starting a business yourself, and the second is by buying an existing business.
Obviously if you start your own business you’ll again be putting in a ton of work up front, but buying a business is no walk in the park either.
When you buy a business, you’ll have to secure financing, which usually means getting in touch with banks or other lenders. You’ll be compiling paperwork and filling out a personal financial statement. The underwriting process for loans usually takes several weeks.
Then you’ll also be searching for potential business to purchase and then going through a due diligence process to ensure the business is healthy and to come up with a valuation for your business.
I have yet to purchase a business, but I have a friend who has bought a few businesses. His first business resulted in several hours of work each week, and his second business became a full time job for him.
Clearly, a business purchase can result in plenty of work for the investor, but that doesn’t mean that the income it produces is dependent on your time investment.
My next investment will be an online business. Online businesses come in many shapes and sizes. You have websites that make money from advertising, e-commerce and affiliate marketing. You have e-books and courses, YouTube channels and social influencers, subscription services and dropshipping.
To invest online you’ll be going through the same processes. You’ll secure financing by talking to lenders, you’ll do your due diligence to verify the health and profitability of the business.
Some online businesses, such as blogs, can make money on their own, with virtually no work from you. But others can become full time jobs like the business my friend bought.
Usually businesses that require more work are less expensive and vice versa. If you want a more personal view of buying an online business you can follow my path to buying my first.
“Be Your Own Boss” Passive Investments
The last type of passive investment is the “be your own boss” style. The return on these types of investments may still be tied to how much time you spend on them, but they will allow you the freedom to work when you want, where you want, and how much you want.
Not all contract businesses can be run at any hour of the day and night, or from any location, but some can.
For example, there copywriters who do nothing but write content for website and blog owners. They set a rate and can choose what work to accept. They can do their work from anywhere and only need to accept work when they want to.
There are also transcribers. Sites like Rev.com pay regular people to transcribe videos and pay by the minute. You can make even better money if you speak multiple languages. Multi-lingual transcribers get paid quite well.
In fact, most things you can do online can be turned into some sort of contracted position that allows you to create flexibility in your work schedule.
Passive flipping (“bird dog”)
There are two sides to an investment purchase. There is one side that is selling and the other side that is buying. Basically all investments have this process.
And anytime there are buyers and sellers, there is a potential market for people who connect those buyers and sellers. In real estate, they are called “bird dogs.” They go out searching for owners willing to sell their real estate at a discount, then they pass the deal onto a buyer. The buyer will pay the bird dog a finder’s fee.
You can do this style of business outside of real estate as well. You can connect buyers and sellers of businesses. You can even connect buyers and sellers of more unique investments.
Either way, this type of dealing can be done on your own terms.
No matter your definition of “passive investment” there are opportunities out there to make money without the restrictions of a full time job.
Whether you’re getting paid dividends while sitting at home, setting up businesses or real estate to make money while you sleep, or creating income when and where you want, you can create income streams that give you more flexibility to do what you want.