Passive Income 101: How do I build it and what’s the best source?

Passive income

passive income - man reading book in water

Passive income is the goal right?  Everyone and their mom wants to achieve passive income and have money coming in.

What is passive income?

But what is passive income?  Free money coming in every month?  Well that’s the idea but it usually don’t quite work out that way.

A lot of people imagine life like the man above, relaxing in the water, on the beach, or drinking margaritas.  And while passive income is awesome, it takes a lot of work to generate.

Passive income is when you have money coming in every month that you don’t need to actively chase.  For example, if you own an apartment and rent it out, you’ll get passive income every month in the form of rent.  Or if you have an online business and sell an ebook or course, you’ll get passive income from the sales.  You won’t need to chase the rent money or sell to people individually to buy your products.

However, passive income isn’t guaranteed.  Your renters could decide to pay late or not pay at all.  Or if you stop producing content or running ads, then your traffic will begin to decline.

Why generate it?

Passive income is still the goal.  It’s one way to generate financial freedom, or it can be combined with active income as part of your freedom formula.  If you can have enough passive income coming in then you can be immune to any one source depleting or taking a hit.  It’s not about never working again.  Creating passive income is about taking the grind out of the work and making it fun.

When you don’t need to hard sell x amount of people per month, or don’t need to show up for the paycheck every week, life becomes a lot better.  When your income is passive rather than active, it allows you to really focus on your craft and enjoy what you do.

How to Build Passive Income

How to build passive income

So how do you build passive income?  Well you need to have a source that will give you money without you needing to do direct actions.

You’ll still need to do indirect actions to maintain your passive income.  But you won’t need to do direct actions in order to keep the flow coming.  Just maintenance actions.

You build passive income by having an income stream that doesn’t require direct actions on a consistent basis.  These are things like:

  • Selling an online product
  • Affiliate marketing
  • Own a business that someone else runs
  • Invest in businesses
  • Rental property income
  • Stock market

Selling an online product

Selling a product online is the first thing most of us think of when it comes to building passive income.  In the age of the internet, we constantly hear messages that tell us to sell something online and then go live on a beach.

If you decide to go this route then you can either sell your own digital product or sell a physical product.

Digital product

A digital product is going to something like an ebook or video course.  This is something that requires no work on your part once the consumer buys it.  And it requires no direct actions either.  You’re not calling up people to buy your product.  They’re going to your website and buying it.

The pros to this are attractive.  You own your own website and you own the product.  You have complete control over your business.  Barrier to entry is also low, at least from a monetary perspective.  Most websites are going to get traffic through blogging or YouTube videos.  So if you’re dedicated to creating content and can gather an audience, then you can sell your own product.

However many people make the mistake of thinking it will only take a few months to grow an audience.  Or they think one particular blog post or video is going to get millions of hits.  Yet in reality, it takes a while to gain enough traffic and build a relevant audience.  In fact it takes a lot longer than you think.  If you’re willing to put in a few years with zero pay in order to build an audience, then you can have a successful online business and generate a lot of passive income.  But you must be willing to put in the time.  And you also need to be delivering value to your readers.

Takes a long time to get to the “passive” income

I’m not trying to discourage you, this has been an incredible way for me to grow my business.  But even generating this kind of “passive income” isn’t very passive.  It’s taken a few years of weekday nights and weekend days of consistent writing in order to get to this point.  I love what I do and that’s why it’s possible for me to do it.  If you’re going to build passive income through your own website by generating organic traffic, then you absolutely need to love it.

Physical product via Dropshipping 

dropshipping

The second way is to sell a physical product.  While you can make your own, the most cost effective and popular method is to dropship via Amazon FBA or Shopify, oberlo.

This method is much more passive than active because it doesn’t take a few years of building an audience to get going.  In fact, if it takes you a year or two to get to market then you’re too slow and will likely be too late.

For selling a physical product you’re going to need a few grand, at least 3k but ideally up to 5 or 10, to invest into advertising.  I’d recommend Facebook and Instagram ads.

The hardest part will be picking a niche that has enough demand but not quite enough competition for you to break into.  That way you can still have good profit margins, which will further advance your ability to grow and build passive income.

This type of passive income takes having money in the bank, but it’s a lot less compared to some other methods like real estate.  If you’re passionate about e-commerce and have the money to make it work, then selling a physical product could be the way for you to go.

Affiliate marketing

Affiliate marketing is when you make a commission on someone else’s product by offering it to your audience.

I don’t do any affiliate market yet.  But if I did, an example would be me advertising to you guys to go buy someone’s product.  Let’s say I was a big fan of hanes t-shirts.  I could include a link like this for you to go buy the t-shirt.  The browser would either track that it came from my website, or I could give a discount code like “haneslovers696969”.  That discount code would be associated with my business, and then I’d get 10, 20, or whatever agreed upon percentage.

The above is just an example, I don’t make any money off of hanes t-shirts.

The point is that you can do affiliate marketing to product relevant to your audience.  This can be a solid method to produce passive income.

However, you need to make sure that the product are legit.  Otherwise you will hurt the reputation of your brand by screwing over loyal readers/viewers.

You also need to have an audience.  Which means grinding away for a few years on blogging or YouTubing.

Invest in businesses

invest in businesses

By investing in businesses I don’t mean the stock market, but actual businesses you know.  Becoming an angel investor is a big risk.  It’s likely that you’ll never see your money again.  Which is why I don’t recommend this option.

But if you have the money, then your 25k or 100k could potentially turn into millions if you invest in the right business.  If I had to choose the this option, I’d look for a tech start up with Stanford nerds who have no money but are all smart as fuck.  You can offer to give them advisory on the sales/maketing side.

This could turn out to be active income or no income at all.  But on the small chance it works out, then you could become ultra rich.

Investing in businesses is a numbers game.  You should wait until you’re already rich to do this.

Own a business that someone else runs

Owning a business that someone else runs is also a way to generate passive income.  This is for guys who already have a decent net worth and have the ability to purchase a business.  Or you could build up a business and hire someone else to operate it.

For example, you can build an active income business like a service based business.  My first business was a service based business and it’s actually what I recommend all of you guys do.  I still have that business as a source of active income.  Rebellious Development brings me active income through coaching and will being me passive income with my future products.

But anyways, once it gets to a certain run rate, you can hire someone to run it for you.  For example, if the business generates 400k a year, you can pay someone 100 to 150k to operate it.  And then you can take home whatever else is left over.  That could be 50k or 100k, totally depending on the profit margins of your business.  Or you can split the work, hire one person to do marketing/sales, the other to do the work itself (marketing, pool cleaning, security, etc.).

The trickiest part is to hire good people.  If you have hardworking friends you trust and know can do the job, then this can be a great way to build passive income.  But if finding the right employees is difficult, then this might turn into active income and tons of management work.

Rental property income

rental income

Rental property is the classic but solid way to generate passive income.  It takes a lot more money than an online business takes, but a lot less then investing in businesses directly.

100k can buy you an apartment in Vegas that you can rent out for 700-900 USD a month.  It’s not the worlds best investment in terms of short term ROI.  But that’s still almost a grand per month if having to do close to nothing if you get a good tenant.  If you’re willing to give up 10% of the money then you can hire a property management company.  This will truly make your investment into passive income.

It takes a fair amount of money to get into the rental property game.  And even then, the money you put in could be better used on your own business if you don’t already have one.

On the flip side, if you already have your own profitable business, then rental property income is a solid passive income stream.  It can help to add to the money you have coming in from your own business.  It’s a great way for those of you with an active income stream like a service based business to start generating passive income.

You may read in some of my articles where I discourage real estate.  But that’s only if you’re taking out a mortgage or putting 100% of your savings into it.  If you’re buying the property in cash and are putting 50% or less of your net worth into it then you’ll still be okay if the market crashes.  And in that case real estate can be a solid source of passive income as part of your wealth strategy.

Stock market

invest in stock market

Lastly is the stock market.  It’s true that the stock market goes up each year, at least in the long term averages.  Short term year to year can fluctuate.

I’m not a financial advisor, so you can do what you like.  But if I had to say something, it’d be to put your money into mutual funds and things like the S&P 500.  You can also invest into companies like Coca-cola that have dividend payouts.

You won’t see a lot of this money until your 50’s and 60’s, because it takes a long time for the compound interest to kick in.

Investing in the stock market isn’t a terrible investment.  It generates passive income if you sell the stocks or funds after they go up.  But unless you know how to pick them well, it can be difficult to make good money off of it or make consistent money from it.  It’s better used as a long term strategy to build some wealth on the side rather than be your main strategy.  However, like real estate, if you have good money coming in from your main business, then it’s not a bad stream of passive income to have.

Possible to build up

It’s going to take a few years of massive grinding to achieve passive income.  You can make an exception with drop-shipped product, but that’s going to take some capital to begin with.  The traditional methods of building passive income like real estate and the stock market can still be solid, but they take a lot of capital to begin with if you want to make a respectable monthly income from them.

You’re not going to be working an hour a day from beach like you might’ve thought.  It takes a lot of time and effort to build passive income, or a lot of money to begin with.  Since most of you aren’t rich, you’re going to need to invest your time and effort.

Active income has value

Active income has value in that it builds character and teaches you willpower.  It also gives you money now.  Grinding to close deals in sales or get the program to work in development can pay well.  And that extra money can be invested into an Amazon FBA store + ads or a rental property.

The best thing for you to do is to pick one form of passive income and get good at it.  If you like real estate, save up your money with your active income and buy a cheap apartment for cash.  Then rent it out.  You’ll begin to grow your passive income on the side.  Once you have a few grand a month, you can continue with your active income or live a minimalist lifestyle on the passive income you generate.

Passive income allows you to have more flexibility

freedom is amazing

The reason people chase passive income is because they want flexibility.  They don’t want to work or they just want to work less.  But it’s because they’re doing something they don’t enjoy.

What I encourage you guys is to find something you enjoy that can also be turned into a business.  It can be personal training, web designing, programming, fixing cars, whatever.  Then turn this into a service based business.  This will be active income.

Over time you’ll be able to make 6-figures and ave your money.  You can use this saved money to invest into a dropshipping business, real estate, the stock market, or whatever you’d like.  Or you can blog/YouTube about the subject and make passive income around that.  For example, if you’re a car detailer, you can open up your own shop.  That’s your active income service based business.  The you can do YouTube videos showing people how to do what you do.  You’ll service people in real life, generate passive income through products you sell online.

It’s not about not working.  Even with passive income there will be some maintenance work.

And as a man, you need to work and have a purpose.  But you need to do work that you enjoy.  Figure out what you like to do and start a business around it.  Then invest that money into unrelated streams of passive income, or create another product based business around that thing you love.  It takes time and energy to build passive income.  But when you finally start to make it, you’ll see how beneficial it can be.

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