September 13, 2022

What Is Passive Income?

In a fast-paced world where the 9-to-5 grind is often the norm, the allure of passive income has captivated many. But what exactly is passive income? At its core, passive income refers to money earned with minimal effort or activity on the part of the earner. In this article, we will explore the concept of passive income, its advantages, popular sources, and how one might tap into this seemingly magical revenue stream.

The Passive Income Paradigm

To truly appreciate passive income, one must first understand its antithesis: active income. Active income, as the name suggests, is money earned as a direct result of one’s labor or active involvement—think salaries, wages, and hourly pay. Conversely, passive income doesn’t require constant active involvement. Instead, it often necessitates an initial investment (either of time, money, or both) followed by minimal oversight.

The Appeal of Passive Income

The appeal of passive income lies in its promise of financial freedom. It’s the dream of earning while sleeping, vacationing, or even while indulging in other ventures. With a sustainable passive income stream:

Financial Stability: It can serve as a safety net, supplementing active income.
Time Freedom: Liberates one from time constraints, often associated with traditional jobs.
Geographic Mobility: Many passive income streams aren’t location-dependent.
Diversification: Helps diversify income sources, reducing reliance on a single income.

Popular Passive Income Sources

a. Rental Income

Owning a property and leasing it out can generate a steady cash flow. With the rise of platforms like Airbnb, even spare rooms can be monetized.

b. Dividend Stocks

By investing in stocks that pay dividends, investors can receive regular payouts, typically on a quarterly basis.

c. Bonds

Bonds, or debt securities, pay interest over a set period. They can provide steady, albeit often modest, returns.

d. Royalties from Intellectual Property

Authors, musicians, and inventors earn royalties whenever their work is purchased, licensed, or used.

e. Affiliate Marketing

Promoting products or services online can earn commissions for every sale made through one’s referral link.

f. Digital Products

E-books, online courses, and software can be created once and sold repeatedly.

Building a Passive Income Stream

While the benefits are attractive, establishing a passive income source requires careful planning:

Research: Understand the domain you’re venturing into.
Initial Investment: Whether it’s capital for stocks, time for creating a digital course, or both for a property.
Patience: Returns might not be immediate.
Maintenance: Despite its name, passive income might require periodic check-ins.

Challenges and Misconceptions

It’s crucial to address some common myths:

It’s Completely Passive: Even rental properties require occasional management.
It’s Easy Money: Initial setup can be challenging and capital-intensive.
It’s a Guaranteed Success: As with any investment, there’s risk.

The Future of Passive Income

With technological advancements, passive income opportunities are evolving:

Cryptocurrencies and DeFi: Earning interest through crypto platforms.
AI and Automation: Automating businesses more than ever before.
Virtual Real Estate: Monetizing spaces in the digital realm.

Conclusion

Passive income, while not a get-rich-quick scheme, offers an appealing avenue towards financial freedom and diversification. With the right research, dedication, and sometimes a sprinkle of luck, passive income can transform one’s financial landscape, providing stability and freedom in unprecedented ways.

Purchasing real estate can be one of the smartest assets to acquire as a long term investment. There are quite a few ways you can turn that investment into a profit long-term and short-term. Turning your real estate property into a rental property can generate income for you for years to come. Here are 3 Ways Rental Properties Can Make You Income Passively:

The Property Appreciates In Value
Tenant Pays Rent Monthly
Use The Property As An AirBNB

Let’s take a closer look.

The Property Appreciates In Value

The first way your rental property can you make you income passively is if the property appreciates in value.

While it is not a guarantee that your property will appreciate in value as the market value can fluctuate up and down depending on supply and demand and other various factors including loan interest rates, etc, that can influence the market prices, in the long run, properties generally hold and increase in value over longer periods of time.

If you take a look at the prices of real estate from ten years ago and compare it to now, you can clearly see a huge difference in prices. A house that cost $100k – $200k ten years ago is now, on average, worth close to one million dollars or more.

Also, most properties in newly developed communities generally increase in value almost immediately from pre construction to completion, especially in high demand areas.

Therefore, holding on to your property will make you income passively by allowing you to buy low and sell high should you decide to do so in the future.

Tenant Pays Rent Monthly

In the meantime, you can look for tenants to rent your place out to and earn recurring monthly income in the form of monthly rent.

The second way a rental property can make you income passively is of course, by having tenants pay you rent monthly.

As the owner of the property, you can create lease/rental contracts and find someone to live in your property and pay rent as the tenant.

You can rent the property out to the tenant at a higher cost than the mortgage payment and pocket the difference. While the amount may or may not be significant high, the recurring monthly income is still a great source of passive income.

So now let’s take a look at the next way your rental property can make you income passively.

Use The Property As An AirBNB

Renting your property out and receiving a monthly rent is a great source of passive income. However, this third way a rental property can make you income passively takes it to another level.

These days, more and more property owners are turning their place into AirBNBs because of how lucrative it can be.

By charging per night for a stay at your property, the amount you earn monthly becomes significantly more, granted you are continuously receiving bookings to stay at your place.

Most people will stay more than just one night, so if on average you are booked 2-3 nights per week, you can potentially make the same monthly profit of renting the place out to a tenant within one to two weeks of booking per month, depending on the cost per night of course.

Let’s take a look at an example with some numbers. If you rent out your property to a tenant at $2000 per month and the mortgage is $1500 per month. Your monthly profit and passive income is $500.

Now for the AirBNB instead, let’s say you charge $150 per night to stay at your place for AirBNB. $150 x 7 nights (or 1 week) is $1050. So you can make the same amount you would charge a tenant in about 13-14 days (or 2 weeks) of booking instead.

If you happen to get bookings for the entire month, you end up making $4500 – $1500 mortgage = $3000 profit. $500 per month or $3000 per month? What sounds better to you?

Depending on your location and how popular your property is, you can definitely make significantly more.

On the same token, you could end up making less than if you were to rent to a tenant if you do not receive consistent continuous bookings.

Using the same example of $150 per night, 10 nights of booking is required to cover the monthly mortgage. This shouldn’t be too difficult to achieve as long as bookings remain somewhat consistent from month to month.

Now, with some patience, persistence, smart marketing of the property, and over time, as your ratings increase and more AirBNB users find your property, the repeat visitors and referred visitors from positive reviews can bring in more consistent bookings. This can turn your property into a passive income money making machine that you can eventually put towards scaling up to another rental property, then rinse and repeat. At that point, four or five AirBNB properties would be more than enough to leave your daily grind for good!