I remember the first time I said to myself, “Wait a second. You can do work once, and then continue getting paid for it over and over again?”
I didn’t really think it was possible. I thought someone was messing with me.
As someone who, for the longest time, knew nothing other than working a typical 9-5 hourly job, earning passive income was truly a mind-blowing idea at the time.
I immediately turned to the person I go to most when I don’t know something — Google. (Yes, I realize Google isn’t a person, but it might as well be, for how close he and I are.)
I began searching for what it was, and ways to make it. I soon realized it was going to be a lot more difficult than I had originally thought. I was so excited at the prospect of making money while I wasn’t working, that I was a little discouraged to find the following:
- Passive income is a lot harder to make than active income (more on this below)
- Passive income paid little (and often nothing) initially
- Passive income often has a large risk of failure/quitting before seeing any profits
But I can do hard things.
If I’ve learned anything in life, it’s that the secret to being successful in anything is hard work, self-control, and consistency.
If creating passive income were easy, everyone would be doing it. And very often, doing the things that everyone is doing isn’t the most worthwhile venture. Most things worth doing often require opposition.
Active Income vs. Passive Income
From the time I was 11 to 15, the only real form of work that I could think of to make money was mow lawns.
My best friend and I, we would load up our lawn mowers, push them down the street, and go door-to-door to see if people were interested in us mowing their lawn.
Let me tell you. We were so busy.
During Summer break, often times we would work 40 to 50 hours to get as many lawns done as possible. And even still, we had more people who wanted us to mow for them. The problem is we didn’t have enough time. We already had more than we could handle, even though we wanted to take on more.
I kept thinking to myself, “How can I take on more lawns? I would if I could, I’m just exhausted!”
That’s the problem with active income. It’s not scalable. I wanted to make more money, but the only way to do so was to work more hours, and I didn’t have anymore hours in the day left to give.
Active Income is simply exchanging currency
When you go to work for an hourly wage, we typically work 40+ hours per week, right?
At the end of the pay period, you’ll get a paycheck. Most often, you’ll take that paycheck, pay your mortgage/rent, utilities, and any other bills you have. We then go to the grocery store and buy groceries for the week.
You walk up to the cashier and hand them $50 to cover your groceries. You might think that you’re handing them $50, but in reality, you’re handing them 5 hours of your time (assuming you make $10/hr).
This is what I meant when I say you’re simply exchanging currency. All you’re doing is converting your hours into dollars, and then your dollars back into hours. Once your paycheck is all used up, you have to go back to work to earn more.
This exchange of currency is all-too-common, but it’s wrong, because you’ll never get ahead this way.
One of my favor quotes from Warren Buffett:
Until you learn to make money while you sleep, you’ll never be rich.
Active Income is easier, but less rewarding
The reason Active Income is so typical, is because it’s easy and fast. And also, because most Americans don’t know any other way to make money.
If you wanted to, you could head on down to McDonald’s, apply for a job, and within the week, you’d likely have your first paycheck.
The problem with this, however, is you only make money while you’re working. The second you punch out of that timeclock, you quit making money.
Passive income doesn’t care when you work, because it’s working for you night and day, 24/7. It requires a substantial amount of work upfront, but then pays massive dividends, weeks, months, or years down the road.
Passive Income is worth the initial effort
As I mention in the title of this post, I make $2,256 each and every month, whether I work or not. That’s $3.13/hr, that I get paid whether I’m on vacation or whether I’m sleeping. I could legitimately sit back and do nothing for the rest of my life, and this money would keep coming in no matter what.
That’s $75/day, 365 days out of the year. Amazing!
The great thing about this too, is that this number slowly increases. Out of that money, I don’t keep any of it. Not a dime goes into my bank account. Instead, I let it sit there, reinvesting itself, to grow larger and larger.
It would be great to have an extra $2,300 per month added to my budget. I could upgrade my car, or my house, and have a substantially nicer quality of living with that money. But I don’t.
You see, I picture each and every dollar as little soldier. This is a soldier that goes out and works hard for me, so that I don’t have to. If I were to spend that money, that’s fewer soldiers I have out in the workforce, trying to round up more dollar bills for me.
Peace of mind
This additional money gives me incredible peace of mind.
I don’t make enough money passively to quit my job — yet. Of course that’s the goal, but I’m not quite there yet.
Should something happen to me — maybe I get hurt and can’t work, or I get fired — I’ll still have a significant amount of money coming in each and every month that I can use to cover the majority of my expenses. That doesn’t mean that we’d be living high and mighty, but we could make our mortgage payment and we wouldn’t starve.
Sadly, most people would be in a substantial financial bind if they miss one or two paychecks. It’s unfortunate how many people live paycheck to paycheck. But knowing that we have supplemental income, should something happen to my day job, is incredibly reassuring.
The 4 Ways I make passive income
Here’s a look at the 4 main ways that I make passive income. Some are more substantial than others, but all of them together add up to a significant amount, and continue growing month after month.
1. Rental Property Income – $1,400/month
As of this writing, my wife and I have four rental units that, after all expenses paid, net around $1,400/month.
This is by far the largest portion of our passive income.
We started our journey into real estate a few years back, but so far, it’s grown into a nice income for us. We’re always seeking new investment properties that cash flow.
You may be saying to yourself, “Now hold on a second. Real estate isn’t passive! You have to collect rent, call plumbers and electricians when something breaks, deal with tenants, etc.”
That may be true, but real estate is about as passive as you can get. We automate all our rent collections each month, and if something breaks, we call someone to come fix it. On any given month, the most I spend on any of our rentals is 3-4 hours, but most months, I spend no time at all. And remember, passive income doesn’t mean that there isn’t any work involved. It just means that the majority of the work is front-loaded. Then, you can sit back, and do small amounts of work to maintain that income.
We’re currently in negotiation of a duplex, and potentially have a tri-plex on the back burner as well.
2. Website Hosting – $450/month
For my 9-5 day job, I work in the IT industry.
Over the years, I’ve learned how to build websites not only for my employer, but for other people on the side. Occasionally, I’ll reach out to small-to-medium sized businesses who either don’t already have a website, or are looking to redesign their current one.
I typically charge an up-front fee for the initial design work and build. But once that’s complete, I also charge a monthly hosting fee — essentially their “rent” on the internet.
I rent a server out of San Francisco for anywhere from $15-20/month. Then, I’ll host multiple websites on this server, but charge clients $10-50/month, depending on the complexity of the site. As of this writing, I have 13 websites that I host for clients.
You may be asking yourself, “Why would people pay you to host websites for them, when they can do it themselves for cheaper?” You’re right. They absolutely can. But most people don’t know how. So I’m capitalizing on a knowledge and skill that I have, but they don’t.
For the most part, this is truly passive. Occasionally, I’ll have a client call up and say, “Hey, can you update this? Can you change the font here?” But this is very uncommon. It’s rare if I spend even more than 30 minutes per month on existing client work.
3. Principal Paydown – $236/month
In addition to the rent that we collect each month from our rental properties, we also get an added payout — principal payoff.
Each month, we use the money we collect from tenants to pay the mortgages on our rental properties. A significant portion of this money simply goes towards interest on the loan. A smaller portion, however, goes to paying down the principal. Between our four units, we pay down $236 in principal, using other people’s money.
This isn’t money that we necessarily have sitting in a bank account, accessible to us tomorrow if we needed. It’s sort of a delayed payout. If/when the time comes to sell these properties, we’ll have made money through rent, through property appreciation, but also from principal paydown from our tenants.
Even better, each and every month, this number goes up. As the loan amount decreases, the more money is applied to principal, instead of interest.
So while we may be making $236 this month, it may be $239 next month. And then $241 the month after that. It will continue growing larger and larger, until eventually, our mortgages will be completely paid off using other people’s money.
This source of income is truly 100% passive in the sense that I make money without having to do anything. This will always continue to grow, no matter what, as long as we have real estate.
4. Stocks/Mutual Fund Interest – $170/month
From money that we already have invested in stocks and mutual funds, we earn $170/month in interest, as well as dividends.
This works similar to our principal paydown from rental income, in the sense that it continues to grow each month.
Remember those money soldiers I talked about earlier? This effect compounds slowly overtime, but has massive results long-term. As we leave our money in the stock market, and continue to let it grow year over year, that $170 amount gradually increases. So while it may be $170 this month, next month it’ll be $171. And then $172. The longer we let it sit, the more work is does for us.
We typically average anywhere between 7-8% on our stock portfolio, so this dollar amount is an average. Some months are lower, some are higher.
Passive incomes ideas for you
Just because these are the four sources of passive income that I use, does not mean that you have to do something similar. People are cut out for different things, and not everyone wants to be a landlord. That’s totally acceptable. Here are a couple alternative ways that you can build passive income for yourself.
1. Start a blog
I make money from this blog. Not a lot, but eventually, I’d like it to be a large source of my passive income. So much so that it could (eventually) replace my full-time income.
These guys made over $100,000 in the month of December. I’m not kidding. Their blog has been killing it, and they did that in only 3 years time. That’s not a guarantee that anyone can do that, but with enough hard work, anything is possible.
There are many bloggers who make significantly more than that as well. If you have a passion about something, blog about it! Who knows? You might be able to make a few bucks.
2. Write an E-Book
Similar to blogging, if you have a passion for something, write a book. You can sell physical copies of it on Amazon, or sell digital copies.
If you have a way with words, this is a great way to put in the work once, and then get residual sales for weeks and years in the future.
3. Build an app
Do you have a game or app idea?
If you have some coding experience, you can develop an app, publish it to the Apple App or Google Play Store, and get downloads from potentially millions of people. Many people say that the app market is too saturated, but I don’t believe that. If you have an idea, make it happen!
4. Start a YouTube channel
Is writing not your thing? Maybe you’re meant to be on camera instead.
We started a YouTube channel this year in hopes to eventually make passive income from this as well. Again, we know this is a long-term venture, but we’re okay with putting in the work now to reap the benefits for years to come.
5. Sell Stock Photography on Shutterstock
Are you a photographer?
There are lots of websites, such as Shutterstock, that allow you to make money off your photos. By uploading your photos and giving other people the rights to use them, you can make a small commission off of every purchase.
Maintaining your streams of passive income
This is by no means an exhaustive list of passive income ideas. There are literally hundreds more things that you could do to build passive income.
Now, while it’s possible that you can make money from each and every one of the items I’ve listed above, it’s going to require some work the get started.
And even at that point, once you’ve made it big, very few things will continue to generate income while being 100% hands off. Your sources of passive income will benefit greatly by being updated and maintained at least a couple hours each week. The sources of passive income that I have all tend to do better, and even increase, when I maintain them actively.
My approach has been to focus primarily on the sources of income that bring in the most money (in this case, real estate). Because it’s tried and true, and proven to bring in money, this is where my wife and I are actively working. The other sources are all side projects, and don’t get a lot of time devoted to them until they start to blossom and produce something sizable.
Now, I really don’t mean to come off as bragging and to say, “Look how much money I make!” No, that’s not it at all. The point of this post is to get your mind starting to think about different ways that YOU can build passive income.
Nobody said it would be easy. They just said it would be worth it.
Is that cliche enough?
Ha! It really is true, though.
Building passive income is by no means easy. In fact, it’s really hard. If you’re looking to make a quick $1000 by the end of the weekend, chances are, you’d be better off working a few hours of overtime at your job.
But if you’re willing to put in the hard work and the time, to really create something that can grow into a full-time income, maybe even years down the road, passive income is the way to go.
Once things are really churning, you can put your work on autopilot, while you travel the world and reap the benefits of all your hard work.