Published On: Mon, Jan 27th, 2014

Passive Income — Foolish Fantasy or Doable Daydream?

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Some people view the concept of passive income in the same light as others view the perpetual motion machine and cold fusion … a great idea but pure fantasy. Somewhere between the true believers and the skeptics resides the truth.

 Passive Income Defined

Before venturing out onto this limb, it is important that we are all on the same page. Passive income is not about getting something for nothing. There is no free lunch. Passive income is created by a great deal of hard work up front that pays off, hopefully, at some point in the future. The operative word here is hopefully. Remember, without risk, there is no reward and if you take no risks in your life, you are actually risking everything.

So the definition of passive income in the context of the discussion here is: Current investments or work accomplished now that will pay back at a future date.

Examples of Passive Income

  •  Investments
    Hard work and intelligent investing can result in interest and/or dividend income at some point in the future. This income will essentially require no additional work at that future date. While meeting the definition of passive income, it is an objective that is not achievable in the absence of hard work.
  • Informational Products
    Selling “how to” books, DVDs, eBooks and CDs is another approach to passive income. Developing such products is hard, time-consuming work and to be successful in a manner that will support a leisurely lifestyle in the future requires a product that is truly exceptional.
  • Rental Income
    Buying and renting property is also a path to passive income. Many of the largest hedge funds have been buying up single-family homes in this depressed housing market, which lends some serious credibility to this strategy. Single family homes are perhaps the most desirable investment due to pent-up demand. Mortgage loans are unattainable for large swaths of the population whose credit was devastated by the economic collapse in late 2008. This created a vast pool of potential renters.
  • Blogging
    If you have something truly interesting or useful to say or to share with internet devotees, a blog may be just the way to go. Successful blogs attract thousands of readers and readers, being consumers as well, can be reached by advertisers on your blog. The revenue that rolls in from your advertisers can be considered passive income.
  • Peer-to-Peer Lending
    Remember that element of “risk” referenced earlier? Here is an example of such a risk. The peer-to-peer lending platforms across the internet provide regular folks with money to invest with the opportunity to play banker. There is a plethora of peer-to-peer lending sites on the internet such as LendingClub and Prosper that allow individual investors to loan to other individuals at attractive rates of return that far exceed what would be received from investing in a savings account, certificate of deposit or even most stock purchases.

Are They Really Passive?

Let’s examine these passive income strategies.

Investment in my view is marginally passive. You can’t build a portfolio of stocks, bonds, treasury bills …whatever and just walk away from it. It has to be monitored and tweaked due to changing circumstances. In this sense, it isn’t totally passive. It requires your attention.

Information products don’t usually have the ability to sell themselves. Once created, they must be marketed, promoted and kept fresh. Is this totally passive income? I think not.

Rental income is possibly the least passive of all. Real property requires maintenance. Rents must be collected, inspections must be made, and occupancy rates have to be at a certain level. All this requires work. There will be issues with tenants, ranging from minor disputes to endless court appearances in the case of an eviction.

Blogging is an ongoing commitment. Yes, passive in the sense that is up and running and has attracted a goodly number of followers, but work in the sense that it has to be maintained, new posts must be created and if ignored, readership will rapidly decline and advertisers will jump ship.

Peer-to-peer lending is probably the most passive of all the choices offered here. Once the investment is made, things are largely beyond your control. It is passive by default.

Your Take-away

No free lunch! As stated early on passive income is almost never totally passive. It lies somewhere in the middle between very hard work and doing nothing!

Does anyone have their own take on passive income to share with readers? We’d like to hear from someone who has a successful passive income stream.

Dominique Brown
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Dominique Brown

Dominique Brown
Dominique Brown is a husband, father, financial planner, author of the book "How to Fix your Credit," author of Your Finances Simplified, owner of S&D Capital Holdings and a landlord. Mr. Brown's advice can be found on the Huffington Post, Business Insider, Yahoo, Madame Noir, HR Block and Ebony Magazine.
Dominique Brown
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About the Author

- Dominique Brown Dominique Brown is a husband, father, financial planner, author of the book "How to Fix your Credit," author of Your Finances Simplified, owner of S&D Capital Holdings and a landlord. Mr. Brown's advice can be found on the Huffington Post, Business Insider, Yahoo, Madame Noir, HR Block and Ebony Magazine.

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African Americans are significantly more likely to have some type of debt (94%) compared with the general population (82%). Credit card debt, student loan debt, and personal loans are all significantly higher in the African American community.

Source: Prudential’s 2013 "African American Financial Experience" study