The Myth And Truth Of Passive Income


Every day I’m bombarded by social media and YouTube ads asking me how I’d like to make money in my sleep and walk away from my 9-to-5 job. How about getting paid to do nothing?

The pitchmen and women in these ads tell you it’s all about passive income – income you don’t have to work for. All you have to do is set up an online business that can be run on autopilot. You can pay for a course to learn how to do it or pay a premium, and they’ll do everything for you. Your business will be on autopilot, and all you have to do is watch your bank account grow.

Here’s the catch to all these online “passive income” opportunities:

The business you’ll be starting and running will be the same business that got shoved in your face that you got suckered out of hundreds or thousands of dollars to start in the first place. The business is finding other suckers to buy the same information you bought. It’s a passive income Ponzi scheme where the guy at the top skims off the income of everyone below them.

Here are some of the more popular “passive income” opportunities touted by one of these wealthy work-from-home gurus:

  • Affiliate marketing.
  • Online courses.
  • Online ads on ad networks like Google Adsense.
  • Influencer marketing on social media.
  • Sell ebooks on Amazon.

The problem with these “passive income” opportunities is that for most people, they don’t work, and for others, these activities aren’t exactly “passive.” Maybe the plan is to show you how much work these “passive” activities are and to convince you to pay someone to do it for you.

Don’t have time to write an ebook?

​​They probably have several pre-written ebooks for you to choose from. Just pay to get into their system and pay for the advertising to peddle the ebook, course, or whatever.

The only people making money from these “passive income” opportunities are the people peddling them. For everyone else, it’s just another scam in a long line of scams promising you riches from doing nothing.

Not all passive income is bad, though. It’s the key to wealth that ultra-high-net-worth individuals (UHNWIs) and institutions have been using for decades to build, grow and maintain wealth – and it’s not from putting a business on autopilot selling consumers things they don’t want or need.

True passive income is not achieved by handing over money and sitting on your couch. It takes a little more work than that.

True passive income is generated from real assets and businesses that offer goods and services people want and need, and generating passive income from these assets is not just a matter of handing over money and collecting checks.

Even if you plan to own an asset yourself but plan to generate passive income from it, you will still have a fair amount to put into the investment for it to cash flow, including:

  • Money.
  • Time.
  • Labor.
  • Time and effort to outsource tasks and responsibilities.
  • Advertising.
  • Marketing.
  • Staffing.
  • Oversight.

Real estate investing is one area where you’ll find many charlatans looking for you to part with your money. They suggest that real estate is not passive and that it’s impossible to generate a passive income passively. They only say this to convince you to hand over your money to pay them for doing all the “hard work” that goes into real estate investing.

While there are real estate strategies that are not passive, to say that no kind of real estate investing is passive is misleading. On the active investment side, you have wholesaling, rehabbing, flipping, buy-and-holds, and active management, where you, the investor puts in all the work, including prospecting and doing all the grunt work.

Now there is a class of real estate investment strategies I would brand as a hybrid strategy that exhibits both active and passive strategies. These strategies offer the potential to generate passive income but may require a fair amount of work upfront.

One example is leasing activities, where you’re the property owner and landlord but outsource all the day-to-day activities. As a landlord, you may outsource the work of tenant acquisition, marketing, advertising, and property management. However, this strategy still requires a fair amount of work to find, acquire and finance properties and acquire competent providers to carry out operations.

Hard money lending is another hybrid strategy where passive income can be generated, and a fair amount of tasks can be outsourced but where a fair amount of work is required upfront to get assets to produce.

Finally, there is a class of assets in the real estate space that is as close to being truly passive as you’re ever going to get. Investing in private real estate funds or private real estate syndications typically involves a little due diligence upfront to make sure you’re partnering with seasoned professionals. Still, after handing your capital over, you truly are leveraging someone else’s brain power and efforts. In the right hands, you truly are sitting back and enjoying the fruits of someone else’s labor.

The right kind of passive income is the gateway to wealth.

The wealthy become wealthy by leveraging the experience, knowledge, and infrastructure of seasoned experts by partnering with them. True passive income allows investors to make money in their sleep, and this cash flow, when reinvested, can grow wealth exponentially from multiple streams of passive income.

But buyers beware when it comes to “passive income” opportunities. Some are scams, some aren’t passive at all – requiring a fair amount of sweat and capital, some are a hybrid, and some are truly passive. Understanding the differences will go a long way in avoiding losing money and generating the type of income that will allow you to walk away from your job.