The idea of passive income — income you make using a “set it and forget it” model — has been a popular idea for decades. Who doesn’t want to make money doing little to nothing? There’s no shortage of people online offering to teach you how to make passive income doing everything from real estate to investing in stocks.
But is passive income really possible or is it a myth? Let’s look at some of the more popular passive income streams and explore just how “passive” they really are.
Real estate
One of the most popular passive income strings is real estate. Buy a home (or several homes), rent them out and watch the money roll in. Sounds great — but who does the renter call when the water heater goes out or the toilet breaks? You.
You’ll also have to send contracts, run background checks, and find new renters when people move out. That doesn’t sound very passive.
You can hire a property management company, but they take a portion of your profits, usually around 10% of the monthly rent. Plus, you have to have the money or the ability to take out a mortgage, which is out of reach for many people.
Verdict: Passive if you hire a property management company, but also requires large start-up costs.
Blogging/affiliate marketing
The average affiliate marketer makes around $82,000 per year writing articles, posting on social media, or recording videos. The problem is, affiliate marketing and blogging jobs aren’t passive at all.
Affiliate marketers can spend hundreds of dollars on website hosting fees, ads, and expensive video equipment or editing software. Writing just one article or recording a video and editing it can take several hours or even days.
The Google algorithm, which helps bloggers get traffic, changes several times a year, so you’ll need to constantly learn new marketing strategies. While this flavor of passive income can “make you money while you sleep” if someone buys a product you’ve promoted, it’s far from passive.
Verdict: Not passive at all, though it has lower start-up costs than real estate.
Investing in stocks or CDs
This is a truly passive income stream. The S&P 500 earned an average return of 12.6% per year over the last 15 years. So, if you put $10,000 in stocks (and picked the right stocks or invested in index funds), you might expect to earn an average of $1,260 per year for doing nothing more than letting companies borrow your money. To earn $70,000 a year, you’d need to invest $555,555, which is a lot.
Keep in mind that 12.6% interest is an annual average over 15 years, so you wouldn’t earn that every year. Plus, historical averages don’t guarantee returns in the future.
Buying CDs is less risky, but current average CD rates are around 5% (and these are unusually high), so you’ll only earn $500 a year off that $10,000, which isn’t enough to live on. Those rates also fluctuate and may go down in the near future.
Verdict: Definitely passive, but you need to invest a lot of cash to earn decent returns.
Is passive income possible?
Passive income is not a myth, but most passive income streams require a lot of work to get started. You are unlikely to make thousands of dollars in income while you sleep. But spending time writing articles, purchasing homes, or investing can set you up for financial stability by providing another source of income.
When reading articles about passive income, pay attention. Is the person suggesting a passive income stream trying to sell you something? If so, you might just be their passive income stream.
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