Passive income is the holy grail of ways to make money.
According to Wikipedia, “Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.”
There are two key phrases in this definition that will help you define what passive income is to you.
Passive Income: What Qualifies According to You
The two things you have to define in order to know what qualifies as passive income are “regular basis” and “little effort required”.
Let’s examine these one at a time.
This is the easier term to define for most people. When I think of income on a regular basis I think of paychecks.
While passive income sources won’t give you paychecks, you should probably be receiving income in the same types of intervals. This could be daily, weekly, biweekly, semi-monthly or even once a month.
Little Effort Required
This is the trickier one. Effort can be defined in many ways. The two things I think of when defining effort are how much time something takes and how difficult the task is.
The combination of those two determine the level of effort required in my mind.
So how much time do I think should be involved in a passive income stream? For income to truly be passive I don’t think you should have to spend more than two to five hours per week.
If you’re spending more than two to five hours on a task, I think you’re ventured into part time job territory. This hours per week number may be different for your personal situation. That’s fine. We all need to come up with our own definitions.
Difficulty is the second factor. For an activity to be passive it has to be pretty easy for me. If it is hard to understand or causes me any stress at all then it doesn’t represent the easy passive income lifestyle many portray.
Now that you have your own definitions for what “little effort required” and “regular basis” you also have your definition for passive income. It’s time to take a look at many commonly cited passive income streams and see how passive they really are.
Individual Dividend Stocks
Dividend stocks can put off a nice income stream and, for the most part, the payments should be pretty regular. Most stocks pay quarterly while others pay twice a year or annually. I’d say this qualifies for the first part of my passive income test.
Technically, you could spend no time researching and keeping up to date with your dividend stocks, but I advise against it. While I personally don’t believe in investing in individual stocks, Jim Cramer from Mad Money on CNBC does.
Jim Cramer recommends you spend at least one hour per week per stock doing homework to ensure you keep up to date on your investments.
This gives you the opportunity to keep up with the information that helps you make the determination of when to buy or sell your stocks.
If you were just going to have one stock this would qualify as passive income. However, having all of your eggs in one basket is never a good idea.
Jim Cramer suggests you own a minimum of five stocks and a maximum of 10 stocks to be diversified. This pushes us awfully close to the part time job classification.
Stocks can be difficult to understand if you don’t have a financial background. They can also be stressful if they make huge moves up and down over short periods of time.
Overall, the combination of time involved, knowledge needed to understand and potential stress put dividend stocks out of the passive income category to me.
Rental Real Estate
I personally believe rental real estate has the most potential to be considered passive income, but only if you structure it correctly.
Rental real estate income is generated on a regular basis as long as you don’t have lengthy vacancies between renters. Unfortunately, vacancies do happen and might happen often. So maybe the income isn’t as regular as we’d like.
If you’re managing the rental property yourself there may be months where all you do is take the rent check to the bank. However, there will also be plenty of months where you have to fix something in the house.
You might have to figure out how to come up with enough money to replace the roof at the worst time possible financially. That doesn’t even count the time to find a good contractor.
If you run your rentals this way rental real estate is far from passive.
Managed Rental Real Estate
If you want more passive rental real estate, you may want to hire a property manager. The property manager will take care of most of the issues for you but it will cost a hefty chunk of the monthly rent payment.
The rental management fee doesn’t count any costs that may pop up such as repairs. Even worse, you may not have as much control over who does the repair work and how much they charge you.
Hiring a property manager is the way to go if you truly want your rental real estate to be passive income but it definitely comes at a cost.
You’ll still be needed to make decisions but hopefully the property manager has already done the legwork and you just have to pick an option.
The stress can run high and real estate isn’t the easiest thing to understand. Many things will feel like they are out of your control.
You’ll have to do new tax return schedules and draft a lease or hire a CPA and attorney to take care of those items for you. If you already understand these you will have a great advantage.
If you’re just starting out, blogs definitely do not qualify as passive income. You may not make any money for the first six months to a year. Even then my guess is it won’t be regular income for a quite a while.
There is a huge learning curve in the beginning if you aren’t very good with blogging technology and terminology. I often found myself frustrated and stressed because I couldn’t get something to work. You could hire it out, but that eats into your profits.
This doesn’t mean that a blog can’t become a passive income source. It does take a lot of legwork in the beginning to get enough traffic to make a decent amount of money.
After you’re up to a good traffic and income level many parts of blogging can be outsourced at a cost.
Assuming you can keep your costs below your income and don’t mind handing over control of your blog I think blogging has the potential to become passive income.
The Results – What’s Passive Income To Me
So there you have it. Rental real estate has the most potential to be passive income in my opinion. Dividend investing isn’t passive if you’re doing it yourself and doing it right.
Finally, blogging will take a long time before you could even potentially consider it passive, but it is possible.
If you want to start your own blog, check out my step by step guide about how to start a self-hosted blog with Siteground here.
What are your thoughts? Do you have experience with rental real estate or blogging? Do you agree with my conclusions? Are there other types of “passive income” you’d like me to look into?