High Level Approaches to Passive Income Generation

I was initially planning to have this post about the different high-level approaches to passive income be one of the first on my blog, but I haven’t had the time to edit it until this weekend and I got a bit ahead of myself with some of the other posts that have come before. In any case, without further ado, here is it is:

There are innumerable specific ways to generate passive income — but to make them easier to work with, I am going to attempt to break them out into one of several major categories. There are undoubtedly different specific techniques that will span categories or won’t quite fit into one perfectly, but we’ll cross that bridge when we get to it. In the meantime, here is the current breakout of major categories that I have come up with along with some examples for each category…

Simple Approaches

There are many simple approaches to building passive income that do not involve starting a business, elaborate investments, specialized knowledge, skills, or resources. The simplest of these can be found at your neighborhood bank, for example:

1. Opening and contributing to a savings account, money market account, etc.
2. Buying CDs.
3. Purchasing annuities.
4. Trusts.

Each of these have different levels of risk, reward, availability, etc. — For example, even a high-interest a savings account probably isn’t going to break 5% annual ROI and, for the most part, trusts that are worth anything significant are not available to the average every day person (you pretty much have to be lucky enough to be born into a wealthy family) — but they are things that can generate passive income for you. Whenever possible I will try to take into account the relevant factors when deciding which approaches to analyze and research first, and it’s quite likely that I will not get around to tackling some of the less practical approaches (e.g. trusts) for a very long time (if ever), but part of my goal is to at least catalog every potential idea that I can, so they are included on the list here.

Securities Investments

If you explore the finance section of your local library, book store, or Internet search engine, you will find an unlimited selection of individual investment strategies. There are probably nearly as many different specific strategies for investing in different securities and derivatives as there are investors. Each of these approaches have their own strengths and weaknesses and if you look long enough you are sure to find a strategy that appeals to your individual goals and concerns.

However, only a few select investing strategies can create passive income. You can certainly make a bundle by buying and holding stocks, or by doing tons of day trading of options or futures. However, none of these approaches yield what we are looking for: passive income.

The simplest example that I can come up with that of a strategy that does yield passive income is simply buying and holding dividend paying stocks. While you are still probably not going to find massive returns this way, a savvy investor should at least be able to beat the <5% returns that you can get with a savings account by perhaps double — a colleague of mine has employed this strategy for the last couple of years and I believe he has averaged over 10% annually, which is a pretty respectable return for any investor, and especially impressive considering that he has no professional training or education in investing (although he does have a degree in accounting which I’m sure required some basics economics classes, etc) and that he spends a minimal amount of time on his investments.

Real Estate

Like with securities, there are many different individual approaches to making money in the real estate market — land-lording, flipping, foreclosures, real estate options, etc. But again, we want to focus only specific techniques that produce passive income. Buying a house and living in it for 30 years may make you quite a profit, but it doesn’t put money in your pocket every month. If you know what to look for, flipping houses can be quite lucrative, and you can often make a large profit without much time investment… so it can be quite appealing, however it still does not meet our requirements because once you have finalized the transaction, the money stops coming in.

An example of a real estate play that does qualify is land-lording. If done right, you can create a situation where as a land-lord you have tenants occupying residences that you own (condos, townhouses, multi-unit dwellings such as duplexes, apartment buildings, etc) and not only paying your mortgage for you (which builds your net worth) but also creating positive cash flow on a monthly basis. This is the type of passive income opportunity that we are interested in.

Royalties

In the most basic sense, royalties are payments to the owner of some form of property (intellectual/artistic property, physical land, etc) for some form of use. This is the category of passive income generators that I am the least familiar with, so I will be doing more research and providing more information later, but for now, here are some specific examples of different types of royalties:

1. Copyright royalties (on written works such as books and screenplays, as well as photographs, etc).
2. Performance royalties (on performed works such as song,movies, etc).
3. Mining/mineral royalties (the right to drill for oil on a specific property, etc).

One interesting aspect of a lot of the different types of royalties is that while you can treat them like any other business/investment and go out and purchase the rights to existing property and then collect the royalties on them, you can also just create a new work from scratch and you automatically inherit the rights to collect the royalties.

Of course, in order for this to matter, you must be capable of creating a work that is useful to other people who are willing to pay for it. And if most of us had the talent required to, for example, be a rock star, we would be out there doing that right now and not sitting here reading/writing this blog.

Maybe a better way to look at it is to say, an interesting aspect of some of these royalties is that even if you don’t have the talent or creativity to create something that you can collect royalties on, you can always buy them from existing rights-holders and profit from them anyway.

Business

It goes without saying that starting a business is no trivial task and it requires a lot of hard work and dedication to be successful with any entrepreneurial endeavour, however owning a business is perhaps the most readily available or universally accessible path to passive income generation for the average person. It is possible to start a business and approach it in such a way as to never generate any passive income — for example if you were to start a business that provides professional services such as accounting or legal advice to people, and you provided all of the professional services yourself, you are not really creating passive income… you have just traded your 9-5 job working for someone else for a 9-5 job working for yourself.

However, almost every business has the potential to built up to the point where it is generating passive income. In the professional services example, if you can grow your client base to the point where you need to hire other accounts or lawyers to service all of your customers, and you do this and keep growing the business until you have enough other professionals working for you and servicing your clients that you can stop servicing them yourself, and you hire administrative assistants to handle the administrative details, and accounts to handle your own accounting, and lawyers to handle your own legal issues, etc. until there is nothing for you to do personally but to make sure that everything is running smoothly, you will have built a business that generates passive income for you.

The same approach is possible with almost any other business — for example, landscaping, web design, maid service, interior decorating, etc. However, not everyone has the necessary attributes to be successful with this type of business. First, you need a skill that you can base your new business on. Then you need the ability and drive to sell yourself to new customers. Then, until you get to the point where you can hire others to do the dirty work for you, you have to be organized and disciplined enough to handle all of the administrative, accounting, legal, and other details that go into running a business. For many people, this just seems like an insurmountable task.

There are also tons of risks associated with starting a new business. I’ve heard the “conventional wisdom” many times that “50% of all businesses fail within the first year, and 80% within the first 5 years”. I don’t know if this is true or not, and in fact I’ve seen a couple of articles refuting this statement, for example, “The Seven Pitfalls of Business Failure and How to Avoid Them“, and “80 Percent of Companies Won’t Fail Within 5 Years“. But, regardless of what the real numbers are, there is a definite risk of failure, and a start-up business failure can carry quite a heavy price tag in some situations — and this is a risk that members of the more conservative crowd are just not willing to accept.

However, even for the most conservative of us, there are numerous potential businesses that can be started with a minimum of risk. For example, the coin-operating vending machine business which I mentioned in a previous post. There are also businesses that seem to be practically tailor made for people who are looking to generate passive income. A few examples of these are:

1. Laundromats.
2. Car Washes.
3. Self Storage.

In addition, there are many other ways to minimize your risk, such as franchising. Since there are so many specific potential businesses than can be started, I will be attempting to focus on those that are firstly, well suited to those seeking passive income (such as those mentioned above) and secondly, the least risky.

As with the royalties approach mentioned above, an interest aspect of the approach of using a business to generate passive income is that you do not have to start the business yourself. You can buy an existing business. This particular approach is interesting because in many cases you can obtain financing for the business using the business itself as collateral for the loan, so you don’t necessarily need a huge credit line or great credit history like you might think. And in many cases the owner of the existing business will be willing to structure a creative transaction so that you do not even need to put a lot of cash down. For people that have the right resources and skills to negotiate the purchase (or can acquire the assistance of someone with those skills) buying an existing business can be quite a short-cut to a large passive income stream and this is a specific topic that I intend to explore in great detail later on.

Internet Marketing

Internet Marketing (IM) could be considered just another business to be started, but it has become quite a buzzword lately, and there is an ever growing segment of the population that is turning to different IM techniques to create primary or secondary passive income. Because of the depth and breadth of options available, and partially because this blog is on the Internet and it is easy to link to a lot of other sources of good information on IM around the web, I have broken this out into it’s own category.

Off-hand, here are the main examples of specific IM techniques that can be used to generate passive income that I am aware of currently:

1. Affiliate Marketing.
2. Writing e-Books.
3. Blogging.
4. AdSense (or other advertising) Arbitrage.
5. Automated eBay stores (this may belong in a different section).

There are numerous other specific IM techniques (SEO, etc) but either they are not well suited for generating passive income, which is of course what we are interested in, or I am not aware of how they can be applied to generate passive income. As this is also not an area that I am an expert in (yet), I gladly welcome any further information from readers.

Network Marketing

Networking Marketing (NM) (a.k.a. Multi-Level Marketing (MLM)) has been around for a long time in many forms. Probably the most well-known of which is Amway. This is perhaps the most controversial of the major approaches I have listed here. Many people associate NM/MLM with pyramid schemes and ponzi scams. While there are undoubtedly many instances of unsavory or corrupt individuals or organizations using similar practices to separate honest people from their hard earned money, the fact is that there are also legitimate examples of NM that have made a lot of honest and hard working people a lot of money.

While the whole NM/MLM world is not a good fit for many, (and in fact it leaves a bit of a bad taste in my mouth personally), NM/MLM is of special interest to people seeking passive income, because it is especially well suited to the task. While you can spend as much or as little time as you want actually selling the NM products directly, if you can sign up motivated people with good sales skills as your “down lines” (in NM speak, the people who are under you in the pyramid), then you can sit back and relax, and collect an income from the fruits of their labor.

I’ve already mentioned Amway, but here are the examples of legitimate NM/MLM opportunities that I am aware of today:

1. Amway
2. Quixtar
3. AGLOCO (see my previous post for detailed information about AGLOCO)

I’m sure I will uncover plenty more when I start down the path of researching NM/MLM specifically.

Conclusion

Well, that’s all I have for now. I would like to think that I have covered all of the major approaches, but it’s entirely possible that I missed some, and I’m sure there are tons of good specific examples of each of these approaches that I have not included. I would love to hear from readers out there who have anything to add to this post. I am interested in feedback on any posts I make, but I think this one specifically may benefit from people who either have experience with some of the approaches I’ve listed or with other approaches that I’ve missed, so, if you have something to add, please post a comment below. Thanks.

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