Whether passive income exists is an age old debate, which in my opinion will never be resolved. It all comes down to our individual definitions of the term.
Without “duking” out whose definition is more accurate, here are my top 5 favorite passive income avenues. No matter how you define passive income, each of these has some characteristics that I am positive will meet your definition as well.
1. Inheritance
Didn’t we all wish we had a rich uncle who loved us so much that he decided to name us the beneficiary of his entire estate? It only happens in movies from my recollection, but this is by far the quickest and easiest way to benefit from a passive cash windfall.
All jokes aside, though massive inheritance cases are far and few, inheritances ‘happen’ everyday to all kinds of people in all corners of the world. The beauty of it is that YOU DO NOT have to create the initial capital needed to benefit from the passive income stream.
2. Interest On Certificates Of Deposit / Fixed Deposit
I like this avenue because it not only provides a nice passive stream of income, but also protects your hard earned capital over the years, months, weeks, minutes or seconds (if you inherited it I suppose).
As long as your money is protected or insured (example: FDIC insurance in the USA for up to $250,000 per account or RBI – Reserve Bank of India insurance up to $1M on foreign deposits), you can sleep well at night knowing your cash is safe and earning interest income.
Of course, the historically low rates in the USA are not helping right now, but if you are in a country that pays in the double digit interest rate margin, you may be profiting nicely from this scheme. I just hope your country’s inflation is not as high or higher as well.
The challenge in capitalizing from this passive income stream is obvious. You need to build a capital base first on which you can earn the income.
3. Royalties / Franchise Fees
This one always intrigues me. I wished I had the genius to come up with an idea / patent and license it out in exchange for royalties. Either that or starting a burger joint like “In and Out” that blows people’s mind with their “secret sauce” so that I can franchise the concept and collect on franchisor fees.
Unfortunately, I have neither going on for me, and that is why this one made it to my list of top 5 favorite, but not my list of the top 5 of MY highest passive income earners.
4. Rental Income
This is one I currently capitalize on and enjoy a lot. I like the cash flow I receive monthly, the equity I build with each passing month (mortgage balance is reduced over time), the potential long term appreciation of the property and the short term tax benefits from depreciation and what have you.
The challenge here is that you must understand real estate investing, and execute it to where you have investment property that generates passive income. Similar to accumulating a capital base on which to earn interest, this endeavor can also initially be capital intensive.
5. Internet Income
You can’t deny it, but you GOTTA love this one. Aside from a fat inheritance, what other platform allows you to create something (a lot of things) from nothing? With a mere $10 investment in a domain name and another $20 in hosting, you can be flying with the pigs.
There are so many ways to monetize your website or blog online. I currently capitalize from at least seven different income streams from my portfolio of niche websites. I generate profits from private advertisement, public ads such as Google Adsense, sales of my digital products such as e-books, lead generation and referrals, affiliate commissions and a few others.
The success of my websites and blog have also led to several one on one coaching and consulting type gigs, with both individuals and small companies. The experience has truly been rewarding and I really enjoy this passive income avenue.
But is this avenue truly passive? Not in the beginning, no way. You can toil for years before the fruits of your labor start paying off. From personal experience, once it starts raining, it pours. And the beauty is that it pours harder automatically on its own with each passing day, week, month, year.
Concluding Thoughts
I am not a trust fund baby. I have not yet and do not anticipate benefiting from an inheritance. That said, I have managed to amass a decent amount of cash on which I am generating a solid passive interest income stream.
I don’t think anything can get any more passive than inheriting wealth (maybe finding a stash of cash on the street can be), but aside from that unlikely scenario, interest income on your savings is the epitome of passive income in my humble opinion.
If you are wondering why dividend investing is not part of my list, I don’t particularly rank that avenue as high as these five because of the risk / uncertainty component attached to it. That said, a portfolio built carefully to yield dividend income can provide a nice trickle of passive income over time.
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