What is Passive Income?

Passive income is a way to build wealth without work.

Passive income sometimes involves an initial effort – such as writing a book or creating an online course. Once that’s complete, the work product continues to generate income. Other times, all it takes is money to invest.

Physicians, already trying to manage grueling schedules, can add income without adding hours. There’s money to fall back on, if for some reason your practice slows, or salary drops. Working professionals can leverage passive income through retirement.

Passive income is the gift that keeps on giving. How do you work less and earn more?

Understanding Passive Income

Passive income is an investment strategy to create wealth without labor Taking advantage of a second income stream is common sense. The busier you are at work, the smarter is set up sources of passive income. Here are common sources of passive income.

Peer to Peer Lending: This isn’t crowdfunding, it’s more like crowd-lending. Websites like Peerform let you offer personal loans to other people.  The interest you earn is passive income. All peer to peer lending sites operate on the same principle – people investing in people.

There are different models, different minimums, and different fees. StreetShares focuses on loans for small businesses, particularly veteran-owned. They offer Veteran Business Bonds to fund those loans, with a $25.00 minimum investment, and a 5% return.

Real Estate:  The profit you make from rental properties is passive income. Depending on your mortgage, property ownership becomes all profit. There are exceptions – for a realtor, it’s not passive. You’re actively involved in generating the income. Also, you can’t “self-rent.” If you own a property, it’s not considered passive income if you rent space to a company you own or operate.

Another option for real estate income is to use Real Estate Investment Trusts (REITs). These investment firms buy, manage, and finance commercial real estate. Online platforms like Fundrise eReit are attracting more investors. REITs offer a diversified portfolio and accounts are easily liquified.

Stock Dividends: Some stocks offer investors dividends. When the company is doing well, they distribute a slice of the profits to shareholders. Dividends are passive income, whether the cash is re-invested or not. Dividends are not guaranteed, they are dependent on the company’s profits.

Dividends rise and fall, depending on the market. If a company takes a hit or a catastrophe occurs, dividends disappear. The coronavirus killed any hope of a dividend from airlines in the near future.

Digital Assets: Technology can yield streams of passive income, but not without risk. The gaming market is a $152B industry with over 3 billion users worldwide. Multiplayer video games and eSports interest seed investors and venture capitalists. Purchasing an app for resale, investing in a digital platform, or buying a revenue-generating website generates passive income.

Startups/Small Businesses:Investment in a business is passive income, with one exception. The IRS requires No Material Participation. It means that for your investment to be passive, you can’t be involved in the operations of the company. Earning a percentage of the profits for an investment is passive income. It no longer qualifies if the investor is working at his investment.

Different types of Income

There are two other types of income, active, and portfolio.

Active income is what you’d expect. It is income from wages, salaries, tips, and commissions. It can also be income from a business if you participate in day to day operations. A physician who takes a salary is receiving active income, the same as a resident in a hospital.

Portfolio income comes from “paper” investments in the market. The money comes from capital gains, interest on bonds and loans, or dividends. Portfolio income has a favorable tax rate and doesn’t require withholding. There’s no effort involved other than financial investment. Some analysts see overlap with passive income but check with the IRS. They don’t always see it the same way.

About Taxes

Anyone who’s ever had a job understands how taxes on earned (active) income. Taxes are withheld from your salary and at the end of the year, there’s a W2. Income taxes use a progressive scale. Different tax rates are applied along the income scale. The current tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. 

The taxes for portfolio income and passive income more complex. Taxes on investments are different than active income. Taxes on portfolio income can be up to 20% of the income received. Taxes on passive income are closer to active income, but there are ways to minimize them.

We assume if you’re investing, you have a CPA or tax advisor. If not, please get one. The goal is to build income, not face an an audit by the IRS.

Passive Income Strategy 2020

The internet is the place to be. It’s built for passive Income. Here are some simple ideas to get started. Be aware you have an online presence, a website, and/or a blog.

  1. Affiliate Marketing

 There are so many opportunities are out there to promote products and services. Affiliate marketing programs offer a commission to their partners. When someone follows a link from your website and makes a purchase online – cha-ching. It’s almost like free money.

Different affiliate programs offer different commissions and payment structure. Aweber, an email marketing company, has one of the highest paying affiliate programs. BigCommerce, (online store platform) a offers 200% commission on your referral’s first monthly payment.

Affiliate referrals are tracked by a cookie. Each cookie has a duration. This is the period for your referral to make their purchase. For example, Aweber’s cookie is good for 1 year and BigCommerce for just 90 days.

Stay true to your brand – that will boost your referrals. Only choose products/services you feel confident promoting. Once you’ve signed up, include affiliate links easily in your blog posts. Do reviews or how-to-videos. Always link directly to the page for purchasing the product.

  1. Online Courses

The market for learning is exploding. Digital classes are an excellent source of passive income. It takes effort to create the course – be prepared. Depending on your area of expertise, it could take up to 80 hours.

Once it’s up, there’s nothing to do but collect the money. The biggest issue with online courses is applying expertise to demand.

An OB-GYN might do a series of classes for first-time mothers. Modules include First Trimester, Second Trimester, Third Trimester, and Giving Birth. (Include a standard disclaimer to prevent liability. If you’re not sure, talk to a lawyer.)

The price of each module could be as low at $100.00 If one class is viewed 1000 times, that’s $100,000. If all four classes are taken, you’ve made a $400,000 in passive income.

One thousand views is likely a low ball for first-time mom pregnancy classes. Think of this series like the book: What to Expect When You’re Expecting. It’s sold millions.

You can host your courses on a learning management platform. Teachable offers strong support for new users and has an affiliate marketing program.

  1. Monetize Videos

Do you have a YouTube Channel? If you do, maybe you should run ads on it? It’s surprising how small amounts of money can add up. Check out the YouTube Money Calculator to estimate what you can earn. A monetized video that gets 2000 views a day can make up to $146 a month.

That’s $1752 a year. For one video that you already paid for and produced. If you have 5 videos at that rate – you pulled down $8,760 for doing nothing. This is passive income at its finest. The more your content is viewed, the more money you make. If daily views hit 5000, the annual return on a single video can be as high as $4,334.

There are some qualifications to meet before you can monetize:

  • Linked AdSense account. (Remember, YouTube is owned by Google)
  • 1000 subscriber
  • 4000 hours of viewed content
  • 18 years old
  • Adherence to YouTube monetization policies.

Passive income on YouTube is easier is for established YouTube channels. The more subscribers you have, the more options you have to monetize. Charge for channel subscriptions or create a merchandise shelf to sell swag.

  1. eBooks

There’s money to be made selling expertise. The eBooks we’re referencing are non-fiction. These are eBooks providing solutions to problems or offering insights about their experiences. The area of expertise and complexity of the topic determine the book’s length and price.

These are some steps to start your process:

  • What is your field of expertise?
  • What life experiences matter to you?
  • What problem do you want to discuss?
  • What insights do you have on your topic?

An eBook on understanding opioid addiction by an ER nurse will pack some punch. If that nurse is a dad who lost his daughter to addiction, the author’s credibility goes through the roof. The price would likely be under $10.00.

Higher priced eBooks deal with topics addressing complex problems. Scientific eBooks can cost several hundred dollars. Establish your authority and expertise by looking at the problems facing your industry. Then write about how to fix them.

Use Amazon for research. Look for eBooks in your field. See what’s selling and for what price. You can look at the number of pages and see the reviews. This provides parameters for your book. If you’re not a writer, hire one. There are lots of freelance ghostwriters available.

Not every eBook has to be a 300-page tome. A doctor who likes to garden might write a shorter book on poisonous plants and insect bites. The book could walk through appropriate re-actions. Remember, eBooks can have links. Use your website to add important supplemental information.

Though a $221 eBook on emergency medicine may seem like the way to go, ask yourself how often it gets purchased? Amazon offers a 70% royalty rate. If an eBook sells at $7.95, that comes to $5.56 per purchase. Strategically, you can bundle your eBook with supplemental content. A workbook, a guide, supplemental content for different age groups. If you offer add-ons to your sale, you can bulk up the purchase price, and your royalty.

Amazon isn’t the only game in town either. Publish on Barnes & Noble, iBooks – lots of sites to sell your book. The royalties will vary, but the outreach will grow. One last thing, get professional help with proof-reading, editing, and especially cover art!

If you put in the effort to write an eBook, it should be eye-catching and well-written.

Start Making More

Passive income is a smart approach to financial security. Who doesn’t need more income? The benefits from passive income are clear:

  • More money with little or no extra effort
  • Use your skills to develop income streams
  • Tie your efforts back to your main business
  • Get a good return on financial investments
  • Diversify your holdings
  • Maintain passive income into retirement

If you think you don’t have any money to invest, create an online course related to your field of expertise. Don’t expect to make millions off the bat – instead, start establishing your authority. When you do the first course, be thinking about the second.

The same is true with your eBooks. Research topics and ideas in your field. Think in bundles – sell add-ons for your eBook or build out a series. Costs for editing and quality cover art are affordable and make a big differences in sales.

You can build passive income by investing money. But if you’re short on cash, use your skills to get started. A little effort to start will pay off in the long run.

Passive income is the second job you never have to work.

 

 

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