I read one too many breathless blog posts on the virtues of passive income and decided to write a rebuttal. Much of this should be obvious to folks with a solid economics background; in fact, please correct me if I got anything wrong.
People seem to think in an odd way about passive income. One Helium.com author writes
I think the first time there was any money [in my Helium.com writer's account] was when it showed about 3 cents. That actually thrilled me.
Les called me and said "Quick, check your earnings page, tell me what you see for your credit card article (I thought, "here we go again with the 'Reddit' business"). I checked and lo and behold I had made around $4.00 in just a couple of hours for that one article he had submitted. Wow! Seriously. As the day progressed, it reached $8.00, then $10.00 and finally a little over $12.00.
Sub-minimum wages really are exciting, aren't they? (At the end of the story, the guy has won the proverbial Helium.com lottery, and ends up making $1,246 submitting an article on how he hacked a credit card company's balance transfer offer to reddit. If I recall correctly, this inspired a spate of Helium.com writers spamming reddit with their posts. Probably why I ended up reading his article in the first place.)
Now I just have to think of a way to employ people normally and trick them in to thinking that the income they're making is "passive"...
But even smart people are in to passive income. Here's Brian Armstrong, who looks pretty sharp: economics degree, Airbnb software engineer, and now Y Combinator startup founder. His blog is largely about passive income, and he even wrote a book about it a few years ago. So being an expert like this, we'd expect him to be making lots, right?
- In this post, he gives his breakdown for December 2008: $250.00 from real estate, $1,260.40 from his blog/book about how to make passive income, $129.20 from his new tutor matching site UniversityTutor.com (best tutor matching site I've found, BTW)
- In this September 2010 post, he reports UniversityTutor is making over $2,000 a month and set to keep growing.
So first, it looks like selling people the dream of passive income is a very profitable business to be in, and actually having passive income is not a requirement for entering it.
But is that even true? Brian reports that his high December earnings are due to book promotional efforts. At some point, he decided to make his book available free. Would he have done that if he was still collecting substantial revenue from it? Doesn't seem that likely.
Does your blog really count as a source of "passive" income if people gradually stop visiting when you stop making new posts?
And second, yeah, maybe if you're a good software engineer with a good idea you can build a passive income business.
In fact, working for "active" income vs building a "passive income" business is a bit of a false dichotomy. You can convert the cash you make through a regular job in to "passive income" by investing it and collecting interest. And you can convert your "passive income" business in to regular old chunk of cash by selling it.
If you're interested in making more money in your off hours, starting a business is one option. Doing freelance work is another. Starting a business is higher variance--you could make it big, or you could waste a lot of time and effort. You'll most likely have to do something no one else is doing, or at least do it better than everyone else is doing it, so any kind of highly specific guide or formula for making passive income is probably out. (Ask yourself why the person selling you the guide doesn't just hire people to complete all the steps in the guide and collect the profits for themselves.)
Interestingly, however, it seems as though internet businesses may be underpriced as an investment class. This guy writes:
I think a fair price to sell websites for is around 12 months income, depending entirely on how much time you put into the site for that income to continue. If the site is running on complete autopilot then you may be able to get 2 years revenue or even more.
For example, if I find a site on Flippa that is ranking well for a certain keyphrase in Google and it’s making a lot of money, I might not always be able to purchase it for what I consider is a fair price — some bidders are happy to wait over 3 years for a return on their investment.
If we assume the market price of a completely hands-off internet business is 3 years' profits, then you'll have doubled your initial investment in 3 years, since you've still got the business to sell afterwards. Abusing the rule of 72, I estimate that this is equivalent to getting a 24% annual return on your investment, which is obviously absurdly high. (And this doesn't even take in to account the fact that you could reinvest your internet business' earnings.)
Of course, there are reasons to be wary about getting in to internet businesses as well. Ease of buying and selling isn't the greatest and you might get scammed. But probably the biggest thing is the Internet's short attention span. Google changes its ranking algorithm periodically, and beyond that, it's easy to be eclipsed by something newer and better (see MySpace). So if I were wealthier, I'd want to have a portion of my net worth in internet businesses, but not all of it.
BTW, http://www.rolfnelson.com/ is good for rational analysis of stuff related to entrepreneurship.