Passive Income Explained


The concept of passive income has generated a lot of interest in the Internet age. Web entrepreneurs offer industry secrets and slick advertising campaigns, promising to help you generate your own passive income. In many cases, these are multi-level marketing scams and get-rich quick schemes. Let's examine what passive income is really all about.

What is Passive Income?

Passive income is money that's generated "on auto-pilot." It involves a product that can be sold on a consistent basis, with very little labor or effort on your part. Here are a few examples of things that generate passive income:

  • Earnings from a business that doesn't require constant involvement and oversight from the owner, such as an Internet store
  • Rental income generated from an investment property
  • Royalties earned by an author on their published books; also royalties earned by an inventor who owns a unique patent
  • Licensing fees for use of intellectual property


Dubious Passive Income Plans

The Internet is loaded with marketing plans promising to teach you how to generate passive income through a website. The amount of money these plans earn is questionable, and the Better Business Bureau warns that these might be multi-level marketing scams. Here's a sample of how the process works:

  1. An Internet guru with "secret" information tells you that he got rich selling something on the web.
  2. He tells you it's simple to do, and promises to teach you how to do it as well.
  3. He sells you an information product, such as an ebook or a series of online videos.
  4. The information product tells you to develop and sell your own information product on the web.

    No one knows whether this person has actually earned "millions" on the Internet, but he just made $19.95 or more from you, if you bought his information product.

    Downloadable Information Products

    There are legitimate information products that you can sell online, including your own. You can write or hire someone to write ebooks and set up a website or blog to sell it. All you have to do is set up your shopping cart, and upload your ebook to the cart so that it can be downloaded when payment is received. You can market other people's ebooks this way and generate passive income while you sleep. 

    Rental Properties

    Rental properties are another example of a passive income source. If you own a home, a duplex or an apartment building, it generates rental income in return for very little work on your end (in theory). Property owners sometimes find that they're spending a lot of time doing repairs and dealing with tenant issues. If you want generate passive income from rental properties, you'll need to hire a property manager to deal with the repairs and tenants. You can offer a small percent of the monthly rent in exchange for their services.

    Licensing Fees

    You don't have to market and sell everything that you can own or create. You can license your original creations to others to do the work. For example, a programmer might create an application and license it to someone else to package and sell it online. A songwriter might license her lyrics to a company, which could then market it to a record label or advertising company. In exchange for a license, they will pay you a residual income.

    There's an old saying: "there's no such thing as a free lunch." This applies to passive income as well. Every legitimate passive income opportunity requires some amount of investment, whether it's time, labor or money.


    Daphne Mallory, Esq. is the co-owner of Mallory Writing Services and has written more than 100 articles helping home based business owners and entrepreneurs start and market their business. You can learn more about her here.

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