Building Passive Income Streams

As time goes on, the value of having multiple income streams becomes more and more apparent to me. The more income streams you have, the less trouble your life will have if one of those income streams goes defunct or experiences a downturn. Thus, I’ve been thinking a great deal about developing more income streams for myself.

So, let’s back up. An income stream just refers to any source of regular financial income in your life. Your job is one. Your pension is another. Rent from an apartment building you own is yet another.

Of course, I don’t have the regular time to invest in another job or another high-content website at this time, so, for me, the best route to look for new income streams is to evaluate passive income streams.

What’s a passive income stream? A passive income stream is one where, once you’ve done the initial investment, there’s little or no upkeep to that investment required to maintain the income stream. Writing a book is a passive income stream, for example – once that book is complete and on its way to the publisher, you just sit back and wait for the proceeds.

Most passive income streams require some sort of significant investment up front. Generally, that investment breaks down into two distinct groups: an investment of money or an investment of time.

I’m going to stick with discussing the types of passive income streams that I’m interested in developing.

Investing Time
Most time investment usually pairs with an investment of ideas and energy as well. Generally, you’re turning spare time into some sort of item that will provide a steady stream of income over time.

Books, electronic and otherwise I’ve already written two books – 365 Ways to Live Cheap and The Simple Dollar. Both are working for me as passive income streams, but the stream from each book is quite small. Unless you’re J.K. Rowling or John Grisham, the passive income stream from writing books is not going to sustain you. The solution, of course, is to write several books so that the streams add up to something significant.

Another factor when it comes to writing books is that the options for self-publishing just get better and better. Self-publishing is a double-edged sword. When you self-publish, you tend to retain a much greater percentage of the proceeds for yourself, but your distribution tends to become more of a problem, as it’s hard to get your book on the shelf at Barnes and Noble. The growth of great self-publishing platforms and the rise of e-readers like the Kindle have mitigated these worries somewhat. If I write another book, I will most likely self-publish it.

Static websites Another approach is to simply develop a static website that provides information on a specific topic, then add some sort of revenue-generating mechanism to it – affiliate links to Amazon, a portal to buy a product of some kind, direct advertisements, or something else. Once that’s in place, spend some time developing links to it so that Google can find it. After that, you’ll keep generating a steady trickle of advertisement and referral revenue.

At some point, this is the route that The Simple Dollar will take if I ever choose not to keep writing it. I’ll turn off comments, make the site static, and go on with my life. It’ll still earn some revenue for a very long time.

Investing Money
On the other hand, one can simply invest money with the purpose of generating a passive income stream. This, of course, requires a chunk of money up front and an expectation that each year will only return a small portion of that initial investment. Usually, though, some significant portion of that initial investment can be recouped through selling the investment or waiting for it to fully mature.

Dividend-bearing stocks If you bought $10,000 worth of Coca-Cola stock one year ago, you would have bought in at roughly 53.60 a share, which means you would have purchased 186.5 shares of KO. You would have received four dividend payments of $0.44 per share during that period, so each dividend payment would have been $82.09, for a total of $328.36 over that year. It’s a 3.28% return, plus you still have the 186.5 shares of KO stock.

If you choose a very stable company that pays out a very steady dividend, this type of approach can earn a very reliable income for you. On the other hand, you are invested in a single stock, so you would probably want (over time) to invest in a variety of dividend-bearing stocks. You might also want to invest in an index fund that spreads out your investment over a lot of stocks (less risk), but also waters down your dividend (less return).

Treasury inflation-protected securities TIPS are bonds that you can purchase from the government that return at a fairly low rate, but their face value adjusts according to the rate of interest, so that when the TIPS matures, you will be able to sell it for more than the initial purchase price.

TIPS return at a very low rate, of course, but they have the advantage of being rock-solid investments that will match inflation growth when you sell them.

Savings accounts and CDs This is a similar rock-solid investment that is also very liquid (meaning you can pull out the money whenever you need it), but the interest rates (right now) are very poor. There are times when a savings account or CD is very solid. This is not one of these times.

Annuities Annuities are investments you can purchase, typically from an insurance company, that will pay you a certain amount each year for the rest of your life. The younger you are, the smaller that amount is, of course.

Let’s say, for example, that you purchase a $10,000 annuity, one that the insurance house quotes at 4%. That would mean you would receive $400 each year for the rest of your life from that company.

The risk here, of course, is that the insurance company may eventually become insolvent, leaving you with nothing at all. If I were to purchase this, I would seek out an insurance company with a long history of stability and a great bond rating, and even then, I’d diversify across multiple insurance houses.

 

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What approaches am I considering? I’m still investigating several of these approaches, but I can say that I am moving in a direction where more passive income is a part of my life. As I actually begin to make moves in these directions, I’ll post about the moves on The Simple Dollar.

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  1. Wesley says:

    Just going to throw out there that even for the most basic of Hosting and domain fees it may be difficult to actually make money off of a static web page with some ads and referral links. Now it would probably work decently with a site like this one with a TON of content, but unless you have a pretty large amount of content either built up over time or all at once, there is a very low probability that you would make any money at all after the fees mentioned above are taken into account.

  2. Alan says:

    THis is a great story – a lot of our goal at Betterment is to turn investing into a passive income stream, which is why a lot of people compare us to a savings account even though we are an investment account.

    I’ve also been talking with lots of static website affiliates lately. And while I understand the business model and certainly there are some dollars to be had, I agree with Wesley that the much smarter model would be to write about a vertical that you are passionate about, build a trusted readership, and partner with relevant affiliates that will add value to your readers.

  3. George says:

    There are stocks beyond the usual fare that rarely get mentioned when it comes to passive income:

    REITs – Real Estate Investment Trusts often pay a reliable dividend above 5% that increases as inflation increases. Tax on the dividends is like ordinary income. Some examples: LTC, OHI, WPC, UHT.

    Mortgage REITs – Organized as a REIT, but they don’t own any property, they typically pay a (risky) dividend over 12%. NLY is the gold standard for this class of REIT.

    MLPs – Master Limited Partnerships. Used to be easy to find MLPs paying over 6% dividends, but now that they can be held by ETFs and energy prices have risen steeply in the past year, most of the yields have dropped to 5%-6%. KMP, OKS, ARLP, BIP, WPZ are some examples. There are tax benefits to owning MLPs, but the tax paperwork may be more extensive than most people are willing to file. KMP, OKS, ARLP, BIP, WPZ are some examples.

    Municipal Bond Funds – most are leveraged, so yields of 6%-8%, free of federal tax, are available. Muncipal bonds are currently getting negative press due to valid concerns that there might soon be defaults, which has also boosted yields. VKQ is one example and is, by no means, a gold standard in this category.

    The risk with all of these options is the same as with any stock: the dividend might be cut or, on the day you need to sell it, the market might not be willing to pay a good price for the security and you won’t get your money back.

  4. Jason says:

    A friend of mine gave me a lecture the other day on passive income streams. This article was great. Thanks.

  5. It seems like if you are going to invest time in building a passive income stream, it will have to be a project that you are passionate about, or you run the risk of wearing yourself down. I am currently working a full-time job by day and writing a book on nights and weekends, and it’s tiring. Thankfully, the principles I use in my day job apply to the book I am writing, and vice versa. So if I am learning something new for one project, it automatically applies to the other!

  6. Ryan says:

    One area I think you forgot to mention is real estate. I think finding a few good rental properties can lead to lots of passive income over the years. Just my 2 cents. Keep up the good articles.

  7. Brent says:

    I think it is very difficult to make money from a static website. You use this website as an example of one that might one day become static. But you’ve put in many hours building up this website with content and actively attracting visitors with fresh, new information. It takes a lot of skill and luck to create a “set and forget” website that will bring in enough money to cover domain name registration and hosting fees.

    For a majority of people, they will need to create an active website or one that offers a custom product or service to make a profit. At which point, it would be no longer static.

  8. cc says:

    don’t forget web services. i’ve got a big chunk of server space, i parcel it out to web clients when i design their websites, after the site is up they get billed an annual hosting fee. this more than pays for their hosting, my hosting, and even a little extra to put in the bank. it doesn’t make me rich, but i’m always happy to have an extra $20 in my pocket.

  9. NewReader says:

    It hasn’t been my author friends’ experiences that “once that book is complete and on its way to the publisher, you just sit back and wait for the proceeds.” They have all spent weeks if not months traveling and doing interviews, book signings, and the like to promote their books. Eventually, the books became a passive source of income, but the biggest burst of sales when the books were new was accompanied by lots of effort on the authors’ parts.

  10. Rob says:

    You can’t pull your money out of a CD whenever you need it unless you are willing to give up all of the interest you’ve made plus an early withdrawal penalty. And savings accounts are so anemic, they aren’t worth using except for things like emergency funds. With an assumed annual inflation rate of 3%, you’re actually losing money by leaving it in the bank.

    CDs are good for planning large purchases that you won’t make for a while, but savings accounts are for liguidity, not income.

    If you want to invest and haven’t started, it’s going to take a few years of regular contribution and compounding your dividends before you’ll start garnering a significant amount in dividends. Not to mention the work that goes into picking stocks.

  11. Kevin says:

    Rental properties are still an UNBELIEVABLE passive income stream. Yes, you have to stay on top of it, but not nearly as much as you think. Like anything else, study up, understand all the pitfalls, get a mentor, etc.

    3 bedroom, 2 bath houses are the best. They are always in demand. You will earn positive cash flow and get HUGE tax breaks if you have W2 income you need to protect.

    The last point, I have one rental property for each of my kids that solely acts as a college fund. The renters are paying off the mortgage and in 15 years I can refinance or sell the property, but will have over 100k in each house ready for their college expenses. Also, they will be active in managing the property as they grow up…learning another valuable life skill.

  12. Jonathan says:

    #6 Ryan,
    I thought the same, but Trent mentioned that these are just the passive income ideas that HE is interested in. It is also possible that he considers real estate investing to be “active” since property management can require a lot of time.

    About 18 months ago I wrote my first (and so far, only, due to a lack of more good ideas) cell phone app. I probably spent at least 100 hours altogether on the project (including updates and improvements over many months), but since I’d done it as a labor of love (initially without even a thought of selling it), I wasn’t bothered by that. To my surprise, I netted over $2,000 in 2010, and the revenues keep coming in even though I haven’t spent 1 second developing in the past 8 months. I LOVE the “royalty” model of income.

  13. GayleRN says:

    I think that passive income is kind of a misnomer. Most passive income requires time and work to get it going and to keep it going. I spend at least 2-3 hours a day to monitor and in research and education on my chosen methods. That is in addition to a full time job and family responsibilities.

    In addition,I continue to practice frugality, cutting expenses where I can. At the present time the mortgage is paid off, the car is free and clear, so monthly expenses are down considerably allowing for increased saving. At some point the investment income will cover the minimized expenses.

  14. Nate says:

    The amount of work required for any income stream can be put on a sliding scale between 100% passive and 100% active. A 100% passive income stream would be one which required almost no effort: click a button, wait for your return. I would put a savings account in this category. A completely active income stream is one which requires a significant amount of time. A full-time job would be an example of this.

    People mention real estate as a passive investment but to me it’s not: it’s a business. And as a business, it can be as passive or as active as you make it through the systems you create.

  15. Zak says:

    I’ve found that Municipal bond investing (either indvidually or through a bond fund) in your own state will be tax-free at both the federal and state levels. For example, NJTFX on the stock exchange (a NJ tax-free bond fund that I’m heavily invested in) is yielding 4.36% tax free which would be equivalent to having a taxable CD for over 6%. (We know we haven’t seen those days in quite a few years.)

  16. lurker carl says:

    I’m with GayleRN, no income source is really passive unless you’re willing to risk it vanishing or worse.

    Having been a landlord in the past, that source of income is anything but passive unless you hire out the management. Even then, you have to keep an eye on your properties and employees. When the cat’s away, the mice will play.

  17. Joan says:

    As far as writing another book, please don’t say IF say when. I’m looking forward to your next book.

  18. Gal @ Equally Happy says:

    @GayleRN
    I think you and Trent are talking about the same thing. Sure, no income stream is completely passive in that it requires to work to setup or maintain. If that were the case, everyone would be doing it.

    However, you both (and me as well) seem to be talking about income streams that require relatively little effort to maintain AFTER they are setup.

    Static websites, even with relatively little content can work if you find the right niche. However, there is a good amount of work with finding the niche.

    Real estate can also work but it requires a lot of start up capital.

  19. Squirrelers says:

    The key here in this definition of passive is that after the initial investment of time and money, you can collect from an income stream while investing very little additional effort. It’s the follow up time that shouldn’t be discounted. I think some bloggers tend to view their blogs as a source of passive income when in reality it’s more of a secondary source of income (if fortunate). The shut-down apprach you described would be passive.

  20. I think you have more chances in building passive income stream in a blog than a static website. Customers want something new and original every time they click. Why would anyone read newspapers and magazines? Because they offer something new on a daily basis.

    In a dynamic society like United States and Europe and some of the Asian ones, customers need “dynamic” information. And they need it everyday especially if that is online.

  21. Charl says:

    I’ve lived in apartments that the owner obviously considered a source of passive income. I called them “slumlords”. When you own property that others live in, expect to invest money in maintenance and repair on an ongoing basis.

  22. Passive income is seriously life-changing.

    For me, content articles on eHow have been a huge anchor to my residual/ passive income but I’ve spent the past year and a half diversifying; my static websites bring in a very good steady income now through adsense revenue and affiliate commissions.

    We also have two rental properties and have been incredibly blessed so far to have two long-term tenants that literally pay their rent every month on time and we never hear from them otherwise. Both places are kept up beautifully and repairs have been handled by the tenants (we filled both places with contractor/ builders) who bill us only for materials.

  23. Having a side buisness is the way to go. I started out building a web site http://www.free-party-games.com I get about $1500 a month off of that after about 4 years of working on it. In the middle of that I started http://www.a-debt-free-life.com I now get about $1000 a month off of that. About six months ago I started doing http://www.lawton.124online.com it is now making more than the other 2 combined and looking better each month.

    This is the way to go. I get to be home with my kids and have a little money coming in for a rainy day.

    Love it.

    Melissa

  24. Dan Blakely says:

    Would agree that creating passive income streams is where you need to be if you are looking to downshift a career, spend more time at home with the family or just spend more of your life doing the things you love.

    This all takes me back to the book “Your Money or Your Life” where Joe suggested that we invest our money in government bonds. At the interest rates today, this looks crazy but with inflation looming who knows. Point is that Joe advocated what I would call a pure passive income – it was an investment vehicle for his cash with a guaranteed return over it’s life. Trick is finding these types of investments today.

  25. Carl Friesen says:

    Authoring books is not a passive investment. It’s almost unheard-of for someone who is not already an established author to just send a manuscript to a publisher and sit back to watch the royalties roll in. Even a traditional publisher requires an author to build or maintain a “platform” — frequent speaking engagements, media citations, publishing articles and active social media. That’s anything but passive. For the self-published route, it’s the same only more so. That includes e-publishing. Cute-baby videos may go viral, but virtually all books require a lot of pushing for them to generate income. A book is an investment in your whole package as a subject-matter expert, and it can be a good one, even essential if you want credibility in your field.

  26. Mike says:

    Hi,
    If you’re talking about passive income streams I’d have thought Multi Level Marketing (MLM) / Network Marketing / Direct Sales or Referral Marketing would have featured in your article as this industry has the potential to generate a serious income within 3 to 5 years.

    There are many Billion Dollar companies out there, listed on NYSE, with good reputations that would make a good choice for Passive Income.

    Regards

    MikeDubai

  27. If anyone has been tempted to dabble in creating a site, they should do it as soon as possible. The way google is, new sites don’t get much traffic the first year. Plus, the older a site is the more trusted it is and thus the more traffic it would get as time goes by.

  28. Can you give the names of advertisers or affiliate programs? Do you have to have a certain number of followers before approaching these programs?

    I’ve heard of clickbank and lifetimecommisions.com. Any thoughts on any of this?

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