The internet is full of many wonders. One recent discovery made while exercising my dutiful consumer due diligence mandate is the existence of the strange class of people who believe in the economic unicorn known as passive income. Never mind the subtle oxymoron contained within the phrase itself, the notion of “passive” anything rarely comes with a positive connotation. When is the last time you accomplished anything of note through passive action? I find the whole idea to be abhorrent.
But down the rabbit hole we go because we all need something to judge from time to time to boost our self-admiration. Before I step so high on my soap box that I catch altitude sickness, let me first acknowledge that it is possible to earn income outside of a paycheck. We cannot deny the existence of investment income, which is critical to nearly all financial plans. It just takes capital. A whole lot of it to generate a meaningful amount.
The idea that income can be earned “passively” is as misguided as believing a jolly, gravity defying saint from the North Pole delivers presents under your tree every year. It’s pure fantasy that diminishingly discounts all the work that precedes the miracle of Christmas morning. You know what the closest thing to Santa is? It’s Jeff Bezos, founder of Amazon, and he worked obsessively to get where he is. Oh, and unlike Santa, he doesn’t work for free and only one day per year.
The appeal of passive income is completely understandable. If you have been allured by this siren’s song, don’t blame yourself. Just know that at some point the onus is on you to recognize when something sounds too good to be true. Here are some of my favorite bad ideas gleaned from the latest fad to secrete out of the internet, otherwise known as short clips.
4th Place: Buy real estate on loan and become a landlord (because this is super passive)
3rd Place: Hire professionals on Upwork.com and arbitrage their labor via contract work (so simple, reliable, and passive!)
2nd Place: Set up a free Chat GPT account and use it to create blog posts. Use said blog posts to leverage other “free” AI systems to create art and media content. Post these online and begin earning advertising dollars immediately!
1st Place: Helium mining (nuf said)
My favorite, helium mining, I am particularly excited about. The TikTok sensation that suggested it informed me that I could make at least $5,000 per month. He had me hooked, but then the video ended. I honestly don’t know if he meant mining the atmosphere for helium or if this was some obscure cryptocurrency. Oh well, I guess I’ll just have to keep working.
Many of the ideas I encountered sounded realistic. Some devolved into obvious sales pitches for get-rich-quick schemes. They were all about passive income alright, your income going into their pockets because of passive critical thinking skills. Others, while meaning well, were not so forthcoming about the actual work required. One of the most common themes involved owning and operating real estate.
Let’s look at a classic VRBO/Airbnb small business example:
My family and I frequently visit Cape San Blas in Florida. I am familiar with what properly leases for from month to month or week to week. You can rent a place like this one below for about $6,000 per week in early summer. Peak season can be higher, but prices fall off substantially during the winter. It really is an awesome, quite and affordable place to take a family for some beach time.
Here are the projected costs:
30-year Investment Loan Mortgage with 8.5% rate: $10,082/month
Property Taxes: $888/month
Homeowners insurance: $574/month (I think this is too low but it’s what Zillow estimated)
HOA fees: $210/month
Utilities: $400/month
Property Management: $1,500 / month (includes miscellaneous minor repair/replacement)
Total monthly cost: $13,654 / month
Up-front costs include:
Down payment: $327,800 (passively earned, of course)
Furnishings & Amenities: $50,000
Expected annual lease income: $200,000
Less total annual expenses: $163,848
Net Income: $36,152/year
All that leverage, almost $400,000 in up-front investment, just for $36,152 per year in income. I used this example on purpose to make several points to dispel the myth that real estate is easy money.
Investing in real estate requires substantial capital up-front. Where is this coming from? Other passive income sources? I think not.
Generating an attractive Return on Investment takes skill and discipline. Most successful real estate investors would reject the idea above.
It is, most certainly, not passive. Real estate investing can be lucrative, but it is also work.
You can collect a portfolio of smaller, lower cost properties, but your workload will grow in proportion to the number of tenants you manage.
There is always an opportunity cost. This establishes a minimum acceptable return for a project. In business, they refer to this as the hurdle rate.
There are only two ways to earn quasi passive income that I am aware of. First, you can receive a handout directly from the state. Second, you can win the lottery. Theoretically, this income still isn’t “passive” in the truest sense because recipients are simply consolidating the working capital of millions of others. Either explicitly or through inflation. Passive for the earner, I suppose, but not in total.
Income is generated through work. We can certainly work smarter, more efficiently, and find underserved markets that demand premium earnings. However, there is no escaping the human plight that labor is necessary. I, for one, find a life of pure leisure to be unnatural and derive purpose from work. It is the purpose of life according to the author of the 2,500-year-old book of Ecclesiastes, known only as “the Wise Man”.
We can always staple a deer antler on a horse’s head and call it a unicorn. It will look just as stupid as the idea of passive income.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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