After reading books like E-Myth (twice in a month), the Rich Dad Poor Dad series (multiple times) and most recently The 4-Hour Workweek (while on a beach), it became very clear to me that the wealthy earn their money differently, and I wanted to learn how they did it!
How to Create Passive Income
To quote Pat Flynn, a very successful passive income expert (he’s made millions), “We don’t have to trade our time for money one to one. Instead, we invest our time upfront, creating valuable products and experiences for people, and we reap the benefits of that time invested later.” He adds, “It’s not easy. I just want to make sure that’s clear.”
I think he sums it up very nicely. Create valuable products, services and experiences for people, and reap the benefits of the upfront time invested later, keeping in mind it is not going to be easy.
Doing this correctly means you can actually start to work less, but earn exponentially more. So where do you start?
1. Invest in Real Estate
Investing in real estate has been around for ages. Whether you are looking to buy your first duplex or getting into a large commercial property, rental properties can provide passive income through rents with some very appealing tax benefits. This method can be harder to get started with given the initial capital needed in most cases, but is certainly a great way to generate passive income. (For related reading, see: Top 10 Features of a Profitable Rental Property.)
2. Own a Portfolio of Dividend-Producing Investments
This is a very passive way of generating income, but the catch is you need a lot of money to build this passive income machine. For example, you find a combination of dividend-producing stocks and bonds (this also can be done with CDs and other cash equivalents) you are comfortable with, and the yield (or passive income) generated on the portfolio is 5%. In order to generate $50,000 a year in passive (dividend) income you would need $1,000,000 in your account.
3. Earn Royalties From Creative Works Like Books, Music and Screenplays
Creating original content that other people love can be very rewarding to you from a personal growth perspective (people value something you have created) and from a financial perspective (people are willing to pay you for it). You create something once, but keep getting paid a royalty for it long after you completed it. Music is a nice example.
4. Build a Financial Planning, Investment and Insurance Business
When you sell insurance (property and casualty, life, disability, etc.) to your clients you are paid an initial commission, but more importantly you would continue to get renewal (passive) income from the policy you sold for many years into the future, as long as you serviced that client to keep them happy and on the books. You could also do this by charging for financial plans and managing people’s investments. (For related reading, see: Is a Career in Financial Planning in Your Future?)
5. Generate Ad Revenue From Your Website, Blog and Social Media
A great source of passive income is advertising dollars from other businesses and people. If you have a website, blog or strong social media following, other businesses will start to take notice. A trick I have learned in this space is that it is much less expensive and faster to go where people already are then to try and create it yourself. But, if you create it yourself, then others will come to you. This is how you turn your blog, etc. into passive income.
6. Create an App
People have been able to make a lot of money from creating and selling an app. You can offer the app for free to users, and if enough people use it you can then charge businesses to advertise (just like #5) with you. You can also offer a version of the app that has no advertisements, but the user must pay a nominal fee to have this version. Depending on the app, you could also be bought out by a larger company and given a lump sum to walk away. This happened to Garret and Jessica Gee. Garret developed an app that was eventually sold to Snapchat for $54 Million!
7. Patent Royalties
This is more common than people realize. Have you invented something that everyone would love but don’t want to build a business around it? This could be a product, process, drug, etc. Big businesses are looking for and willing to pay you royalties in exchange for being allowed use your intellectual property. (For related reading, see: Make Money on Your Intellectual Property.)
8. Licensing Fees
Have you developed a particular brand or system that others can benefit from? The options here vary quite a bit. For example the rock band Def Leppard is able to license their brand because of their massive success.
9. Invest in Businesses
Another form of passive income can come from investing in private equity opportunities in businesses that are growing. There are certain limitations on who can invest, but it can be a great way to generate passive income from profits in a business that you have very little if any active role in.
Attitude of the Wealthy
So, creating something of value that improves people’s lives, marketing it to an audience that has critical mass and wants what you are providing, and understanding it will take some time, effort, and risk, seems to be the secret sauce to creating passive income. This is simple, but will not be easy. Are you ready to get started?
(For more from this author, see: Investment Portfolio Management for Entrepreneurs.)