Take a character from Mad Men out of the 1960s and plop him down in most U.S. office spaces until about 2010 and — except for desktop computers and
What’s the ultimate passive income business, considering the following: business dependencies, cost and time to maintain, time to build, ease of scaling, competition, and revenue?
It helps to define the question a little better, what do you mean by “passive” income? Most of the answers provided wouldn’t meet my criteria of being “passive” they might be effective ways to make money might even have a recurring element but aren’t truly passive.
To me the idea of passive means “you don’t have to do anything”. By this definition almost no income is truly passive so I and most of the people I know have found more success with “low maintenance income” where it doesn’t take much time to keep it going.
Here’s an analysis of the broad categories one might consider and how they work in practice:
1. Investments – this is the single most passive form of income. With a proper asset allocation mix it can literally give you a steady income indefinitely for absolutely zero effort. The problem is you realistically need $10-$20 million invested to truly sustain with a decent lifestyle because the money needs to compound slightly faster an inflation while you’re drawing on the growth. Contrary to what another poster said I would not say this should be wholly composed of high grade government bonds because the yields are so low and there’s a potential risk of them being eroded by inflation therefore not making them perpetually passive. Instead a high grade stock mix that will over the long term adjust for inflation (probably better) plus pay a decent dividend is your best option probably with a portion in long term bonds and a small amount in commodities (gold etc) to balance it out. A money manager can rebalance for you once a year so you never have to look at it and can simply draw an income without thinking for decades. However, how do you get the initial principal?
2. Real estate – referring here to cashflowing commercial or residential real estate (renting farm land might also work but I don’t have experience with that so can’t comment) not any form of development. This is technically an investment but I separate it from the previous one because people tend to treat real estate slightly differently than paper assets that is to say they tend to be more hands on for example managing the property. You can and probably should delegate property management but in the big picture you’ve usually got to spend at least a minor amount of time checking up on the management especially as the property wears down and needs maintenance, if there are radical shifts in mortgage rates, etc. Property is fairly simple compared with most businesses and fairly easy to manage so it’s a nice place to store wealth and very practical means of achieving very low maintenance income but not quite as much so as paper assets and still requires you build up the money to buy the real estate to begin with. A quick note on the returns off real estate vs paper assets. Both are poor forms of cashflow meaning the ratio of cashflow to capital invested is quite low (generally less than 5% for each so you’re talking about tying up a lot of money to get a fairly small amount of income to live on). You boost this through leverage but even with leverage by the time you’ve paid all your expenses it’s rare to get better than about 10% net positive cashflow. Real estate bulls usually don’t understand stocks and vice versa so they tend to bash the alternative investment. As I’ve learned more ababout them both over the years I’ve found they are pretty comparable. You’ll typically get slightly higher rates of leverage on real estate than stocks (typically 80% LTV vs 70% LTV) but in practice the margins are closer because a safe sustainable real estate strategy involves having a reserve fund in case anything goes wrong (vacancy, maintenance, etc), which you don’t need in stocks. Yes, you can technically do zero money down actually in both cases but you won’t find that happening at scale in most cases and definitely not when you’re looking for a safe stable long term passive income strategy. I find if you buy well you can usually do slightly better cashflow off real estate than stocks but the tax rate on that income as rent vs dividends for stocks is generally higher so your net income at the end is pretty similar assuming you know what you’re doing in both.
3. Internet businesses – pretty much anyone who says this is truly passive hasn’t done it. It can be a fantastic source of income, way higher cashflow rates than investments so way more practical for someone getting started without a ton of money to invest and you can build it up to have some fantastic recurring income especially if you delegate the tasks to other people but then you’ve got to manage them. You can hire a manager but then you’ve got to manage the manager. In the relatively short run this can be almost completely hands off but over a year or two it will typically decline if not nurtured with effort and that’s assuming it was a really great internet business to begin with. The internet simply changes too much to be 100% hands off for very long. So in short measured over a few years it will definitely take a lot more of your time to maintain than real estate. On the other hand it also yields way more in a shorter time for less investment of dollars if you do it well so for someone starting out this is a better option.
4. MLM income – no one preaches passive income more than the MLM industry and almost none of them truly practice it. Yes, if you build it up really big and well in a good company it can sustain for quite a while with minimal attention but in practice this rarely happens, almost all the big players are very active every week in working with their team to maintain and hopefully grow. Some people do very well here. In my experience both the building and sustaining are less predictable (because more factors are out of your control) than the internet option. MLM is a great place to learn the basics and if you thrive there great but mostly I wouldn’t recommend this as the best option.
5. Franchise ownership – this is usually more capital intensive than the Internet business or MLM but less so than real estate or investments. It depends a lot on the franchise you get into and when (yields tend to go down as the franchise grows in success). Overall a good franchise can provide a good low maintenance income stream but usually the real success is in being a multi-franchise owner. For the right kind of person this is a good place to learn business but best for someone with a good job and lots of savings not someone just getting started or someone who has already amassed a huge amount of money. Like the Internet business even as a multi store owner there will be some maintenance in almost all cases (some franchises require you work say one day per year in each location etc)
6. Trading – I only bring this up because someone mentioned it, it’s not passive. Yes, you can do some solid returns though consistency tends to be a problem I rarely find people who it is the best option for, really only those who really enjoy it and it’s something they want to be doing part time long term.
7. Royalty ownership – yes if you own a patent or valuable IP this can provide a decent almost no maintenance income stream for a period of time (until the IP expires or the market for it fades – often the later happens before the former). The trouble is this field isn’t very predictable at all so if you get lucky great but generally don’t set out expectiexpecting it to happen that way for you.
8. Business – any business can be made passive or rather low maintenance (over time they always eventually go down if not given some love). You scale it up, delegate the work and put management in place. This will get you mostly hands off if you do it well but it will still take some attention, in my experience about 1-2 hours per week to maintain ok. You can improve the passiveness by putting a board of directors in place to oversee the management of you’re big enough. The key to making it truly passive is then to have other shareholders in place with an invested interest in holding the board of directors accountable but by that time you almost might as well simply invest in the companies of others, it’s usually easier. That being said this is especially true when you consider any company can fall prey to a changing market or bad management so you’re more stable and consistent having the initially described diversified portfolio. That being said business is one of the best vehicles to make the money to have to invest because you can sell the company for a decent multiple with tax favourable consequences in a lot of the world. Business like this is however probably the most complex vehicle so you either get lucky or do a ton of learning to make it work at a high level.
Hope that helps.