The Pros And Cons Of Passive Income: What You Need To Know Before

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There would be nothing better than to have your money working for you, instead of you working for your money. Who doesn’t dream of continuing to bring in significant income while sleeping or going on vacation? 

That’s what passive income can do. Passive income as a concept has been gaining speed, especially since the internet offers new and varied ways to do it. It means having financial independence while also being able to do what you want to do, when you want to do it. 

There may be some work in setting up your sources of passive income, but the hope is that there is little work over time to keep the money coming in. 

There’s no doubt that earning a passive income is very appealing, and there are several ways that you can do it. 

However, you need to be aware of the pitfalls that can arise when seeking out sources of passive income. 

Benefits of passive income

There are several benefits of passive income that make it an appealing option for investors and individuals to strive for. You should never expect that you’ll be generating passive income right away, but you can lay the groundwork for success down the road. 

Pros And Cons Of Passive

Passive income gives you the ultimate flexibility. You'll have financial flexibility, but you’ll also have personal flexibility. There’s no need to be chained to a desk for 8 hours a day. It’s also something you can use to supplement your regular income without taking up much of your free time. 

People with passive incomes can go on trips when they want, be home for their kids after school, and live the lifestyle they want. 

Much like you want your portfolio to be diversified, you also want your personal revenue sources to be diversified. If you rely on a 9 to 5 job, no matter how stable it may seem, there is some volatility there. If you are fired, or if the financial state of the company requires layoffs, you might find yourself in trouble. 

By adding a passive income to go along with your working income, you give yourself protection in case you lose your job. 

You can have the potential for scaling up with many passive income streams. If you are renting out a room, you may be able to eventually rent out a house. Then as you grow your income there, you can rent out multiple properties. 

Each money-making venture only takes a little more work, but you get the extra income that is the same or greater than the income you had before. Passive income can also be used to invest or develop other income streams, meaning you can make it grow. It takes money to make money, as they say. 

Pitfalls of passive income

There are, however, some things you should be aware of. Passive income is not a guarantee. You have to be in the right position when setting up your venture, and you have to do the initial work to get it set up

There can be a heavy investment of time and money upfront, whether you’re buying property, stocks, or creating a product. You will also need to be patient as some income streams take some time to see a return. 

Passive income is also like any other investment. It carries risk, and there are several things that can derail them. 

For instance, the housing market could tank, meaning that your real estate holdings won’t be as valuable, and you might lose rental income. Investments in stocks, bonds, or futures are affected by market forces over which you have limited or no control. Also, regulations and societal changes could affect your income stream. 

Passive is also a slight misnomer. There is no such thing as a free ride. Most passive income streams require at least some work, like maintenance on rental properties or updating an online workshop or video. 

You will have to do that work, plus have some patience. In some cases, it will take years before you see substantial returns. Do not expect immediate results and be realistic. 

Let’s examine some pros and cons specific to certain types of passive income streams. 

Rental income

This involves real estate investing with the purpose of renting them out for profit. This is a very popular passive income stream. There are many people who build up their real estate portfolios and eventually hire a property manager to do all the heavy lifting while they rake in the money. 

How To Advertise A Real Estate You Plan To Sell

This can be a very consistent stream of income, and lucrative over time. 

However, you need to be on top of things when you acquire a property, and make smart choices. You need a good location, you need to hire a good property management company, and you need to make good investments. You may also need to deal with tenants if there are any issues. 

The market can fluctuate, which means you could be left holding a property that’s losing value and doesn’t generate any rental income. 

Dividends

You can earn dividend income by buying stocks that dole out a share of the profit to its shareholders. This is a reliable source of passive income when things are going well. 

That said, it’s important to make good investments in dividend-paying stocks. Analyzing the company’s financial health and dividend history to get a read on whether it will be profitable in the long run. If you don’t, you’ll find your share shrinking every year. 

Royalties 

If you’ve got a creative side, then you may be able to earn royalties on what you create. This can go for any kind of intellectual property that can be trademarked, copyrighted, or patented. 

So if you’re an author, musician, artist, or inventor, you may be able to make a passive income from the sales of your work or from licensing it to others. 

This type of passive income is fine, but it is limited. You may write a song that streams enough to make a living, but that will die down, and you will have to write another song and keep them coming. It’s a lot of work upfront to create a piece of art or to invent something. There is also an element of luck involved, too. You may also need a significant investment to get your invention made or to market your work. 

Affiliate marketing

Affiliate marketing is very big right now. Online influencers, such as on Tik Tok or Instagram, can get paid to refer certain products to their audiences. This is also done on other online platforms, like websites, and blogs. 

Benefits of affiliate programs

Once established, this can bring in a big passive income stream with a possible market that goes around the world. However, you will have to start from the bottom. Building up an audience is a lot of work, much of it done with only a handful of followers. While you can work hard at it, you might never get a foothold. Affiliate marketing is a little less passive than other choices. 

You will have to keep producing content to keep getting advertisers. 

There are also investing options that can bring in a passive income. 

Real estate

You can also make money off real estate as an investor. While it can be passive income while properties are gaining value, you need to be very careful with which properties you purchase. 

Examining the market for opportunities is vital, because if you read the market wrong, you will be left holding the bag. 

Stocks

Investing in stocks and index funds is a good way to bring in passive income through capital appreciation and trading at the right times. The drawback is that there is always a risk with stocks

What to look out for in stock affiliate programs

The market can be volatile, and if you are caught with the wrong stocks at the wrong time, you will find yourself in trouble. It also takes significant capital to be able to make significant money. 

Make sure that you mitigate risk by diversifying your portfolio. Do this not only with your stocks, but invest in some futures too. It’s tricky, so make sure to do your research on how to trade futures so you can be successful. While they are subject to market fluctuations as well, you can protect your portfolio by having varied investments. 

Bonds

A bond is one of the most reliable ways to make passive income. The government of the bank will pay you regular interest payments, and then will pay the entire principal back when the bond matures. While they are steady, the amount of money you can make is limited, unless you buy a large amount of bonds. 

Mutual funds

A mutual fund works just the same as the name implies. Multiple investors can pool their money together to buy assets, such as stocks, bonds, or futures contracts. The dividends are then paid out to each investor, along with interest payments. 

This is a good option because there are multiple investors sharing risk. However, like any kind of market purchase, you want to make sure you invest in something that is on the rise. Not only that, but the fees involved can be quite high, so be sure to do your research. 

Peer-to-peer lending

As opposed to going to the bank to get a loan, why not become a bank? Through peer-to-peer lending, you can lend money to other parties, and the interest becomes passive income.

However, there is always the risk that the borrower will default on the loan, so you must be very careful about who you lend to. Having a diverse set of borrowers will help you mitigate risk. 

Passive income streams: pros and cons

There’s no doubt that having passive income streams can give you both financial and personal freedom. They also protect you from the risk of losing your job. While this all seems great, you have to remember that nothing in life is free. 

If you do the work and the research, you should be able to find a passive income source that works for you. 

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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