4 Things Most Americans Don't Know About Passive Income

Passive income sounds pretty amazing. You build something once, and then you can just collect money without having to lift a finger ever again.

But is it really as straightforward and easy as it seems? Here's what most Americans don't know about passive income.

Passive Income Usually Requires Work Up-Front

One of the biggest misconceptions is that passive income means earning money without having to work at all. But in reality, most passive income streams require either a lot of effort, significant capital or both.

For example, if you want to make passive income via rental properties, you’ll need enough capital to buy the property first, then maintain, insure and manage it. And even if you want to start an online course, you’ll still have to dedicate time and effort to creating and marketing it. Even blogs and YouTube channels can take months or years to gain traction -- and require a constant stream of content to keep the revenue going.

It Isn't Always Completely Passive

Passive income isn’t always passive. If you're renting out property, your tenants can decide to move out, which means you’ll need to find new ones. Your website could lose traffic because of Google core updates, and your e-commerce store customers could also request refunds. Online creators need to make a steady stream of content to keep the revenue going.

So if you expect your passive income stream to be completely hands off, you might be disappointed.

“Passive income is a category of ownership and you either pay for it with time or you pay for it by giving up a portion of your profits to an outside company. Both are usually a lot more than most people anticipate,” said Jason Gerstenberger, licensed independent insurance broker and Airbnb host. 

You May Need Starting Capital 

It's typically much easier for you to start making money passively when you already have money to invest.

For example, even though dividend investing, real estate and certain business acquisitions can all generate relatively hands-off income, you generally need to invest money up-front to start making meaningful returns. And even a 5% annual return on $10,000, for example, is only $500 before taxes.

In other words, you need to have realistic expectations about how quickly investment income can replace your paycheck.

It Can Come With Risks

Passive income also isn’t guaranteed. You could invest hundreds of thousands of dollars into a rental property and not get any bookings. A product that’s selling really well today could also stop selling six months from now.

As someone with plenty of experience managing short-term rentals, Gerstenberger said people need to be realistic about the numbers before assuming their income stream could provide steady earnings.

“I’m not trying to scare anybody, but if somebody’s trying to buy a property as passive income, they need to really crunch the numbers and do the research to make sure that they can make it work. It doesn’t generate nearly as much money as people believe,” he said. 

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.