Learning By Doing: 6 passive income models
Before I started pursuing my passive income goals, I wanted to assess the full range of passive income streams. What do they look like? How are they different? What is required before you start? What time and skills needs to go into them?
I set about readings articles like 23 Passive Income Ideas You Can Start Today and 43 Best Passive Income Streams & Opportunities. It’s clear there is a wealth of ideas and opportunities. I also began to see patterns in what these ideas entailed. As a result, I wanted to group the different ideas together so that I could assess if they were right for me and prioritise which I might want to pursue.
The passive income categories below are defined and then grouped by their common factors: monetary cost (upfront and ongoing) and time cost (upfront and ongoing). To simplify things, I’ll assume the revenue opportunity across each is the same. Whilst this ultimately may not be true, I think it’s difficult to say what the revenue opportunity is as ultimately this is dependent on how well you execute.
In this case, I have also made a note of the skills you might stand to gain from each and whether you would be tied to a location. As mentioned in my first post, this project is also about skill acquisition and becoming free from a physical location.
So let’s see how the different types of passive income models stack up.
This model requires ownership of something (typically high value) that you can rent out to others on a shorter term basis.
- Property Income from renting out a room/house (long term)
- Property Income from renting out property on Airbnb (short term)
- Rental income from renting out a high value product (such as machinery, tools etc)
Costs & Skills
- Upfront monetary cost — High. Property in general is very expensive and requires a high salary to get a mortgage. Renting out a high value product can have a lower barrier to entry but are still typically expensive.
- Ongoing monetary cost — Minimal (relative to value of house/product). Some maintenance etc maybe be required.
- Upfront time cost — Low. If you own the house already, then renting long or short term just require putting on a letting site. If you don’t own the house/product already, then finding and buying the right one may take some time but still, relatively low and can often be put onto a specialist who is incentivised to make the find for you (e.g. Estate Agent).
- Ongoing time cost — Low. Finding new tenants, maintenance, etc. Can be low effort and can also have someone manage it for you if desired.
- Skills: Property management, relationship management
- Location-tied: Yes and no. If you hire someone to manage it then no, otherwise if you are managing it directly, you will want to be around.
Similar to the rental model, this requires buying some form of ownership in something so that you can earn a yield on that over time.
- Funds — Index funds, IRE’s
- Managed Personal Funds
- Portfolios — Nutmeg, Betterment
- Public Company Stocks
- Private Company Stocks — via crowdfunding, angel investing, etc
- Public Bonds
- Peer-to-peer lending — LendingClub, FundingCircle
- Invest as a silent partner in a business
- Buy an already monetised blog and continue to sell the ad space
Costs & Skills
- Upfront monetary cost — Medium to high. To be worthwhile, you need a decent amount of money to invest in the first place. New digital portfolios have reduced the amount you need upfront, e.g with Nutmeg you can invest starting at £5,000 but for many people this is still a large chunk of disposable income to see go.
- Ongoing monetary cost — Minimal. Management fees over time can be reasonably low.
- Upfront time cost — Low to medium. Depending on how active you are with your investments, the time input can be pretty low.
- Ongoing time cost — Low to medium. Again, depending how active you want to be and what strategy you take to your investing, the ongoing time can be low.
- Skills: Market analysis, stock analysis
- Location-tied: Mostly no. If you do a more active type of investing like angel investing, you may want to be near your investments, otherwise you can invest and manage investments from almost anywhere in the world.
Create and sell a digital product
This requires a lot of upfront energy to assess a market and opportunity, create something of value and sell it to a willing customer base. It requires minimal up-keep and normally has a set and sell approach. Normally digital products are created in niche areas were you can carve out a customer base.
- Sell digital products online — photography, ebooks, video course, mobile app, wordpress themes, plugins
- Create an affiliate site — comparison site, review site, directory, etc
- Lead capture website
- Membership site
- Create a niche marketplace or job board
- Resell online products/white label software
Costs & Skills
- Upfront monetary cost — Low. The barrier to producing most digital products is very low at this stage. For example, ebooks can be published for free.
- Ongoing monetary cost — Minimal. Depending on how much you want to market the product, this can be minimal.
- Upfront time cost — High. You need to invest a huge amount of time upfront to properly assess an opportunity and make sure you can make money. This may involve keyword research, competitor analysis, etc.
- Ongoing time cost — Low. Again, provided you invested enough time upfront to make sure you were in a suitable niche that you can profit in, the ongoing time can be fairly low.
- Skills: Opportunity analysis, market research, tech, design, digital marketing, monetisation
- Location-tied: No.
Create and sell a digital presence
This is similar to the above digital product approach, in that you need to asses a market and opportunity. It differs however, as rather than selling a product, you are typically selling advertising to an audience of interested followers.
- Build a blog
- Vlog — Youtube, Snapchat
- Instagram page
Costs & Skills
- Upfront monetary cost — Minimal. It is free to create accounts on youth, instagram or snapchat and start uploading content.
- Ongoing monetary cost — Minimal. With time, you may want to invest in some better equipment than a standard smartphone but again this can be minimal.
- Upfront time cost — Medium to high. To really have success, you need to assess what people might find interesting and how you can gather a lasting following.
- Ongoing time cost — Medium to high. These pages require constant updating and fresh content to keep followers engaged. You also need to monetise this though sponsored content relationships and so on. (Of course, at some point you could outsource this work, but initially it would be on you).
- Skills: Opportunity analysis, market research, digital marketing, community building, monetisation
- Location-tied: No.
Similar to the digital products, this involves market research of some kind but adds a physical element to the model; the storage and delivery of products.
- Create and sell products — jewellery via Etsy, t-shirt printing, etc
- Buy bulk from overseas and sell it down stream
- Ecommerce Store and drop ship
Costs & Skills
- Upfront monetary cost — Medium. You need to invest some money upfront in producing the product or buying in bulk. You also need t consider storage.
- Ongoing monetary cost — Medium to low. Depends on the cashflow ongoing but generally you’ll need to have some stock and store at all times.
- Upfront time cost — Medium. If you’re investing in product you’ll want to commit some time up front to make sure you’re in a market you can profit in so do your research.
- Ongoing time cost — Medium. You’ll need to be around to do some marketing as well as monitor the packing and shipping of product. You may also need to consider customer service. (Of course, you could outsource this with time).
- Skills: Opportunity analysis, market research, marketing, logistics, customer service.
- Location-tied: Yes. You need to be with the product so that you can ensure the sale fulfilment.
Automate a service business
This requires finding an opportunity which you can attract customers to but then typically outsource the work to others who are able to do it for you. Often, this may involve taking advantage of remote services in other countries that you can buy at a far cheaper rate.
- Become a referrals source for small business
- Build a service business and outsource the work — SEO agency, cleaning agency, consulting business etc.
Costs & Skills
- Upfront monetary cost — Low. May involve small marketing tests to see how easily you can attract customers.
- Ongoing monetary cost — Low. You can outsource work to far cheaper places in other markets.
- Upfront time cost — High. You’ll want to commit some time up front to make sure you’re in a market you can profit and effectively outsource the work.
- Ongoing time cost — Medium. Of course, the goal is to eventually outsource it but at the beginning you’ll want to know the process yourself an you’ll be needed for ongoing management and perhaps training every so often.
- Skills: Opportunity analysis, market research, marketing, people management
- Location-tied: No. Services can be outsources on digital platforms such as Fiverr, Upwork, etc.
Summary and comparison
As you can see, there are many different examples and ideas that fit into the above framework. Each of them are passive to varying degrees and have different barriers to entry.
Below, I have given each model a score based on the criteria outlined above.
Now, with each of the models having a score we are able to compare and order the models by certain areas of preference.
The passive order
For example, if you have time to invest upfront but want to generate purely passive income, you would want to order the models based purely on their ongoing time cost.
Here you can see that digital products is the winner, whilst the investing and rental models also score well. It’s interesting to see the models that don’t score so well; digital presence and physical products. These initially are not very passive until you can’t outsource the day to day.
The time poor, money rich order
Now consider someone starting from a position of money or wealth, but has little to no extra time. This might be a business exec or investment banker, typically working long hours but earning good money. They might rank the above factors by limiting the overall time that goes into each, both upfront and ongoing.
By summing the upfront and ongoing time cost you can see that the investing and rental models perform best. They are also those which require the most monetary investment upfront, so this would seem to be a good fit for someone of this profile.
The overall order
Now consider an individual who cared about both time and monetary costs. What would they go for?
Again, digital products and investing score very well.
Now consider my motivations from my first post. I wanted a passive income stream that had a low ongoing time cost, was not tied to location and would build a useful skill set. I also have a preference for low upfront costs.
With these factors considered, digital products seems to be the clear winner. There are several very useful skills to be learned and can be extremely passive. Of course, work needs to be put in up front to have the desired results.
Let’s get digital
With the above analysis done, it became clear to be that I’d want to move forward with some digital product strategy. I’ve already begun work on a few ideas and look forward to sharing soon.