The Truth About Earning Passive Income from Online Businesses
Is it better to just invest in real estate?
Depending on how deeply you’ve researched ways of making passive money, you may have only just discovered online businesses as a great option.
When passive income first comes to mind, most people think of traditional banking investments like index funds and real estate as passive investments. However, online businesses are becoming a new breed of passive investments as the digital asset space matures and as new automation tools make these investment vehicles just as passive as traditional options like real estate.
In order to gain a better understanding of just how passive online businesses can be, we wanted to take a moment to compare what is required to maintain a passive investment in real estate with what is required to maintain a passive investment in the digital asset industry. Our goal here is to pull back the iron curtain and give you a better understanding of how these investment vehicles differ and compare in terms of their passive and active workload requirements.
Real Estate vs. Online Businesses
The dream of many aspiring investors is to make passive income from an asset that will generate a steady stream of revenue with the least amount of risk and effort required on their part. When we say passive income, we mean anything that requires little to no work to maintain a constant cash flow into your bank account. In essence, passive income is “free” money that doesn’t require you to take an active role in order to produce a source of income.
Real estate is traditionally known as a viable form of passive income for many entrepreneurs and is currently known as one of the most common investment opportunities. However, online businesses have gained a reputation for being just as passive as the real estate market, with an even higher return on investment (ROI). Just as there is inherent risk in any type of real estate investment, there are also risks that are commonly associated with online businesses. So what are the benefits of the real estate market that can’t be found in the online business space?
Property Management Companies
One benefit of the real estate industry over the online business space is that the former offers services such as those provided by property management companies. Not only will these companies help you find tenants, but some will even offer to handle any repairs needed on your property. Furthermore, some may offer legally backed systems to help you should a tenant break a contract or, even worse, damage your property beyond repair. Property management companies will take money out of the rent paid to you by tenants for their service fees and repairs and then send you monthly checks containing the remaining balance.
Property management companies offer a great passive investment strategy for real estate owners, as their services provide “hands-off” solutions. You only need to communicate with the property management company, and they will handle the small, nuanced operations involving tenants or any service-related issues that must be addressed to keep your property rentable to any current or future tenants.
Online Businesses Are Slightly Different From Real Estate
While the reputation of online business as a passive investment opportunity is beginning to grow, there are a few major differences between digital and physical asset ownership. With online assets, you can outsource the majority of the work required to maintain these investments to VAs and other freelancers, thus minimizing the workload required of you as the owner. Many of the sellers who come to our marketplace claim to spend only one hour or less per week maintaining their businesses once they have automated all backend operations.
For example, we know of one seller who sold their software as a service (SaaS) business for $106 thousand within just two days of listing it on our marketplace and spent less than one hour per week maintaining the asset. However, we ask that you take this information with a grain of salt, as every business owner will have different workload requirements depending on various aspects of their chosen business model. Although online business may sound hands-off, you must pay more attention to such a business than you would to any traditional real estate property investment because no one is watching the business aside from you. Any number of things could go wrong, and only you can reverse any negative outcomes you may encounter.
Risks of Not Watching Your Digital Assets
Unlike the real estate market, in which you can hire a management company to maintain your investments for you, digital assets will require you to keep a watchful eye. Even after you’ve outsourced the primary workload of maintaining the business, you must still play an active role in overseeing important business decisions that have the potential to either grow or reduce your asset’s general outcomes. Several issues may arise, including:
An Expired Domain
Many digital asset owners don’t realize that an expired domain could affect their investments in a short amount of time. Someone could easily capitalize on your domain name should you allow it to expire. For example, they could buy it and then flip it for a quick profit if you are not aware of the expiration date or have lost access to the original email with which you purchased the domain. Alternatively, someone could easily buy the domain and then try to sell it back to you, knowing that you are already highly invested in its value. The worst-case scenario would be if someone were to purchase your expired domain and then build a completely new website using this address. Bottom line: don’t allow your domain to expire, and always keep on top of your domain provider’s terms and deadlines to prevent any of these situations from happening to you.
Declining Traffic or Revenue
In contrast with the real estate business model, some online assets rely heavily on traffic as a primary source of revenue. This is especially true if your online business is a content-based site, which relies on high traffic to increase the likelihood of converting traffic into a steady stream of revenue through affiliate and display advertising clicks or other forms of monetization.
Aside from the volume of traffic, the quality of traffic may also have a large impact on your online business revenue. Overspending on paid advertising and other means of generating traffic may also lead to a decline in profits. With an eCommerce business model, you may see decreased sales due to increased competition within your niche, seasonality, or a decline in customer interest in a product you provide. Most importantly, you may risk losing the entire value of your asset if you don’t spot such a decline before it’s too late. It’s not all bad, however, and you will have time to mitigate these issues if you spot them early enough to make the business changes needed to prevent them from worsening.
Outdated Content or Products
Keeping your content up to date is an even more important factor in maintaining an online business investment than, for example, remodeling a rental property once a year to keep up with design trends. Whereas a home remodel is less likely to contribute to your real estate property’s potential to generate income, outdated content will definitely have negative effects on your online business. Not only will outdated content make your business less relevant to current search terms, but having outdated products will also lead to fewer sales, as your competition can offer improved solutions to your target audience’s problems.
If you are in the affiliate marketing space, you must update your content as often as possible, even if it pertains to an evergreen topic. This could involve updating affiliate links to newer products within your niche or linking to recently published content to provide accurate, valuable, and up-to-date information to your readers. If you don’t update your content often enough, you won’t be in a top-ranking position in the search engine results page, and you will lose out on a lot of traffic that you would have gained if you had updated your content to match your target audience’s search intent. So what are our final thoughts on generating passive income through online businesses?
The Verdict: Hands-off, but Eyes-on
Similar to any real estate investment using a property management company, online businesses can be quite passive if they are optimized and automated on the backend. This is especially true for content businesses, as the content and operations of such businesses can be outsourced to VAs. Considering all the moving parts required to maintain eCommerce assets, eCommerce businesses may require a more hands-on approach. However, eCommerce businesses can also be just as passive as content-based businesses if a similar approach is taken. Many buyers are constantly looking for turnkey solutions. As more tools are released each day to automate backend operations, digital assets are becoming just as passive as traditional investment opportunities.
In terms of passive income potential, the bottom line is that digital assets can be passive but require more attention than other investments on the market, such as real estate investments. Digital assets aren’t entirely hands-off, and you will need a specific skillset to mitigate any potential issues. Of course, you can always hire individuals with these skills to maintain a passive investment, but it would still be wise to have a general understanding of your business model in case you need to step in and make adjustments to prevent a decline in your asset’s value.
The biggest pro to managing an online business over a real estate investment is the fact that you can scale a digital asset to a much larger ROI than you could expect from any real estate investment. Furthermore, you would also have a direct influence on this return, which you would not have with a real estate property. Regardless of the type of investment strategy you choose, we hope that you have gained a better understanding of whether online businesses are the best form of passive investment for you, given your current skills and your willingness to make a passive investment.
