Had to engage in the conversation here – Leo – says there is no such thing as passive income he argues that we all should be developing businesses not just relying on SEO to climb to the top of the rankings.
Not Passive Income
OK so lets step back. In the dark times pre-passive income – I used to be a highly overpaid IT consultant – I was paid a nice hourly rate by companies who wanted to upgrade or replace software. I used to work on a salary – a “safe” job right. Yup, it was – I never got fired from a permanent job – but it was huge, huge millstone around my neck. You see turning up 40 hours a week – even if the hours were somewhat flexible – meant that I could only travel in the holidays- I only got 4 weeks annual leave so even with creative use of leave without pay, public holidays and anticipated leave – I could only get away for 6 weeks ever couple of years.
I could afford the travel – but I didn’t have the time – the rules around my presence at work were my definition of hell.
Business or Passive Income ?
I looked at options – buying a franchise is a popular one around here – but it sounded like buying a job to me (told what to do – lots of bosses (clients) and high overheads (franchise fees)) – no thanks. Plus, again – you have to be in the country to run the business.
Starting my own business – I never considered it to be frank – I not only couldn’t sell, I didn’t want to. I didn’t want to risk my capital and the failure rate for small business in New Zealand is pretty high (and usually that takes your house too).
I started to look at other options. When I started researching my options I came across the concept that you could invest now and get paid later. I could buy property and get paid rents, I could buy shares and get paid dividends (rarely in my country but the principal is still there).
Passive Income Take 1
This was promising – I did quite a bit of research. In the end we invested in property (my partner was already in shares) – and its worked for us and continue to do so.
Now some will argue property investment, particularly residential, free-standing, older wooden houses, in earthquake prone countries, is not passive. They will say houses need to be maintained, tenants need to be found, managed and got rid of.
Yup – and you can outsource the lot! Case in point – house we own in small town New Zealand.
Here’s the rough figures (all NZ$ – NZ$1 = US$0.75 at the moment – but relatively it doesn’t matter).
Purchase price 2003 – $77,000
Currrent estimated value 2011 $150,000
Unrealised capital gain 6.4% a year
Original tenant left a few weeks ago – yup same tenants for 8+ years – never missed a payment – $140 to $160/week for 8 years.
Gross rental income: $8320 or 10% cash yield
Gross yield 16.4%/year (yup that’s why we don’t focus on shares very much).
Now the property does have expenses, we use a property manager, pay Council rates and insurance, and of course we borrowed the purchase price so there is mortgage interest as well – but time wise its cost us about 2 days when bought the place (one day deciding to buy the place, one day due diligence, signing papers) and now – eight years later we spent 1/2 day, inspecting the property and arranging for someone to give it a good tidy up.
Is that totally passive income? No
Is it bloody close, the way we do it – yes. And even we maintained and managed the properties ourselves (and plenty of larger landlords do) – we would have a business giving a us a ful-time income for a very part-time amount of effort. But we don’t that because between the two of us we are crap at DIY and are too soft to deal with ratbag tenants!
Will this property be passive income for us for the next 10, 20, 30 years? Should be, likely to be, unless there is a major earthquake in the region – when it won’t be a total loss – but we will probably get paid out and have to walk away at that point. Is passive income guaranteed – nope.
So if property investment is so great – why didn’t I stick with it? Well we did – but we stopped buying – why? Risk, to make good money on property you need to gear up (borrow) – to do that you are layering risk on risk – we got to the level of borrowing against asssets that we were comfortable with – and stopped.
Property is an as passive or active income as you design it to be.
Passive Income #2
My second attempt at passive income you are familiar with, as documented right here. I rank websites at the top of the SERPS and make passive income from the advertising on them. Frankly I never started off to build a business online – a wanted a passive, long term income – and I have that now. Some of my income is from fairly new sites, some of my income are from sites and pages that I haven’t touched for three years. Last year I inadvertantly demonstrated that I could do little work for several months have not affect my income.
What’s long-term income though – will my websites still rank in 3 years, 5 years, 10 years? Maybe, maybe not – but every indication to date is that older sites rank and hold their rankings better than new sites. But one of the reason I have many websites is the same I reason I own 5 rental properties in smaller, cheaper places, rather than just 1 or 2 in the fairly expensive city I live in – diversification. If one of my houses is destroyed or untenanted – it hurts but its only part of my portfolio. If one of websites gets out of favour with Google or that particularly niche falls out of fashion – the others are still producing.
Now from what I am seeing – nothing much has changed on the last Google update – my sites are still ranking in the same place more or less, my Hubpages may be a little down – but that could be coincidence/seasonal too. February didn’t match my record January month – but I know my pattern is that once I hit a new income record it takes 3 to 4 months to match it again – in short I am seeing nothing out of the ordinary in my business.
Leo argues that I really should build a business online – a real business with real clients – but nothing has much changed for me – my freedom is still the most important thing for me – and having to be available to clients cuts into that freedom. Having a few clients is fine (and I do) – but ramping it up seems to be just trading freedom for income – a trade I’m not really prepared to make.
Leo argues that SEO will get more and more competitive over the coming years – it could well do – though I wouldn’t overestimate the ability of corporates to adapt – pretty bloody slow in my experience. He argues that I should establish a “real” business which has real followers and therefore not be dependent on search traffic. I know a little about this – because this blog gets “real” visitors not just search traffic. As far as I can tell though -the people who convert are the search traffic.
What I know is that with my silly little sites – I can make a little money – not a huge amount – sometimes $1/day – sometimes more. But even at $1/day lets look at the rate of return:
Initial purchase of site: (all prices US$)
$8 for the domain
$10-$15 for content on the site Ti
Backlink articles at say $1/each – maybe 30 -90 articles – say $90
Annual profit $243 … annual costs say maybe $20…
No mortgages, no property managers, no rates, no insurance, no risk of earthquakes…
Passive Income – Is It For You? Maybe Not If …
If You Want to Make a Difference
If you want to make a difference in the world – then blogging ain’t where its at – go become a health worker, or a volunteer in a country that needs the help. An engineer bringing clean drinking water to kids in Africa, a researcher finding a cure for cancer is making a difference, me – not so much.
If You Need Money Now
As I have advised many people – if you need money this month, or next month – or even in the next 6 to 12 months – this won’t work for you – it may, but for most beginners it won’t work. It didn’t work for me – I got a job – it paid, it was a crappy job but it delivered what I needed at the time – cash.
If You Have Huge Income Requirements
I remember when I wrote about making $1000/month with Adsense – that it seemed like a lot of money (I hit that milestone almost exactly 2 years later) – $1000/month is a lot of money to me – its not enough to live on – but I could live on it if I had to – its pretty much what the NZ government pays as a pension for the over-65’s and most of them seem to do just fine.
About US$5k /month would work just fine for me – but I see people making $10k plus in the TKA forums – frankly that’s nice – but its unlikely to ever be me – because I don’t really need the money I will probably never persue it! If you really need to make a 6-figure salary – again I’d say get a job – just make sure you have the right skills.