Understanding Passive Income

Passive income is different than active income. Active income is earned from your work and when you stop working the income stops. Passive income is different. It keeps working even when you are not. For this reason, passive income is a force multiplier. Effort that you spend today creating passive income will multiply your efforts through time, compounding upon itself and rewarding you many times over.

#2 Income is reoccurring and sustainable

Passive income comes from selling access or use of income producing assets. In this way, the asset is not entirely consumed but can be used repeatedly to earn income without requiring new effort to regenerate. Some assets can be used indefinitely while others are long lasting.

#3 Income requires minimal time investment to maintain

This criteria is the most subjective of the three. Passive income cannot be passive if it requires burdensome effort to maintain. This is not an exact measurement, however, we consider income to be passive if the investor can ignore the asset for extended periods of time (i.e. go on vacation) and the income continues to produce without decline. As the saying goes, if you're making money while you sleep its 'passive income!'

#1 Income is produced from an income producing asset (IPA)

Passive income is derived from employing an asset in a manner that generates income. Many things can be assets. These assets are owned by an investor and can be purchased or created. Assets include real estate, stocks, bonds, royalties, and more. There are 7 Classes of Income Producing Assets, which you can learn more about below.

Income must meet three criteria to qualify as passive income

7 Classes of Income Producing Assets

Most income producing assets (IPA) fall into one of seven classes. Categorizing assets by their class is helpful in identifying which passive income strategy best suits your skills, time available, and related constraints.

Physical Asset Class

Digital Asset Class

Intellectual Asset Class

Artistic Asset Class

Debt Asset Class

Equity Asset Class

Risk Asset Class

These tangible properties generate income through leasing or usage. They require initial investment but offer long-term returns with minimal ongoing effort once established. Examples include rental properties, short-term vacation rentals, farmland, vending machines, laundromats, car washes, tool rentals, and vehicles used for car rentals (e.g., Turo) or advertising. It also includes direct ownership of mineral and resource royalties structured as a profit-share of the income produced. Ideal for those skilled in maintenance or market analysis, these assets hedge against inflation but involve high upfront costs and lower liquidity.

Online or software-based assets provide scalable income with low maintenance. They leverage technology for recurring revenue, appealing to tech-savvy individuals. Examples include Software as a Service (SaaS), mobile apps with in-app purchases or ads, and monetized websites/blogs via AdSense or affiliate marketing. Success hinges on marketing and SEO skills, offering low startup costs and global reach but requiring initial development effort.

Creations of the mind with legal protection generate income through licensing or sales. They suit innovators and legal experts. Examples include patents, trademarks, and franchises. These assets provide perpetual income with minimal involvement after setup, though they demand niche expertise and strategic negotiation for licensing deals.

Creative works yield unique royalty-based income, ideal for artists with an audience. Examples include music royalties, book sales, film/TV royalties, art licensing, and photography royalties. These assets require initial talent and audience-building but offer sustainable returns, though success depends on market demand and distribution platforms.

Lending money for interest provides steady, low-risk income. Suitable for risk-averse investors, examples include bonds, peer-to-peer lending, certificates of deposit (CDs), high-yield savings accounts, and mortgage notes/trust deeds. These assets prioritize capital preservation but require analytical skills to assess creditworthiness and interest rate trends.

Ownership in businesses generates income through dividends or silent partnerships. Ideal for market researchers, examples include dividend stocks and private business ownership as a silent partner. These offer long-term growth potential with minimal involvement, though they require understanding economic trends and company financials.

These involve managing risks for higher returns, suited for sophisticated investors. Examples include options contracts, covered call ETFs, arbitrage strategies, structured products like insurance, and cryptocurrency staking/lending. They demand advanced financial modeling skills and risk management, offering high rewards but significant volatility.