What is Passive Income? A Guide to the Reality of Passive Income

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Passive income sounds like a dream come true — earning money without any active effort. The reality is that there’s no such thing as 100% passive income. This type of income stream can better be described as frontloaded work: You have to put in time, effort, and (usually) money first to collect those passive returns. Even then, most passive income requires periodic maintenance and attention.

That’s not to say that passive income isn’t worth acquiring. It can give you greater flexibility and freedom and bolster your financial stability.

However, before you pursue passive income, it’s important to get a clear understanding of what that entails. This article clarifies what passive income is, provides examples of passive income, and gives pointers on how to realistically acquire passive income.

What is passive income?

Passive income refers to money you earn with little or no active effort. It comes from sources other than your full-time job, side hustleor a contracted client (in the case of self-employment). In any of those working relationships, you’re expected to put in hours or churn out deliverables to get paid. In contrast, passive income doesn’t require active labor. It’s often thought of as extra cash you can make in your sleep.

That’s the typical mindset when it comes to passive income. However, the truth is that passive income is a modern money myth. Most passive income streams require careful preparation. Even once they’re up and running, they require occasional attention, so they aren’t fully passive. One example is rental income, one of the most common passive income streams, according to the Internal Revenue Service (IRS).

Once a property is rented to a tenant, you don’t have to do much beyond collecting rent. Hire a property manager or property management company, and you don’t even have to worry about landlord tasks like building maintenance. However, you first need to acquire a property, get it…

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