This might sound strange, but I don't like the term "passive income". It sounds like a scam. Probably some people actually want a scam, but I think there is a better way of putting it. Profit is roughly "sales - costs". Normally costs are scaled by labour. The higher the volume, the more labour and therefore the higher the costs.
You can categorise the shapes of these curves. In a really dysfunctional company, the amount of labour your need per unit will increase as volume increases. A good example of this might be some bus companies where the cost per rider increases as the number of riders increase -- you get popular and you go out of business.
Consulting companies tend to have a linear relationship. The more you sell, the more you have to do. However, the per unit cost doesn't really change based on volume. Manufacturing companies tend to have a less than linear relationship. The per unit cost decreases with volume. You get the "efficiency of scale".
With computers we can create services with a very nearly constant relationship between volume and labour. In other words, I do the work once and then there is no other cost to increase sales. Of course, from a business perspective, this is ideal. You do the work and then you can scale the business without having to invest more money.
The thing I dislike about the term "passive income" is that it implies that you are getting free money. It's not true. For this kind of constant cost business, you've front loaded the costs. The first one costs as much as the first million. In fact, you may be in the red for a very long time (or forever... "Any side projects, Games, OSS" ;-) ). For this reason, I'd much prefer (the infinitely less catchy) term "front loaded business". I guess it will never catch on, but I wish we could discuss this topic without having to always derail into get rich quick and "living the dream of money without work" schemes.
Passive describes the level of effort, not the investment. Usually passive income is rent-seeking.
Property management is a great example. I can buy a cheap house in a lousy neighborhood, make a modest capital investment, sign up with Section 8 and get pre-screened tenants with guaranteed cash flow. My marginal work output is very low - a few hours a month.
I used to lease a few acres of land to a farmer. The only work was meeting to have a cup of coffee and exchange the check and paying the taxes. :)
And your work per month could be contracted out, so you don't actually need to do any more effort than meeting with your account periodically to make sure you're making money.
Is that 80-100 or 800-1000? I have one single family rental and a new roof(hail damage), busted water pipe, and toilet wax seal cost me $5000 this year and that was with insurance covering 2/3 the roof) That was my profit for several years. Ie I don’t see how this is profitable to anyone.
It’s because most “gurus” don’t actually own and manage properties. The only way I can make a double digit cap rate in the hood is by doing all the maintenance and labor myself.
I agree that nothing is truly passive. Everything involves some form or another for maintenance and triming what I would call "entropy".
There are some lines of business that really is very passive, but those either don't have much of a moat or competitive advantage and can easily be squashed by something newer, nicer and better.
Yeah. It sounds like a euphemism to me. Like "I want to do something that's at best ethically murky because I'm trying to not have to work for a buck." It doesn't help that the only people I hear use this term are mercenary SEO types that litter the web with ad-loaded junk-sites in their free time.
Another way of stating it is you get paid for bringing value to the marketplace. Creating and delivering value is usually very expensive. There are ways to shift around the creation and distribution of value and there are certain notable edge cases that would allow people to nitpick my definition.
But by and large there is a certain physics to business and you can conceptualize it as having certain conservation laws.
Now if you're looking for the Quantum physics of business where those laws don't seem to hold and seemingly magical shit starts to happen and you discover the superfluid of value creation... Well let me clue you in a little. It's absolutely possible.
However!
The conservation laws still hold as what you're trading off to find this magical superfluid or superconductor of business is a very high search cost to find a viable configuration in which to run your operation. So the search cost to find a new, undiscovered, viable configuration or to find a known viable configuration or to obtain the resources to operationalize a viable configuration that has become known to you is so astronomically high in the worst case that it turns out not to be worth it.
Passive income is very expensive from that stand point.
You can categorise the shapes of these curves. In a really dysfunctional company, the amount of labour your need per unit will increase as volume increases. A good example of this might be some bus companies where the cost per rider increases as the number of riders increase -- you get popular and you go out of business.
Consulting companies tend to have a linear relationship. The more you sell, the more you have to do. However, the per unit cost doesn't really change based on volume. Manufacturing companies tend to have a less than linear relationship. The per unit cost decreases with volume. You get the "efficiency of scale".
With computers we can create services with a very nearly constant relationship between volume and labour. In other words, I do the work once and then there is no other cost to increase sales. Of course, from a business perspective, this is ideal. You do the work and then you can scale the business without having to invest more money.
The thing I dislike about the term "passive income" is that it implies that you are getting free money. It's not true. For this kind of constant cost business, you've front loaded the costs. The first one costs as much as the first million. In fact, you may be in the red for a very long time (or forever... "Any side projects, Games, OSS" ;-) ). For this reason, I'd much prefer (the infinitely less catchy) term "front loaded business". I guess it will never catch on, but I wish we could discuss this topic without having to always derail into get rich quick and "living the dream of money without work" schemes.