The Myth of Passive Income

Share:

Note: The views expressed in this article are my views alone and not the views of my employer or anyone else.

Passive income is the new gold rush for our generation. Everybody wants the dream of figuring out how to make $10K a month doing nothing so that they can quit their day job. This is why real estate has always been popular, the idea of passive income through rent has always been appealing. This is also why more and more people got into the stock market during the pandemic. Having a second income is always a good idea, however, passive income in its current definition is really a fallacy.

Passive income implies that you don’t have to do any additional work for your side income. That you accrue income and can have your “regular job” with no additional work. This is false. Passive income requires a fair degree of maintenance or risk. Let’s look at the first case with real estate. Everyone thinks they can get into real estate, buy a home and Airbnb or rent it out for passive income. But let’s consider the costs for being a landlord, assuming you’re actually a good landlord. First of all, you are responsible for repairs and issues in the apartment. Those repairs both expend money but actually more importantly, time and effort. You’re spending a lot of time trying to find the right people and parts to fix the problem which takes away time from your regular job. In addition, there is another headache of screening new clients and searching for a new one every year or 2. Finding a “good” tenant is not always easy, which is why most landlords require a security deposit or something to cover their potential damages. In fact, if a landlord does find a “good” tenant, they sometimes will avoid a rent increase for them just because of the headache of finding a new tenant. This may not always be the case but it does highlight the time, effort and headache associated with being a landlord. If your apartments you’re renting out has an amazing tenant that stays for a reasonably long period of time AND the apartments has no issues, then it is truly passive income. No real additional work and collecting a check. Alas, this is not the case and this is why the headache associated with it makes it a second job.

Let’s also consider the stock market where many people have tried to make passive income here. This one doesn’t have any maintenance costs. After all, anyone can open up a brokerage account and the fees are minimal. So what’s the problem? Well for starters, you have to invest time in picking the right stock. The amount of research needed to pick the right stock is enormous, whether it be reading quarterly earnings reports, looking at various industry benchmarks, seeing what other experts have to say, etc. Most people don’t even bother with this and just invest based on their gut or what their friends say. I met someone recently who said he invested in crypto without knowing what blockchain was. I don’t proclaim to be a blockchain or crypto expert which is why I didn’t invest in this stuff but his desire to get into the market at all costs in not uncommon. Some people may get into the market just through an index fund so that their risk is spread out? So what’s the problem? No additional research and the risk is minimized. This may be true but the income potential here is also minimal. Index funds are not high growth opportunities and unless the Federal Reserve pumps another trillion dollars into the economy, we’re stuck in a bear market for a while which means it’s a stock pickers market.

This is all to say, having a second income is totally fine and many are doing that post pandemic but passive income is a fallacy. Everything has costs associated with it whether it be time, effort or money.