Once you set up a business, it will start generating income on its own, so you can sit back and relax as the money pours in. This sounds like a dream, right? It certainly can be, but it may also be too good to be true if you don’t do it properly.
Many aspiring entrepreneurs believe that they can create a “set it and forget it” business, where they do an hour or so of work a day and the money flows in. This theory of “passive income” is often considered in areas like real estate investing, franchising and blogging, among other industries.
There are certainly entrepreneurs who can make money from a variety of passive income streams, but creating a source of revenue that will deliver lasting results requires extensive research and planning rather than simply making a small investment and then forgetting about the business. Warren Buffett famously said “If you don’t find a way to make money while you sleep, you will work until you die,” and he is a proponent of establishing multiple passive income streams that work effectively.
The more time you spend researching your market idea or preparing a strategic plan, the easier it will be for the right audience to find you. The extensive background work will help you use your limited resources wisely to generate a good return on your initial investment.
Here we’ve detailed the pros and cons of pursuing a passive income business to help you understand the facts you should consider before moving ahead with a plan for passive income.
Pros of Pursuing a Passive Income Business
A sustainable long-term passive income stream requires some upfront effort and investment. Most types of passive income are derived from real estate or property, while other types include royalties from patents, license agreements or dividend income from stocks. Pursuing any passive income business can provide entrepreneurs with the following benefits.
● Cash Flow – A passive income stream is one where the money is usually received regularly, with some upfront effort. Once the initial work is completed, with a little maintenance over time, it has the potential to help you earn for years to come. Successful passive income ideas can typically generate revenue, whether you are sick or vacationing.
● Offer Multiple Income Streams – You can work with multiple passive income streams to get involved with as many as you like. There are a variety of passive income opportunities, including ad revenue from a blog, royalties from a book or online course and the rent from a rental property.
● Gain Back your Time – Earning enough passive income may provide you with the ability to diversify your time and money, but remember that you have to market your business to maintain the income.
● Retirement Income – Depending on how much effort you put in on the front end, a passive business can provide you with extra cash each month, thus helping you with retirement income.
● Lower Tax Rates – Passive income may be taxed at a lower rate so you can leverage your cash flow better.
● Supplement the Existing Income – Passive income ideas can supplement your current active income stream, and you could also use them as your main sources of income.
Cons of Pursuing a Passive Income Business
If you aren't doing your part to stay on top of industry changes and customer expectations, your passive income may quickly dry up. Even when you delegate responsibilities, you should check in with your team to make sure they perform the tasks up to your standards. Below are a few concerns that come with a passive business.
● Unless the income comes from a passive investment source like a publicly-traded stocks, bonds or annuities, it usually requires an active presence and management.
● Depending on which income streams you decide to pursue, you may have to put in significant effort to start during the early phases of building the business.
● Passive income businesses could take several months of hard work before you earn a profit. You may also not receive consistent passive income and can have highs and lows depending on many factors.
● Passive businesses are usually not your primary source of income. They also require personalized customer support, new idea exploration or planning new strategies to stay relevant to the industry.
● You probably have to try some different passive income streams before you find the one that works for you.
● You may need to make a financial investment to get your business idea off the ground.
Research Before Taking the Leap
A passive income business pays you for an up-front investment of time, effort and money. It can help you leverage time and knowledge through information technology to achieve a long-term sustainable income stream. Since the barrier to entering a passive business is low enough, anyone can earn a passive income.
If you’re thinking of pursuing a passive income business idea, do a significant amount of research before you take the leap. Many businesses advertised as “set it and forget it” ideas will require large investments for you with no guarantee of a resulting income. Your best bet is to do a tremendous amount of due diligence before launching any business, particularly one that offers returns on investment for very little work.