Passive Income is the equivalent of a king sitting on a comfortable bed fed grapes and fruits by his servants. There is nothing quite like passive income for making you feel excited about the next day.
When it comes to passive income, the granddaddy of them all is rent. Rental income is money that you collect from someone living in your home or using your property. And although we attach the “passive” term to these funds, it can take some work to keep it coming in.
I personally love rental income. If you can get a nice stream of rental income coming in, you can become rich rather quickly. But again, it does take management, leadership, and people skills to keep the money train rolling.
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In the article “Mailbox Money,” I talked about rents, dividends, and royalties as ways to bring in cash passively. Now we will pit them all against each other to see which one could be right for you.
All three incomes have their pros and cons, but I strongly feel that you should work on bringing all of these powerful forces under your control. Trust me, I have been gathering all of these income streams under one roof for the last six months, and it is incredible.
Yesterday, I was busy at work all day, and I got six emails from Amazon. Each of the emails was royalty payments from book sales across the different Amazon Markets. I can’t tell you how great the feeling is to get “random” money throughout a typical day. The amount of money is irrelevant. It makes me feel as though my life is continually moving forward.
The other two emails are from dividends and my online teaching gig ($35/hour). My wife collects our rents and deposits them into our accounts. Together, it creates a tailwind of cash that you can leverage however you want. As I discussed in “The Truth about Discretionary Income,” your actual spending money comes from the income that comes from passive sources—rents, royalties, and dividends.
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Now onto the battle royal between my favorite sources of passive income; royalties, rents, and dividends. I will briefly introduce how I started earning each source of income, followed by how they compare to each other. Let’s jump right into it.
How I began. Here is a quick summary of each passive income source. We started collecting rental income as we began to rent out our guest bedrooms in our primary residence roughly two years ago. I also began building up my dividend portfolio approximately two years ago. We are now getting to the point of earning serious money from our dividends ($500/month). I am new to the royalties game, having started about six months ago. However, it is quickly growing on me.
How passive is it? Now, no money is truly passive. You (or someone) had to complete some form of work to build the stream of income. We call things passive when we don’t have to tie work to time. For example, when I work at McDonald’s, I am exchanging one hour for $15. Once that hour is over, I receive no more money from this time exchange. However, I can write a book and make money from it for my entire lifetime.
Intro to REITs part IV: REITs vs. Rentals
For this article, I am going to use rental rooms as the type of rent I compare. Everyone can get into room rentals, dividends, and writing books, so it is equal across the board. Renting rooms can be very passive. However, you will have to deal with roommates. Roommates can be highly annoying, but over time this tends to subside. Once you have done it for a while, you will start to screen for the people who fit the flow of your house. Once you get a good fit, it is free money. The only thing better than receiving $800/month from our roommate is when we receive another $800/month from our other roommate. Renting rooms is how we became rich.
Dividends also can be very passive, but there are two things to consider. First, usually, you have to work a job to fund your dividend portfolio. Next, you will have to keep up with the companies of your dividend-paying companies. For example, one of my favorites is AT&T. They may be cutting their dividend soon, which is fine if it makes the company stronger. I’ll just buy more Verizon to offset the cut. So I spend 20-30 minutes daily catching up on my companies. I love it, though, and don’t consider it work. Reading is the best way to keep your brain engaged, so dividends are passive to me.
Royalties are entirely passive once you complete the initial work. Yes, you can go back and update your book, but you don’t have to. Now, getting someone to find your artwork, music, books, or videos is a whole separate discussion. That involves building an audience or advertising. However, the actual product is passive once complete. Overall I will call royalties the most passive of the income sources.
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Which of the three is most consistent? We all love to know when our monies are coming in; it is human nature. Rent by far is the most consistent—it is not even close. Once you get a good roommate, they will not want to leave. The money will come in like clockwork as long as you stay fair but firm. Dividends can be consistent as well because you have a rough estimate of what month they will arrive. However, inside that month, the days change every quarter. Royalties are completely random. I would never want to depend on royalties as a source of income that I rely on for paying bills. One day you are a king; the next nobody knows your name. Rents win hands down in the consistency category.
How easy is it to get started? Again, rents win hands down. Renting rooms takes minimal capital upfront and has very little ongoing expenses. You could quickly (and easily) bring in $600/month by the end of next month—this is the purest form of money, and all you have to do is sacrifice some living space. Dividends take money to initiate. If you don’t put a lot of money in, you won’t get much money out. If you receive a windfall of cash, you will still need to research what dividend-paying stocks and ETFs suit your portfolio. Royalties take time, consistent works, and knowledge to build. Remember, you earn royalties only when people buy your creations. You have to be good at what you do and add value. You can’t produce a crap product and have people continually buy it. Royalties are the hardest to earn. It will probably take me two years of writing to make $600/month.
We Make $50/day in Passive Income
Which has the best tax situation? Renting a room is going to put you in the best tax situation, bar none. I won’t tell you how to handle your rental income, but you should understand what I am saying. Long-term dividend income (once you hold stocks for over a year) is currently 15%, depending on your annual income. Royalties are taxed at your ordinary tax rate—so at the earned income rate. The more you make, the more they take.
Final thoughts. You can see it plain as day, renting a room is the best passive income source, bar none, the champion. It smoothly cruises to the first place for the ease of getting started, taxes, and consistency. Even better, your rental income can help pay off debt and eventually assist in funding your dividend portfolio.
I will continue to recommend renting a room as a way to get ahead in life. However, there are other ways to earn rental income from your home without having someone else living there. I recommend reading one of my all-time favorite articles, “Mortgage Zero,” for many tips on maximizing income from your property. We want our homes to be assets, not liabilities. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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