14 Jul Passive income is bullshit
Summer SZN is here and I’ve slowed down the pace of the blog and newsletter. Despite an attempt to take last week “off,” I got an email from my website host saying that my blogging software needed an upgrade. I went and did it. Then, I learned that because of this update, certain plugins no longer worked – so I went in and downloaded and fixed those. One still wasn’t working, so I had to post on a message board and wait 2 days for a response. Four-ish hours later, everything was updated and ready to go. But man, not only did those four hours eat into my vacation, I created nothing new for you guys in the process. Not even the kernel of an idea.
I first attributed this to entrepreneurship – when you own your own business, you’re never truly on vacation. Fine. But something else felt off. Wasn’t the whole premise of creating digital businesses that you could “set it and forget it.” This was the first step towards the holy grail: passive income. It’s taken me decades to realize that passive income is both bullshit and a distracting concept. Here’s why.
Pick your battle: Time or money
Let’s set the record straight. Unless you inherit a cash flowing business, simply entering the realm of passive income requires one of two investments: time and/or money (which are messily intertwined). Let’s sample a few passive income sources – dividend paying stocks, online courses, eBooks, and real estate – every single one of them requires time or money.
Furthermore, consider the magnitude of those investments versus what they could generate. If you wanted to set it and forget it using dividends, you could invest $10,000 in the S&P 500 and generate $182 per year. (You read that right.) The same amount in US Government bonds, $282!
Or let’s say you spent 3 months self-publishing an eBook which you sell for $7.99. Some very conservative math on the value of your time (240 hours at, say, $25/hour = $6,000) and proceeds of $5.50/book (net of Amazon’s fees) shows that the “returns” of a passive income strategy are daunting. But there’s more.
Maintenance: the hidden tax
Passive income is bullshit because it assumes maintenance costs are zero. Which is pretty much false anywhere you look. Real estate is commonly described as a “passive investment,” but let’s explore the flaws in this thinking.
Let’s put aside the fact that in pretty much any US metropolitan area, any real estate investment would require a huge cash down payment and focus on the maintenance. Longtime RadReader and real estate investor Babak Ziai described how it’s impossible to invest in real estate “without rolling up your sleeves.”
Rental properties have tenants. Tenants have leases. Every time they there’s a break in between tenants, you forgo income. And guess what? Every time you lease a property, you “need to make it marketable,” which includes repainting, repairs, staging, hiring brokers, listing the property and interviewing tenants.
Then you have tenants. And let’s assume they’re angelic, respectful, and timely in their payments. (A huge if.) Not only will your property need proactive maintenance (upgrading stoves, HVACs, and bathrooms), it will need reactive maintenance as things will break, leak, or just naturally deteriorate due to wear and tear.
Furthermore, Ziai points out that the best landlords are “in an active partnership with their tenant” and like in a healthy marriage, mutually trying to anticipate each others’ needs. Nothing passive about that.
Or stated differently: Taxes, homie! One of the benefits of real estate investing is that it offers many tax benefits. But guess what? To take advantage of these, every year you need to collect and categorize receipts and work with accountants (and lawyers) to optimize these deductions.
But I got money moves
I know what you’re thinking. Can’t you pay someone to do this? Aproperty management company, super, landscapers, plumbers, accountants, lawyers, brokers. Absolutely, but it’s not that simple.
First, even if you were to outsource all of these tasks (which many people do), you’re still ultimately the project manager (or that cat herder). Secondly (and we’ll save the math for a separate post), if you do pay all those people, what will be left for you i.e. your passive income will be tiny, and in this economy, possibly negative.
Surely this works in “digital”
Nope. The common example is the online course – a common component in the unbundled career. While, it’s true that the tools are cheap and commoditized, this also means that there’s a sea of competitors out there. So you’ve got to aggressively market it, which costs both time and money.
But even if you put marketing costs in the “initial investment” bucket, courses still require heavy ongoing investment. Creating and grading homework. Building and moderating a community. Keeping your materials updated and fresh. Supporting customers. Processing refunds. Building a Second Brain course creator Tiago Forte said that in order to incorporate maintenance costs, a better name for passive income is “time decoupled income.” Nonetheless, there’s no such thing as set it and forget it.
Maybe, just maybe, the eBook is the last bastion of passive income. We already established that the initial investment would be extremely high. But once released, unless you’re Malcolm Gladwell, you need to promote your book, by appearing on podcasts, a rigorous social media strategy, email newsletters, and book tours.
Start with why?
Hopefully I’ve convinced you to carefully scrutinize the maintenance cost of any passive income strategy. But a deeper question is: Why do you want passive income? Obviously there’s financial security, but is it because you want to FIRE so that you can quit your job and start enjoying life? Do you actually know how you would spend your time if you retired?
Passive income is a distraction to asking some of the harder questions about life. A cop out, of sorts. Yes, income, investing, and entrepreneurship are all tools to live a rich and fulfilled life. But thinking that one investment strategy can answer all these questions is just lazy. Or shall I say, passive?