Passive Income Explained: 5 Methods to Generate It in 2024

August 20, 2024

Passive income is a term that’s used to describe several forms of revenue generation. One type of passive income is earnings from investments, like an Airbnb rental property, dividends, interest on savings, or leasing a piece of equipment that you own. But passive income can also be ongoing earnings from something you’ve previously created. It could be sales revenue from a digital product, like a prerecorded online course, or commission produced by affiliate marketing content, such as a YouTube video. Depending on how passive income is earned, it may be taxed differently.

Passive income is revenue generated with minimal participation. It refers to earnings from investments or cash flow produced by an initial output of labor, with little ongoing effort. Unlike active income, passive income doesn’t involve a straight exchange of time or labor for money. Instead, it consists of creating or buying an asset that will produce a return on investment at a later point. There are plenty of passive income ideas to choose from, such as writing a book, creating an online course, investing in real estate, or joining an affiliate marketing program.

There’s also a narrower definition of passive income used by organizations like the IRS. For them, passive income doesn’t include things like royalties or product sales. They define passive income as earnings from a rental property or a business in which you don’t materially participate. Material participation means being involved in business operations on “a regular, continuous, and substantial basis.”

Is passive income a real thing? Here’s a hard truth: Passive income models are rarely as passive as many people think. Significant upfront work or funds are usually required—like writing the book you’re going to sell, developing a curriculum for your online course, or choosing and purchasing a rental apartment. Often, the work required to set up a passive income stream is unpaid, in hope that your efforts will be repaid over months or years. There’s also the task of managing your content, services, or products. And, you may need to engage in marketing to ensure your offering reaches the eyes and ears of a target audience. Add ongoing maintenance jobs and other types of business admin, and you might start to wonder why the word “passive” is used.

Despite these considerations, passive income remains a potentially lucrative revenue stream, which many people choose to pursue alongside active employment. For online passive income models, ecommerce platforms like Shopify let you automate tasks like order fulfillment, reducing the time you need to spend monitoring your business.

Don’t think about passive income as a mysterious money hack where an entrepreneur sits on a couch while their laptop prints dollars. Instead, understand passive income as a description of where effort is located in contrast to other forms of work. Income is considered passive when effort is front-loaded. In other words:

Passive income is earned through an initial application of labor or financial investment, with compensation following for a sustained period.
Active income, on the other hand, describes a reciprocal exchange of labor and revenue, where effort is compensated more or less immediately. Both passive and active income require work, it’s just a case of when that work happens. Someone paid by a brand to write a blog post every month is generating active or earned income, while someone who writes 20 blog posts for their own website and monetizes them with affiliate links is generating passive income. In contrast to active income, passive income is a riskier strategy. But it can be a good side hustle if you pick the right type of passive income for your skills and schedule.