The Truth about Passive Income

If there were one overwhelming theme that characterizes the online personal finance space, it’d be passive income.

I see it constantly:

“Passive income strategies!”

“7 reasons why you need passive income!”

“How passive income helped me fix my marriage and lose 40 pounds!”

The way gurus talk about it, you’d think there were untapped money streams hidden in the wild like a lucrative, frantic game of Pokémon Go – just wander around enough online spaces and you’re sure to stumble upon one, right?

I receive DMs to the same tune: “Can you help me come up with a passive income side hustle?”

Ugh. No! I can’t. You know why? Because the expectation we’ve all set around passive income is false.

I have yet to find a single “passive income” opportunity that doesn’t require a fair bit of work

Even in my own life, I’d consider Wealth Planner and Masterclass sales to be somewhat “passive” – I can be sitting around on a Saturday doing nothing and make a few hundred dollars if a couple people purchase my digital products.

But were those passive? Did I just wake up one morning, flip on a switch, and start the cash flow? No.

“Yeah, Katie, you had to create the products… but after that, it’s passive!”

I disagree. Sure, it took many hours of front-loaded work to create the products. But let’s not forget one crucial piece of the puzzle here:

The audience buying them.

Why are people coming to Money with Katie in the first place? To read the blog. How do I drive people to the blog? By creating time-consuming content on both the site and on Instagram.

If I cold-turkey stopped posting content, eventually, people would stop coming, and products would stop selling. While I’m not actively working on those products themselves, I spend 20-30 hours per week on Money with Katie – it’s practically a full-time job, except I love every second of it.

(A few months ago, I decided to actually log my hours spent on Money with Katie to see how I was spending my time – after three days, I had already clocked 12 hours, which really surprised me – Do I really spend that much time on this?)

The point? That income may not be directly tied to an hour of writing a blog post, but it’s certainly correlated to it. It’s not “passive” in the way that aggressive Instagram handles like @WEALTHBUILDING101 would suggest.

But there’s another component that makes this example especially perfect:

I didn’t realize I had spent that much time on it because I enjoy it so much. This is my hobby.

And that, my friends, underscores the main point of this article: Every passive income strategy requires hustle. You just have to figure out which “hustle” you enjoy the most.

Strategy #1: Finding ways to increase your income, and then aggressively investing in the stock market

Surprise, surprise: This is the path I’ve chosen myself.

Between my full-time income, freelance work, and Money with Katie, my total effective compensation is higher than it’s ever been (though I have chronic other-shoe’s-about-to-drop syndrome, like it’s all going to be taken away from me).

But just two years ago, my total effective compensation was around $65,000.

It didn’t happen overnight (and I do work 7 days a week), but it’s possible.

After a few years of working 9-5 for a salary and experimenting with different ways to make money (and going through plenty of interview processes for contract work), I finally found a mix that works for me: Keeping a full-time job with good benefits, freelancing in lucrative industries (like tech), and starting my own business that’s totally under my control.

Like I said: It took trial and error. There was a point where I was teaching group fitness in the mornings, working all day, and then working on other stuff until 9 p.m. – regularly. It was nonstop, and I realized it wasn’t sustainable.

Now that I’ve found something that works, I just keep my expenses low ($3,000/mo. or less) and invest the difference.

Where the “passive income” comes in with strategy #1

Nothing about the way I earn money right now is passive – instead, I’m working a little harder than I’d have to be right now in order to eventually have the passive income I need.

With this strategy, you invest until you hit a ludicrous number in the stock market (say, $1M) and then withdraw 4% to live on indefinitely.

That, my friends, is actual passive income. You don’t have to do anything to keep collecting your $40,000 per year to live on (tax-free, if you set it up correctly!).

But the road to get there isn’t passive.

I’ve chosen this path for two reasons:

1. Right now, I like the jobs I’m doing – sure, it still feels like work, but I’m learning and I enjoy my coworkers. It’s not so demanding to the point that I’m miserable. Plus, Money with Katie is a blast.

2. I like how – once you have your “number” – you’re done. You truly have passive income from your investment returns. You don’t have to perform any maintenance, upkeep, or odd jobs to keep it going – the compounding returns do literally all of the work for you.

So it can be a bit of a tough road to get there (working multiple medium-to-high-paying jobs, keeping your expenses low, getting strategic) – it doesn’t happen overnight. But if you can get your total income up to $100,000 and live on around $2,500 per month, you can do it in about 10 years.

The more you make or the less you spend? <10 years.

Strategy #2: Rental property investing

For the sake of transparency, I should disclose that I don’t own any rental properties. My entire portfolio is in equities, so I don’t have personal experience with rental property investing.

That’s not to say I never will or think it’s a less tenable option (more on that later), but there’s something that bothers me about the way most personal finance gurus present rental property investing:

“It’s so passive! I don’t do anything! I make thousands of dollars per month! I put $20,000 down and now I’m rich!”

It’s the type of content that makes you go, “Wait, back up a step – this sounds too good to be true. How are you doing that?”

Because yes, being a landlord means you’ll get money every month just for owning the unit that someone lives in – but there’s a catch.

You may be expecting me to dive into the “property management” argument, but that’s actually not what’s kept me out of the rental property game (though it’s certainly a consideration).

The reason I personally haven’t pursued this path is because it’s not something that you can achieve by simply owning one rental property.

According to BiggerPockets, you can expect (or aim for) about $100 of cash flow per month on every unit that you own. If you own a duplex, you should expect to net about $200/month. A fourplex? $400/month.

(That’s how they define a good deal’s outcome.)

In order to be netting thousands of dollars per month (i.e., to fund your lifestyle and be work-optional), you need to own several properties. Anecdotally, I have a friend in this space who owns seven properties and he nets about $3,000/month.

Where the “passive income” comes in with strategy #2

This one might be more self-explanatory – when you own a unit, your cost breakdown might look like this:

• $800 mortgage and interest

• $100 property taxes

• $50 insurance

• $100 property management company

• Total costs: $1,050

For simplicity, I’m leaving out things like vacancy rates (i.e., if you don’t have a tenant for some period of time and therefore aren’t bringing in any cash) and maintenance.

If you’re paying $1,050 per month, you might charge a tenant $1,200.

Their rent covers your costs, and you net about $150.

If you put $20,000 down on that property and you’re netting $1,800 per year, that’s a good return on your initial investment.

(Again, this isn’t intended to be a cash flow analysis – use the BiggerPockets article above for that.)

But an extra $1,800 per year won’t enable you to quit your job.

You need to own many rental properties in order to make that happen – and sure, you’re gaining both equity and appreciation (neither of which you’re paying for), so on paper, it looks like a pretty sweet deal.

If you’re trying to build a rental property empire big enough to enable you to only own real estate and no longer work for a paycheck, you certainly can do that (it’s a well-documented path to FI), but it takes time, effort, and work.

Finding good deals and good property management companies (so you don’t have to spend your time dealing with tenants) takes time, as does putting down multiple down payments for properties – you need to keep working and saving at your day job to fuel the beginning of this journey, and you can’t exactly quit your job until you have enough properties netting a few hundred dollars per month to support you.

The bottom line

The bottom line is that neither path is better or worse than the other, and both take work:

1. The first forces you to find high-paying work and live modestly for about a decade to a decade and a half, investing as much as you possibly can into the stock market.

2. The second forces you to – one by one – find real estate deals and eventually own enough rental properties to create enough passive income to live on. I’d argue that this one could be much faster, but it carries a higher risk because of how much debt you have to take on to do it.

You could always do a combination of the two (and invest the rental property income), but I’ll share why I haven’t:

Right now, my income from traditional work is high enough that an extra few hundred dollars per month isn’t enticing enough to me to go through the trouble of finding a good deal, withdrawing money from a brokerage account for a down payment, dealing with the loan/debt, finding tenants, and managing a property.

If one thing went wrong at that property that required me to take a few days’ worth of time to go deal with it onsite, it would blow up my week. My schedule is so precariously held together right now that even an afternoon of jockeying around with a property manager, tenant, or repair guy on the phone would throw shit into a bit of a tailspin, and at this point, my time is worth too much to me to explore that option.

But that’s only because I’ve already committed myself to so many other things that earn money. If I had one 9-5 job that was fairly flexible and I hadn’t yet stumbled upon a collection of things that earn well, I may feel way more inclined to start down this path – it’s just not the path I’ve chosen, and not the type of “hustle” that sounds enjoyable to me.

The good news

Both options are (a) more attainable and (b) more lucrative than most people realize.

After all, I’m a dumbass with a PR degree who’s set to become a millionaire by the time I’m 30 through nothing but investing in diversified ETFs and working a few extra gigs.

I know people who started out on $50,000 per year salaries at flexible jobs, got into rental property investing, and now own properties outright and make thousands per month in cash flow.

The key is to start and do your research. Especially with rental property investing: Don’t go out and buy the first duplex you see and assume it’ll be a good outcome. I’d argue the rental property route requires more startup knowledge and savviness, but both paths are tenable long-term.

Thanks to this article’s presenting sponsor, Fundrise

I’ve been using Fundrise to invest in private real estate deals as a way to diversify, since you can see (from this article) that I’m almost (otherwise) 100% in equities. I invested $5,000 to start, and chose to do so because I wanted real estate exposure in my portfolio without taking the landlord route yet.

You can learn more about Fundrise here.

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3. A Thought Experiment in Mini Retirement: What’s Baby FI?

4. Why Everyone Should Strive for Financial Independence, Even if You Don’t Plan to Retire Early