Five Myths of Passive Income

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There are a lot of reasons why you might have thought about creating passive income: more money, less work, more freedom, and less taxes.

Well, maybe you didn’t think about taxes right away, but there is a very good reason to – the taxes for active earned income is going to go up in 2009. And there’s a very good chance that passive income tax rates won’t increase. I predict you’ll hear a lot more about the huge tax benefits of passive income streams in the coming months.

So – let’s see: With passive income: you get more money, you don’t work as hard AND you pay less tax. You gotta know passive income is a good thing.

But that’s when it gets hard. You’ve tried a few things and it didn’t work out. You’ve heard stories of great riches, automatic, you’re told you’d have to be an idiot for it not to work and that you don’t have to do anything – and still, it doesn’t work. So, what’s wrong? You’ve run headlong into the Five Myths of Passive Income.

Myth #1: You don’t have to work.

There are two times when you’ll have to work to build passive income.

(1) You have to work during the growth stage.

(2) You have to work to maintain it. Granted, the second phase (maintenance) should be minimal or you’re doing something wrong.

Let’s say there is a village at the bottom of a hill. There is a spring of water at the top of the hill, but no water in the village itself. The villagers need water on a daily basis. And since not everyone wants to run up to the spring, there are some business opportunities here.

(1) You could get a couple of buckets and run up and down all day. You’ve got immediate cash. That’s ACTIVE income.

(2) You could buy more buckets and hire other people to run up and down all day. You’ve got more cash and expenses. That’s LEVERAGED income. In this case, you’re leveraging other people’s time. You have to put out a little bit of money to buy the buckets and you have to train the guys on how to get the water and deliver it. And you have to deal with people not showing up for work, or trying to go in competition with you or stealing the buckets. So, you have some management headaches as well. It will take you very little time to set up, but there will still be some maintenance required.

(3) You could hire engineers and contractors to design and construct a pipeline that you control. Now, it’s easy to get water and you charge for it. The barrier to entry for competition is steeper, so you’re less likely to have competition, and you don’t need many employees. You have LEVERAGE income here. But in this case you’re leveraging your talent and your money (assuming you’re the one who paid for the engineers and contractors) There is still maintenance time required, but much less.

The first example was active income. You had to work to get paid. The second two were forms of passive income. That’s because you leveraged SOMETHING – either time, talent or money. But, in all cases, you had to spend some time putting the deal together and then in maintaining the deal.

That doesn’t mean you need to be the guy fixing the pipeline, but it does mean that you need to be the guy checking the financial statements every month (or more frequently) to make sure everything is staying on track.

MYTH #1: BUSTED! Fact: There is work involved in creating and maintaining passive income.

There is no such thing as a free lunch at the passive income counter.

MYTH #2: ANYBODY can follow a passive income system and make money.

I used to believe that, but I don’t anymore. “Anybody” has the possibility, but only those people who are willing to step up and out of their own way will have half a chance. And then only those people who can be flexible when things go wrong and have the tenacity to hang on when it’s not making sense will excel. More than anything, though, you must have the mindset to accept success in your lifetime.

MYTH #2: BUSTED! Fact: Not everyone will step up to the opportunities available to make passive income.

One of the stats that seminar presenters know is that out of a regular group, only 2% of the people in a room will follow through. The difference isn’t the deal, the difference is the people.

MYTH #3: If you build “it”, they will come.

There was a time when anytime you invested in a dot com, there was a good chance that you’d have a huge payday soon. And there was a time when most every real estate investment was bound to make money even if it didn’t cash flow. Yet, those days of unreal expectations are gone. Just like that, there are people who think that if you put up a website or a blog, you’re going to be rich.

Can you make money today in the stock market? Of course. Can you make money today in real estate? Sure. I have clients doing it all day long in certain regions of the country. And are there people making extraordinary sums on the Internet? Yep. I know super affiliates who make $50,000 and more per month. In fact, I see their accounting records and prepare their tax returns.

MYTH #3: BUSTED! Fact: Just building “it” doesn’t mean you’ll prosper.

You still need a solid business plan with strong marketing to make your opportunity really move. And figure that you’ll run into a dozen or more things that don’t work before you find the offer that really clicks.

MYTH #4: There is NO risk to building passive income.

There are two reasons why you may have risk:

(1) The inherent nature of the investment is risky. For example, if you’re investing in real estate betting on appreciation, you’ll only make money if the property goes up in value. That’s risky. What if it doesn’t go up? What if it takes longer than you think it will? Suddenly 100% return isn’t so great if you have to wait 20 years to get it.

(2) Your lack of knowledge and experience creates risk in the area.

If you’ve never started an Internet company, it’s doubtful that you’ll hit a homerun with affiliate marketing right out of the gate. If you don’t know how to buy real estate right, you’ll probably make a lot of mistakes on your first few transactions.

And if you’ve never started a home based business before, you might find that an MLM is harder than you thought. Even if you have tons of business experience, market conditions, product launches and marketing might not quite work.

Business is often about being right just one more time than you’re wrong.

It’s the same for a passive income company. There is risk. You can reduce it by being better educated about what you’re investing in, and when and where you’re investing, though. But often, it comes down to pulling the trigger and seeing what happens. (Also, just hang in there – you only need to be right one more time than you’re wrong. Right it on the wall above your phone.)

MYTH #4: BUSTED! Fact: There is a certain amount of risk in almost everything you do.

The secret isn’t in avoiding risk, it’s in overcoming it. How do you minimize it and how do you handle it if things don’t work out like you expect?

MYTH #5: You can just start it and forget it.

Someone is going to have to pay attention to the investment or business. Now, it’s possible to hire that attention. It’ll cost you money and you have to be concerned about how good of a job they are doing and make sure they are doing it with your best interests in mind.

And you have to wonder, if these guys knew how to manage passive income generators, especially ones that don’t take a lot of cash, why on earth are they working for you? Wouldn’t they be doing this themselves?

The best you’re going to get is highly leveraged time, if you still want good returns. By the way, there are low return alternatives. One of Richard’s and my ultimate exit strategies is to just convert to bonds. If you have $10 million at even just 5%, that’s still a tidy sum. And then it doesn’t matter if your tenant pays the rent or trashes the place, your affiliate marketing site gets shut down or general malaise of the market causes a big downturn in revenue. As long as the company or government can pay the interest on the bond (no junk bonds please), there is a check.

That all said – there are some skills that will pay higher than others. For example, the ability to read a financial statement and quickly assess a company or investment will always pay you HUGE returns. Plus, if you know Crystal Ball techniques with financial statements, you can actually see the future. You know where the trouble will be and where the undiscovered gold is laying.

MYTH #5: BUSTED! Fact: You will always need to have SOME time involved in your investments or passive business.

You’ll never have zero time invested, but you can increase your time leverage by concentrating on improving skills such as financial analysis.

Passive income isn’t free, easy or absolutely certain. It is, however, way better than the alternative – working day in and day out, getting paid by the hour and then finding out that you’ve been downsized.

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