Passive Income for Beginners

I. What is Passive Income?

Passive income is money coming in with little to no work.

According to Investopedia, there are three main categories of income: (1) Active; (2) Passive; (3) Portfolio Income. 

• The first type, active income is money earned by rendering some service or doing business. Of course, this consumes time, energy, and focus.
• The second type is passive income. It involves initial effort or capital, but later, you will reap steady fruits or income.
  • Financial author Chinkee Tan differentiates these two by giving an illustration of monggo/mung beans sprouts and the mango tree. Monggo types of income are those that you plant today and harvest tomorrow, or maybe in a few days. For example, an 8-5 job is a monggo type of income. You work for 15 days and earn on the 15th and 30th. 
  • The mango types of income are those that require huge capital or investments of time or money initially, but after a longer period of time, you will reap the rewards continually.
• Third, portfolio income is not earned through doing a job or service but comes from interests, dividends, and capital appreciation. 
  • For me, portfolio income is still a type or a sub-category of passive income, because, by the definition, you involve initial capital, and through time, you generate money.

In this blog, let’s focus more on passive income.

For example, you put P100,000 in a “place” where it earns 6% per year. So in a year, you get 6% or P6,000 without virtually doing anything at all. That “place” is known as a “financial instrument” or “fund.” Did you do anything to earn it? Virtually no! You just basically placed in the money. But P6,000 per year would not be enough to sustain your daily needs and you would need a lot more money to reach the average daily needs. To illustrate, to generate P30k per month, you would need to put P6,000,000 into that financial instrument. This is a capital-intensive passive income.

Value of Your Time

According to Rachel Richards in her book: “Passive Income Aggressive Retirement”, Time is our most valuable resource. When we lose money, we may still find it again. But when we lose time, we can never take it back.

We usually trade our time with money. The traditional way is doing services per hour or per month, then we receive a salary. 

But imagine when you make money without giving your time. This is the concept of passive income. With passive income, there is a chance that one day, you receive money without spending that equivalent time anymore.

First, she recommends getting the value of your time. This will help you make financial decisions regarding passive income. But how? The formula is very simple. Add up all your earnings and divide that by the amount of time you worked.

For example, your business receives P40,000 every month as your income. So P40,000 / 20 working days / 8 hours = P250 per hour. 

So let’s say, you want to decide about your laundry: Should you do it yourself which takes you 5 hours to finish, or just hire a laundry service? The laundry service costs P500 for your whole basket. So, determine your cost: If your hourly rate is P250, multiply it by 5 hours, that makes it P1,250 as the cost of doing your own laundry. If you do your own laundry, you will virtually spend P1,250. But if you let the laundry service do it, it will only cost you P500. So, would you do your own laundry or let the specialist do it?

Should you outsource?

When it comes to financial matters, this is also true. Should you hire a receptionist, a cashier, or a video editor for your business? If you compute your time and determine that you can save, then hire a specialist. This is called outsourcing. Economists call this “division of labor” and in Adam Smith’s Book “wealth of nations”, he said that this is key to progress because it will lead people to specialize. As a result, goods and services become better but cheaper. People will invest in tools or even invent better machines, and better processes that will do better services that are faster and better than you because you are not specializing in it. You also become better at your craft because of the time you spent in it.

But many people are frightened when they will have passive income: “What will I do instead of doing active jobs?” The answer really depends on you. What are you passionate about? Without money considerations, what do you want to do? Raising children, living by the beach, writing, traveling, farming, etc. Passive income may help you find happiness while earning at the same time.

II. Why Do We Need Passive Income? Practical Reasons:

The main idea is that the traditional retirement plan does not work anymore. What are the practical and financial reasons?

(1) Social Pension may not be enough

I say “may not be enough” because it would depend on how you trim down your lifestyle when you retire, how you prepare, how much you contribute, or how simple you will live by that time. 

In the Philippines, the government-mandated social security system is called SSS for private employees  and GSIS for public employees. If you will depend only on social pensions, how will it look in general?

An average Filipino with average employment may rely on SSS/GSIS contributions to save for their retirement. But if you do the calculation, you may be surprised. Simple google “SSS Retirement Estimator” and enter the details. 

• Basically you enter your birth date
• Month and year of your first contribution
• And your Monthly Salary Credit (MSC). You can determine this by going to your SSS online account or by your payslip details. See the chart of SSS as to the corresponding MSC.

And let’s look at the maximum pension which is P20,000 for self-employed, you will get this estimated monthly pension:

Again, this figure depends on your birthdate, your start of contribution, the ongoing policies of the social pension by the time you will retire, the inflation, and other contingencies like your future possible loans, and critical illness benefits.

The fact is, a lot of Filipinos were surprised and were not prepared to face retirement years. For example, I have family members who thought that the contributions from their employers for 3 decades would be enough to sustain their monthly expenses. Others I have known who are self-employed thought that contributing for at least 120 months is enough. What I realized was that what was lacking was financial knowledge and advice back then.

(2) Life Expectancy

People are expected to live longer because of breakthroughs in medicine, increased awareness on nutrition and exercise, and other factors. What does this mean if we are expected to live longer? It means that we will be in the retirement years for a longer period of time, and you will need that financial support to sustain it. Without passive income, you may be forced to find a job during your golden years which will be more challenging because you may be considered by a company to be riskier because of your health. It will be harder also because of your failing health. 

Researcher Aubrey de Gray coined the term “Methuselarity” describing the point where people will no longer suffer from age-related health problems. If you don’t prepare, you will have difficulty in your retirement years.

(3) Lifestyle Pressure

Social media is highly influencing our concept of lifestyle and self-esteem. It exerts high pressure on what to do, what to eat, where to go, and where to live. Everything somehow must be Instragrammable and hashtag worthy. And if we don’t combat this temptation to “keep up with the Joneses” and don’t ignore conformity to the world, the pressure will affect our future financial situation. As they say, we adjust our ambitions depending on who we will be jealous of.

The “Sandwich” Generation

Sadly, many unprepared people might depend on their children or work non-stop to support their retirement. As a result, their children will need to support both their aging parents and their young children. These children are sometimes called the sandwich generation. If this cycle keeps on repeating, the parents will make their children their retirement fund, it won’t end until a generation will decide to stop it. However, if you will prepare for your retirement, your children in the future can dedicate most of their resources to their own families, and you in your golden years will be financially independent, like a “tree planted by the rivers of water which gives forth fruit in due season.”

III. Types of Passive Income

The two main types: (I) Time-Intensive and (II) Capital Intensive.

Time-Intensive Passive Income Streams

as the name suggests, these passive income streams are “money machines” that require lots of time to build. If you don’t have much capital or money for a start, these income streams are a good way forward. These are also ideal if you want to pour in lots of time, or don’t want to borrow money to build your passive income stream.

(1) Online Courses

Building your online courses enables you to earn income passively. One day, you will check your account and see payments from enrolments at the courses that you built in the past. 

Why is building online courses important?

Teaching a course allows you to help even at least one life, and this is fulfilling. I believe that as humans, we were created to replicate. It is a human thing to multiply yourself whether it means physiologically through birth or by discipleship.

Don’t make profit as your primary purpose. Money must be secondary. If our goal is only to make it, then we are frustrated if we fail to reach it. The primary goal must be to build another person with the knowledge we have accumulated, organized, and shared, and we see that it builds them as it builds us.

Knowledge is meant to be shared. Compare Dead Sea vs. Jordan River: the Dead Sea is so-called “dead” because it just keeps on receiving water and minerals. As a result, it becomes so dead that no fish or any organisms living in it. While the Jordan River or any other river receives waters from the springs, pay them forward. As a result, they flourish. Hence, the saying, “to give is better than to receive.”

What are possible topics?

Experts suggest focusing on an overall topic that you have knowledge about, and where you can build sub-topics and deeper studies later. Try to assess your life situations, unique experiences, and passions. You can teach anything ranging from how to live life as a seafarer, overseas worker, or how to live in a certain locality. You can also build courses on gym exercises, how to use certain software for beginners, programming languages, cooking courses, cultural practices, real estate marketing, and sales.

What are the forms?

You can share your course by making a video such as recording yourself and your screen, making audio recordings, blogging, or creating interactive quizzes.

Where can I build my online courses?

The top platforms where you can build your online courses are Skillshare, Coursera, Udemy, and Kajabi, or within your own website.

Foundations

Selling online courses mean that people have to pay first before accessing that knowledge. This is called “gated content” or “paid content.” But people won’t easily enter their credit card details or pay you money without trusting you first. To do this, you need to build trust, authority, and rapport. You can do this by offering free content and exposing yourself to your target audience. Here are the ways to build this foundation:

Build a Facebook Group/Community

Facebook has a large user base that most of your friends are already using for years. Facebook is a good way to build lasting relationships, trust, confidence, and familiarity in a cheap way. With Facebook, you can position yourself as a go-to-expert in your field, and even create multiple Pages focusing on different specialties. When you have an organic post that gains a lot of organic views, try to boost it by paying Facebook because if it is being commented on, shared, and liked by a non-paid audience, there’s a high chance it will be liked by the paid audience. Also, don’t forget to build your email list. When your audience may no longer be using Facebook, most likely, they may still be using their emails.

You can also build your own FB group based on your location (like being in the same subdivision, sub-urb, barangay, or city), interests (like motorcycles, photography), life situations (single parents, cancer survivors, solo travellers), or advocacies (pet adoption or recycling). You can also combine categories like “Yamaha Nmax in Manila” so that your community will be highly relevant and engaging.

Within a group, create a sense of community like organizing meet-ups, rides, electing officers, collecting monthly dues, printing t-shirts, jackets, or stickers, or doing outreach work. Increase trust and likeability by encouraging volunteerism to help members, post group activities and live streams. Make sure to create a good group photo and a well-written about us section.

Build a Youtube Audience

Youtube is dubbed as the world’s second largest search engine. It can help other people find you through searches, suggestions, and if your content matches their interest, you appear on their Youtube homepage. 

Before selling an online course, it is recommended that you give value first for FREE. How can people trust you with their money if they don’t experience or know you first? 

Later, I will share how to build your Youtube audience, and how to earn through affiliates, ads and sponsorships.

Boost your exposure through Podcasting

Podcasting is another way to promote your content or brand.

Podcasts are becoming popular because it does not need your full attention. People use podcasts when they are doing other things like driving, doing exercises in the gym, or babysitting. Unlike TV ads, people can pause it or listen to it at their own pace.

Podcasts can also be downloaded and do not consume very big amounts of space in phones. People can download and listen to it while on their vacations or unplugged moments. 

Podcasts can also be listed on various devices such as phones, laptops, desktops, and Apple iPods.

Podcast creators can also easily record audio and upload them on Spotify, Youtube, or Apple Podcasts.

In 2022, here are the statistics of podcasting:

• 78% of Americans are aware of it while 91% of Australians
• The Philippines has 31 million podcast listeners, the biggest in Asia – spiralytics.com
• 41% of Americans listen to podcasts on a monthly basis

You can earn also earn through podcasting by:

• Cross-selling products, souvenirs, or brand items
• Listener donations – you basically create good content and convince your audience to support you via funding websites like Patreon
• Advertising – this is usually done when a podcaster shares a ‘promo code’ during the podcast so that the advertiser knows how many converted through that podcast episode
• And as we discussed, you can promote your online courses through your podcast

(2) eBooks

One of the most lucrative passive income is Kindle eBook Publishing. The best price for an eBook is between $2.99 – $7.99, but $2.99 is the most popular. With that price, you  will receive 70% royalty or $2.09 plus more if you sign up for KDP Select Program. So if your eBooks sells 10 copies a day, you will receive $627/month which is a decent amount for passive income, and that’s just for one eBook.

The first step is to figure out your expertise. Knowledge, experiments and practical experiences on what you write about are important for you to produce unique and authoritative content. Considering if you’ll write a fiction or non-fiction is important as it forms everything on top of your content.

Next is to discover the titles that are in the best seller’s list of your expertise. If possible, read and research them, and take note of the ideas. Find missing points or use your existing resources to capture them. Start with abundance of ideas and write your musings in a commonplace notebook. The worst thing is to memorize them because our brains are not that good in remembering. At this point, your mind is still whirling, so don’t mind the grammar first or write perfect sentences. Just let your brain juices flow. Use word prompts. Word prompts are words, phrases, sentences, and even pictures that spark your imagination and enables you to write in your own word. 

Next is outlining. Create three to five headings, and under each of them, create five subheadings. Then transfer your ideas and word prompts from the commonplace notebook under these outlines. Expand your word prompts according to your own words. The best thing is when you create an original material out of your own words. Be direct to the point if it’s non-fiction.

Make it your aim to create 250 words per subheading. So, if you have 5 headings with 5 subheadings each, you have a total of a 6,250-word ebook which is sufficient. A typical ebook does not need to be 25,000 words. 5,000 to 7,500 words will be okay.

Perform first edit, then read the entire book to perform the second edit where you improve grammar, punctuation and layout. You may also let someone edit it.

(3) Ads

Advertising is one way to generate passive income. This is done by displaying ads to your platform such as your website, video, or any property. Digitally, you can earn through ads by enabling them in your Youtube videos or blog. When someone wants to advertise their product or service, they may go to Google Ads for example, and pay Google to receive views, clicks, or calls. 

In order for Google to find this audience, Google will place ads on the content that they host. Google has a way to determine which audience may have interest in the advertiser’s products or services. In return, Google will pay you if you’re the owner of the content where advertisers gained exposure, clicks, or leads.

Whether you are making Youtube videos or blogs, make sure that you focus on one main idea or one main topic. Afterwards, use tools like Keyword.io, Google Keyword Planner, Google Search Suggestions, and current events to create content that will drive traffic to your site or channel.

Also, consider topics with advertisers that are most likely to pay higher. For example, if your target audience is businessmen, most likely they have money to spend and you are most likely going to have a higher income per 1,000 viewers than having a student audience. Your income may also differ if your audience is mainly from USA, as compared to an audience from the Philippines. This is because the audience in the US may have different spending power than the Philippines. But if you will create for a more lucrative topic, you may also have a high competition. Creating content in a less-crowded, low-competition, but interesting topic will generate for you better rewards. Evergreen content are those content that are searchable and relevant after a longer period of time.

Here are tips from TankoSmith’s book: “10 Ways to Grow Youtube Channel”. These are just excerpts, some of them are mine.

1. Engage with your audience – respond to comments, put links to your socials, do live and say hi to your viewers, mention them in your video.
2. Promote in other social media channels – link your channel from your blog, website, social media channels.
3. Do interviews with other creators in your industry.
4. Repurpose your content in other media to promote your brand. Example: Create a video from your blog, or vice versa. Or edit your video into shorter clips.
5. Create attractive thumbnails and titles, but make sure that your title really reflects what your content is, and deliver your promise. Use A/B testing to determine which title or thumbnail works better.
6. Upload frequently or regularly – continually feed your target audience. This will also benefit you in the long run to continue honing your expertise and deepen your knowledge.

Regularly check your Youtube Analytics and monitor your video impressions, audience retention and watch time. This gives you idea what sections to improve, what topics to create, and the typical length for each segment.

(4) Affiliates

Number four, affiliates. Affiliate passive income allows you to earn commissions by marketing another. This is usually done online by placing links in your content and leading people to another company’s service or product page.

For example, you may build a Facebook group on cats and create a reputation in that online community that you are good in helping cat owners. You constantly review and recommend products. You sign up for an agreement with a company, let’s say Amazon in the US, or Shopee, Lazada, or Alibaba in Asia. They will then provide you with a special link for certain products which you can promote. Every time people click that link or buy using that link, you earn passive income.

But be careful because it’s unethical to post affiliate links without transparent notice that they are affiliate links. Some customers may believe your recommendation is in good faith only, hence creating a bad experience and may cause you to lose audience. Social media platforms are now requiring people like influencers or celebrities to disclose whether the product they are promoting is a sponsored post. 

You can also do this not just in Facebook but through blogs, Youtube, or TikTok videos.

(II) Capital-intensive (Portfolio Income Streams)

Next are portfolio income streams. As stated earlier, portfolio income is one that comes from interests, dividends, and capital appreciation. I also submit that this is a sub-category of passive income because it requires initial capital investment but you can earn without doing active work later.

Here are different types of portfolio income streams:

First is the stock market. A stock market is a place where buyers and sellers meet to exchange shares or ownership of publicly-traded corporations. It’s like a wet market like Divisioria in Manila or Libertad in Bacolod City, but instead of buying stuff like chicken or rice, you buy a certain portion of ownership of a corporation. 

There are two basic approaches to stock market investing: (1) First, Capital gains; and (2) Second, dividend Investing.

Capital gains mean that you are after the growth of the value of the shares. Hence, your aim is to buy a stock at one price, and hopefully sell it at a higher price later on. On the other hand, dividend investing is buying the shares of a company today that pays steady dividends, usually paid every quarter or every year.

(5) Capital Gains – Stocks Investing

Next is stock investing for capital gains. Best selling author Matthew Kratter said that “the stock market is the greatest opportunity machine ever created.” There are two kinds of people in the stock market:

1. First, those that love the dopamine, the rush, the excitement for quick money gains while trading stocks. They buy and hold the stocks for hours, days, or weeks and then sell them – these are called traders.
2. Second, those that want to get rich slowly and quietly over the years. They buy and hold the stocks for years – these are called “investors.” 

Whether you are a trader or investor, or hybrid, there is room for you in the stock market.

What is a stock? It is a share of ownership of a company. For example, when I buy 100 shares of SM Malls, I become a partial owner of SM. I am called a “shareholder.” 

Another way to understand this is to think that the whole SM is one whole pie, and this pie is divided into 1.2 billion+ slices (also called outstanding stocks). As of the time of this recording, each slice costs P800. So multiply that to 1.2 Billion and the worth of the whole pie of SM Malls is around 960 billion pesos. This is called market capitalization. If I buy 100 shares now, I own 100 out of 1.2 billion shares, or around P80,000 worth of SM Malls today.

The most important decision in evaluating a business:

When talking about investing, you may have heard about Warren Buffet as one of the world’s most successful investors. He is the “god” of the stock market. He owns Apple, Coke, Goldman Sachs, Moody’s, and Wells Fargo, among others. But how does Warren Buffet invest? 

In general, he typically invests by buying a share at a wonderful price which is below a the company’s actual value or worth, with the expectation that the company will grow over the long-term. 

But what is a “wonderful company?” For example, he owns shares in Coca-cola since 1988, but how did he know back then that Coca-cola will grow big? 

Number one is hindsight. It’s the ability to predict the company’s marketability in the coming years. He picks companies that will be around 20 years from now or so. But what is the most important factor that Warren Buffet uses to say it will sustain? 

This is the most important factor: Pricing Power. He wants to own companies with good pricing power. What is pricing power? Pricing power means that a company has the power to raise prices without losing customers.

He said The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.

For example, if Apple wants to raise its prices, or sell its iPhone for a higher price than Android Phones, people won’t bother because it is Apple. It has a strong brand with a strong pricing power. Apple has less competition also because it’s the brand that has a complete computer ecosystem ranging from phones, desktops, laptops, watches, earphones, and even software like TV and arcade games.

In contrast, if you sell gasoline, and you try to increase the price, people will complain and will most likely leave your gasoline station and go to your competitors. This means that you do not have good pricing power. So, for Warren, a good company to invest in now, is the company that has a good pricing power.

In contrast, a company with a weak pricing power cannot help but to lower their prices and margins, hence lowering their quality. It will then result in being eaten up by the competition.

To invest in stocks, you can use the Robinhood app or website in the US. But if you want to invest in US stocks but does not live there like me, you can use financial platforms that offer foreign investment solutions like ATRAM of GCash in the Philippines where you can invest in US tech companies like Apple, Microsoft, Visa, and Google.

(6) Dividend Investing

Next, dividend investing. Buying stocks that regularly pay dividends, and holding them for a long period of time is a great way to build passive income. 

There’s no better feeling than waking up in the morning and suddenly finding cash in your account which came from dividends.

What is a dividend? To understand it, you must first know what company profits are. When a company makes profits, it will usually do two things: (1) One, to reinvest the profits back to the company such as buying new assets or upgrading facilities; (2) Two, distribute some of the profits to the stockholders.

You can also check out the website of the stock exchange. For example, the Philippine Stocks Exchange shows not only the historical dividends but also the upcoming or projected ones. This gives you idea what dividend stocks to consider and buy.

Here are four tips in buying dividend stocks:

Tip 1: The Lindy Effect

What is a very important principle in choosing dividend stocks? In Matthew Kratter’s Book, Dividend Investing Made Easy, he shares a powerful shortcut called “the Lindy Effect.”

It came from a cafe in New York where actors used to gather after broadway shows. They noticed that if a show lasted for 100 days, it has a probability to last for another 100 days. It means that the probability to last longer comes with age.

Basically, the probability for living organisms to die increases with age. For example, plants, animals, and humans, have a higher probability of dying as they get older. 

But this has an opposite effect with non-organic entities such as works of art, shows, and corporations. For example, people have been listening to the masterpieces of Beethoven since the 1800s. Meaning, that for the next 200 years, it is more probable that people will still be listening to them. On the other hand, people have been listening to Justin Bieber since around 2009, and it is also probable that his music may also last for the next years.

But comparing Justin Bieber and Beethoven’s music, which do you think will probably last for the next 200 years? Justin Bieber or Beethoven? Again, this is only a probability. No one knows about our tomorrow. But it is most likely that since Beethoven’s music survived for more than 200 years, it is probable to survive in the next 200. 

So applying this principle to dividend stocks, which company has a higher probability to keep releasing dividends? Coke which was incorporated in 1919 or a company that was only incorporated in 2004? Of course, it’s Coke. Unless of course along the way, something really revolutionary happens to an industry, or a great breakthrough happens like what happened to Kodak and Blackberry and after the introduction of the iPhone.

In dividend investing, the Lindy Effect is useful. We want to own dividend-paying stocks that will be around for a long time because it won’t be good if we own a company now but after a few years it will go bankrupt. 

Hence, companies that have been paying dividends regularly for a very long time are likely to continue doing so.

These stocks are also called “Dividend Aristocrats.” So if your purpose is long-term dividends, buying Dividend Aristrocrat stocks is the best decision. Check out with your broker to know which stocks have been paying dividends for the longest time. In the Philippines, you can check it out on the Philippine Stocks Exchange website.

So one of the best ways to build passive income is to purchase high-paying and regular-paying stocks in the stock exchange.

Tip 2: Cost-Averaging

Sometimes we have a tendency to buy stocks lumpsome, or one-time big time. Let’s say investing Php 10,000 PHP in full today, but next month all stocks started going down. To avoid this scenario and to avoid the so-called “analysis paralysis”, divide your P10,000 into 4 weeks. So you invest P2,500 per week for 4 weeks. By doing this, you have invested in a certain stock at its average price for 1 month. If it goes down next week, you will be happy that you can buy it at a lower price. If it goes up next week, you will be happy that you already bought it a lower price. This is called Cost-Averaging because the price you paid is the average price.

Tip 3: Diversification

In the stock market, it’s best if you invest in several companies that produce products and services that people use every day. Concentrating all your money in one industry, for example, is not ideal because if that industry will go down, your losses will not be mitigated. 

For example, if you invest in a coal company, what happens if one day, the government decides to aggressively regulate coal? Of course, your investment will go down. But if you also have invested in a solar and wind energy company as well, your losses will be mitigated or cushioned because your investments are spread out. This is called diversification.

As a famous line from the novel Don Quixote says, “Don’t put all your eggs in one basket.”

Check out Matthew’s book for more strategies. Link in the description below.

Tip 4: Not Just Dividend Per Share

You may be tempted to only select a company that has a high dividend rate. For example, Company X declares a P3/share dividend, while Company Y declares a P1/share. So you will automatically choose Company X. But be careful.

Remember that once a company distributes dividends to the shareholders, they take the money from the profits that could have been reinvested back into the company or pay off their debts. A high dividend rate does not always mean a highly ideal company for the long-term.

Also remember that dividend distribution is purely dependent on the discretion of the Board of Directors. So a company’s quality is also measured by who sits in their Board of Directors.

You should also look at the company’s history, income, profits, asset growth, and how consistently they distribute dividends. If a company declares a high dividend this year but did not do so in the last 10 years, you should assess its other metrics to know about its health. You don’t want to invest in a company that won’t stay long after some time, or else you lose all your invested capital.

(7) REITs

Number 7 are REITs. REITs mean Real Estate Investment Trusts. These are companies established for the purpose of owning real estate projects such as apartment buildings, office buildings, medical facilities, hospitals, hotels, resorts, highways, warehouses, shopping centers, and railroads, among others. REITs allow the public to buy shares of ownership. If you invest, you will enjoy consistent dividends. 

This is a form of indirect rental income because REITs are required by law to distribute the rental income to investors, unlike the typical companies where it is up to the Board of Directors to distribute dividends or not. 

In the Philippines, REITs are required by law to distribute at least 90% of their income to the investors each year. So, you with REITs, as long as the company has made an income, you are assured to get dividends. 

If you don’t have enough money yet to pay your equity for a real estate property, you can invest it first in REITs, then, you may feel that you are already a real estate investor in some way.

(8) Mutual Funds

Next are Mutual Funds. Unlike other forms of investments, mutual funds are managed by highly qualified and experienced professionals, hence they are considered safer. Instead of you studying the markets, monitoring the charts, and current events, you simply determine (a) what type of investor you are, and (b) when you would need the money. The, you may either call your mutual fund company or buy through your online broker.

Mutual fund companies gather money from multiple investors, this is called pooling of funds. The person that manages it is called a Money Manager or Fund Manager. Every mutual fund has its own set of guidelines or prospectus, and the fund manager must follow this document, otherwise, he may be liable of an offense called style drifting. So, this gives you confidence that a certain Fund Manager does not just haphazardly make impulsive decisions along the way.

Mutual funds are also regulated by the government, particularly the SEC, but unlike deposits, your money is not insured by PDIC or deposit insurance.

Mutual funds allow you to invest in multiple or various companies with a relatively smaller capital. This allows you to enjoy diversification. Again, diversification is “not putting all your eggs in one basket,” so that you won’t suffer great losses if one industry goes down because it can be mitigated by another industry.

However, the top disadvantage of mutual funds is that it charges you fees. These may include annual fees, sales charges, taxes, and management fees which will be charged even if your funds suffer losses.

There are different types of mutual funds depending on the risk appetites and time horizon of investors.

For example, Money Market Funds are restricted by the government to low-risk and high-quality investments only. But since the risk is low, the returns are also low. The one caveat for low risk investments is that the rate of inflation will eat up the growth of your investments, hence you end up losing money.

Bond funds are not restricted therefore it has higher risks, but higher possible returns. 

In the Philippines, there is a Home Development Mutual Fund (or PAGIBIG), where employers are required to contribute mandatorily partially for their employees. The charter or the law creating the said fund requires that 70% must be used to finance housing for the citizens. It also offers MP2 or Modified PAGIBIG II Savings which offers a higher dividend rate to contributors encouraging everyone to save.

Investing in government-mandated contributions can be considered a more stable passive income stream because the State itself requires businesses or individuals to contribute to them, and ordinary people can loan from them and thus customers are guaranteed. Even if a customer cannot pay, the government may find other ways to pay its debts. So you as an investor can be confident that government-supported funds can stay there for a longer period of time.

(9) Dropshipping

Dropshipping is like doing e-commerce like Amazon, Alibaba, or Shopee. You generally have a physical product sold through an online interface. The magic here is that you don’t carry or manage a physical warehouse or inventory. When someone buys from your online store, you then purchase the items from a third party and ship the item directly to your buyer. As a result, you as the seller or merchant never touches the product itself. 

Dropshipping allows you to sell products without investing thousands or millions in keeping an inventory and maintaining huge warehouses.

There are two ways to dropship: Number one, find existing products to sell and dropship; Number 2, create your own product, find a manufacturer and dropship.

To achieve the so-called “passive income”, you need to find a product that has long-term marketability, and not just something that is hot and trendy now but will only last for a while. If it’s not long-term, it’s no longer passive because you will keep updating them.

The go-to platform for dropshipping is Shopify. They have a service called Oberlo that will guide you through the setup. You may also find and buy existing Shopify stores. You may also checkout existing e-commerce platforms in your country if they allow dropshipping or not.

According to Rachel Richards, the #1 secret to success is to invent your own product, find a manufacturer, and test the market. In the e-commerce space, if you sell a product, people can see your price but they can easily search for competitors offering the same at a lower price. If your product is not unique, they will go to your competitor. 

So the solution to this is to increase your pricing power. Create new, unique, and hard to imitate, so that your competition is low and you can dictate the price of your product without fear of losing customers. Sell gradually, test your market always.

(10) Rental Income

One way to earn passive income is by buying real estate property. In fact, this is the most widely-available opportunity for everyone. Real estate investing is every man’s opportunity to build wealth. Yes, there are people that got rich through tech and apps business, but with real estate, everyone can achieve it with a bit of grit, patience, and wise moves.

Why you should invest in real estate property?

1. First, real estate investing hels you fight inflation. Whatever the economic condition is, there is always a demand for homes and rents. So as a landlord, you can always increase charges as inflation rises. Unlike money in a savings account, money in real estate increases higher. But take note that it is not as highly liquid as a savings or stock market account. You cannot quickly withdraw your money by selling your real estate immediately. However, if the title is under your name, you can use it as collateral to borrow money.
2. Second, you can leverage your existing property to further finance your real estate purchases. The rental money you receive from one can be placed to purchase another. This expands your assets.
3. Next, it is stable. Over the years, real estate investments protect your assets from the volatility (ups and downs) of markets. Experts confirm that investing in real estate is still a good idea even during recession, especially residential. In fact, people may even be buying real property during market volatility because of lack of confidence in the stock markets. Also, people always need housing and as long your property is well-maintained, you won’t have trouble finding tenants. However, during the pandemic lockdowns, we found that commercial rentals are more prone to risks than residential ones.
4. Next, property appreciation. Through time, the value of land generally goes up, not down. In contrast, a car’s value goes down after years of use. Studies show that in the last 100 years, residential real estate has kept up with inflation.
5. Equity. When you buy real estate, usually you won’t pay 100%. You will only pay a portion of it around 20 to 25%. This is called equity. The rest, you will only pay through financing, leveraging or bank financing. You only pay for a fraction of its worth, and the rest you pay in the future.

Ways to invest in real estate

House hacking

House hacking means finding ways to generate income from your home. Traditionally, it means you living in a duplex or triplex as your primary residence, and you rent out the other unit so that their payment will be used to pay your mortgage. You virtually live in the property for free, plus it will be completely yours.

Property Flipping

Property flipping is when you buy a house that needs a lot of work, fix it up, and sell it for profit. You must be willing to put in a lot of work to turn it around. But to make it a passive income stream, you can turn it into a long-term residential rental property or AirBnB unit. But first you have to do some research on the location, is it viable for renters? Is there a good demand? Make a trip to the property. Compare prices to nearby properties. Ask for upcoming developments, safety situations. Consult with real estate experts, brokers, appraisers, tenants, and landlords to get a bigger picture.

More tips

If the thought of looking after the property or manage renters on a regular basis stresses you out, considering hiring a  property manager. Also, don’t mix business with charity. When a renter is delinquent, it’s better to enforce your contract immediately, otherwise, you will end up suffering losses. Don’t over leverage. To leverage means to use borrowed money to purchase or develop a property with the hope of generating profits. If too much, you will be cleaned out if there is an economic downturn. 

Real estate expert Doug Skipworth said, “Don’t wait to buy real estate. Buy real estate and wait.” If you are challenged to start, consider partnership. Look for a partner to finance your dream project. Also, if you are 33 years old or below, you can take advantage of government’s 30 year loan program. In the Philippines, you can avail it under the PAGIBIG Housing Loan program. 

Another strategy is owner or in-house financing. You may approach the owner who can carry your mortgage. Talk to him and share yourself as having the capacity to pay. Talk about your income, your job, your life situation, and how you will be able to pay the monthly amortiztion. Personally, I find it easier to avail owner financing rather than government or bank financing. Usually, the owner will allow up to a maximum of 5 years to pay with an interest starting from 8%, or 12% or the maximum of 18%.

Conclusion

When your passive income has reached the amount of your cost of living, experts call you as a 100 percenter. But to be a 100 percenter or beyond, there are two common objections: These are (a) No time; (b) and no money.

Don’t have time? Sit down, look at your schedule and identify the time wasters. Maybe we are spending too much time on streaming devices or social media. Can we cook instead of eating out? Can we cook all our food in 3 days and put them in the freezer? Maybe we can hire someone to do some tasks. View your time like money. Budget it. Create a Google Calendar, and find time to create. Cut off anything that wastes your time.

Don’t have money? You can either decrease your spending or increase your income. Can you schedule your grocery or shopping during the sale? Can you get rid of certain appliances? Can you look for a higher-paying job?

These ways of creating passive income are good, but they’re meaningless unless you take action. 

Starting can be difficult, but it is in starting that you can succeed. You may make mistakes, you may fail but… what if you succeed? Make time. Save money. Develop grit. Along the way, you will compile experiences that will make you better and smarter. Don’t self-prophesy of failure/ This is a world of opportunity. Take risks, and enjoy the journey. See yourself enjoying time and financial freedom, making the world around you a better place.