Quora Answer: What are Some of the Most Profitable & Consistently Performing Ways of Producing Passive Income?

The following is my answer to a Quora question: “What are some of the most profitable and consistently high performing ways of producing a passive income?”

Passive income is defined as income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.  It is distinct from portfolio income, which is often mischaracterised as passive income.  Generally, passive income comes from two sources: rental activity or business activities where you do not materially participate.  Whilst some financial institutions may recognise the income from capital growth, or negative gearing, they actually relate more to portfolio activities, and the use of financial instruments.

If you have the means, the most straightforward means of getting passive income is to invest in property directly.  REITs would fall under portfolio income, not passive income, since you do not manage the property or own it outright.  Rental income, manage properly is consistent.  You can outsource the property management to another entity, and just collect your rentals.  The issue is the high entry barrier, and the attendant complications of being a landlord.  There is a steep learning curve.  If you have property, you can flip it, and that is a source of income as well, provided you make the correct call.  There is a higher inherent risk since it involves a lot of leverage.  It is important to anticipate the market, and not be reactive.

Another way to earn passive income is to invest in a business.  You become a shareholder, and live off the dividend and profit share.  If you are a significant investor, it would be prudent to have a place on the board as a non-executive director with major voting rights.  That way, you have a say in the disbursement of dividends and the profit share.  This is not as easy as people imagine since most businesses do not perform well, and you stand to lose a lot of money backing the wrong horse.