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What is Passive Income? How to earn Passive Income.

Updated on July 19, 2011

What is Passive Income?

Unlike Earned Income where you go out to work and are paid on an hourly basis, Passive income is an income received on a regular basis from an asset.

Once the initial work has been done to buy or create the asset, often minimal effort is required to maintain it, hence the name passive income.

In summary, examples of the various types of passive income include:

  • Real Estate

  • Royalty Income from:

    • Licencing a Patent

    • Copyrights and trademarks.

    • The use of intellectual property such as songs or books that you have published or a computer software product that you have written.

    • The extraction of oil, gas, or minerals from your property.

  • Earnings from internet advertisements on websites

  • Earnings from a business that you own or have a share in but do not have any direct involvement in.

  • Residual income

Passive income from Real Estate

Many people invest in Real Estate in the hope of receiving passive income.

In its simplest form renting out a room in your home and receiving rent each week or month from your tenant is a form of Passive Income.

Buying a house or apartment and renting it out is another way to earn passive income. Hopefully the rent paid by the tenant at least covers the cost of the monthly mortgage and any running costs and any surplus profit each month is passive income.

Some people rent their property out all year round, others have property in holiday areas and let the property out during the holiday season.

More sophisticated forms of Passive income from Real Estate can include owning commercial premises such as a shops, offices or warehouses and renting them out.

Royalty Income

There are many forms of passive income from Royalties, which includes the following:

  • Royalty income from patents.

If you have invented a product, it is classed as intellectual property and you can protect your idea with a patent.

If you do not wish to set up a company to manufacture the product your self, you can allow another person or company to manufacture the product and sell it and in return you will receive Royalty income.

Royalties are typically a percentage of the revenue received from using the asset, or a fixed price for each unit sold of the asset.

  • Royalties from the agreed use of your intellectual property such as songs, books.

As an example, apparently, the late Michael Jackson bought some of the Beatles songs from Paul McCartney and by allowing other parties to use them, would receive passive income from the Royalties.

  • Royalty Income from copyrights, trademarks and brand names.

The two types of royalties most commonly encountered are royalties for the use of copyrights and trademarks.

As an example:

  • A fast-food restaurants may use a well known brand name to sell their food under.

  • A company producing or selling a fairly traded product may pay to use the Fair Trade trademark.

  • Royalties from the extraction of oil, gas, or minerals from your property.

  • Royalties from the sale of products using certain processes.

Earnings from internet advertisements on websites

If you have a website or blog, there are several ways that you can earn passive income from adverts on your site.

  • You can allow companies or individuals to place an advert on your site and receive a regular income in return.

  • Pay per click (PPC). Many people with websites or blogs have joined the Google Adsense scheme, which allows Google to put adverts on their page.

Whilst reading a web page a browser may see an advert on the page that they are interested in and click on it. The owner of the page earns an amount for each click ranging from a few cents to several US Dollars.

  • Websites such as Hubpages enable people to write articles or stories for the internet. Members of Hubpages can earn passive income from advertisements that are placed on their articles (Hubs) in several ways. They can join the Google Adsense scheme and earn money every time someone clicks on an advert on their page, or join the Hubpages Ad Program, and Hubpages pays you an amount every day according to how many people looked at and read your articles that day.

If you would like to join Hubpages, and start to earn a passive income, join here.

Residual income

This is a regular income earned by a sales person, who has sold a product or service, such as Insurance, that is renewed on a regular basis.

What are the advantages of passive income?

In order to earn an income via Earned Income, you need to repeatedly go out to work to earn the money to pay the bills every month.

With Passive Income, you spend time and/or money acquiring the asset that generates the passive income and hopefully it will continue to create a stream of income for you for the rest of your life.

You can use the revenue stream that it generates to buy more assets that generate passive income, leading to an upward spiral of growing wealth.

Eventually you may have enough Passive Income coming in each month to cover your basic bills at which point you will become Financially Free and have no need for paid employment as a source of income.

If you are just starting out in the world work, building up a portfolio of assets that generate passive income is a great way to have extra income to your earned income from a job. It is also a great way to build income for your retirement.


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