From the moment I started thinking of setting up my own business, there were a few things that I wanted to achieve:
- be more flexible than a regular job - no more working 9-5 every Monday to Friday
- a better lifestyle - working less. Doing more of the things I wanted to do
- mobile - the ability to work from anywhere
There were lots of business ideas that I considered but with each idea, they were binned if all they did was trade time for money. Trading time for money means that if you do not work one day, you do not get paid. I needed a business that would bring in passive income.
There are lots of examples of businesses that operate with a passive income model. The classic example for me is online guitar lessons. You can sign up to certain web sites (here's a good example: https://www.guitarlessons.com/academy/) and access guitar lesson videos which you can watch at any time. You pay a monthly subscription but as soon as you stop paying, you lose access.
The beauty for the guitar tutor is that once those videos have been made, he has very little work to do each month to keep the money coming in. He has built the web site, set up the payment systems and created the videos. All the hard work has been done so now he can sit back and be paid each month, without doing much work, freeing him to do whatever he wants.
Setting up a passive income business is not easy, it is not quick and there is no guarantee of success. There are plenty of people online giving advice on how to set up a business like this but a lot are just journalists reporting on the method. Here are some of the myths surrounding passive income businesses from someone who has set them up himself.
1. Passive income generation is easy
I currently have five businesses set up using the passive income model and each one has taken a lot of work to set up, market and get customers for. There is a lot of hard work that goes into creating your business. It's hard work and you are more likely to fail than you are too succeed - there is no getting away from that.
2. You will be rich
The second myth is that you will be paid a lot of money. Yes, some people do extremely well, bringing in over £100,000 a year but we hear about these people because they are the exceptions. Boring stories do not make the news and that's what most people will be - a boring story about a failed business.
Passive income businesses rely on lots of small payments each month and so it can take a long time to build up to a decent monthly income. The best example of this is my web hosting business. People pay me a £5 a month to host their web site for them. It takes a lot of £5 payments, from a lot of people to make a decent income for me.
3. It's easy and anyone can do it
No it's not and no they can't. It's a gamble and it takes a particular type of person to build a successful passive income business. Firstly, you will most likely need to set it up whilst holding down your current full time job. It takes a long time to build a business and get enough regular customers paying you on a monthly basis before you can quit your existing job and rely solely on your passive income. You will effectively be holding down two jobs at once for a couple of years.
'You cannot quit your day job today and start a successful passive income business tomorrow'
You also need to consider what you are going to do and how you will be different to other people. I've already mentioned the online guitar lessons. There are lots of people doing that because it's a great way to make money so if you chose that, consider why would customers buy lessons from you and not someone else? I'm not saying don't consider setting up a business that someone else is already doing - in fact I argue the opposite in my blog post 'Invention is overrated' - but what will make your business stand out, why will customers choose your service over a competitors'. You need to offer something different.
Benefits of passive income
In the introduction, I listed three reasons what I wanted to be able to achieve by starting my own business. The first was flexibility. Starting your own company, especially one that is based on the passive income model allows you to work mostly when you want or at least it should, if set up properly.
Being able to work when you want allows you to work around everything else going on in your life. If you want to go away for a long weekend, you can. If you want to be able to pick up the children from school, you can do that and work later on. These things are not possible when you are stuck in an office, working for someone else. Passive income greatly improves your ability to work when you want because you are no longer selling your time for money.
Since growing my business I have made small but significant changes to my working day. I now am at home to send the children off to school and I'm home at the end of the day to meet them. In between I go to the coffee shop, take the dog on extra long walks and I'm the first person my friends call when they have a day off and they want to do something because they know I can drop everything and go play golf.
The freedom and flexibility is life changing.
The three types of income
Let's start with the simple one, one we all understand because we've done it. An active income is quite simply, a normal job. One where you're working for someone else or you're self employed but the basic tenant of an active income is that time equals money. The more you work, the more you'll get paid.
A normal office job is active income, an Uber driver is getting an active income. The MD of McDonald's is getting a monthly salary as active income. If they do not show up to work, they will not get paid.
The next type and most would argue the best type, is passive income. This requires a lot more work upfront. Most of the time people will refer to new-age ways to make passive income such as setting up a successful YouTube channel or blog. That's fine but these are very abstract concepts to the majority of people and even people of my age who were bought up with this technology and use it on a daily basis may still struggle with it. Not how to use the technology but how to make money from it.
A simple yet profitable example of passive income is being a landlord. You buy a property and rent it out to someone else. Each month you receive an income (the rent) and you only have to do something if something goes wrong e.g. the boiler breaks or you need to find a new tenant. The passive income model allows you to work less and enjoy life more because you'll have a lot more free time. You don't have to suffer the daily 9-5 grind of working, whether it's for yourself or someone else. Of course there are downsides and one of those is your income which will almost certainly be a lot lower than if you were working full time, certainly in the beginning anyway.
The hybrid approach
Like most things in life, it's usually a good idea to take two competing ideas, take the good bits from both and come up with a new way of doing things.
The hybrid model is great, especially when you first start your business. You can sell some products or services for a large, one off sum and offer the same thing under a pay monthly option. That's what I did with my web site company. I sold some web sites to customers for a larger one off fee, anywhere from £250 upwards. This was my active income. Other customers preferred a pay monthly option where they got a similar service but paid for the site on a monthly basis instead which added to my passive income.
With the hybrid approach, you can even wind down the active part of the business as the passive side grows. The majority of my customers chose to have a pay monthly web site which allowed me to gain a passive income for the long term whilst others paid outright for their site which gave me immediate cash on hand.
As the passive income grew, I stopped advertising the 'buy outright' option because it only gave me a short term gain. It was helpful in the beginning though as it gave me an immediate lump of cash to help me get buy on.
Sometimes I start marketing the 'buy outright' option every-so-often if I get bored or would like to make a bit of extra money but as soon as I get enough customers, I stop the marketing again.
The best bit about choosing a passive income model is that although it takes longer to build up a sizeable monthly income, once you do you are only ever going to build on it. I have built my business up slowly and have a rule that I try to stick to which is that I do not aim to increase my annual income by more than £10,000 a year.
That seems like quite a small figure when you consider how quickly some businesses grow. It also may seem crazy - why would you want to limit your income?
It’s not a rule that is set in stone but more of a guideline so that the business does not grow too quickly and cause problems like becoming unmanageable. A slow and steady growth rate allows me to adapt to ensure that my customers are still happy and I am not letting them down.
I could aim to grow the business by more than £10,000 a year but that also comes at a loss of free time.
Remember that my businesses are based on a recurring payment model so that additional £10,000 isn't just for that year. That is there every year and we just keep adding to it.
Steady growth allows you to scale the business without disappointing customers.
Passive income ideas
There are lots of online lists giving brief details of ways to make a passive income. Below are the ones that I have tried, am currently working on or believe have real potential.
Online shop / drop shipping
This is something that I have tried a few times, some successful, others not. Starting an eCommerce web site to sell products is fairly straight forward and there are plenty of ways to build a web site. The two main difficulties are marketing the site (actually getting people to visit the site and buy from it) and finding a trusted dropshipping supplier.
The first online shop that I set up I made the mistake of processing all of the orders myself and holding the stock. When an order came in, I literally had to print off an address label, package the item and take it to the post office myself.
This was hard work but it taught me some valuable lessons, mainly that dropshipping was the way forward.
Dropshipping is where you make a sale and pass the customer details on to a supplier. The supplier then sends the product directly to the customer. You never see the product. You just take the payment, pay the supplier and that's it.
Web hosting business
This can be a great business because it requires very little work on a week-to-week basis but it does require a lot of work finding customers. Hosting a web site should be very simple and people are willing to pay a little bit more if you can offer them something extra, such as really good service.
Referrals / advertising
The best way to do this is to build a blog about something that you are knowledgable and passionate about. It will literally take years of hard work and creating content before anyone notices you but if it is something that you enjoy, it is worth doing. Set up and running costs are minimal.
If your blog starts to get noticed you can integrate Google Adsense adverts into the site or be paid to promote and review products from other companies. This site is an example as I make some money from referring people to services that I use and recommend.
A more traditional passive income model is renting property. Obviously this requires a large investment upfront to buy the property but if you have the funds available, or can club together with some friends to raise the cash, becoming a landlord is a great way to make money with minimal effort.
Online video tuition
Just like the online guitar lessons that I mentioned earlier, online video tutorials where customers pay a subscription to access your content is a great idea. Like all other models, it does require a lot of effort up front but if you have the right personality and skill set, it is worth considering. Picking a topic that is timeless is crucial. There's little point in creating tutorials on something that's really popular right now, only for interest to die off in a few months.
Self-publish a book
Amazon now allows you to self-publish a book and offer a print to order system called CreateSpace. If you have the talent and have an idea that will sell to a large enough market, it is worth looking into.
It's what I am using for my book.
How to build a passive income business
There are a number of things to consider once you have chosen which business to start.
One of the key aspects is automation - making sure the business can run on a day-to-day and week-to-week basis without too much intervention from you. I talk a lot about this in my book. You need to set up systems and structures so that you are not required.
Automatic payment systems are a necessity. Getting your customers to set up automated payments can be done through Direct Debits or online through PayPal recurring payments. You can also use online finance software such as QuickFile which allows you to set up recurring invoices which will be sent out automatically on whatever schedule you choose - weekly, monthly, yearly etc. - via e-mail. QuickFile is great because it also sends out up to three, custom reminders to customers who have not paid.
If you decide to sell products online, you ned to make sure the order is sent through to your drop shipper as soon as possible. You cannot keep your customers waiting. You can either get the web site to do this for you automatically or consider employing a virtual assistant to monitor your e-mails and pass on orders as they come in.
For service companies like web hosting, you will need to ensure customers can access support when they need it. We use a notification system that sends a message to my phone if a customer requires help but I have also tried outsourcing support to another company in the past.
The procedures you put in place depends on how much you want to spend (virtual assistants and outsourced support costs money) and how much work you are happy doing each day.
I mostly operate on my own - without virtual assistants or support staff. I've set up lots of automated routines and have e-mails and alerts sent directly to my phone. Everything I need, literally everything, is in my backpack or an online service that I can access anywhere. I take my backpack everywhere so I can always resolve issues myself.
The only support that I rely on, on a fairly regular basis is a telephone answering service which I divert my calls to when I am in a meeting. See my resources page for more information and my recommendations.
As the business continues to grow, and along with it my income, I may consider investing in some virtual assistant hours each week to take care of all of the mundane jobs that cannot be automated.
Ultimately you need to decide what lifestyle you want (how many hours you want to work each week, what income you would like) and build your business with those goals in mind.
Passive income gives you time.
Free time, time with family or time to try other business ideas or projects. It's allowed me to spend more time with my children and write a book.
It was not easy but it definitely was worth the hard work.
'Really, any business can generate passive income.'
Really, any business can generate passive income. Even traditional businesses like shops, garages and restaurants. All you need to do is install management that you trust to run it on a day-to-day basis and just be on call for any big decisions.
It's not too late. If you you've already started a business, you can adapt it. If you can't adapt it, sell it and use the profit to invest in start something new.
Personally I prefer online businesses like eCommerce shops that drop ship products because they do not require staff, premises or staff - all big cost items that require managing and impact on your bottom line.