The best aspect of passive income is that once you have the ground work in place, it does not require your direct involvement to continue earning. Whereas the typical way to earn a living is work X amount of hours to get Y amount of money, passive income allows you to cut out many of those hours and potentially make even more money. This type of income is also available in almost any type of industry, allowing you to streamline your current work with your future income.

The difference between residual and leveraged passive income is that residual income is the type of payment that comes again and again from work that was done once. Leveraged income is payment to you for the work done by other people. Residual income would fall under the category of rental properties, while leveraged income may be made by franchising new locations of your company. Both are the types of income that will increase your wealth and secure your retirement.

Really, passive income is all about financial freedom. As a business owner or freelancer, you don’t want to panic every time you fall ill or need a few days off, wondering how deeply the time off is going to affect your income. Passive income allows you to take a breather now and then, and relax when you are sick, without worrying about the month’s paychecks. They’ll be coming in whether you’re working or not! This, along with the fact that passive income is not hard to build, should be good enough reason to get started today.

The type of income a person decides to build is entirely up to them. Many times, a business owner will find ways within his chosen industry to begin earning. Those who do not own a business, or wish to diversify, may look outside the box. Commodities like precious metals, or investing in stocks (like tech or gold stocks) and bonds, even affiliate marketing are markets that almost anyone can get into.

As with most financial opportunities, there is a learning curve as you begin. You may train in different ways for a couple weeks or months, before feeling safe to jump in. Once you do know the ropes, there is almost no end to the amount you can earn for you and your family!

There are four basic criteria all income producing investments should meet to some degree before even thinking of investing.  Yes, that may mean exotic investments such as cash flow notes are off-limits, but better safe than sorry. These criteria are diversified holdings, reasonably high income generation ability, potential for at least some income growth, and liquidity.

Diversified Holdings

The idea of diversification may seem cliché but, through proper diversification, an investor can secure their income and properly manage their risk. If you get nothing else out of this post, know this:  high income investments often sport such attractive yields because there is inherent risk in owning them.  Ample diversification will help mitigate this risk somewhat.  For example, you wouldn’t dream of investing a large portion of your portfolio in a single high-yield bond, would you?  Instead, you’d probably choose a high yield bond fund.

High Income

These income generating investments should consist of dividends and interest payments that are steady and reliable. Stocks that do not pay reliable dividends are not among the best income investments. By contrast, dividend mutual funds, municipal bond funds, and real estate investment trusts (REITs) typically make very good income investments.  This is the base revenue stream and these investments should be spread through high interest CDs, high dividend stocks (such as utilities), and a variety of other fixed income investments (bonds, savings accounts, etc).

Potential For Income Growth

A good income investment would ideally have at least some potential for income growth.  Not that there’s anything wrong with a fixed income investment;  far from it, it’s just that by definition, fixed income investments carry no inflation protection (putting aside TIPS for now).    Thus, the fixed income portion of any income portfolio must contain at least some amount of more riskier assets, such as stocks, whose dividends tend to grow apace of inflation.

Liquid

Unless you are richer than Donald Trump, an illiquid investment is generally not a good investment.  In an emergency, you can always sell off liquid investments to raise capital.  If your assets are illiquid, however, you may be forced to take out a loan or, worse, sell out at a ridiculously low price at exactly the wrong moment. This can all be avoided by keeping easily liquidated assets on hand. These include anything traded on a regulated exchange, mutual funds, and most residential real estate.

By creating an income investment plan that involves consistent payouts, investors can add to their monthly income or even keep building more investments for retirement. Investors can alter the investment strategies to meet changing lifestyles and goals. With planning and vigilance, an investor can keep their investments safe for years to come.

As an aside, I love these “best of” articles.  Why?  Because since it’s my site and my opinion, “because I said so” is actually a reasonable argument.  Today, I will be ranking the top 5 income producing assets ranked in descending order.

The 4 Best Income Producing Assets

5.) Real Estate

When most people think of passive income, they traditionally think about real estate.  Rental properties, the theory goes, are a great source of passive income since the tenants pay you to own real estate!  Oh, if only that were true.  In reality, real estate isn’t all that passive as a general rule.  You may not end up routinely fixing a clogged toilet at 4 in the morning (then again, you might) but you will almost certainly have to perform semi-regular maintenance on your properties.  What’s more, you’ll have to fill vacancies, paint and perform repairs between tenants, and even hunt down the occasional late rent check.  That’s not to say real estate investing can’t be immensely rewarding;  it can.  That the majority of American millionaires supposedly got that way via real estate is no fluke.  It’s just that, if making money without working for it is your goal, real estate probably isn’t your cup of tea.  Note: REIT mutual funds are an exception to this rule and I think everybody should own one.

4.) Blogging Income And Internet Marketing

Plenty of people are obsessed with making money on the internet but let me tell you, it ain’t easy.  I’ve been at this about 5 years now (only seriously for 2 years, though) and I’m still not at the point of generating a full-time livable income from it, although I’m getting close.  That said, the internet is still young enough that online money making opportunities are not difficult to find if you know how to find them.  Don’t expect to retire this time next year, but if you work intelligently and consistently at it for 4 or 5 years I see no reason why you couldn’t easily make 6 figures online.  For an older example of how I have made money online in the past, check out my posts on creating online passive income and my niche mini site case study.  I no longer use this method myself because I have since found more lucrative methods, but it does work and is a great way for beginners to learn the ropes.

3.)  Bonds And Bank Certificates Of Deposit

It would be difficult to think of a more boring investment than a high yield CD, but when it comes to your money, the less excitement the better.  Short-term investment-grade bonds and FDIC-insured CD’s are safe, convenient, and as close to a sure thing as you’re likely to get these days (one worries even about treasuries lately) but their downsides should be obvious:  relatively low yields and no inflation protection.  If you invest $1,000 in a 5 year CD, you will get back exactly $1,000 in 5 years.  Meanwhile, the cost of living will have gone up, maybe significantly.  That’s why I really prefer:

2.) Income-Oriented Mutual Funds

There are literally hundreds of decent income-focused mutual funds out there (most balanced funds qualify).  Vanguard Wellesley Income, Vanguard Equity Income, even Vanguard STAR Fund are just a few I recommend.  The really cool thing about these income funds is that if they contain stocks, they have built-in inflation protection.  Since corporate earnings tend to rise over time with inflation, so to do corporate dividends.  Thus, provided you don’t spend down principal, you should get a modest raise most years.  Can’t beat that.

And The Best Income Producing Asset Is…

1.)  Immediate Annuities!

Okay, this one is totally a cop-out and they aren’t for everybody, but you can’t deny immediate annuities are among the finest income producing assets around once you’ve reached retirement age.  Why?  Because you get a guaranteed monthly income stream and what’s more, you get to know what it will be before buying.  Yields on immediate annuities are usually significantly higher than bonds, CDs, or practically any other income-producing asset.  The downsides are that you have to pay extra for inflation protection and are exposed to non-trivial financial risk if your insurance company goes bankrupt.  I would advise anyone considering an immediate annuity to split their money amongst at least 2 or 3 different insurers to hedge that risk and remain below your state’s annuity protection limits since most states have an FDIC-like guarantee for income annuity products:  find out what yours is.

The same thing happened to millions of families in the recent real estate bubble.  Everyone thought home prices would continue to rise so they bought more house than they could afford and banked on the possibility of selling it at profit if they couldn’t make the payments.  Unfortunately, real estate values plummeted instead and these families were left with upside down loans that they had no hope of paying and if they tried to sell the house they would have to come up with several thousands of dollars just to get out of the house.  This is really the problem with the real estate crisis, people owe more on their homes than they can hope to sell them for so they are stuck.

Many lending institutions are starting to realize that it would be better to get some payment for the home instead of nothing so they are starting to restructure the loans.  Japan had this same problem and they have dealt with it by extending the life of mortgages.  Now it is not uncommon to obtain a 50 year mortgage and there are even ones as long as 99 years.  Of course the lending institution need some guarantee the property will hold its value so these would not be available for anything other than well constructed, stick built homes.  But if the structure qualifies it can decrease the payments while the owner waits for prices to come back in line.

Another determining factor in choosing an asset allocation is your risk tolerance.  If a person has 100% of their portfolio in stocks, and we have a 25% correction, then the value of their retirement fund just lost $25 for every $100 invested before the decline.  Had their assets been split evenly between stocks and bonds then he or she would have only experienced a 12.5% loss due to the stock market and probably would have seen an increase in the value of their bond holdings. Also, when a major correction occurs, the people who are heavily weighted to stocks are more likely to get scared and pull out completely because of the large short term percentage loss.  This locks in the loss with no hope of rebounding as future gains increase the value of stocks again.

What About Non-Traditional Assets?

The theory of asset allocation is very well known and is a corner stone of almost every financial retirement plan.  The downside to having a large portion of your assets in safe investment vehicles, of course, is that you have less up-side potential. Since conventional wisdom holds that the more you have in stocks over long periods of time, the better you will do, it is important to deftly walk the thin line between risk and reward.  One idea that is gaining more traction is to look at alternative asset classes to fill in the gaps.

An interesting point:  many experts argue a person should factor in Social Security payments on the bond side of your asset allocation.  While not everybody agrees, it does make a certain amount of sense.  Your Social Security benefits are an obligation to pay just like a bond is.  Thus, unless the federal government goes bankrupt (which is possible albeit unlikely) these funds will be paid out.  This means you can have more money allocated to stocks and still be prudent, giving you a larger upside potential from the equities.  In theory, at least.

Could this logic apply equally to passive income from an online business opportunity?  If you set up a business that provides a steady cash flow, then in effect you have a bond-like stream of income.  I am not talking about future earnings from an actively operated business (which entail plenty of risk) but more in terms of passive income streams like those from rental properties in the brick and mortar world.  The more income you have from alternative sources, the less you will eventually need from your portfolio, increasing your ability to take risk if not your need to do so (an important distinction).

There are many paths to Jerusalem, and many ways to diversify your portfolio than just with stocks, bonds, and cash.

• The next Microsoft might get sued by the old Microsoft, forcing you out of business
• The commercial real estate market might crash again, taking your REIT dividends with it
• Google might stop sending lucrative search traffic to your blogs
• Your next stock pick might turn out to be a dud
• The market might be flat for the next 10 years

Any one of the above so-called passive income streams could stop producing at any moment.  If you rely on Google for 70% of your online revenue like I do (I know, I’m working on it), one shift in the rankings could wipe out a sizable portion of your income (it’s happened to me at least twice).  Any one or even combination of two of the above strategies is unstable at best.  But imagine if you had 7, 8, even 15 different passive income streams, none accounting for more than 15-20% of your total income?  Even if your business crashed and burned, you’d be able to pay the mortgage.  Even if your financial stocks cut their dividends in half, you’d be able to eat.  The value of building defensible passive income streams is obvious.  Here’s how to build them.

What Do We Mean By Defensible?

A defensible passive income stream is one that doesn’t require a lot of ongoing work to maintain but that isn’t overly reliant on any one outside entity (i.e. an entity you don’t control) in order to function.  A portfolio of 10 or so income-producing blogs on different topics you post to a few times a month in your spare time can be an excellent defensible passive income opportunity, especially if no single source of traffic (i.e. Google) accounts for the majority of your traffic.  One or two blogs on the same or similar topics that receive 70% of their traffic from Google are not defensible.  While the search-dominant blogs will probably be much more profitable on a per-visitor basis, the spigot could disappear at any time without warning.  It’s happened to me, and it wasn’t fun.

Examples of Defensible Passive Income Streams

Note:  By “Passive Income Streams” I don’t mean income sources that don’t require any work to maintain, merely sources where the bulk of the effort comes at the beginning.  If I have to spend 40 hours to get a website up and running or make a real estate deal but only 2 or 3 hours per month maintaining it, I consider that a relatively passive income source.

• Broadly-Diversified Total Market Index Funds - These funds tend to yield less income than their income-focused cousins, but their dividend payouts are generally much less susceptible to market shocks.  Remember that income funds focused on the Financial Sector would have seen their payouts decrease dramatically last year while total-market investors would have been fine from an income perspective (although they would have lost principal).  While hassle-free and extremely reliable, this is probably the least lucrative passive income stream around so it should probably be the last you tap into.
• Your Own Small Business – Getting into business for yourself is risky, tis true, but at least you are the primary determinant of your own success or failure.  If something isn’t being done how you want it to be done, you can change it.  Okay, so this probably isn’t the most “passive” of income sources, but controlling your own destiny is the key to building defensible cash flow.  Starting your own business is also the quickest way to generate are large income (if things work out).
• Community-Driven Websites - Online properties that generate their own content such as forums are often low-maintenance cash cows for their owners.  Community focused blogs, while a bit more work, can be equally lucrative.  You would be shocked how much money a well-optimized blog can pull in.
• Well-Maintained Rental Properties – While perhaps not as lucrative as running an operating business or popular website, investing in quality rental properties is a great defensible way to build a defensible income.  True, the rent you are able to charge is partly determined by the local rental market, but you also have the ability to make shrewd improvements to wring the highest possible rent from your property, even in a down market.

Examples Of Passive Income Streams That Are Not Defensible

Non-defensible passive income streams can be a great boon.  By all means, if you see a lucrative opportunity, take it, but these income streams probably won’t last forever and shouldn’t be relied upon.  They can be a great source of cash to invest in more sustainable ventures, however.

• Time- or Trend-Dependent Markets – The Obama Chia Pet was a brilliant idea and probably made somebody a lot of money, but its days are obviously numbered.  In fact, the novelty has probably already worn off.  I wonder how quickly sales dropped off after the inauguration?
• Sector- Or Income-Focused Mutual Funds – Yes, REIT funds, Financial Sector funds, and equity income funds are all great sources of passive income, but the financial crisis taught us the perils of being too concentrated in any one sector of the market.
• Niche Websites With No Community Component – As lucrative as they can be, niche mini sites depend heavily on the search engines for traffic.  One false step and your site will be dead in the water.  Building dozens of sites on a variety of different topics helps to mitigate this problem somewhat, but you’re still walking on thin ice if this is your only strategy.
• Any Other Income Source Dependent One A Small Number Of External Entities – Any income source dependent on a single external entity (Google, commercial real estate, etc) is bound to rise and fall with its dependency.  This is fine if you spread your bets around, just be aware your REIT dividends are far from secure.

Finally, The Key To Financial Security:  Compounding

I bet you saw that one coming, didn’t you?  Einstein was right:  compound interest truly is the 8th wonder of the world.  Consider the following (entirely realistic) example:

Assume you toil for a few months on the internet and manage to get to where you can reliably generate $100 per month in passive income.  Nothing special, but it’s a start.  Now suppose you reinvest that $100 every month into new passive income streams (or into reinforcing your existing streams) and are able to increase your monthly passive income by 50% each year.  This is not at all difficult to do, when you think about it.  After a year of hard work, you would be earning approximately $150 per month.  After two years, $225 per month, and so on.  But look what happens after 6, 7, 8, 9, or even 10 years!

• 6 years – $1,139 per month!
• 7 years – $1,708 per month!
• 8 years – $2,563 per month!
• 9 years – $3,844 per month!
• 10 years – $5,766 per month!

After just 10 years of continued effort and reinvesting your alternative income, you would be earning just under $70,000 per year.  What’s more, if you’ve done things right you’ll only be working 10 hours or so per week to generate that income.  What would you do with an extra $70,000 per year?  Could you retire?

But Most People Will Fail

Let’s face it, most people will fail to generate long-term financial security using this or any other method.  Why?  They won’t stick to it.  Or worse, they won’t even get started.  How many of you would give up after 2 years of hard effort if you were only making a measly $225 per month?  I’d guess 99%.  Life is a game you are practically guaranteed to win, if only you keep trying again and again over the long hall.  But most won’t.  Most will fail once and move on to something less damaging to their ego.  Will you?

$100 monthly to start then increase by 50% each year

That said, I have had some success in the passive income arena.  There is one passive income opportunity in particular I can recommend, and another semi-passive opportunity I endorse if you’re willing to put in the upfront effort. I’m not saying there aren’t other legitimate sources of passive or semi-passive income out there, but if there are I’m not aware of them or at least haven’t tried them out.  Feel free to leave suggestions in the comments!

The Ideal Passive Income Opportunity

The ideal source of passive income, of course, is portfolio income.  As you may recall, dividends from mutual funds occupy the top 3 levels of the 8 levels of passive income, meaning they are very easy, effort-free income sources.  All you have to do is pick a fund (equity income funds are especially attractive for this) and write a check.  The downside, of course, is that you have to save up a substantial sum of money in order to realize a significant income using this method.

Still, for those of you with a lot of idle capital, switching to an income-oriented portfolio may be the beginnings of your path to financial freedom.  To be honest, this is probably the only truly passive income opportunity I’m aware of.  All the others require at least a little effort.

Semi Passive Income Opportunities

The best semi-passive income opportunity I’m aware of to generate passive income online is to create niche mini sites.  If you do it yourself, these sites take anywhere from 10 to 30 hours of work (or as little as an hour if you outsource everything) and can be expected to reliably generate around $100 a piece on average once you’ve got the hang of it.  Obviously, some niche sites have much greater profit potential than others, but in my experience your winners and losers will tend to average out to around $100 per month in the long run.

The beauty of  niche sites is that once you’ve set them up, they can generate income for years to come with virtually no work required on your part.  There is one caveat to this, however:  you’ve got to build your sites around evergreen content.  That is, your sites should be about topics that will always be relevant.  For example, teenagers will be getting acne and searching for ways to clear it up until the end of time.  The cash for clunkers program, on the other hand, lasted just a few short months.  Which do you think will prove more profitable 5 years from now?

If you work diligently, you can easily build two or three niche sites per month so that in a year’s time, you’ll be generating anywhere from $2000-4000 per month in internet income without any additional work on your part.  Of course, there is a learning curve and you likely won’t do anywhere near that well your first year, but I’d be willing to bet you could do even better your second if you stick with it.

To that end, I’ve put together a short list of mutual funds ideally positioned to yield attractive cash returns going forward.  They may not be the top-performing funds in any given year, but if passive income in the form of cash flow from your investments is what you’re in the market for, these funds will deliver.  All of these funds have significantly below-average expense ratios (investment costs matter, after all) and where possible, I’ve stuck to index funds.

You can research all the mutual funds mentioned here for yourself in detail by signing up for a free Morningstar account and entering their ticker symbols into the search box at the top of Morningstar’s site.  I highly advise you to do your own homework before making any investment decision.

All figures are current as of 7/15/2009.

Top Income-Producing Funds

Vanguard Equity Income (VEIPX) – The Vanguard Equity Income fund currently yields 4.36%, which is extremely impressive for an unleveraged, all-equity mutual fund.  Though actively managed, Equity Income sports an expense ratio of only 0.30%, in typical Vanguard style.  Over the last three years, Equity Income has been a bit less volatile than the broad stock market and lost only 31% of its value in 2008.  That may sound like a lot, but remember this is a value-oriented fund and most value funds traditionally invest heavily in the financial sector.  Compared to its peers, this fund performed admirably.  Going forward, this fund should benefit from any economic rebound nicely and pay a handsome income in the meantime.

Vanguard Wellesley Income (VWINX) – The Vanguard Wellesley Income fund is one of the most successful balanced mutual funds of all time.  Founded in 1970, it has to crank out average annualized returns of 9.94% despite an extremely conservative asset allocation consisting of only 40% stocks and 60% bonds and it’s done so with volatility less than half that of the overall market .  It currently yields a healthy 5.13% and costs only 0.25%, which is a bargain for management of this caliber (it’s managed by legendary Wellington Management).  It’s also one of the few funds around with 10-year returns averaging over 5% per year and lost less than 10% of its value in 2008.  Expect steadily-rising payouts and relatively smooth sailing with this one.

Vanguard REIT Index (VGSIX) – This is bound to be a controversial recommendation considering the recent debacle in the real estate market, but real estate has been and always will be an attractive asset class for the income-oriented investor.  The Vanguard REIT Index fund currently yields 6.06% and despite recent troubles, sports a solid 10-year average annual return of 5.31%.  Do I recommend you invest the majority of your portfolio in real estate?  No.  But a 10-20% allocation seems prudent.  Historically, few asset classes will yield as much current income as real estate.

Vanguard High-Yield Tax-Exempt Municipal Bond (VWAHX) – This is the only bond fund on the list because it exhibits an extremely attractive risk-reward profile going forward, which is tough to find among bond funds right now.  It currently yields 5.03%, which is the equivalent of 8.15% for investors in the 35% federal tax bracket, 6.98% for investors in the 28% tax bracket, and 6.7% for investors in the 25% tax bracket.  And the fund didn’t have to take on too much risk to get these yields, either:  its average credit quality is A, which is just below the middle of the investment-grade rating band.  True, the fund will be a bit interest-rate sensitive due to its 7.43 year effective duration, but that’s not something that should concern most income-oriented investors.  After all, we’re after steady income here, not capital gains.

As mentioned before, you can and should research all the mutual funds mentioned here for yourself in detail by signing up for a free Morningstar account and entering their ticker symbols into the search box at the top of Morningstar’s site.  I invite you to do so before making any investment decision.

Choosing A Niche

The first order of business is to select a niche to build your mini site around.  There are two schools of thought here:

1. Find a niche with low competition and relatively high profitability regardless of whether or not you enjoy the topic or even know anything about it.  Web entrepreneurs following this pattern often rely on sheer volume of sites to build their income.  They build a small site (outsourcing content creation or BSing it) and move on to the next idea.  If you build 100 different sites, some of them are bound to be profitable.
2. Find a niche you enjoy and are knowledgeable about.  Even if it’s not the most profitable topic to build a site around, focusing on a topic you enjoy will make it seem much less like work and more likely you’ll keep at it for the long haul.  For new web entrepreneurs without the skills to reliably sniff out profitable niches with low competition (like me), I think this approach makes much more sense.

For more on choosing profitable niche topics, check out the following resources

• How To Choose A Niche Topic For Your Blog at Problogger
• How To Find Profitable Niches at The Unofficial Adsense Blog
• How Do I Find A Profitable Niche For Affiliate Marketing at eHow

Do Keyword Research

In all honesty, keyword research is something that comes with practice.  I could tell you exactly how I do it, but you probably won’t really “get” it until you try it out for yourself.  Since I’m still not all that great it it, I’ll refer you to an excellent free ebook written by a guy named Josh Spaulding, an ebook I use myself whenever I build a new site or need to do some keyword research.  It’s not easy, but I have seen dramatic results applying the simple techniques he teaches to target specific keywords on this blog, the Spanish blog, and a few other sites I dabble in.

One free tool I can whole-heartedly recommend is Google’s AdWords Keyword Tool.  Of course, this blog and my Spanish site have accumulated enough links and search engine juice over the year(s) that I can rank for keywords far out of the league over the average new site but if I had to start from scratch, I would target keywords with between 1000-1500 searches per month, according to the Google tool.

Create Unique And Useful Content

Here’s where I feel many make-money-online gurus lead you astray.  Many of them advocate sourcing free content from article directories such as EzineArticles or spinning Wikipedia articles just enough to fool Google to post on their site.  Personally, I feel that strategy is a recipe for disaster.  You may fool the search engines temporarily, but you have to believe they will one day grow wise to your shenanigans and turn off the spigots, leaving you with dozens of worthless sites.

By far the most effective way to attract links and build traffic over the long haul is creating a ton of free, valuable content.  Some examples of this from my Spanish site are the free Spanish lessons, pronunciation guide, verb tutorials, conjugation charts, learning guides, et al.  If you can create something unique, you stand to gain a lot of attention.  You don’t have to break new ground to succeed, however.  If you have a knack for distilling complicated topics into simple, easy-to-understand steps or gathering disparate knowledge from all over the net into a single place, you can do just as well.

Monetize Your Site

Now that you’ve created tons of valuable content, you’ll need a way to capitalize on all that quality traffic and turn it into revenue.  Google AdSense is the easiest most popular way to monetize almost any website and that’s how I got my smart, but over time I discovered I could make much more money promoting products created by somebody else.

For Learn Spanish On Your Own, that comes in the form of product reviews for various products sold on Amazon.com, particularly high-dollar Spanish audio learning programs.  It’s no accident I mention the virtues of various high-quality commercial products at every opportunity.  My Rosetta Stone reviews and Pimsleur review pages are two of my biggest earners not only because of their extremely high quality and good reputation among learners, but also because I spend so much effort promoting them.  Note: Do not promote a product you haven’t personally used and don’t honestly recommend just to make a quick buck.  Your lack of knowledge and personal experience will show and readers won’t buy through your site.  Furthermore, you risk seriously damaging your reputation if you aren’t careful.  Never sell a product you don’t believe in.

Promote Your Site

There are many ways to promote your site, but they all come down to attracting links from other sites.  Article marketing is my promotional method of choice, although you could use any marketing technique you’re comfortable with.  Article marketing boils down to writing articles for distribution on article sites like EzineArticles, Ideamarketers, etc.  These sites allow you to include 2 or 3 links back to your site at the end of every article in an attempt to entice readers to click through, providing an easy source of traffic.  Since you get to control the links’ anchor text, you can use article marketing to target promising keywords for SEO purposes.

Rinse And Repeat

While you’re unlikely to make more than $100 or so per month from any one site, the key here is volume.  Three or four years of consistent effort should be enough time to build dozens if not hundreds of different sites.  Even if most of them never earn you more than $2 per day, their cumulative earnings can become significant over time.  Fifty sites earning an average of $2 per day yields $100 per day, or $36,500 per year in extra income, and that’s a conservative example.  Certainly you will have some sites which earn considerably more than $2 per day even if you have many that don’t.

The point is, several years of dedicated effort is likely to pay huge dividends in the future.  It’s conceivable that 3 or 4 years building niche sites could generate enough cash to achieve financial independence, or at least enough to quit your job and focus on your internet projects full-time while you build your income.  Or if you prefer, you can simply save and invest the extra income for retirement.  Even an extra $5,000 per year over a 30 year career can make a huge difference in your retirement nest egg.

For all the rhetoric surrounding passive income, there are relatively few sources of alternative income that are truly passive.  My definition if “truly passive” is simple:  it’s okay that an alternative income stream requires a bit of work upfront to get the ball rolling, but once an income stream is up and rolling, it should require absolutely no further intervention.  A few common sources that fit the bill are investments in things like equity income funds, index funds, or even CDs at the bank, but these income streams all requite large amounts of capital to get started.

Passive Online Income Fits The Bill

Income-generating websites are a good fit for two important reasons:

1. They often require very little if no on-going work once up and running (fulfilling my primary requirement)
2. The upfront capital requirements are negligible:  $10 for a domain name and $6 per month for a web host and you’re good to go.

Now it’s important to note I am not talking about blogging, here.  Blogging is a huge on-going commitment and while it probably has the greatest long-term profit potential, it most certainly isn’t passive.  I’ve finally reached a point where I earn a respectable per-hour income from my blogging activities ($15-20 per hour, roughly), but for months and months in the beginning I worked for literally pennies per hour.  It will probably be another year or so yet before my per-hour income from blogging reaches a level equal to that of my full-time job (if it ever does).

Niche Mini Sites For Passive Income

A niche mini site is a small, tightly focused website designed to be the ultimate resource for its niche.  Strong, focused content is useful for attracting inbound links over time, which will increase your site’s search engine authority.  In my experience, it takes around 20-30 hours to produce a quality mini-site capable of producing a decent income of between $100-200 dollars per month.  That may  not sound like much, but look at it this way:  $100 per month would generate a yearly income of $1,200.  If it took you 30 hours to build, launch, and market your new site, that $1,200 equates to $40 per hour in the first year alone.  Fortunately, mini sites in most “evergreen” niches like Spanish, finance, or acne can have a profitable life-span of many years, if not decades (who knows where the internet will be in 20 years?)  Spending just 10 hours per week working on web projects should be sufficient to launch approximately one mini site each and every month, or 12 sites per year, yielding a monthly income of between $1,000-2,000 per month after the first year.  Could you use an extra $2,000 per month?  I sure could.  And please believe me when I say these numbers are extremely obtainable if you work hard at it.

A Mini Site Example

My Spanish language site, Learn Spanish On Your Own, is an example of a niche mini site focused on the tools and techniques required to learn the Spanish language.  As you can see, it’s not much to look at (it was the first money-making website I ever created), but is full of valuable content such as grammar tutorials and a step-by-step learning guide from beginning to advanced Spanish.  The site is sprinkled with contextual advertisements and product reviews (the site’s real money-maker) to generate income.  All told, this site took me approximately 40 hours to build (it was my first, remember) and currently generates around $300 per month.  While the site isn’t entirely passive (more on that later), it requires very little on-going work for me to maintain that level of income.

You may have noticed I added a blog to the site about 6 months ago.  At that point, I was reliably generating around $100 per month from the site and realized I had just scratched the surface of its profit potential, so I made the decision to invest more time into the project.  You will probably have a similar experience:  some of your niches will prove to be more profitable than others and you may decide to devote more time and resources to those successful projects at the expense of the failures.  While that particular website won’t be “passive” anymore, you will probably be able to dramatically increase that project’s profits with only a moderate amount of work.  To me, that’s the real beauty of the multiple-niche-mini-site mentality.  If you build 15 or 20 sites and they average $100 each without having to spend any additional time on them, that’s great!  More likely, however, you’ll discover some of your sites generate far greater income than the average and others generate very little.  Building niche sites is a great way to test the profit potential of many different unrelated niches with no financial risk.  Then, you can focus on the projects most likely to increase your income substantially.

Tomorrow, I’ll give more details on how to go about building a niche mini site, using Learn Spanish On Your Own as an example.