Today I want to talk to you about Passive Losses. Yep, you’ve heard me right. Just like Passive Income is that profit you make on a regular basis with very little maintenance effort Passive Losses are those losses you take from those ventures which are supposes to be generating Passive Income.
When I talk about Passive Losses some people look at me surprised. It seems to be a widespread misconception that the Passive Income business model can only generate positive outcomes, or in the worst case It won’t generate anything at all, but the truth is it can generate losses too just like any other business model.
I’m not saying this to try to scare anyone, but I feel it’s kind of important to understand the risks of what you are getting into. So let’s take a look at a few scenarios in which some Passive Income revenue streams might turn into Passive Losses.
Common causes for Passive Losses
There are many ways in which your passive income portfolio can lose money. Here I would like to go over some of the most common reasons for passive income loses so that we can all see how there really isn’t anything magical about passive income, it’s a business model with its strengths and flaws just like any other.
This is the simplest of the losing situations to understand. All passive income revenue stream have some sort of overhead expense.
If your revenue streams come from the brick and mortar world, then this is obvious. If you have a franchise you’ll have to pay for rent, bills and salaries. If you are in the real estate business your properties will have to pay taxes regularly, they will also need to be maintained, etc.
If your revenue streams come from the digital world your overhead expenses might be smaller, but still, if you have a website, you’ll need to pay for your hosting and domain name at the very least. Even if you sell stock photography or any other sort of intellectual property on a third party platform you’ll still need to invest a lot of your time into taking those photos, writing that ebook, coding that plugin… and remember, time is money.
Either way, no matter how small your overhead expenses might be or in which form they come (cash or time). If you don’t make enough sales or generate enough revenue to cover those overhead expenses, you will be operating at a loss.
Stock portfolio fluctuations
If you have a stock portfolio as part of your passive income portfolio you are subject to the market fluctiations. Dividends will be a quite stable source of income; however, the value of companies can change a lot from one day or another. It only takes one good or bad financial report or an internal scandal to make a stock go through the roof or hit the ground.
This is why having a diversified stock portfolio is so important. If you only buy stocks from one company or a small group of them your passive income portfolio will be tied to the fait of those companies, and even though I believe investing in stock is a great long term source of passive income it can play against your passive income portfolio in the short run.
Owning and renting real estate is a great source of passive income. However, if you count the value of the properties themselves as part of your passive income portfolio then you will be subject to market variations just like it happens with stocks.
The real estate market has its ups and downs just like any other market. So a property that’s worth 10 today might be worth 15 or 5 tomorrow based on demand for that kind of property in that particular area.
Even if you are collecting a steady rent from your property, if the market is going down, so is the value of your property and therefore the value of your initial investment to buy that property.
Imagine you have this industrial building which you paid 1MM for and is generating 5K in rent per month. Those 5K are a great passive income revenue stream, but if the market depreciates 10% over a one-year period your building will be worth 900K by the end of the year and you would have collected just 60K from renting it, taking a virtual loss of 40K.
There is nothing magical about passive income, it’s just another business model with its own strengths and weaknesses. And of course you can lose money with a business that generates passive income just like you can with any other business.
It’s also true that the initial investment required to set up many passive income revenue streams is very low thanks to the internet, which makes becoming profitable much easier than it is in the real world. But that doesn’t mean the model is bullet proof and a lot of time and money can be lost if you jump into it without a plan.