Home Blog Personal Development

3 Key Lessons for Avoiding The Dark Side of Passive Income

Michael Blank
3 min read
3 Key Lessons for Avoiding The Dark Side of Passive Income

When I first read the book “Rich Dad Poor Dad,” it changed my financial goals drastically.  I went from trying to build up a nest egg for retirement to pursuing passive income. To this day, I believe that it is a worth while effort, and I continue to make that my financial goal.

We know that once passive income equals our living expenses, we are financially independent. At that point, we can quit our J.O.B. and do the things we really want. Even if it takes ten years to achieve, it’s worth it.

Passive Income. It’s what we want. It’s good.

But no one ever told me there is a dark side to passive income.

Here are some lessons learned over the years.

Related: The Flywheel Effect: Building Your Business into a Passive Income Machine

Lesson # 1: Don’t Become Complacent

I got into the restaurant business as a way to launch my passive income career. After opening several pizza restaurants and hiring someone to run the restaurants for me, things stabilized. I met with my operator over lunch once per week to review the numbers and discuss opportunities and challenges.

Weeks went by, then months and, eventually, several years.

If you’re familiar with the short story “Who Moved My Cheese,” then I’d say I had grown quite accustomed to my daily cheese and came to expect it. I didn’t realize that the cheese was getting old and smelly, and that it was slowly dwindling.

The income of the businesses slowly declined year over year. I didn’t realize it until one day we bounced two checks in two weeks. We were having cash flow issues.

This rattled my cage pretty significantly and forced me to get more involved in the restaurants.

The lesson here is: don’t get complacent with your passive income investment!

There is a parallel lesson in the apartment investing world… While you should always strive to have a property manager run your properties, don’t become that absentee landlord. Make sure you interact with your property manager regularly, ask for reports, ask questions, and keep him accountable.

In other words, stay involved.

Lesson # 2: Don’t invest in anything you’re afraid to run yourself

The other dark side of passive income is that you shouldn’t invest in anything you’re not willing to run if necessary.

In my case with the restaurants, I eventually parted ways with my operator. I knew it was the right thing to do, but I also knew I would have a full-time job running the restaurants.

I was depressed for weeks. I DIDN’T SIGN UP FOR THIS!!! It was supposed to be a passive income investment!

I have another investor friend of mine who funded an enthusiastic entrepreneur’s vision of a coffee house. When the entrepreneur defaulted on the note, my friend was suddenly the proud owner of a flailing coffee house. He did what he had to do to liquidate the business. It was certainly not what he signed up for either!

One of my mentors funded an e-commerce business which was highly profitable. But when the owner defaulted on his payments, my mentor took over the site and now runs it himself. My mentor was smarter, though, because he knew this rule of passive income: he wasn’t afraid of running the investment if he had to. In fact, he’s actually having some fun with it.

Don’t invest in anything you’re afraid to run one day.

Related: The Truth About Active Income vs. Passive Income

Lesson # 3: There is no such thing as TRUE Passive Income

Unless you’re investing in savings bonds and CDs, there is no such thing as passive income. Or, at least, you should not treat anything as true passive income because that means you’re becoming complacent.

And complacency is the down fall of every successful entrepreneur. It is to success as good is to great.

I think it’s all about setting the proper expectations. Expect to be active enough with your investments and they will take care of you for a very long time.

I would LOVE to hear your stories about your experience with passive income! Comment below and let’s discuss…

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.