The Myth of "Passive Income"

“I’m glad you could make it!” he said. “I’ve got an idea I want to run by you.”

I’d just arrived at a birthday party for one of my daughter’s kindergarten friends. If you’re a parent, you understand the kind of party I was at. It was one of those “invite everyone from your child’s class” parties where the parents stand around and make small talk with each other while our kids consume all the junk food and juice boxes we’d never feed them at home.

Since becoming a father, these birthday parties have taken over my weekends, and the parent who was excited to see me was a father I’d been chatting with during a similar party a couple weeks prior. I felt a bit awkward because he was excited to see me, but I couldn’t remember his name. However, he clearly remembered me. And, judging by his statement, I knew what was coming next. He wanted my feedback on a business idea.

This kind of thing happens a lot. When people find out I teach entrepreneurship, they love telling me their business ideas. And I don’t just mean typical entrepreneurs pitching their venture-style tech companies. I mean my neighbor, my hairdresser, my bartender, and even, one time, my mailman.

I don’t mind. If I’m being honest, I enjoy seeing the entrepreneurial spirit in so many people. Plus, I enjoy watching the trends of what people think are “good businesses.” For example, in the early 2010s — toward the start of the smartphone era — I heard lots of ideas for phone apps. You wouldn’t believe the number of people planning to hire some “kid” for a few thousand dollars to build an app that was going to become the next Angry Birds,

These days, I hear plenty of ideas for IoT gadgets. Apparently it’s as easy as sending your design to China, and, a few weeks later — voila! — you’ll have yourself the next world-changing wearable you can start selling on Amazon or Shopify and make millions.

This time, my fellow parent wasn’t pitching an app or an IoT device. Instead, he wanted to tell me about a real estate business. His plan was to pull together a group of people and start investing in rental properties near college campuses. “We’ll never have trouble finding renters,” he argued, “And I figure if we can get 20 or 30 properties over the next five years, we’ll have ourselves a nice stream of income without having to do any work. Easy money, right?”

Over time, I’ve learned that these types of situations aren’t the best moments to try to teach people about entrepreneurship. Besides, pointing out a bunch of flaws in someone’s idea makes me seem like a jerk. So I did what I usually do: I nodded politely and said, “Yeah… that sounds interesting.”

But, in my head, I was thinking: Are you crazy? How could managing 30 properties filled with college kids not create any work? That sounds like a horrible way to try to make “easy money.”

Even crazier than his idea is how often people pitching me their business ideas have similar expectations. They think building a business is easy, and they think once a business is built, it will run itself while they get rich. What they don’t realize is that they’re falling for the biggest myth in entrepreneurship: the myth of passive income.

Passive income, for those who don’t know, is a term used to describe a type of business that generates money without requiring effort. The entrepreneur does whatever the entrepreneur wants — completely unrelated to the business — while money continues pouring in by itself.

Sounds magical, right? And that’s exactly what passive revenue is. It’s magic. It’s make-believe. It’s not real. It doesn’t exist.

Take, for example, this article you’re reading right now. By some measure, I suppose we could describe an article — like this one — as a way of generating passive income. On certain platforms where it's published, I get paid (fractions of a penny!) when people read it. Since you’re reading this article after I’ve finished writing it, that means I might be getting paid without having to do any work. Woohoo! I’m rich!

Except there’s a problem with describing this article as passive income: this article didn’t write itself. I wrote it, and that wasn’t a passive act.

In addition, before writing this article, I wrote lots of other articles. And before those articles I wrote blog posts, books, essays, midterms, and reports all the way back to when I was first learning my ABCs in elementary school. Each one of my previous writing experiences taught me something that helped me create the article you’re reading right now, and none of that work was passive.

So even though you might be reading this article while I’m not actively writing it, getting this article in front of you — just like any product or service someone ultimately consumes — wasn’t passive. It took years of work. The same is true for every type of business, including the real estate business I was being pitched during a child’s birthday party.

I realize businesses can seem like great sources of passive revenue before you start doing the work of building them. But passive income in entrepreneurship is a myth. Once you start doing the work of creating a business, you’ll quickly discover that products don’t build themselves, customers don’t sell themselves, and companies don’t run themselves. All those things require constant effort.

In other words, if you’re searching for a way to make money without doing any work, I suggest you put your money in a mutual fund, because there’s nothing passive about building businesses.

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Aaron Dinin teaches entrepreneurship at Duke University. A version of this article originally appeared on Medium, where he frequently posts about startups, sales, and marketing. For more from Aaron, you can also follow him on Twitter or subscribe to Web Masters, his podcast exploring digital entrepreneurship.