What’s Passive Income? It’s Not What Influencers Say It Is.

What’s Passive Income? It’s Not What Influencers Say It Is.

Misconceptions about passive income abound, namely that it’s easy to earn. Luca Alboretti was hoping to make “passive” income by selling products online, but discovered that the amount of work required is a full-time job.Bryan Anselm for The New York Times Luca Alboretti was enticed by the thought of making money in his sleep.

He was looking to supplement his income as a real estate agent in 2018 when he created an online store selling golf products, an idea he had hatched after watching a YouTube video about how to earn $150,000 a year in “passive” income selling salt and pepper shakers online.

“I thought I would wake up to a couple of hundred orders, fulfill them and collect my profit,” said Mr. Alboretti, 28, who lives in northern New Jersey.

He spent about $5,000 on sourcing and testing the golf products, developing a private-label product and paying website management fees. He put in about 10 hours setting up his online store, writing descriptions for each item, communicating with suppliers and marketing his site.

Yet a year later, Mr. Alboretti had made only $300 in sales. He closed the store and began using the Instagram page he had created for it to share humorous real estate content he made instead. “I worked hard to get my couple of hundred followers and didn’t want them to go to waste,” he said.

That morphed into ActuallyAgents , a multiplatform social media brand that is known for its clever memes on Instagram and free educational resources for real estate professionals and lead generation services for brokers in the United States and Britain.

ActuallyAgents has become Mr. Alboretti’s full-time job. “The courses, videos and social media content don’t create themselves,” he said. “None of this is passive.”

Search “passive income” on YouTube, TikTok or Reddit and you’ll find a wealth of videos by people claiming they make thousands of dollars each month this way — whether they sell courses, e-books or other products online; offer property on short-term rental platforms like Airbnb and VRBO; or even buy and maintain vending machines in high-traffic buildings. The allure: Theoretically, it’s easier than a traditional 9-to-5 “job.”

“We live in a passive-income-obsessed culture,” said John Boyd, founder of MDRN Wealth , a financial planning firm in Scottsdale, Ariz.

This preoccupation with making money effortlessly, he said, is fueled by investors in their late 20s to early 40s, who are understandably frustrated that they aren’t in the same financial position their middle-class parents were at their age and are looking for easy ways to catch up. But investing several thousand dollars to buy a vending machine that pays out just a few hundred a month, or overextending yourself by taking out a 10-year mortgage to buy a rental property, isn’t the best way to create long-term wealth or to save for retirement, Mr. Boyd said.

While many people claim to be making passive income, particularly on social media, only 20 percent of American households earn such income — either through dividends, interest or rental properties, according to Census Bureau data . And the median amount that those households make from those sources is $4,200 a year, according to bureau figures.

So, what is passive income?

The Internal Revenue Service defines it as trade or business activity that you don’t materially participate in, meaning you aren’t involved in its operations on a continual and significant basis. However, the I.R.S. does consider rental real estate activities a source of passive income as long as the property owner isn’t a real estate professional.

Yet there is much confusion about what qualifies. What people often call “passive income” is income that isn’t dependent on a single paycheck or employer, said Kevin J. Brady, a vice president at Wealthspire Advisors in New York City. In some cases, without understanding the difference, people are talking about leveraged income — putting in time and effort in advance to earn recurring profits from selling, say, an online course or an e-book — or additional revenue from a side hustle (that is, more work).

Although the I.R.S. recognizes renting property as a way to create passive income, people often underestimate the time and money needed to buy and maintain that property. Unexpected repairs and expenses can eat into rental profits. As the property owner, you’re on the hook to pay property taxes and insurance costs, and if the property is in another state, you might need to pay someone to manage it.

“What will you do if you’re hoping that tenants will pay the monthly mortgage on your rental property, but […]

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