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Passive income is defined as "earnings an individual derives from a rental property, limited partnership, or other enterprise in which he or she is not actively involved." In addition, "passive income does not include earnings from wages or active business participation, nor does it include income from dividends, interest, or capital gains." As such, passive income cannot be achieved from active stock trading or from dividends received from the same. Such income obtained in this way is known as "portfolio income." Now that passive income has been defined, the question becomes, how does you set up a stream of passive income?

It is important to note that passive income in not entirely passive. You have to contribute some sort of actual input in order for your passive income stream to be created and as such, passive income is more than just merely collecting rents. As stated in the definition, passive income can be obtained from rental income of investment real estate. However, in order to obtain rental income, you have to own some sort of interest in the rented real property. This means that you have to contribute cash to purchase the property, the time to conduct due diligence on the property or to find the same, and/or knowledge or education in negotiating a price suitable for investment and in finding a tenant to occupy the property. Therefore, although your involvement in the rental property after it is leased is minimal, there are some necessary actions that need to occur in the beginning.

The easiest route to take in order to set up a passive income stream is by investing in real estate. The advantages of investing in real estate is that on average, your investment property will appreciate, you will obtain a monthly cash flow from rental income, and there are some tax advantages when you decide to sell the property. However, there are some disadvantages to purchasing real estate.

One of the biggest disadvantages of buying real estate is the cost. You could easily spend hundreds of thousands of dollars in order to purchase one property. Additionally, if you borrow the money, you have to pay the mortgage out of your own pocket for every month that your property is not rented. If you are diligent, you can avoid or at least minimize owning a vacant property.

Regardless of the advantages and disadvantages, if you purchase real estate and rent it out, the rental income that you collect is considered to be passive income. Therefore, if you want to set up a stream of passive income, buy an investment property and rent it out. This is easier said than done. However, if you educate yourself and maybe even partner with others that have experience with this kind of investment, you should be able to find a good investment.

Learn more about this author, Marco Angioni II.
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