The Ultimate Guide to Passive Income
The Hyperfocused Entrepreneur
August 7, 2023
Read time: 14 minutes
Too busy to read? Watch the video here instead.
Click here to join 1,800+ students unleashing laser-like focus in the Hyperfocus Masterclass.
I freaking hate the words “passive income”.
I hate it because when most people hear those words, they get this mental image of money just flowing into their bank account while they sit on a beach in Bali sipping mai thais.
Underlying the term “passive income” is the idea of “easy money”.
And this is absolutely the wrong way to think about passive income, because the truth is:
There’s NO such thing as truly passive income.
All income, no matter how passive, requires SOME level of effort on your part.
The real question isn’t whether or not your income is passive… but to what degree is your income passive?
Or put another way: HOW passive is your income?
The degree to which your income is either passive or active depends upon a little thing called Leverage.
So, let’s erase this idea of Passive Income from our minds and instead, let’s replace it with a new term that’ll fundamentally change how we approach the money-making game.
I call it:
Leveraged Income
Let’s define our term real quick so we’re all on the same page:
Leverage is the means by which we increase our output per unit of input.
Increasing our Leverage means that we put in the same amount (time, energy, resources), but we get more out (in this case, money).
When it comes to making money there are 4 types of Leverage we have to understand:
- Labor
- Capital
- Technology
- Media
Let’s take it from the top…
1. Labor Leverage
Of the four types of Leverage, labor is by far the least efficient.
Unfortunately, it’s the only one most of us were ever taught how to use (which is why most people are not winning the money game).
Within Labor Leverage, there’s actually two levels:
- Your Labor
- Other People’s Labor
Your Labor, in particular, is the lowest leverage way to make money. This is what’s referred to as exchanging your time for money.
The reason this is so inefficient is because you’re trading your time in a 1-to-1 manner.
For instance:
I used to work at a bike shop and was paid an hourly rate.
For every 1-hour I worked, I received the same amount of money (excluding overtime).
If I wasn’t clocked in, I wasn’t making money.
On the spectrum of active versus passive income, this is just as active as it gets.
The second form of Labor Leverage (Other People’s Labor) is a far more effective way to make money.
See, you can only produce and sell so many widgets in a day which puts a cap on how much you can earn.
But if you can get somebody else to come work with you, then you’re now able to produce and sell two or even three times as many widgets.
Huzzah!
Here’s an example from my own life:
My first business was a window washing company. In the beginning, it was just me and a buddy going around knocking on doors and washing windows.
On a really good day we could maybe get through 3 houses worth of windows.
We’d charge about $15/window and the average house had around 20 windows, so all told that’s $300 of revenue per house, and around $900 a day.
And that’s about the best we could do just trading our time for money.
To break through to the next level, we had to start hiring.
Fast forward a year, and we had a crew of 15 split into 3-squads washing around 6 houses a day and bringing in just over a million in revenue per year.
A number that would’ve been impossible to hit without all those extra hands.
Now, here’s something interesting about Labor Leverage,…
Despite being the most inefficient form of money making leverage, it happens to carry the most status in the general public’s eye.
If you’re at a party and somebody asks about your company, they’ll likely be more impressed if you tell’em you have 1,000 employees rather than just 10.
The crazy part is, that team of 10, if utilizing the right forms of leverage (which we’ll talk about in just a second), might be vastly more profitable than the organization relying purely on Labor.
I’m embarrassed to admit this took me a really long time to figure out.
It wasn’t until I got my first taste of our next form of Leverage that I finally saw the light… and then the game changed entirely.
2. Capital Leverage
The majority of wealth created in the 20th century was done so by financiers like JP Morgan or investors like Warren Buffet.
The idea here is that we treat each of our dollars as though they were a worker. Our goal is to find ways to get that dollar working harder for us than we worked for it.
We’ve got a fancy word for Capital Leverage that pretty much everybody is familiar with…
It’s called Investing.
And this is the form of leverage Warren Buffet had in mind when he said:
“If you can’t find a way to make money in your sleep, then you will work until you die.”
Now, within Capital Leverage, there are actually two levels just like with Labor Leverage.
- Your Money
- Other People’s Money
The greatest fortunes of the 20th century were made utilizing OTHER people’s money, and you can do this too, but we’ll circle back to that in just a second.
First, let’s talk about creating Capital Leveraged Income with your own money.
Now, chances are good you’re probably already doing this.
If you’ve got a 401(k), a Roth IRA, or are just invested in the stock market, bonds, crypto, or angel invested in a tech startup, then you’ve got your money out there working for you.
But there’s a problem with this form of leverage. And that is, unless you’re investing in highly speculative opportunities (like Angel investing in a tech startup), the chances of generating massively outsized returns are low given the amount of risk.
So most people simply take their actively earned Labor Income from a W2 and put it into relatively stable opportunities (like index funds in the stock market) generating around 10% a year.
Now, 10% is great, but you probably only have so much money of your own that you can put to work, right?
Which means if you want to live solely off the fruits of your Capital Leveraged Income, you’re gonna need a really large sum of money.
Let’s break it down with numbers:
If you’re making $100,000/year and want to replace that income with Capital Leveraged Income, then you’re going to need at least $1,000,000(!) generating a 10% annual return.
By the way, it’s highly optimistic to think you’ll consistently earn a 10% rate of return. In reality, you’d probably need closer to $2M of capital to conservatively generate $100k in yearly income. I’m merely using these numbers to paint the picture of just how hard it can be to get to “financial freedom” relying solely on your own capital.
But that doesn’t mean we should just give up entirely on Capital Leverage, because remember, this is how so many great fortunes were created in the previous century.
They did this by leveraging OPM, aka: Other People’s Money.
Now, the great thing about Other People’s Money is that there’s A LOT of it out there and most people lack the time, energy, and knowledge necessary to allocate that capital themselves.
And so they give their money to investment professionals, fund managers, general partners, and founders of businesses for THEM to allocate.
Here’s two examples of using Other People’s Money that my private equity real estate firm utilizes right now.
First, we use the bank’s money by taking out a mortgage for 75% of the purchase price of an apartment building.
Just to use simple numbers, let’s say we’re buying a $1M apartment building. Instead of using $1M of our own money, we go to the bank for financing. They give us a loan for 75% of purchase price, or in this example, $750,000.
They do this because they earn an interest rate on that mortgage of let’s say 5%. Now, here’s the really interesting part… The money that the bank is loaning us isn’t actually theirs…
It’s their depositors’ money.
See, the bank might give people like you and me a 3% interest rate for keeping our money in a savings account so that they can turn around and lend that same money to businesses like mine where the bank can earn 5%. They pay you and me the depositor 3% for our savings account, and keep 2% all for themselves.
And they never even put their own money on the line.
See what I mean about the power of using other people’s money?
Okay, back to the original example with our apartment building for $1M.
So, we got a loan for $750,000, which means we can now buy this building by only putting up $250,000 of our own dollars.
And this a really powerful form of leverage for building wealth because we’re acquiring valuable cash-generating assets despite perhaps not having a full $1M to buy the building ourselves.
Okay, so that’s the first type of Capital Leverage that my company utilizes in acquiring real estate.
But there’s a second form which we use to fund the downpayment, or the $250,000 the bank expects us to come to the closing table with.
This we do by raising capital from private investors or other private equity groups. In exchange for giving us this capital, these investors expect some pretty juicy returns (often north of 15%-20%), which are returns that would be very difficult to generate on the open market.
And this, in a nutshell, is how we’ve acquired nearly $100M of real estate over the past 3 years.
Now, this is a grand simplification of a complex topic. But I wanted to share this because Capital Leverage is one of THE most powerful ways of producing wealth.
The downside is you need to have some highly specialized skills that would incentivize investors and capital allocators to give you their money. But, if you can develop those skills, then the sky’s the limit for your Leveraged Earning potential.
But here’s the thing…
Given the current state of the world, I’m actually more excited about the last two forms of Leveraged Income because the barrier to entry is so low and the potential upside is near limitless.
The first one is:
3. Technology Leverage
Think about Google, Facebook, Amazon, Microsoft, or Apple…
These are some of the most valuable companies the world has ever seen and they were all built on the back of code and technology.
Which is why, I believe the BIGGEST opportunities available to us all are through the world of coding and programming.
The amount of leverage you can generate from a piece of software that’s nothing more than a few lines of code is mind boggling.
A 16-year old who speaks code, has a laptop, and access to the internet, could create an app from their parent’s basement that changes the face of the world.
How crazy is that?
If Capital Leverage was the dominant form of wealth creation in the 20th century, then, so far, in the 21st century, the big winner has undoubtedly been Technology.
And here’s the craziest part of all…
You don’t even really need to speak the language of machines to benefit from this form of Leverage.
Last year I created a digital product using no-code software in a single afternoon. I then turned around and sold that product to hundreds of customers. Each of whom were able to receive the exact same product and experience instantaneously with no additional work from me.
In one day, I sold $20,000 worth of that product at a 98% margin.
That’s a crazy amount of leverage that’s literally available to everybody with a computer and internet access.
Think about how ridiculous that is for a second…
The amount of opportunity available to us right now at this moment in time is something our parents and their parents just never could’ve imagined in their wildest dreams.
But…
Despite how exciting Technology is as a way of generating ridiculous amounts of Leveraged Income, it’s not even the one I’m most excited about.
See, I’ve saved my personal favorite for last, which is the one we’re using right now at this very moment.
4. Media Leverage
Let’s rewind the clock a hundred years…
In 1923, if you had a message you wanted to share with the world, the only options available to you were really the newspaper, books, or radio.
If you couldn’t get one of the dozen newspapers, publishing houses, or radio stations that controlled the majority of distribution at that time to run your story, then your ability to create an audience that knew, liked, and trusted you would depend on you actually traveling town to town to deliver your message.
Fast forward fifty years and now we had television, but still the same problem persisted.
All major media distribution fell into the hands of a few gatekeepers like ABC, NBC, and CBS.
Well, that’s all changed now thanks to the internet and things like smart phones, YouTube, podcasts, and social media at large.
It has never been easier in the history of mankind for people just like you and me to reach a million people with our message no matter how weird or esoteric or niche that message is.
And if you can find people who resonate with your message, and then build an audience or a community around that message, then translating that attention or those eye-balls into meaningful amounts of Leveraged Income is fairly straightforward through affiliate marketing, paid advertising, or just selling your own products and services.
The reason I love Media Leverage the most is because you can utilize it by just being YOURSELF and sharing your personal stories, battles won, and lessons learned.
And the real beauty of just being yourself is that YOU are irreplaceable.
With every other form of Leverage we’ve discussed, YOU can be replaced or disrupted by competitors.
But not when you use Media Leverage to amplify YOUR voice.
Think of Joe Rogan as a perfect example of a person who has built a media empire worth close to a billion dollars just by being himself and distributing his message via technologies that are practically free to use and available to literally all of us.
And the great thing for Joe is there’s only one of him. He can’t be replaced.
Now, creating a personal brand is just ONE way of utilizing Media Leverage, but there are countless others that don’t necessarily require YOU to be front and center.
For instance, one of the previous companies I had a hand in building was Escape Climbing.
We grew that company by putting out awesome educational and entertaining content on Instagram and YouTube, which attracted people to our company (though not necessarily to us as individuals).
And that company is actually a really good example of a business effectively utilizing all 4 forms of Leveraged Income as we had about 15 employees (Labor Leverage), significant amounts of our own capital funding the business (Capital Leverage), we moved a ton of product on Amazon (Technology Leverage), and we did it by spreading our message on social media (Media Leverage).
Pretty cool, huh?
4 Leveraged Income Ideas
Okay, so now that we understand the 4 types of leverage we can use to make money, here’s 4 leveraged income ideas you could start implementing right now to create “passive income”.
First up is exactly how I started my wealth building journey:
1. Services Business
I got my start washing windows, which was actually a great first business because I learned so many valuable skills in a low cost environment.
In particular, you’ll learn marketing, sales, product design, customer service, hiring, training, and fulfillment. If you can master those skills, you’re gonna be unstoppable.
The great thing about a service business is that they often require very little upfront investment.
The downside of a service business is that you’re going to be trading your time for money… at least in the beginning until you’ve reached the scale where you can start hiring.
Okay, so a Services Business is a great way to get started, but it’s not the endgame.
For me, I took the profits from my early businesses and combined it with Capital Leverage to go out and…
2. Invest in Real Estate
There’s a lot of ways to invest in real estate, but my favorite if you’re young and flexible is to househack a multifamily property.
This is where you buy a small multifamily property, something a duplex or a triplex, and you live in one unit while renting out the others to lower your cost of living, pay off your mortgage, and potentially put some cashflow into your pocket each month.
One of the keys to making this work is by using something called the FHA loan, which is designed for First Time Homebuyers who have low credit and not a ton of capital to start out.
Note: this is location dependent and might not work outside the US.
Real estate has made more millionaires than any other investment vehicle for very good reasons. It’s worth putting in the time and energy to learn exactly why that is and then figure out how you can get involved.
But if that’s not your cup of tea, here’s another Leveraged Income idea:
3. Affiliate Marketing
Here’s the gist of Affiliate Marketing:
Find a product you love and then go to the seller to work out a commission whereby you earn a bit of money for every customer you send their way.
It’s great for the company with the product because they’re getting customers and it’s great for you because you don’t have to worry about product design, customer service, or fulfillment.
All you’ve got to worry about is mastering how to drive traffic that converts into sales.
Here’s one avenue you could pursue, and I have friends who’ve done incredibly well with just this one.
Okay, so here’s what ya do:
Find somebody who has an online course or digital product that you love and that you know can bring people value. Go to that creator and work out an affiliate deal where maybe you get 20% of every customer that ends up buying the course.
If the course sells for $100 then you make $20.
Next, build a landing page. This is the place you’re gonna drive your traffic and if it’s designed properly, it’s going to convert leads into happy paying customers.
Once you have your landing page, you need a way to drive traffic and the quickest way to do this in my experience is through Facebook and Instagram paid advertising.
Head over to Facebook, create some ads, and then drive traffic to your landing page.
Once your ads and landing page are dialed in you could easily pay $10/customer in advertising cost knowing you’ll make twice that on the backend.
Then, it’s just a matter of scaling your ad budget.
Now with all that said, the variable here that’s going to determine your success and failure is how good you are at designing a landing page, your copywriting skills, and your understanding of paid advertising.
Luckily, the internet is FULL of free resources on all these topics. So get out there and start learning.
Alright, last up in our list of Leveraged Income ideas is to create a:
4. Media Empire
I believe everybody has a unique story to share, and if you can just tap into that story and figure out how to share it with the world in an authentic way that delivers value to the audience, then there’s no limit to the amount of passive income you can generate.
If you want to learn more about how to do this, I highly recommend you check out this article where I break down exactly How to Build a $1,000,000 Personal Brand.
Until next week,
Stay Hyperfocused,
AV
From YouTube This Week:
4 Passive Income Ideas: How I Make $125K per Month
Want to go even deeper?
1. Ever felt like Sisyphus, pushing that boulder of focus uphill? ADHD, distractions, procrastination- all fighting to knock you back. 💥
Welcome to the Hyperfocus Dojo! 👊 It’s your secret ninja training ground to master your brain, win this war and live your dream life.
The Hyperfocused Masterclass: the exact system I used to overcome ADHD, write a bunch of books, build some successful businesses, and acquire a whole lot of real estate.
2. If you’re in relentless pursuit of doing less, but better, than check out my podcast, Amplified Impact, for a quick-hitting daily dose of motivation and inspiration.
