Updated October 1, 2021
Many trickles of water running together eventually form a mighty stream. And while that’s not exactly what you’d want to hear relating to your roof or your basement, it is something you want to hear about business—specifically, the business of residual income.
What is Residual Income?
- Real Estate Crowdfunding
- Book Publishing
- App Development
- Sell Digital Downloads
- Affiliate Linking
- Email Marketing
What is Residual Income?
Personal residual income is income that you continue to accrue even after the work that produced that income is completed. Most Americans do not earn money through residual income. For example, someone who works as an employee and is paid an hourly or yearly salary gets paid for the amount of time they are working; nothing more. But someone who writes a book, produces an album, or owns a rental property enjoys the passive income of receiving money on a periodic basis (such as in real estate) or whenever someone purchases the time they have produced (such as royalties).
As it turns out, residual income is not just for movie stars, authors, and real estate investors. There are plenty of ways the average American can earn residual income, especially with the wide reach of the internet.
Here are 8 common ways people can earn money through residual income:
Dropshipping involves selling something without housing the actual inventory of the items you sell. Whenever the retailer sells an item, they then order that item from the supplier, who ships it directly to the buyer.
While this does increase the cost per item to the retailer, it also allows them to sell items online without the need to cover the costs of warehousing it. This particular residual income idea allows anyone to operate a retail outlet without the costs of operating assets.
The average operating assets for a retailer typically take up to 25 percent or more of their total expenses, and that can be particularly pricey to shell out up front—especially for an aspiring retailer with low amounts of disposable income. Dropshipping, however, is a residual income opportunity where you don’t need a loan to cover purchasing inventory. The monthly expenses are quite low because all you really need is a customer-facing website where you whitelist items made by the supplier as your own. With a little social media marketing, dropshipping can turn into a solid revenue stream.
AirBnb is just one of the many peer to peer lending sites where a property owner can rent vacant properties to paying guests. If you own a vacation home or additional property that you are not using, this can be a great way to draw a residual income stream off it.
Of course, there are many ways to make passive money from real estate, and many tax breaks it can offer. Take, for example, the Section 280a Deduction, which allows you to use your own home or even an unoccupied vacation home as a business-related tax write off for events and meetings.
3. Real Estate Crowdfunding
Many people want to invest in real estate—whether that means flipping homes or acquiring a portfolio of rental properties—but do not have the capital to do so. Thankfully, these days they can use a real estate crowdfunding tool to bankroll what they need to get to work. By posting a project and goal online and getting visitors to the page to contribute to financially, the investor is creating income. However, it’s not really a pure residual income model because the contributions are one-offs.
Remember—personal residual income involves receiving payment for the tangible results of work, even after that work has ended. Crowdfunding may, however, open the door to the truly passive, definitively residual income of real estate, especially rental properties.
If you’re interested in learning about the various ways real estate can provide residual income, sign up for our Infinity Investing workshop!
4. Book Publishing
Publishing intellectual or creative materials, like books, musical albums, and movies, is a quintessential form of passive income or residual income because every time someone buys the book, movie, or album, its creator (or at least the one who owns the rights to it) collects royalties.
Royalties are a portion of the sale that go to the owner of the intellectual property. Today, book publishing is as easy as uploading a Word document and book cover to Amazon Kindle and hitting publish. It costs nothing to get started, and the potential to sell as many copies as you possibly can is only limited by how well you can market the book or how big your fan base is.
5. App Development
Apps are used for pretty much everything these days, from shopping to banking to playing games to editing pictures and everything in-between. Developing an app that users can download on their iPhone or Android and then collecting any associated payments is another source of residual income.
For example, you could pay a developer to create a free downloadable game that offers users tokens to accelerate game play with said tokens needing to be purchased. This would allow you to collect passive income from users. Note, however, that the app development market is somewhat saturated, and developing a more comprehensive application can require a software developer that costs up to tens of thousands of dollars.
6. Sell Digital Downloads
If you’ve created something that can easily be sent over the internet—like music, a movie, or a piece of art—you can sell digital downloads of that item, either through a marketplace like Amazon or your own website.
This is also true for educational content like courses. If you know something about a given topic, you probably know enough to create a light-but-informative class on the subject that can be downloaded by students all over the world. By putting your course on a site like Udemy or Teachable, you can expose it to thousands of people who can benefit from your knowledge—and pay for it, providing you with residual income.
7. Affiliate Linking
An affiliate link is a link that someone can click through to and arrive at an item or service for sale. If the clicker then completes the deal or sale, the person who posted the affiliate link gets a portion of the sale. Affiliate links can be posted almost anywhere—on your website, on your blog, or as comments on social media posts—where they can definitely be seen by thousands of people. Affiliate link users may spend a decent portion of their time sprinkling these links around the web, particularly in places where clicks might be more frequent, such as a message board or discussion thread relating to the product in question. Some retailers will only offer affiliate links to individuals with sites that are highly trafficked or meet certain requirements. Others, like Amazon, will let just about anyone promote affiliate links to products around the web.
8. Email Marketing
Email marketing involves directly sending email content to a list of subscribers. In the email, you may include the option to purchase a digital download or have affiliate links to products you discuss and derive residual income from every click.
Building an email list of willing participants (not scraping them off the web) can take time, but it’s definitely rewarding. In fact, direct email marketing has the highest ROI (return on investment) out of all forms of digital marketing. Moreover, even though there is work involved in writing the email and crafting a convincing sales message, mass mailing software like Mailchip or ConstantContact turn that work into passive income once the same message is mailed to hundreds, thousands, or tens of thousands of email inboxes—potentially resulting in a solid stream of passive income.
What is the Difference Between Passive and Residual Income?
There is no difference. Residual income is a type of passive income, and the two terms are often used interchangeably. Sometimes they are combined and referred to as passive residual income. There are some forms of residual income that seem to be more passive than others. It all depends on the activity and the person running it.
Does Residual Income Have Any Other Meanings?
Actually, it does, in terms of a VA lender providing a veteran with a VA mortgage. Residual income in this case refers to monthly income after the home loan and other major expenses. The residual income formula is used to determine if a veteran seeking a VA mortgage can likely keep their household afloat, financially, without the VA loan putting undue strain on them; the residual income requirement varies based on family size and location.
Residual income also relates to corporate finance and stock analysis. A residual income calculation can provide investors a valuation of a company’s economic value via profits, after all opportunity costs have been deducted. This type of equity valuation will sometimes show that even a company making economic profit will have a negative residual income.
Is Real Estate Residual Income?
Yes, real estate is an excellent form of residual income. However, this specifically relates to rental properties, where renters (either residential real estate or commercial real estate renters) pay rent to the property owner on a monthly basis.
Buying and selling homes (typically called flipping homes) is not a residual form of income because the revenue is generated from the one-time event of a sale. Real estate also offers great opportunities for rental property tax deductions, and while that isn’t passive income, it does put money back in your pocket.
For more information about tax deductions available to rental property owners, join our Tax Tuesday Webinar!
It’s important to keep in mind that most investors who actually have had success with real estate will tell you that while rental property income is residual, it’s not necessarily passive. Even if you have a property manager taking care of your properties, you will still need to put work into growing and managing your portfolio.
Are Stocks Residual Income?
Stocks are only a form of residual income if they produce dividends. Dividends are shares of company profits issued to shareholders. If a stock does not produce dividends, whether or not it can be considered residual income is open to debate. One could say that if the price of a stock went up and the investor sold it to make a profit, that profit is passive income. However, that’s also arguably not the case because the action of selling it is a one-time event that cannot be repeated for that particular share.
Dividends, by contrast, are paid on a regular (usually quarterly) basis. Remember, however, that the phrase residual income also relates to stocks in a different way—the residual income valuation model might be used by a potential investor before buying stock to gain a true sense of a company’s financial health by using a residual calculation of factors drawn from material like a company income statement.
There Are Many Opportunities to Create Residual Income
You don’t need to own an apartment building or a huge stock portfolio in order to make some residual income. In fact, you just need to invest a little time learning about the many ways the world wide web has made earning residual income possible for everyday people through things like eCommerce, email marketing, and affiliate links.
There are plenty of books and blogs on each and every residual income model mentioned above, and you can also find personal support through a local investment club or investment center where like-minded entrepreneurs can gather and share the resources they’ve used to develop their own streams of personal residual income. One of the most important things to realize if you’re just getting started in the world of residual income is that building up your income streams takes time. Just remember that eventually many trickles will yield a mighty river of cash flow into your bank account.
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