What is Residual Income?
At it’s most basic level, residual income is the income earned after all the bills and expenses are paid.
For the average worker, this would be their disposable income. They’ve gotten their paycheck. Then paid the monthly expenses and have some money leftover to do what they want.
In the corporate world, the definition is a bit different. They look at the revenues left over after all the costs of capital to generate the revenue is paid.
Get passed all those fancy words and it’s still the same: the money that is left over after everything is paid for.
But the third definition, and what we all dream about, is more related to passive income.
Continuing to earn an income for work that was done long ago and there are no more bills or expenses left to pay. You could call this passive residual income.
Residual Income Formula
For corporate America, the formula looks like this:
Residual Income = net operating income – (cost of operating assets * cost of capital)
For personal finance, the formula looks like this:
Residual Income = Net Income – Expenses
Say you earn a check for $3,000. Taxes take a $500 chunk out of it so you’re left with a net income of $2,500.
That month, you’ve also got a mortgage payment for $1,000. Plugging that into the formula:
Residual Income = $2,500 – $1,000 = $1,500.
For the dream business, the goal is to get those expenses as close to zero as possible.
Passive Residual Income Formula
One thing the “expenses” didn’t take into account for the personal finance formula was our time. Our time is worth something and we shouldn’t discount it.
For a normal 9 to 5 job, that’s what we’re paid for. We’re trading time for money.
In the corporate finance formula, our time would be part of the “cost to operate asset.”
Corporate America considers time as part of the bills paid before they’re paid.
Combining the two, we get a formula for passive residual income that would look like this:
Residual Income = Net Income – (Time Working + Expenses)
By getting the “time working” down to zero and the expenses as low as possible, we’re left with:
Residual Income = Net Income
…and the money is coming in without lifting a finger.
The Residual Income Model
The ultimate residual income model means you’ve got to create something of value, up front, that people will continue to pay for.
Writers do this with books. They put in the hours, days, and even years, up front and then make money on the back end.
Same thing with musicians. They record a song and then are able to sell it the rest of their lives to make residual income.
Their “time working” after the initial investment has gone to zero.
The ultimate passive residual income model moves away from trading our time for money. It puts an emphasis on creating value for others.
Residual Income Examples
Name any musician or author and there is someone who is earning residual passive income. There is an argument about publishers taking a cut, and music labels taking their share, but both are great examples at their most basic level.
Richard Branson is a great example of building a residual income empire. The Virgin brand has grown to airlines, cell phones, record label…and on and on.
Mr. Branson doesn’t actually spend his day to day hours working on each of those businesses, but he still earns income from them. If the companies do well, he does well.
Warren Buffett is another shining example. He’s created Berkshire Hathaway that brings in income like Richard Branson, but Buffett also earns passive residual income from all his investments.
By sticking mostly to dividend paying stocks, Mr. Buffett allows his money to work for him. He buys a share of a stock that pays dividends, and each month or quarter, he gets paid.
The more stocks you buy, the larger that residual income becomes. To the point where Warren Buffett earns roughly $62 million dollars a year on dividend payments. That’s a massive income snowball.
Now those are two owners of massive companies, but what about the little guys?
Steve Scott is a prime passive residual income example.
Steve has built an ebook empire that brings in 5-figures per month from ebook sales.
He’s able to write them fast on topics that people are looking for. Then posts them to Amazon and let their millions of built in customers do the rest.
How to Earn Residual Income
If you were to make a little drawing about how a painting sold, it would look something like this:
The cycle would keep going round and round. To earn more money, you’d need to keep creating more paintings.
To start earning passive residual income, you need to find a product that can be replicated. One that doesn’t have to be built every time.
The internet has made earning residual passive income so much easier.
Digital products are the easiest form of earnings. There is no inventory to take care of. No manufacturing that needs to take place.
Design some software, write an ebook, or create a product that people are looking for. Then give people the ability to download it while you get paid to sleep.
This way, the product only needs to be built once. After the first cycle, we remove the “make painting” and are going back and forth between “sell painting” and “earn money.”
In the example of an ebook, the first cycle would look like this:
But after the first cycle, “write ebook” is removed. You only have to do it once and then the cycle becomes:
Earning residual income doesn’t need to be all passive, though.
There are lots of ways to earn money.
You can earn it by shopping through a portal like Ebates.
Credit card rewards points are another example. With each dollar spent, you earn a point that can build to a level where you can buy products, or even take a trip.
This isn’t ideal for building an income snowball, but this is the “ultimate guide to residual income” so we’ve got to cover all our bases.
Speaking of examples, let’s look at a few.
Residual Income Ideas and Opportunities
Write an Ebook
We’ve covered this one a bit already.
If you’ve got some knowledge that you find yourself teaching friends and family about, it’s time to write an ebook.
Whatever you’re teaching is already in demand, which means there are other people out there who want to know too.
Sit down and write an ebook. It doesn’t have to be long.
Put it on Amazon and tell all your friends and family about it. Get a few reviews from them and you’re off to the races.
Steve Scott runs a site called Authority.pub geared towards helping people sell books.
Start a Blog
This has become a very common one to build residual income.
Kind of like writing an ebook, but the effort is put in over a longer period of time.
Again, you’ve got knowledge that people want to know, so you create a blog to start teaching people.
If you’re consistent and write in-depth, helpful articles that people find useful, you’ll build a following.
More and more people will come to your site and see you as an authority.
To earn money from a blog, you’ve got all sorts of avenues.
You can start affiliate marketing products that you’ve found useful. Affiliate marketing is where you earn part of a sale that was made based on your recommendation.
Advertising is another way to earn residual income from your blog. Put AdSense ads on your site and get paid based on the number of clicks or views the ad receives.
Having a popular blog makes selling an ebook or app a lot easier too. You’ve already got a large group of people who are potential customers and will buy your products.
Pinch of Yum is a cooking blog that has been CRUSHING it with residual income.
Invest in Dividend Stocks
This is a favorite of mine and Warren Buffett.
If you’ve already got a job you like, or are earning income another way, you can invest in dividend stocks to earn residual income.
Certain stocks will pay out money, or dividends, on a monthly or quarterly basis. They do this as a way to repay investors.
For corporate stocks, they do this as a way to repay investors from profits earned instead of putting their money back into the company.
Those dividends are then yours to do with as you like. You can spend the money or turn around and reinvest them, which I highly recommend.
Investing in dividend stocks is a major part of building an income snowball.
The more money you’re able to invest in dividend paying stocks, the bigger your snowball will get and the more residual income you’ll earn.
It’s a beautiful cycle.
Start an Online Course
This one is like an ebook or blog.
You’ve got knowledge that other people are willing to pay for.
Instead of teaching them face to face, or having them read a book, create an online course.
There are a lot of platforms that make the process simple.
Courseminded is an online course…about creating an online course.
Once the course is created, usually with bundled audio, video, and some written information, you post it online and earn residual income from each sale.
Create a Review Site
Because of the internet, the research people put in before making a purchase is incredible.
Before the internet, if you wanted to buy a TV, the only person you could talk to with any knowledge was the salesman. Now there are thousands of websites that can help you out.
If you’ve got a passion for fish tanks…start a fish tank review website.
Start the website and then write in-depth reviews of products that will help people make informed decisions.
Like a blog, you’ll get people who are searching for fish tank reviews. Then earn residual income from affiliate fish tank sales or posting ads.
TopTenReview is pretty generic, but if you niche it down, you could dominate a topic pretty easily.
Build an eCommerce Store and Dropship
Dropshipping is the easiest way to sell a physical product.
You’ll find a distributor that is willing to send the product from their warehouse to your customer.
This means you don’t have to order inventory, have a warehouse, or storing anything. You don’t even need to worry about dropping things off at the post office.
Find a product (or category of products) you want to sell and then look for a distributor that can dropship them.
Then, head over to Shopify and set up a storefront.
When people buy a product, you can set up Shopify to automatically notify your distributor and they’ll send it to your customer.
Andrew Youderian of eCommercefuel did this to the tune of $1M a year in revenue selling CB radios and trolling boat motors.
Create an FBA Store and Resell Things
FBA stands for Fulfilled by Amazon.
Like dropshipping, you can buy products and ship them to Amazon. They’ll house them in one of their warehouses and take care of the rest when your product is purchased.
If you want to carry inventory, you can order products in bulk from a distributor. Then send the products to Amazon and set up your storefront on their site.
The bonus of having your store on Amazon is that there is already a built-in user base.
Millions of people are already searching and shopping. No need to try to convince them your website is a safe place to buy. They’ve already ordered from Amazon and don’t have any problems with doing it again.
Or, you can find great deals at local stores, buy a bunch of products and do the same thing.
Travis Scott of StuffParentsLike used a toy store liquidation to buy up a bunch of product. He turned around and sold them via Amazon and made ~$3,000 a month.
It takes a bit more work than other businesses but the residual income is very nice. Plus, it becomes a bit of a hobby hunting down great deals.
Build Software
Building software requires quite a bit more time and effort to get up and running, but the passive residual income returns are HUGE.
Once the software, or app, is built you charge a high margin and don’t have the cost of products or shipping to worry about.
Dane Maxwell of The Foundation has figured out a process to come up with software ideas. He even gets other people to pay for the development.
In essence, you’ll talk with other business owners to figure out a major problem their having.
If you find enough of them with the same problem and can come up with an idea that would save them both time and money, you’ve got yourself a viable product.
You can even get those business owners to make an early purchase at a discount. Take those early purchases and use the money to fund the development of your app.
If you don’t have any development experience, go to a place like Freelancer and hire someone to do the programming.
It seems daunting, but the returns are amazing.
Buy Rental Property
It’s kind of like investing in dividend stocks.
If you buy a rental property, you’ve got residual income coming in like clockwork from rental payments.
There is definitely some skill to picking prime locations to ensure that your units never stay empty for long.
Charge enough rent to cover the mortgage and find someone else to manage the property. Then this becomes an excellent choice to earn passive residual income.
Plus, you’ve got all the equity in the property that you get back when you sell. All of which has been paid for by renters.
Not all of us has enough money saved up to buy a rental property, though.
Here is where RealtyShares comes in.
You get the benefit of owning a rental property without having to come up with a large sum of money for a down payment. And you don’t have to worry about someone running the property for you.
Like rent or a dividend investment, you invest in property and then earn residual income payments.
You’ll make money from owning a rental property (along with hundreds of other people) and not take on all the risk.
Start a YouTube Channel
Starting a YouTube Channel is like building a blog.
It takes quite a bit of effort to build up an audience, but once you do, the residual income from advertising shows up every month.
Your YouTube channel could be about anything. Search a topic and you’re bound to find someone who is reviewing a product, talking about it, or just making funny videos.
The opportunities are endless as long as you’re willing to put yourself in front of a camera.
There is a little box that you’ll click on the dashboard that allows advertising on your videos and YouTube takes care of the rest.
Looking for more ideas? Check out the massive list post I pulled together with tons of ideas on how to earn residual income.
Conclusion
Whether it’s passive residual income or plain residual income, the rewards are massive.
If you take that residual income and invest it, you’ve started an income snowball that will grow fast. The faster it grows and the more residual income you earn, the sooner you’ll achieve financial freedom.
Disclosure: All investments entail risks. There is no guarantee that investment strategies with RealtyShares will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long-term especially during periods of a market downturn. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any.
