What is residual income and how can you use it to achieve financial independence?
What is residual income…and how do I create it?
It’s a frequent question I get on the blog. The term ‘residual’ or ‘passive income’ is thrown around a lot but often not explained very well.
Everyone wants to make money while they sleep…but the reality of residual income remains just a dream for most.
We’ll get into the technical answer and how residual income may be different from other passive income strategies but the short answer, if you ever want to reach financial freedom – the freedom from having to worry about that next paycheck – then you better have some income-generating assets pumping out residual income.
This is the first of five posts looking at residual income, understanding what it is and how you can create a constant stream of cash flow.
We’ll look at how some assets differ in earning-power as well as some residual income jobs in this post before detailing individual income streams in follow-on articles.
Financial Freedom like a Rockstar with Residual Income
Growing up in a working-class family, I was always amazed at how some people were able to make money doing seemingly nothing.
The three surviving members of The Beatles were still making millions a year, long after they had stopped touring together (though Paul and Ringo still made millions more as a solo artists). One song alone, Yesterday, is estimated to have earned as much as $30 million in royalties through 2015.
The world of rock was full of stories like this, millionaire rockers living off their prior work. Sting’s 1983 hit “Every Breath You Take” still reportedly produces $2,000 a day in residual income.
I made a big chunk of the $90,395 in income over the last 12 months from products that spin off regular cash. It’s not quite Beatlemania but it pays the bills…and then some.
Residual income is money you earn off the sale or rent of something you own, a product or a copyrighted work.
Some call it royalties, some passive income. I call it the only way to financial independence.
How to Build a Residual Income Stream
I started freelancing in 2011, mostly writing investment reports for advisors and banks. I made good money writing from home but I never owned the final product. Getting paid once was never going to make me financially independent.
I finally got my act together in 2014 and started creating blogs, books and other income-generating assets that would pay me a constant cash flow.
Why not focus on one thing, one product to create residual income?
Because you never know how well that product is going to do or for how long it will pay off. The estate of Tupac Shakur has made more money in the last 20 years than when the rapper was alive. By contrast, rapper Rob “Vanilla Ice” Van Winkle had a smash hit in 1990…but not much since.
Income-generating assets differ on two very important factors:
- By lifetime of residual income stream from just a few months to virtually forever
- By amount of money and/or time you need to put in to produce
The best strategy for producing a lifetime of residual income is to multiply your income streams with multiple products in multiple ideas.
I make money consistently from five sources but not all of them pay out each month. I have ten self-published books but not all of them make much money. If I were to restrict myself to just one passive income category or just one product in a few categories, my income would be so irregular that I would always have to worry about making enough money.
By creating several products in multiple strategies, I have diversified my income to the point that it is consistent each month.
Finding the Best Residual Income Jobs
When you’re looking at which jobs will provide a reliable source of residual income, just go back to the definition of income-generating, long-term assets. There’s two critical requirements that must be met:
- The job must produce something that people will pay money to rent or use over a period of time
- You must have some level of ownership and right to the residual cash flow
For some of best income strategies below, the term ‘job’ might not be the most appropriate term. When most people think of creating residual income, it’s from something they create and that takes some work.
Some of the pure investing ideas where all you need is to put down a little cash might not match this definition but there’s a grey area. What about residual income products to which you buy the right to but don’t put more work into developing? What about investments that don’t require any work but produce a great source of monthly cash flow?
Getting tied up in the definition is less important than finding a residual income strategy that works best for you. This is going to be something in which you’re interested in the topic and have some experience in developing.
Residual Income Investing
Peer lending investing is probably one of the least likely to make most lists for residual income. It’s more like simple investing but does provide a consistent monthly cash flow so I included it in the list.
If you decide to create a residual income strategy, p2p investing is a great way to diversify your cash flow because it’s much more stable compared to other passive income streams. The loans in which you invest have a fixed payment every month and defaults can be extremely low in the safer borrower categories.
I’ve been investing on Lending Club for a few years now and have earned a return just under 10% over the last year. The world’s largest p2p website offers automated software that will invest in loans automatically on criteria you choose to make the ongoing investment completely passive. (lending club return graphic)
Residual Real Estate Millionaire
I’ve been investing in real estate for nearly two decades, mostly in residential rental units. The difference in real estate investing that makes it more of a residual income source rather than just an investment is the work you put into the property over time.
That’s good and bad. Good because you can get higher returns by putting in a little sweat equity and putting up with headaches with property management.
The problem is that real estate is definitely not a passive source of cash flow because you are constantly having to manage the property.
Still real estate rentals can be a good way to get started with residual income because they give you a pride of ownership and, despite the recent crisis, property prices generally increase over time.
Some tips before you get into the real estate game:
- Go slow with one property at first to see if you are up to it. I always recommend buying a property and in a neighborhood in which you would like to live…because if things don’t work out, you might have to live there.
- Don’t go overboard on debt for your first property or two. Real estate seminars love to tell people to leverage their properties to the max and buy as many as possible. That’s a recipe for disaster if you decide you want out or something goes wrong in the market.
- Be willing to give up a couple month’s rent to find good tenants. Doing background checks and waiting for the right tenant will save you lots of money down the road.
I’ve recently started investing in real estate through the crowdfunding platform RealtyShares. It takes the headache out of real estate but you don’t quite get the pride of ownership. I still like direct investing in properties but use RealtyShares to diversify my RE investments through smaller investments in different property types and locations.
Browse real estate deals for free on RealtyShares
Self-Publishing: My First Residual Income Success
The money I’ve made on real estate has been great but it wasn’t until I got started self-publishing books that I found my favorite income-earning asset. Self-publishing fits the truest definition of residual income because it’s something you create and can provide a stream of income forever.
There are very few costs to self-publishing, none if you decide to do all your own editing and design work. Once you load your book onto Amazon or another publishing platform, you could sit back and do nothing other than collect the checks.
I say ‘could’ do nothing because there is some advertising and promotion you can do to keep your book selling but it’s not required to keep earning money.
Some points on self-publishing as a source of residual income:
- Choose a topic from experience and from passion for your first book. Writing from deep experience will make it a quality and helpful read, besides making it a lot easier to write. Writing from a passion will make it more enjoyable and easier to finish, an important factor considering how many authors end up never making it through the process.
- Publish in ebook, paperback and audio formats. I average $2,000 a month on residual payments for 10 books with about a third from each format. The ebook and paperback formats will come from the same copy, just a different file format. The audio version will take a little more work but the hard part (writing) is already done so don’t pass up this easy next step to extra money each month.
- Don’t give up if your first book isn’t a screaming success. While I average $200 per book each month, some make several hundreds while others make less than $100 regularly. Put out a few books and you’ll start to see your residual payments grow and average out.
You Don’t Have to Be a Techie to Make Money on Mobile Apps
This is one of the few residual income ideas I haven’t tried but I know several other bloggers that make thousands a month on their apps.
You can create the app yourself or just be the management behind the process. Look for freelancers on sites like Upwork or Freelancer.
There are three ways to approach mobile apps for creating residual income:
- Offer a free app that makes money through advertising or affiliates
- Offer an app for a one-time payment, usually between $0.99 to $2.99
- Offer a free app that incentivizes in-app purchases, the freemium model
A Higher Level of Passive Income with Video Courses
This is something I’m developing right now and have seen it make boatloads of money for other bloggers. It’s in the same idea as self-publishing but you are recording your content and selling through either a course platform like Udemy or on your own website.
It will take longer to record and produce a video course compared to a book but you’ll make much more money on each sale. Most ebooks sell for well under $10 while video courses usually start at $25 or more.
Some things I’ve learned while producing my own video courses:
- Pay for and spend the time to produce quality videos. Buy a good DSLR camera, get a label microphone, some professional backlights and a good web cam. The reviews you receive will be a big part of making consistent sales and you need your production quality to be flawless.
- Create a series of video courses, each within a related topic and each that can be sold on its own. Sell each for $25 – $50 or package them for a 75% discount. Add some further perks and ‘freebies’ to create a third-tier price package. This gives potential buyer a choice and gives you the opportunity to make more money on higher-level package pricing.
- Learn how to calculate your return on advertising and don’t be afraid to spend a little money for marketing. I know one blogger that regularly spends upwards of $5,000 a month in Facebook advertising to sell his $1,000 course through a webinar funnel. It’s money well spent and he averages five-figures a month in residual income.
Old Fashioned Residual Income Ideas
There are residual income ideas outside the digital space that still work really well. I regularly buy images on Depositphotos for my blog posts. Those photos had to be taken by someone and photography can be a fun hobby that makes you great money every month.
The first thing that popped into my head when brainstorming residual income ideas was a songwriter. I’ve got to admit zero knowledge or advice about breaking into the music industry or other income-earning jobs in entertainment (scriptwriter). I asked around and found this post on BMI.com along with a whole category on getting started as a songwriter.
Blogging: The Anti-Passive Income Source
One misconception I have to dispel is the idea that blogging can be a source for passive or residual income.
I’ve owned my own websites for nearly three years and have written for blogs since 2011. I’ve made well into six-figures blogging but have learned that it’s definitely not passive income.
You may be able to build your blog into a revenue stream that allows you to hire assistants and take most of the work off your hands but I’d consider that more of a business than a residual income source.
It doesn’t mean you constantly have to be working on your blog to make money. I know bloggers that do nothing for months at a time and still make money but you have to put some work into it or eventually you’ll start to see your monthly income fall. The great thing about blogging is that it fits naturally with other residual income ideas, creating a channel through which you can sell your books and video courses.
Check out this post on steps to get started blogging for the truth about creating your own digital empire.
Residual income can mean different things to different people but the important factors are that it’s a long-term product you own and that people will pay you to rent or use. Look for residual income jobs in the topics you enjoy most as a hobby and find out if you can create products around that topic. That passion is going to make it easier to create your first products and will show through as enthusiasm to your potential buyers, students or renters.