What Is Residual Income and How Do You Build It?

March 5, 2021
March 5, 2021 disrupt

What Is Residual Income and How Do You Build It?5 min read

A large part of achieving long-term wealth overtime is learning how to build residual income. Wealth management is very significant for every individual. No matter how much you make every month, with the right education, everyone has the capability of building long-term wealth.

To attain the desired financial freedom, individuals should know how to manage their monthly income, and invest strategically to build residual income over time.

The true question is how?

This article will walk you through the concept of Residual Income and the ways you can build it.

 

What is Residual Income?

So if residual income is such a large aspect of achieving financial freedom, what is it?

Residual income is the money you are left with after taking care of all your financial obligations. Residual income is most commonly calculated on a monthly basis.

Ultimately, residual income is the amount you save after paying your expenses (i.e., electricity, rent, etc.).

However, it can also be referred to as the profits you make on your investments!

For example, if you earn $3,000 per month from your 9-5 job and after paying all bills and meeting every routine expense, you end up with $500, then this would be your personal residual income. 

Your residual income can also come from a variety of sources, for example, if you decide to invest in real estate on the side, and you are getting monthly rent from that property.

After deducting all expenses accrued on your rental property, the profits would be accumulated into your monthly residual income! The more income streams you have, the more residual income you will be accumulating.

In reference to companies and corporations, Residual Income symbolizes the overall health of the organization and its profit-generating capabilities.

After accounting for payable equities, operational costs, and expenses, what remains is the Residual Income.

 

It is vital to understand that residual income is a calculation that shows a person or company, the number of discretionary funds available.

Residual Income VS Passive Income

It is important to understand the difference between a passive and a residual income because they are often interchangeably used and thus, can be confusing for many.

The confusion is attributed to the fact that residual income can be created from passive income investments. However, not all residual income will be considered passive income.

Passive Income is the amount of money you earn from a source of your investment, without any active involvement yourself. 

For example, you make an investment as a limited partner in an LLC and enjoy its dividends without being involved in any business operation, this would be called a Passive Income

Let’s look at the example below for a better understanding of residual income vs passive income. 

If  I am a full-time physical therapist earning 5,500 dollars a month and once I have paid my monthly expenses, I am leftover with $1,600 in my bank account each month. This $1,600 would be classified as my monthly residual income. This $1,600 would not be considered passive income because I am actively working day-to-day to earn my wages.

However, if I have invested in a multifamily real estate syndication that produces $1,000 of passive income for me each month, this $1,000 would be added to my monthly residual income! 

In summary, earning more passive income will help you to build your residual income. 

 

How to Build Residual Income Through Investments?

There may be countless ways to earn residual income but building it carefully and managing it is the desired outcome for every investor.

Amassing wealth comes from administering your investments in a way that leads to incremental growth over time.

If you want to scale as an investor and build long-term wealth, you should have a plan for your residual income to become a part of another investment, to create long-term growth.

Some of the most popular ways to build your residual income are mentioned below.

 

1) Dividend Stocks

One of the most common investment vehicles would be stock market investing. If you are interested in building passive income, dividend stocks offer investors low barriers to entry.

Dividend-yielding stocks will pay investors per share, so the more shares you earn in the company, the higher passive income you will generate.

 

2) Own a Rental Property 

Purchasing a real estate property to earn extra residual income is a popular choice for many investors.

Not only is it a great way to earn monthly residual income, in most cases the value of your property will appreciate over time. Meaning your tenant(s) will be paying down your mortgage while overtime your property will naturally appreciate in sale value!

It is important to note that owning rental properties is not a passive investment.

As a rental property owner, you will need to find the deal, arrange the financing, and manage the day-to-day operations of your rental properties (i.e. tenants, maintenance & repairs, etc.).

If you are attracted to real estate but are looking for a more passive way to get involved, real estate syndications or crowdfunding may be a better fit.

 

3) Real Estate Syndications 

If you are interested in earning stable passive residual income, real estate syndications may be the right option for you. So, what are real estate syndications?

In summary, real estate syndication companies will gather investors to combine their wealth and resources to buy lucrative real estate assets (i.e., apartment buildings).

Real estate syndications allow individual investors the opportunity to partner with other experienced experts to purchase a real estate property that they probably could not afford individually. There are various types of real estate syndications that you can invest in to make a great residual income.

However, research indicates that the most popular option that people choose to invest in is apartments and multifamily properties.

The reason behind this being that this is considered to be a stable and lucrative investment opportunity.

Through real estate syndications, the average annualized return you can make is greater than 15%. The internal rate of return ranges from around 10-15% and within 5-7 years. In most syndications, you will get a 100+% total return on your investment.

 

4) High Yield Saving Accounts

If you are looking for an incredibly simple way to earn interest on your capital, you can put your money in high-yield savings bank account.

This is by far the safest and easiest option to earn interest on your net worth. However, you must note that the returns in this way will be much lower as compared to the options mentioned above.

 

 

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