The majority of today’s real estate investors entered into the industry with one simple business goal: to build residual income. After all, residual income is a great indicator for how well a company is performing. For all intents and purposes, the more revenue streams padding the bottomline of a business, the better. It is important to note, however, that not all residual income streams are created equal. To truly realize the residual income you have always dreamed of, you need to pick the vehicles that will maximize revenues the most efficiently and effectively.
Residual income, in its simplest form, is essentially a synonym for either excess cash or disposable income. From a real estate investor’s perspective, however, residual income is the net income that exceeds the minimum rate of return; it’s the result of exceeding expectations. More often than not, residual income is calculated on a monthly basis and suggests what investors will be left with once all of the bills and expenses are accounted for. It is an important indicator for investors, as it awards insight into their own performance. Not to be confused with cash flow, which represents the net amount of cash being transferred into and out of a business, residual income is reserved for excess profits (never deficits).
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Typically accounted for on a monthly basis, residual income shouldn’t be calculated until all expenses are considered. Having said that, the residual income formula looks like this:
Operating Income – (Cost Of Capital x Operating Assets) = Residual Income
Understandably, inexperienced investors may not be fully aware of the differences that exist between passive income and residual income; after all, the two not only share similar monikers, but they also represent coveted streams of income any investor would be happy to receive. To that end, the two forms of income have several differences that warrant investors’ attention.
Whereas residual income is retained by an investor after all of their expenses and bills have been paid, passive income is inherently different. In fact, passive income isn’t necessarily a sum of money, but rather a method of procurement. As one of the three main categories of income (active, passive and portfolio), passive income is income derived entirely from a rental property in which they are not actively involved. Quite simply, the phrase passive income is used to define income made through little or no effort on behalf of the person earning it.
While passive income and residual income are two separate things, it’s not uncommon for them to converge. In the event enough passive income accumulates, investors may find themselves with residual income. In fact, the primary reason investors are attracted to passive income is because of the residual income it may result in.
As previously discussed, residual income represents excess earnings or disposable income. The money an investor is left with once all of their bills and expenses have been accounted for qualifies as residual income, and there are literally endless possibilities to generate it. Any activities that generate net profits in excess of the minimum rate of return can contribute to an individual’s savings. That said, not all income-producing activities are created equal; some are unequivocally better than others. Passive income real estate investing, in particular, has developed a reputation for awarding savvy entrepreneurs with some residual income of their own. In addition to real estate, here are a few more ways to boost your existing revenue stream:
While residual income can come from just about anywhere, there are several things rental property owners can do specifically to increase their existing revenue stream. Let’s take a look at some of the most creative ways real estate investors can attempt to boost their residual income using an existing rental property:
Real estate investors of every level share one universal goal: building residual income. At the very least, residual income indicates how successful a company is in the moment. The more residual income, the better off today’s investors are. Therefore, it only makes sense to increase your revenue streams wisely. In the event you want to increase your own residual income—passively or not—try implementing some of the suggestions outlined above.