There are a whole mess of myths and ‘tall tales’ in the wealth building space nowadays. There always has been. However, the tallest of all the tales perhaps is what is being touted as residual and passive income.
These two ‘tall tales’ are the unicorns of the wealth building world. There have been dozens of wealth building Gurus over the years that loved to spout off as to how both of these ‘methods’, although elusive, are completely possible if you follow their 10-step system. Of course, these two things are fantasies. Right? They ARE both fantasies, aren’t they?
Are Residual and Passive Income Real?
The unfortunate thing about the genre of wealth building is that there is always an over abundance of fantasy and science fiction used quite liberally when pushing the newest approach of how to become wealthy.
Sadly, there are occasions when the underlying concept has some legitimacy unto itself but the desire to oversell it adds on other aspects which dilutes its integrity. I believe that in their rawest forms, residual and passive income are two of these.
Let’s start with residual income. Is it real? Ask the authors Stephen King and J.K. Rowling if residual income is real. Both individuals are reportedly worth $500 million and roughly a $1 billion dollars respectively. I believe they’d both say ‘yes’!
In addition, many very wealthy insurance agents got that way due to being paid residual income on policies that continue to pay them monthly years and years beyond when they sold them to customers. I know of a couple of acquaintances in the insurance industry who would tell me that residual income is very real.
Do something once and get paid multiple times
I consider residual income to mean “the payment of income to an individual based on value that was created at an earlier time and not relying on a continual exchange of hours for dollars”. In other words, similar to our author friends who created a work of value at one time and continue to get paid for it months, years, decades after through some payment plan such as royalties from a book sale or the securing of an insurance policy, residual income is the result of a ‘one time’ effort and exchange of value.
I think where residual income has received a bad rap is how ‘easy’ it’s made out to sound by the wealth building Gurus. There is no doubt in my mind that thousands of individuals out there have crafted an entire company based on residual income, such as YouTube and Instagram personalities who are now getting paid off the work they have invested building up large followings.
This in turn has helped them sell online courses and other digital assets such as membership sites, master classes, physical products and the like.
These are legitimate and big businesses and they were almost entirely created off of the principle of residual income.
BUT…it wasn’t easy for these individuals to have become successful and most of these types of businesses aren’t easily replicable because it requires the fate of algorithms and some dumb luck to receive the type of following necessary in order to monetize at a sufficient enough level.
Residual Income is real but it takes a LOT of work upfront
However, residual income is most definitely real. In fact, I like to make the argument that some forms of businesses are based on the residual income model. For example, an ecommerce business that has built a particular brand and online following would be a great example of such a business.
More specifically, the entrepreneur who created the business in effect has created a vessel whereby continual sales are generated off of the recognition of the brand and the value proposition that was originally created some time back and is now being curated by this entrepreneur for continued sales going forward to his/her customers.
As a result, an ecommerce business is the ultimate form of residual income. Create value upfront and charge a premium, ie. profit, each and every time thereafter a product is sold.
In addition, businesses are the quintessential form of residual income as they tend to sell at multiples of their annual sales.
How could this be? Basically there is inherent value built into the valuation of a business due in whole to the fact that there WILL be value to the customer base going forward based off prior satisfaction and loyalty that was built up with this customer base at an earlier time.
Passive Income is usually not so passive
So what’s the rap on passive income? In large part, passive income has suffered from way more negative attention given to it by the Gurus.
To this end, passive income has been interpreted by these Gurus as never having to have created any value and still recuperating the income that is generated from these enterprises.
As a result, these Gurus have incorrectly identified almost everything that should rightfully be classified as residual income opportunities as being passive income. As a push back, I would say that creating the entire Harry Potter empire certainly took some serious time and labor. Residual income for sure but certainly not passive income.
I maintain that there are very few true passive income opportunities in wealth building. The obvious class is the paper form of assets. Buying stocks, bonds, index funds, precious metals, commercial paper, treasury bills and the like I would argue are TRUE passive income assets.
You do have to work for the money required to buy them upfront but once they are purchased, you don’t have any involvement in getting them to create income whatsoever.
Real Estate can be partially passive income
Unfortunately, several of the Gurus incorrectly classify all real estate as passive income plays. I would concede that a purchase of raw land that increases in value probably meets that classification but a multi-unit rental property that you actively manage certainly is NOT passive income.
I think that’s the point of all this. There are specific opportunities that build wealth that truly are passive income opportunities.
Buying a multi-unit rental property and hiring a property manager and literally never ever stepping a foot onto that property and simply going to the mail box each month to pick up the rent check IS as close to passive income as you’re ever going to get. Yet, buying, renovating and flipping houses isn’t passive income. That’s called a J…O…B!
The important aspect here is that we must be judicious in what we classify as being residual and passive income. They’re both out there, we just need to know what we’re looking at.
In fact, it is completely possible to embark on creating a wealth building strategy and life plan based entirely on owning just residual and passive income assets. It might look something like this:
Residual Income:
- Build a digital knowledge business that sells digital courses, e-books and membership sites
- Utilize monetized platforms such as YouTube and Instagram to build a following
- Create and sell e-books off of the Kindle Publishing platform
- Convert this brand identity into a physical products business that can be completely managed and run online as an ecommerce business (an Amazon FBA business)
- Create some phone app and/or monthly subscription software that curates content or similar subject matter to existing customer base and current market segment
Passive Income:
- Take business income and purchase shares in a S&P Index Fund
- Purchase multi-unit rental properties and have third party manage property
- Own a business or share of a business that you are not actively managing or involved in
- Participate in affiliate marketing opportunities off of your business’ website
- Participate in your companies 401(k) program
Conclusion
Although chances are none of us are going to be able to create a residual and passive income empire overnight, the reality is that it can be done overtime IF we structure the right business idea around the right fan base. From there, we then need to layer on the right ‘one time effort up front’ offers to this fan base.
Eventually, if we keep building layer after layer of income generating assets on top of one another we’ll reach the Holy Grail of wealth building!
