7 Ideas for Making Residual Income in 2023

With the cost of living on the rise throughout the U.S., 63% of Americans are living paycheck to paycheck, according to a 2022 Lending Tree Report. With limited cash, many people struggle to contribute to emergency savings, retirement funds, and other wealth-building investments. 

Some creative individuals are finding innovative ways to earn residual income to build wealth without adding more responsibilities to their already busy schedules. Having a few sources of residual income will help you add a cushion to your budget, making it easier to build savings and ensuring you aren’t entirely dependent on one source of income. 

In this article, learn how to generate extra income to improve your financial standing, build your savings, and become more financially independent.

What Is Residual Income?

Residual income is the money earned from an investment or business activity after the costs of the investment are paid, and the initial work is done. For example, a musician may continue earning money from royalties on a popular album after paying all costs and completing all the work of album production.

Real estate investors can also earn residual income from rental properties, especially if the investor hires a property manager to take care of the property. Any money left over after the investor pays the costs of owning and operating the property is considered residual income because the investor receives a net profit without ongoing effort. 

Residual Income vs. Passive Income: Differences and Similarities

While some people use the terms residual income and passive income interchangeably, there is a difference between these concepts. Passive income is any income that is not directly tied to the time you spend working. This can include income from investments, such as stock dividends or interest on a savings account. 

Rental income is considered passive income because it is not directly tied to the time the landlord spends working, but not all rental income is residual. Many real estate investors have an initial period of time before the property becomes profitable. The income is only residual after the money exceeds the landlord’s expenses. 

How Residual Income Helps You Build Wealth

According to Federal Reserve data, the average retirement savings of individuals under 35 is just $13,000. But financial educator Graham Stephen says, “By 30 years old, you should aim to have one year of your income saved up . . . if you have $40,000 saved up at 30 years old, you’re on track.” 

Many people are unable to increase their savings rate because most of their income goes to covering basic necessities. But increasing your savings rate by just 1% can make a huge difference in your long-term financial standing. 

Unfortunately, many people don’t have time to boost their income through hard work at a side hustle or by taking on more hours at work. If you don’t have room in your budget to up your savings rate and you don’t have additional time in your schedule, residual income will help you generate the extra cash you need to reach your financial goals.

7 of the Best Methods for Earning Residual Income

1. Invest in a Long-Term Rental

Real estate investing is one of the most tried-and-true methods of earning residual income. While there are many types of real estate investments, purchasing a long-term rental property can be low-maintenance and highly profitable. 

Dr. Ken H. Johnson, a real-estate economist at Florida Atlantic University, says ideally, 50% of a retiree’s investment portfolio should be real estate. He advises, “In our research, we found that portfolios that have a mixture of stocks, bonds, and real estate outperform other portfolios.”

While some real estate investors choose to self-manage their properties to maximize profit, if you’re looking for truly residual income, you’ll want an investment that does not require continual effort. Property management companies allow landlords to earn money without adding more work to their schedules. 

When looking for a profitable rental property that will generate residual income in the long term, look for these three things:

• Rentability: Check vacancy rates in the neighborhood of any property you’re considering as an investment. Low vacancy rates show a high demand for rentals, and you will not have trouble finding good tenants.
• Up-and-coming location: You want a property that will appreciate in value over the years. For that, you need an up-and-coming neighborhood. Up-and-coming neighborhoods have plenty of job opportunities, a growing population, and homes that are priced at or below market rates. 
• Proximity to good property managers: Don’t invest in a neighborhood before you know there is a property management company that can take care of your rental for a good price. 

2. Start a Short-Term Rental Business

Short-term rentals are another option for investors interested in earning residual income through real estate. Thanks to platforms like Airbnb and VRBO, it’s easy to earn rental income from short-term guests and travelers. In 2021, the typical Airbnb host earned $13,800. 

However, expected income can vary depending on the type of property and your location. In a highly trafficked city like New York City, the average daily price of rent is $234 according to AirDNA. With the 75% average occupancy rate in the Big Apple, some hosts can make as much as $64,000.

One of the major benefits of starting a short-term rental business is you don’t necessarily have to have a large amount of cash to get started. While some short-term rental investors purchase whole properties to rent as vacation homes, to get started with a smaller amount of cash, consider renting out a private room in your home. The initial investment will be low, as you’ll only need enough money to furnish the room comfortably. 

Luxury tents are another option for short-term rental investors with a limited amount of cash on hand. AirDNA reports an 11.3% YOY increase in demand for luxury tents. With high-quality furnishings, a luxury tent rental can be highly profitable, especially if you live in a tourist destination. Near Arches National Park in Utah, one luxury tent rents for $200 per night. In Sonoma County, California, one luxury tent rents for over $250 each night. 

Short-term rentals can require more work than long-term rentals. However, just as landlords hire property managers, many short-term rental owners work with property management companies specializing in short-term rentals. 

3. Join a Crowdfunded Real Estate Venture

Crowdfunding allows investors to pool their money together to purchase or develop a property. This means an investor can get started with a smaller amount of cash. Some platforms have minimum investments as low as $10, while others look for minimum investments between $2,000 and $5,000. 

Crowdfunding platform Realty Mogul advertises a target return on cost between 5–7% on many investment projects. However, there is risk in all investments. 

To reduce risk in a crowdfunded real estate venture, follow these steps:

• Do your research: It’s important to understand both the property you’re investing in and the team managing the investment. Look for investment teams with a strong track record of success and properties with strong potential for appreciation. 
• Diversify your investments: If you have a certain amount of money set aside for a crowdfunding real estate venture, consider splitting the money between a few different properties or investment teams.
• Understand the fees: Crowdfunded investments have management fees and closing costs, so be sure the investment has an expected return that covers all these additional costs. 
• Know your exit strategy: Before entering the investment, make a plan for exiting if things begin going south. Make sure you have options for exiting, so you won’t get trapped in a poorly performing investment.

If you’re looking to enter a crowdfunded real estate investment, here are a few platforms that can help you get started:

• Fundrise: 1% fee and a $10 minimum investment
• Realty Mogul: 1% – 1.25% fee and a $5,000 minimum investment
• Yieldstreet: 0% – 0.25% and a $2,500 minimum investment

4. Partner With Brands as an Affiliate Marketer

Affiliate marketers partner with companies to promote their products or services. Affiliates are typically website owners, social media influencers, or bloggers who promote the company on their own sites. Affiliates earn a commission for each sale or lead that comes from their site, allowing them to generate income simply by placing a link on their online platforms. 

Affiliate marketing is a perfect way to generate residual income for individuals who already have an online presence because it involves simply placing additional links on an already existing platform. If you haven’t yet built a social media presence and you’re not a website owner, becoming an affiliate marketer will require an upfront time investment. 

Affiliate marketers can make a significant amount of income if their online followers are eager to purchase the promoted products. But it’s important to remember that you’ll need an actively engaged online audience in order to start earning money. 

5. Purchase Dividend Stocks

Dividend stocks pay out a portion of the company’s profits to shareholders regularly. This type of stock can provide a steady stream of income with no ongoing costs or effort beyond the initial purchase. 

Anytime you invest in the stock market, there is some risk. However, there are a few reliable dividend stocks that are historically consistent in paying dividends to their shareholders. Look for stocks that have a strong track record of growth. 

Consider the following companies for reliable dividend stocks: 

• 3M has had 64 years of dividend growth, with the current dividend payout at $5.96 per share.
• Lowe’s has paid dividends consistently for the past 48 years. As of January 2023, the annual dividend payout is $4.20 per share. 
• Target has paid dividends to shareholders for the past 50 years with steadily rising growth in the value of the payouts. The current annual dividend payout is above $4 per share. 

6. Rent Your Unused Stuff

You can generate residual income by listing items like your power tools, outdoor gear, and spare space in your garage or attic on platforms that connect you with potential renters, like Neighbor, Fat Llama, and Yoodlize. 

According to Neighbor, you can earn between $100 and $600 a month renting your spare storage space. Yoodlize CEO Jason Fairbourne told Utah Business that people on the platform have made $10,000–$12,000 renting spare items, which opens up an opportunity for individuals to get into asset-class investing more easily. Some owners at Yoodlize have purchased items as investments and paid them off within 30 days. 

Fairbourne explained, “Even a trailer—you could pay off in something like six months. This helps people get into asset-class investment at a much lower rate. It could be the first rung of the ladder to help people get into owning properties.”

Once you’ve earned back the initial investment from purchasing an item to rent, you’ll begin earning residual income to help you build wealth. 

7. Become a Peer-to-Peer Lender

Peer-to-peer lenders provide money to borrowers as an alternative option to traditional lenders, like banks and other financial institutions. Borrowers often need money to buy a house, start a business, or complete a construction project, and peer-to-peer loans offer lending options that don’t rely on the strict requirements of banks. 

Some peer-to-peer lenders make agreements with friends or family to lend money at a specific interest rate, while others work with peer-to-peer lending platforms, like Funding Circle or Prosper, to connect with borrowers interested in non-traditional loans. 

Peer-to-peer lending can provide investors with a passive income stream with minimal ongoing effort. However, there is little regulation with peer-to-peer lending, which means borrowers may be at risk of defaulting. If you choose to invest in a peer-to-peer loan, make sure you have vetted your borrowers and you understand their risk of default. 

How Does Residual Income Affect Your Tax Return? 

Residual income is taxed as regular income. If your residual income moves you into a higher tax bracket, you could have a higher tax bill. The federal tax brackets for 2023 are the following: 

Tax strategist Karlton Dennis says there are certain residual income strategies that help you best reduce your tax liability. Real estate investing is one of the most effective strategies for tax reduction. 

“Taxes can get down to zero for real estate investors when the deductions they qualify for surpass the amount of annual income the property generates per year. When this happens, the real estate investor gets to enjoy what is known as tax-free cash flow,” Dennis says. “That is why so many high net worth individuals and wealthy families use this strategy to grow and protect their wealth and reduce their taxes over time, and that’s also why they seek tax professionals who can guide them through their rental purchases.”

To maximize your tax savings, learn about LLC Tax Deductions That Can Save You Thousands or read about Choosing the Right Structure for Your Business Entity. 

Multiple Income Streams Provide Protection and Flexibility 

Individuals with multiple streams of income are protected against economic downturns and unexpected expenses. If a round of layoffs causes an employee to lose their primary source of income, they’ll still be able to provide for their family and continue building wealth if they have a few sources of residual income.  

Multiple income streams also provide financial flexibility. For example, someone with a 9 to 5 job may want to spend a summer traveling or extended time off to be with a sick family member. Residual income makes it possible to spend some time away from work without worrying about not being able to meet financial obligations. 

For more passive income ideas, check out “25 Ways to Make Extra Money.”