There are countless types of financial assets that people aspire to invest in. Both passive and residual income are two very attractive investment options. Have you ever wondered which is a better option out of the two and how are they different? Passive income options such as rental property and crowdfunding options have been highly sought out investment options for the investors.
Both residual income and passive income are close in definition but are different. We will highlight some key differences between the two in the article and in addition, we will help you identify the better option for you.
What is passive income?
Passive income is the income that is generated with little or no effort. This income is generated from investments such as real estate, crowdfunding, stocks, mutual funds, etc. Building a stream of passive income is important to ensure financial security and a steady cash flow. Real estate and business requiring little effort are often preferred modes of earning a passive income.
While starting your passive income channel, you must strategize and plan. You must set your goals and objectives. It is also important that you evaluate the growth potential of the assets. For this, it is recommended that you carry out proper research into the market to identify your potential investment option. Let’s say you are investing in rental property to earn passive income. While selecting your property, you must check for any defect in the property such as title, legal disputes, encumbrance, etc. Apart from defects, it is also important that you calculate the tax payable and also consider evaluating the growth potential of the locality.
Thus investing in rental properties may not be completely passive and may require your active participation at the beginning as well as during the collection of rent. If you opt to invest in real estate through platforms like Assetmonk, you can remain completely passive as we take care of the management and collection of rent. We also offer top-quality properties suitable for your investment needs only after conducting proper due diligence and research. Thus, our investment options are capable of offering an IRR of 14-21%
What is Residual Income?
Residual income is the income that is generated at the end of an income-producing work. Some of the examples of residual income include royalties, interest and dividend income, and income from the ongoing sale of consumer goods (such as music, digital art, or books), etc. Rental real estate can also be an example of residual income. Under corporate finance, the term residual income can be understood as the income generated after all the payment of all the relevant costs of capital. Alternatively, the definition of residual income under personal finance refers to the income which is generated after repaying all personal obligations.
The different types of residual income include:
- Corporate Finance
- Personal Finance
- Equity Valuation
Should I invest in residual income or passive income?
Choices like this are very often put before us. Here the question of their difference arises. Passive income and residual income are different based on the effort put in by the investor. Investing in rental real estate assets can be both rewarding as it earns you both residual as well as passive income.
|Basis||Passive income||Residual income|
|Meaning||Residual income is the income that is generated at the end of an income-producing work||Passive income is the income that is generated with little or no effort.|
|Participation||In a residual income, the active participation of the investor is expected in the completion of the income-generating project||In passive income, the investor puts little effort into his investment.|
|Income generating sources||You can earn residual income from options such as royalties, interest and dividend income, and income from the ongoing sale of consumer goods (such as music, digital art, or books), etc.||You can earn passive income from options such as Crowdfunding, Rental Income, Cryptocurrency, Bank Fixed Deposit, Dropshipping, Affiliate Marketing, etc.|
It is often advisable to investors that they choose every best opportunity to generate income after considering the risk involved and also the rate of risk they can undertake. Simply put, it is always advisable to invest in both residual income and passive income opportunities if you can invest and have the necessary resources. The major goal of the investors is to earn passive income by using residual income avenues. By building your investment portfolio, you will be able to attain financial freedom and also retire comfortably.
Some of the key factors which help you in determining whether to invest in residual income options or passive income options are listed below:
Your objective as an investor plays a vital role in determining the asset class in which you should invest. If you are willing to engage actively, then residual income may be a good option to invest in. On the other hand, investing in passive income options such as crowdfunding options or mutual funds, enable you to invest and stay passive. In the case of crowdfunding opportunities such as those provided by Assetmonk, you need not worry about the maintenance of your realty asset and can still enjoy a handsome yield on your investment based on the product you choose to invest in without much participation from the investor.
Your financial position and your financial ability to invest in yet another factor that helps in determining whether to invest in passive income or residual income options. If you are financially stable or if you have financial resources left after investing in passive income it is often recommended that you invest in residual income options as well.
Each investment option has a different amount of risk which is involved and thus you must evaluate your risk appetite while deciding on an option to invest in. You can evaluate your risk appetite by taking into consideration your financial position and your ability to repay your debt. Then you may compare the same to the risk associated with each of the investment options earning you passive or residual income.
Residual income and passive income are similar concepts having certain differences. Passive income is about staying passive and earning an income. On the other hand, residual income is the income that is generated after the completion of a profit-generating project in which the investor takes active participation. While dealing with the question of which investment option to select, the industrial experts opine that investing in both options together is better. However, factors such as your financial position, your risk appetite, and your objective play a vital role in determining the ideal investment option to invest in.
Assetmonk is a smart real estate platform offering real estate investment opportunities in top Indian cities. Our products are categorized into Growth, Growth Plus, and Yield. Visit our website to know more about our offerings.
Passive or Residual income- which is the ideal option for you FAQ’s:
What does residual income mean?
Residual income is the income that is generated at the end of an income-producing work. Some of the examples of residual income include royalties, interest and dividend income, and income from the ongoing sale of consumer goods (such as music, digital art, or books), etc.
What qualifies as passive income?
Passive income is the income that is generated with little or no effort. This income is generated from investments such as real estate, crowdfunding, stocks, mutual funds, etc.
How do you make residual income?
You can earn residual income from options such as royalties, interest and dividend income, and income from the ongoing sale of consumer goods (such as music, digital art, or books), etc.
Does passive income get taxed?
Yes, passive income gets taxed. You can read about tax on passive income here and tips to save them here.