Residual income is what is known as passive or investment income. One could say that residual income is income that comes in every month based on work that was performed in the past or an investment that was made in the past. The opposite of residual income would be paycheck income. Paycheck income is what you get when you trade your time for money (paycheck).

What types of residual income exist? The prime examples are royalty income, interest income, and investment income. Royalty income comes from copyrights, license agreements, oil and gas leases, etc. An author can write a book and enter into a contract with a publisher who agrees to pay a royalty on every book that is sold. The author is paid every time a book is sold. Every month, the publisher sends the author a check in her mailbox for the sales of her book over the past period. The income comes in as long as there are sales of the book. The author does not have to write anything else to get that stream of income.

An inventor can invent a new product or idea that can be patented. For example, a woodworker conceives of a new fence that goes on a saw to hold the wood in place for cutting. He obtains a patent and enters into a contract with a manufacturer to sell the fence. The manufacturer agrees to pay the inventor a royalty for every fence that is sold. Every time a fence is sold, income is generated for the inventor. Every month, the manufacturer sends the inventor a check in his mailbox for the sales of his idea over the past period. The income comes in as long as there are sales of the fence. The stream of income continues even if the inventor does nothing else. This income comes from the license agreement.

A land owner can enter into a lease agreement with an oil or gas exploration company to develop an oil or gas well. This same scenario can apply to any mineral on the property, uranium, sand, water, etc. The exploration company or producer pays a royalty based on the amount of oil or gas that is produced from the property and sold in the open market. The check comes into the mailbox monthly based on those sales without any further effort by the landowner.

What people do not normally think of as residual income is interest income. Interest income is paid as long as money is on deposit or loaned to the entity that is paying interest. This scenario is the key to most plans for retirement. The calculation is made of how much money one wants per month. If that amount is $5,000, then one would need at least $60,000 per year. If one can earn 5% on a sum of money, then 5% times that sum must equal $60,000. With $1,200,000 earning 5% per year, one would have an income of $60,000. As long as the $1,200,000 is loan or on deposit and as long as the borrower or bank pays 5%, the checks in the mailbox will total $60,000.

The same situation exists in real estate investment that has net income. This type of income is called investment income. The income comes in as long as the person owns the investment. The investment can be real estate, bonds, stocks, or other investment vehicles, like a real estate investment trust. The investor does not actively work on the investment, his money is at work, so the investment is known as passive.

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