Paul Glossop: G ’Day guys, and welcome once again to Pure Property Investment one on one. I’m joined today by Tristan Scifo. Tristan, thanks for joining us mate. Tristan is a financial planner and wealth coach and probably quite topically, what we want to discuss a little bit about today is in that today is in that wealth planning space is, creating passive income, and the question I probably have is, how to create passive income. Look we work in the property space, but as a financial planner, it’s probably property and potentially not property specific so, I’ll throw it to you mate.
How do I create passive income? As a would-be property investor or a would-be investor full stop, or someone starting out or someone finishing up in my working career.
Tristan Scifo: You Paul, I think you’re quite the guru yourself. But, look, you’re right, it goes across all spheres, not just property and all parts of wealth and I guess. Just to note first, passive income is a bit of a misnomer in a lot of peoples’ minds. A lot of people have this idea one day they’ll be financially free and they’ll have passive income they won’t have to anything for and they won’t have to work a day in their in lives, and maybe I’m dramatising it a bit, but I hear this day to day, I tell you, each week of the three or four new clients we meet, we’ll have at least one who’s going to talk about these sorts of things, and they’ve been encouraged by the blogs and podcasts that we hear these days. The truth is, passive income is never complete hands free. The passive nature means it’s not active, which means, you know, not actively, you know, gentrifying or building or doing your 9 to 5’s to get that income.
You are managing, though. Any passive income requires some level of active management, even if you’re just supervising someone else who’s doing the work. Investment properties a very good example. You buy a set and forget property, you have a real estate agent, you have to still monitor them. When the tenant moves out, you’re going to have get involved in the process, soon as the piping breaks, you’re going to get an email or phone call there’s always going to be some level of activity. It’s not just a technicality I’m pulling up. The whole point is, you never want your passive income to be sucking from the well. As a member I’m probably on a high horse at this point, but I believe that we are responsible for the impact we have with our wealth and our wealth is meant to benefit all those around us, and by using your wealth to benefit those around you, you get remunerated, or benefited with income, so it’s never truly passive.
That said, how do you get it, how do you accumulate passive income? It’s really simple – you create value. You generate as many and you acquire as many assets as possible which generate value for the world and the more value that you generate, the more you you’ll be remunerated with passive income. So, what’s an asset? Look, there’s lots of ways you can slice it up. I like to lean on Robert Kiasaki’s definition, at least part of it, where there’s 2 very simple components to an asset.
The first is, it’s got to grow, it’s got to grow over time. If it is going to depreciate, like a car would, your typical car, it’s not quite an asset, not unless you’re able to make sure that it’s getting more and more value over time, like a collectable for example. But things that grow are things like property, you know, land in particular, not the building, but the land underneath it. Certain machinery becomes more and more rare over time can become an asset eventually, and definitely anything that has scarcity to it, because less and less of it over time, you’ll find that it will grow. But that’s not enough because a lot of things that become more valuable over time they can cost you money to hold. And certain properties, a good example would be really expensive strata units which are negatively geared, even though they may grow over time, if it’s going to cost you 3 or 4 thousand dollars a year just to hold it, I would actually say, technically, that’s not an asset.
So, the second category is, you want it to be generating income for you. If something is not giving you an income, it’s dead in the water. It’s giving you paper growth, but until you sell that, it’s worth nothing to you. Yeah, you might be able to leverage against it and use it to invest in something else, but if everything you’re leveraging into is just costing you more and more money, you end up with these portfolios, and I’ve seen some of our clients or some of our prospects, I should say, come to us with, you know, 40, 50, 60 thousand dollars of negatively geared portfolio. It means that each year they’re forking out 40, 50, 60 thousand dollars, and they’re getting maybe a 20 thousand tax back from it all, and that’s eating into all their growth, their asset growth. So the truth is, you need both growth, but you also need income and there are a lot of ways to do that. It’s really up to you to find assets, but once you work out that really simple formula, it become a bit like Monopoly. It’s just, buy as many assets as you can. If you find them, if you find a good deal that’s offered to you, you’ve got the capacity too, you’ve done you risk assessment, acquire it if it fits in your portfolio. Find assets that complement one another, you know, if you have an asset that is very strong in cash flow, and other assets that may have low cash flow but really good growth, pairing them up could go really well. That way, this asset’s going to help make sure it covers any of the shortfalls.
Same thing, if you have assets which have volatility, in other words, they might give you regular income, but there might be periods of time, like a rental property, where there’s no one in there, and during those 2 months, it might be, you get no income. So, having other assets which can cover for that, you know, have a guaranteed, regular income, they might have a low growth profile, they could nicely pair together. So, building a passive income portfolio really is about acquiring the right combination of assets, because you never want them all in the one, we want to diversify our basket.
And last thing I’ll add is, pick assets you enjoy. Find things you’re passionate about, because you’ve got some skills that you can bring to the equation. Again, just to the property analogy, if you’re a builder by trade, and you love your job, purchasing properties you can do a renovation on might seem simple, but it’s going to bring your strength to bear, and that way you’re not getting only the underlying growth, you’re hopefully getting some income. You’re able to add some value or manufacture some value on top of that, because you’re bringing a bit of you to the table – you’re not just relying on professionals to make you money. So, as much as passive is good, a little bit of active doesn’t do too much harm, and bigger picture, we want to make sure our assets are really adding to the world, so that we can get rewarded for that.
Paul Glossop: Yeah, so there are a few key things there that I take away creating passive incomes and asset classes in general is, scarcity factor is key, having properties or an asset in general that like grows in value is obviously absolutely vital to creating passive wealth over time, but also having income producing assets. You used the example of a collectable car for example – very few collectable cars are going to produce a passive income unless you’re going to be renting those out and then all of a sudden you have huge insurance premiums and you’re running a massive risk that this thing crashing in the back of a bus, but the point I think is that diversification, having the ability for assets to grow, as well as provide cash flow and make sure they fit into your own position as far as your own personal income, your own personal time frames and your objectives, and like you said, adding back to the world.
Ultimately, the irony is that assets that you buy that benefit the world, typically the high performing assets, because that’s what people want, and then having it as a bit of a guiding beacon is a fantastic way to analyse it. I’ve not really heard it put that way before, but it’s a great one to sort of think of when you’re buying something, is, how is that going to be perceived by other people. Is that something that’s a positive, or a negative and usually those will reflect on how that property performs, or that asset performs over time.
Great insight as always, mate, so guys if you do want to speak any further with Tristan or his team about creating passive income and how to structure your finances accordingly, feel free to give him a buzz. His details are at the bottom of the screen, and likewise for our details at the bottom and we are always happy to have a chat, and we’ll catch up with you soon. Cheers!