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!
Paul Glossop: Well welcome again guys to Pure Property Investment one on one. Today I’m joined by Andrew Foo. Andrew is the principle of Apexx Wealth. He’s also a financial advisor. And what we wanted to cover today, Andrew if you don’t mind to, is probably talk about your role. And financial advisors are more so properly focused financial advisors in general. Their role in helping investors or would be investors get into the property market and how that financial advisor, financial planner should really be working with the client in the early stages.
Andrew Foo: Look, although as advisors we can you know direct clients to invest directly into property that’s your job. You know, we able to help give clients an objective view of “Okay, this is what you want. Right? You want to achieve you know this amount of properties over this amount of time, how do we get there?” You know, first we look at the cash flow and we look at any potential equity that they may have in an existing place or in their savings. And we form you know a projection of “Okay, this is how much we think you may be able to afford based on what you bring in and how your spending habits are.”
You know perhaps this is you know the price point you should be looking at, you know and this is what the potential repayments will be like and you know we project you know rental income obviously on a worst-case scenario just to make sure we’ve got a buffer. And from there you know if clients don’t have you know the right amount of equity or don’t have savings, we help put a cash flow plan in place to get them to get in those good habits of saving your money, building up a good nest and then using that potentially to get you know the first investment property or get your first home anything like that.
Paul Glossop: But it’s key I think you’ve probably put out a point there saying you kind of making sure that habits are right. I think Aristotle once said that “You are what you repeatedly do”. And making sure if you don’t have those habits in the early stages as far as savings or budgeting, your role might not be to say “It’s time to buy a property”. It might be to say “You need to start changing the way you spending or start to understanding where your money is coming in going out, to get you in the position in 12, 24, 36 months’ time to then therefore buy the property.”
Your role kind of sits right across the gamut right from property investors with big portfolios to manage cash flow and manager objectives right down to those early investors wanting to get into the market. And also like you said I think you pointed out the key is also understanding is this the right asset? Is property the right asset? It might not be, it might well be that they’ve got a diverse property portfolio and they may need to look at some kind of diversity outside of that as well.
Your role is probably look at it, like you said, holistically understand everything that they’ve got, where they trying to get to and how you can best probably project how we can get there in the best way and probably the most defensive way possible.
Again, it’s probably a little bit more of there’s a lot of detail behind that discussion and I think that detail probably needs to happen in a probably good 30 minutes to hour discussion around everything that you have.
And if you do want to talk to someone like Andrew about your position and how he can potentially work with you to talk about budgeting or strategies and objectives. Feel free to contact him on the details at the bottom of your screen. And likewise if you’d like to get touch with us, you can contact us at any time as per details below as well. And we’ll catch up with you soon. Cheers!
Paul Glossop: Welcome to Pure Property Investment one on one. I’m joined today by Aaron Christie-David. Aaron is the director of Atelier Wealth. What we want to talk about today Aaron is, probably a little bit more subject to the rise of both the Sydney and Melbourne property markets over the last five years. Sustained capital growth of that 10-20 percent on certain markets year-on-year has left a lot of owner-occupiers and home owners in a position where they’ve got a quite an amount of, quite a large amount of capital growth and equity ultimately in their properties. And compared to the LVR on their loans on those properties, they’ll be sitting with a pretty large chunk of equity and left with the option now of saying well, “Do I continue on that road that we’re on, pay off my home loan and then think about what’s next?” Or “Do we look at just consistently maybe leveraging a small portion of that equity that’s gained to therefore reinvest that into a different market and create additional wealth as opposed to the trajectory that I am currently on?” But I am sure you probably come across that day-in and day-out with those questions coming from your clients. I’d be happy for you to share maybe some of the ins-and-outs that people that need to understand.
Aaron Christie-David: Yeah, sure. We see a lot of clients have got their owner-occupied properties. So they own, like you’ve said, they’ve got a home loan against it and they’ve got a good amount of equity and what they’re saying is, “Should we be paying down our home loans as fast as possible before we look to buy an investment property?” I guess you do need to seek financial planning advice or speak to your accountant about your options. But for a broking point of view, what can we do? So what we do is that we say, “Right, continue to pay down your home loan as fast as possible.”
I guess it comes out of that good debt versus bad debt train of thought. And we say debt is debt, but if you do want to plan for the future, where what you can do is tap into the equity, so we can draw out a portion which becomes a deposit for your first investment property. And then what we can do is finance the investment property itself. So, that all becomes deductible debt for you as well.
What we want to do with every client is work with their cash flow. Because ultimately, everyone’s big question is, we don’t have to contribute towards this investment property, we want to pay off our home loan as fast as possible, which is right. So what I say is, why don’t you get the best of both worlds. So, ideally look into a neutrally geared property, which takes care of yourself. Best case scenario if it’s positively gaining, it is actually helping to pay off your home at the same time. And again that’s best case scenario. So what we want to do is work with someone like yourself to say, here’s a realistic rental expectation, here’s all the outgoing costs that you need to hold this property. Account for rate rises because eventually they will go up as well. That’s giving you a fairly defensive and conservative view and then even if we take a fairly market standard increase on capital growth and what we are left with these assets that are sitting on the background that should be gaining good returns year-on-year, and in the meantime you are paying your home loan as fast as possible.
Paul Glossop: Yeah, it’s really quite a Pandora’s box when it comes down to people’s position, where they are sitting in that point of time, how long they’ve got left to pay off their home loans and ultimately, how long do they have left in their working careers as well you know. We might say that you’ve got 20 years left to work and earn good incomes in that time and that might mean well there that you don’t need to necessarily focus on just cash flow. You might then say look; we can sustain a small hit because we’re going to earn decent income for the next 20 years. And that might mean that you can go chase more a capital growth-targeted asset rather than a cash flow asset.
But alternatively, if your cash flow is relatively tight, and also your timeframe might not be as long as far as your time in the working career environment, then you might say, we want to get an asset that is going to be self sustaining, still with capital growth focused but being able to be cash flow neutral if not, cash flow positive. The key with that is obviously, you might need to make sure it fits your specific position and your objectives.
But then secondly making sure you release that money in a way that’s going to be tax-effective and also is going to be the right structures which are not going to lock you on something that’s nasty and you haven’t been explained. And all of a sudden now you’re very much a fixed component of one big bank whose got their paws locked tight into you. And unfortunately, there’s a lot of people that go down that path who probably don’t answer the right questions or get the right advice before releasing that equity to invest.
Moral of the story, get the right advice early but really be aware that you’re probably sitting at the opportunity a lot of home owners in the Sydney and Melbourne markets specifically of the last five years, they’re probably in position now, if they haven’t tapped in to equity to potentially look out releasing some equity to reinvest into the market and get compounded returns on what they are going to be leveraging out off and better their retirement ultimately as long as that investment is going to be the right strategic property.
Guys again, if you do want to contact Aaron for any reason regarding structures finances and etcetera. His team is more happy to set up some time to have a chat. His details are at the bottom of the screen.
Likewise, for our own, our details are at the bottom of the screen and we are more than happy if you would contact our team and we could setup a meeting to discuss your objectives and strategies. Speak soon! Cheers.
It’s so easy to run I guess from any other distance look at different options and look and sea changes, tree changes etc. I mean, the truth be told young kids ideally, potentially in school and everything else is entrenched when you do have lives. I do like the opportunity to look and sea changes, tree changes most of the time as a father of two kids myself I know it’s more or less impossible looking at everything else that goes with it.
But if you look at the practical aspects for myself personally, I think Simon has already brought up a few key points there. It’s tough when you buy with the intention of then an owner-occupier to then say, well, it’s great in theory to hang on to it as an investment but practically it’s very difficult on how that plays out for me. I’d probably really want to sit down and see from an accountancy perspective, what are some good strategic property advice that might come from that as well as other mortgage brokerage perspective and looking at loans structures, outstanding debt, equity that may be available and then looking at different options that come there. Personally, I’m a big proponent of the whole rent-vesting cycle. I personally rent where I want to live. I’ve invested in multiple places elsewhere. It works for me. It works for my family. It might not work for most, but it also must be probably in place with the best strategic decisions.
Obviously, it must be capital gains, tax-free exemptions from that family home and really looking at where to appropriate that property or the money from that property best. But where we see the Sydney market personally, similar to what Simon said or Andrew said earlier in the segment, we’re probably somewhere in the middle. I think we’ve got a little bit further to slip. I think certain markets are probably going to do better than the others, places like Newtown inner city in that inner west of Sydney, probably in a better position from the overarching supply aspect. I don’t think in the free standing or at least the semi-detached dwellings aspects they’re not going to be running out of vogue anytime soon. So, I think they’re going to be well positioned if they choose to hold on.
But ideally, I would be getting an advice from if they sell what are the implications if they rent, what are the options? What is the difference in the cost versus actually having a tenant in there and the mortgage difference in between? And then effectively figure out where your money can work best for you and where you want to live long term. Yeah, those are your options.
Interviewer: So some big decisions for Amy there in Newtown.