How To Create a Passive Income Plan
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!
How To Supercharge Your Savings
Paul Glossop: Hello, guys, and welcome once again to Pure Property Investment one on one. I’m joined again today by Tristan Scifo. Tristan, thanks for joining us, mate.
Tristan is a Financial Planner, he’s also a Wealth Coach, he’s a good guy at that, so what I’ll probably do is there are no financial ramifications or having to pay me for that comment either, but look what guys, we’ll get straight into it.
From my side of things and I guess when we talk about the investment property space, and working as buyer’s agents, both for owner occupied properties and investment properties, we get the question a lot, both by clients coming in to us to say, “How much do I need to save to buy my first investment property?” and, again, like a lot of these questions that come our way, it does depend, but it depends on a lot of good reasons, as well as probably some considering reasons that you need to factor into your equation. Tristan, from your end from the wealth coach and financial planning perspective, when that question gets posed, what are some of the things you would think for our viewers to think about?
Tristan Scifo: Yes, it is a good question, but there is an even better question, and it is, “How should I be saving?” A lot of people don’t stop to think how to save, you know. So, people let their pay all come into one account, they spend as much as they need to spend and if there’s something left over, they call it savings. Other people have a specific account, and when they receive their income, they put a regular amount into another account, like a piggy bank or a savings account, sometimes a totally separate bank, one that they can’t see, you know, that they’re not going to rip it back from. And that second type of savings is what we call, legitimate savings. It’s a regular ongoing saving plan of weekly, fortnightly, monthly. That’s what we want to see.
Even if someone comes to me with a hundred thousand dollars, and you think it’s enough to get a property, surely somewhere in Australia, but they don’t have a regular saving plan, I say we’re not going to look at any investment property until you have a regular saving plan. That’s number 1. You’ve got to be saving something, whether it’s a dollar or it’s a thousand dollars a week, we need to have something going ahead. And in terms of how much you need to save, well, if you don’t have much to begin with, then that’s okay, as long as you’ve got a good saving history, and you can prove that you have, you know, the ability to save, then there are avenues to get your deposit together without having all the cash up front.
Obviously if you own a home, then you can be looking at an equity investment, in other words, you’re using existing capital, not cash, to get access to another property, another loan. If you have no properties though, when you’re starting from scratch, a lot of people these days, a lot of younger investors are looking to their parents, potentially their aunties or uncles, and sometimes, even siblings or grandparents, to see if they’ll offer a guarantee. And that’s where the property of a family member is used as collateral for the bank to say, “Look, I’m going to give you the whole hundred percent, or even maybe just ninety five percent, so you only have to put down a very small deposit but if you forfeit on the loan and everything falls apart, I’m going to come after your folk’s home. I’ll force them to sell it, and they’ll cover up”. So, there’s more risk, and a lot of implications to that, but it does mean that you don’t need a specific fee in every situation.
That said, we like to have rules of thumb and I think 60,000 Australian tends to be a good figure to aim for. You’ll find a lot of the time in entry level properties, especially if it’s an investment and you’re able to look nationwide, you can find decent properties in the three hundred, four hundred, five hundred thousand-dollar marks, and at a $300,000 price point, you’d need a 20% deposit, about $60,000. If you’re willing to go a little bit less that 20%, and pay a bit extra cost for it, you then can even afford some of the stamp duty and the additional purchasing costs, for example, the legal costs and also a property buyer’s agent’s cost you might need to pay, and fitting that within 60,000 is achievable. However, it’s going to limit your options. So obviously there’s lots of ways you can slice it. I’ve known people who’ve invested with as little as 42,000, and obviously even less if you’re going to use a guarantee. But if you’re on the road and you want a figure to set your mark on, sixty is probably a baseline.
Paul Glossop: That’s some very sage advice there, to say that rule of thumb of round about 60K, and that is a moving feast as far as that price point over the years with regards to banks’ appetite for LMI and LVR’s that they want to see in different amounts of capital they want to see up front, or whether you’re going to be using a guarantor or not, and I think the other part too, in what you talked about, is making sure that people understand that, that first investment is always going to be the hardest, it truly is. I don’t know too many investors who have 5 investment properties who say that the sixth was the hardest to buy.
It’s never the case, it’s always the first and potentially the second, whether that’s your owner-occupier or your investment property, whichever comes first, it’s kind of irrelevant, but it still is the hardest place to get legitimate savings, but like you said, having some good, considered processes in place to get your savings working in the background, get your money working for you, set some good habits, and then see if there’s opportunity to leverage off family members, friends, or anyone who might be willing to look at putting a bit of capital up for you to allow you get your foot in the door, release their equity as the first port of call, and then looking to utilize that property as your springboard long term.
The first million is always the hardest to make, as the saying goes and that’s really where the focus needs to be – saying it was easy, everyone would be doing it, and that’s why we are always on this journey of trying to figure out the best way to do it, the best structures to be putting them in.
So, thanks mate, really good insights and I think, guys, if you do want to have any discussions with Tristan or his team about how to set those savings up or about what legitimate savings you might need to get your foot in the property door, feel free to give him a call. His contact details are at the bottom of the screen and likewise for myself and my team, our contact details are at the bottom and you can always contact us at those numbers and we’ll chat to you soon. Cheers!
So You’ve Achieved a Passive Income? What’s Next
Paul Glossop: Hello and welcome once again to Property Investment one on one. I’m joined today by Tristan Scifo. Tristan, thanks for coming, mate.
Welcome to the studio. Question I have. You’re a financial planner, you’re a wealth coach, and I’m sure you get this question posed to you quite a bit. We get a little in our office as well, is that we get investors having bought their first investment property, or potentially their second, third and so on, and might get to the point of saying, “I’ve achieved that milestone. What do I now do with my surplus cash, and what’s the next steps?” Because it’s kind of like climbing Everest to some people – I’ve achieved that, now what? And a lot of that comes down to I’ve got surplus cash flow or potentially I’m going to be earning an income for the next 30 years of my life, what should I be doing, and how should I be funneling that money, things I should be considering.
Mate, I’ll throw it to you, because you’re probably more qualified than I to answer different things that people should consider.
Tristan Scifo: Look, it’s a great question. Simple couple of answers. First thing is, celebrate, have a really good meal, some people tend to go on a holiday, don’t blow it, but yeah, yeah, pat yourself on the back you’ve got yourself into something that not everyone manages to get into, an investment property, let alone their own home. But second, and straight after that, book in for a meeting with a coach. Get yourself some accountability. You’ve just achieved this goal that you’ve probably been working at really long and hard, and no doubt you’re feeling a bit of relief. And a lot of the time it’s very easy to sort of rest your legs up and go, “Look, I did it, I’ve got that property, I’m in”, and 2 years can go past, and you’ve saved half as much as you would have. Without that motivation and drive, and particularly the accountability of a good financial planner where you’re headed, there’s a good chance that you’ll lose some steam.
So, if you’re an investor and you’ve got your first investment property, you’re going to have to find a way to allocate your surplus, whether you have a negatively geared property that you have to chip in a bit to hold, or a positively geared property which is giving you additional income before or after tax, you’ve got your savings, and your regular savings at that to do something with. The simple answer is, look at another investment property. But we all know it’s not so easy to get straight into it. You might have used all of your borrowing capacity, you might not have any more to borrow from the banks. You also might tend to give it a bit of a breather, and you might not have some options available straight away, so you do need a vehicle. The first place you could look is obviously an offset account, you know, an alternative to paying off the loan and putting it all in redraw, you could set up an offset account which would give you a guaranteed fixed amount of income.
A bit complex, offset accounts in some cases, but really, whatever your interest rate is on the loan, it’s almost like an offset account is an investment with a guaranteed fixed income at the exact same rate. So, if you’re paying 4.2 % variable on your loan at the moment, your offset will give you 4.2%, or the equivalent thereof. Few implications to it, but that’s pretty much as simple as it gets. Now, can you do better? Is there anything better than 4.2? In the short term, it’s difficult to do better. If you’re going to invest for 6 to 12 months, Paul, I would be very reluctant to recommend a higher risk market-linked investment. Under a year, there’s a lot of volatility. If the market drops, then you might only even get your 4.2, you might get a negative 4. So there is definitely risk involved, but there are some investment vehicles which have lower risk, that we can look at including diversified investment portfolio and cash term deposits and cash-like investments. This is a space that’s highly unregulated.
There’s actually a lot of new products popping up in the market. A few things that people often look at – peer to peer lending – that’s where you become a bit of a bank, and you start lending your money to other people, without sort of using a big bank as an intermediary, you kind of lend directly to them via a platform and there’s a few of these sorts of products on the market, and there’s also a few hybrid high interest savings. It’s not just a normal high interest savings, there’s a bit of added risk to it. Now when you get higher risk, you get added returns, so can be playing with knives at times, but there’s definitely a lot of options, from as simple as putting in the bank to using your offset account to sort of these hybrid type cash investments, then you’ve got your general portfolios with high risk. There’s a thousand other things you can do, but if you’re wondering what it is you should do, you should really get that coach on board, get a plan in place, and choose an investment that suits your risk profile.
Paul Glossop: Yeah. Excellent advice, I think. One thing personally as an investor for the last decade plus myself, and with a property portfolio that spans that time, one thing I’ve realized, one thing that motivates me more than ever is making sure that every single time a property or a purchase or an investment irrespective is made, having a plan after that plan, because the worst thing you can do, and I’ve been guilty of it personally, where probably after 5 years I hit a milestone that I’ve wanted to achieve and I probably went on a hiatus for about 18 months which cost me. And I only went on that hiatus because we kind of, my wife and I kind of achieved what we wanted to achieve, and then didn’t really refocus when we could have refocused straight away, and then hit that button and then gone straight ahead, and that’s probably cost us delayed gratification aspects, which we really haven’t been able to achieve because we probably celebrated a bit too long and took out foot off the pedal when we shouldn’t of, and I think a lot of people are guilty of that. Whether it’s getting your first investment property or getting your fiftieth, or even diversifying into other things and other investments strategies.
Having a plan, having a coach and getting someone to say, “This is what you said you would achieve, this is what you’re capable of doing, now just go and do it. Sometimes you just need that proverbial kick in the backside, and it’s as simple as that. Others need genuine mechanisms to get it happening, but I think the first step is always saying, once you get there, engage that person. If you haven’t engaged them before you get there, get those plans in place before you buy that property, or your next investment property or invest that money into an offset account or different asset classes, etc.
The key for me is having the right support people around you who’re going to give you objective advice based on the outcomes which you want to achieve, and, for me, that’s key, is that getting the right advice by people that have the right intention and also the right knowledge and skill sets to be able to get that outcome achieved.
If you do want to contact Tristan or anyone from his team, guys, everyone’s welcome to, and his contact details are at the bottom of the screen. Feel free to give him a buzz. He would be more than happy to set up some time to go through those aspects and likewise, from our side of things our contact details are at the bottom of the screen, and we’re always happy to have a chinwag. Chat soon.
Government Grants and What You Need To Know
Paul Glossop: Hello guys, and welcome once again to Pure Property Investment one on one. I’m here again today with Tristan Scifo. Tristan, good to have you back in the studio. Tristan is a financial planner, also a wealth coach, does a lot of work with probably everyone from first time investors, people looking probably to set some goals, finances in place from the early stages, right through to retirement planning and everything in between, and that’s probably one part we want to discuss today, if that’s okay with yourself, mate.
With some of the changes to the May budget, one of the things we’re seeing come across the table for first home buyers is the first home super saver scheme, and there’s probably a little more detail yet, is there and we need an acronym for that, which I’m sure they do back in the backrooms of Canberra, but I’m hoping you might be able to share with our viewers a little bit about how that works and how that can potentially help first home buyers, and can they use that money potentially to invest as well, or is it a bit of a taboo topic?
Tristan Scifo: Great questions. Not taboo, it’s just that we don’t really have all the answers just yet, I’m sorry to say, but there’s some good news and some bad news. The good news is, if you didn’t know, Super, superannuation, is a great place to have money. Bigger picture, comparing it to having a property, sorry, comparing it to having a company, comparing it to having assets in your own name, comparing it even just to other trusts, it’s probably the best tax effective vehicle long term for holding any assets, so being able to, not just investing in your Super but being able to take money back out of your Super to use for a property is a really good idea, I think. It’s going to incentivize more people to save in Super and it will make it more feasible for first time investors to get their first property.
The bad news is I don’t believe it’s going to be usable for investment, so it’s only possible if you pull the money out to buy your own home, you going to have to live in it, and even if you intend for that to be an investment, there’s going to be a few boxes you’re going to have to tick off, and one of them is you’re definitely going to have to move into it as if it’s your own place, so it’s a bit of a win and a lose.
Paul Glossop: Yeah. It’s probably a word to the wise there a little bit about the fact that Super, as the vehicle it was intended on years and decades back is being utilized in a way that is quite useful , as a tax effective haven, giving younger people the ability to potentially look at sacrificing some of their wages, better their savings ability and probably set some good habits in place long term as well, which is another great opportunity for people even after the 2 years, where they can offset that cash, bring it back out, buy their home, maybe not from an investment perspective, but I think long term it’s going to allow people to get into the property market quicker whilst not having to pay as much income tax potentially along the way, so thanks for that insight, mate, and obviously there’s a lot of detail that goes below what we just talked about, top line, but if you do want to get in touch with Tristan to talk about how you might be planning to buy your own home in the next few years, months, weeks, whatever it looks like, and how you might be able to effectively use that new policy and maximize it for what it’s worth, his details are at the bottom of the screen.
Feel free to give Tristan and his team a buzz, and I’m sure he’d be happy to sit down and have a chat, and likewise, from outside, from a property specific perspective, we work obviously in the owner-occupied perspective and the investment property space, so feel free to give us a call if you have any property related questions and we’ll catch up with you. Cheers!
