Passive Income (Part 3)

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Now, lets take a look at property as a source of passive income. Property is actually one of the most popular source of passive income. This is due to several factors namely:

1) Inflation works for you! (for the first time ever!)
2) The power of leverage is available for property
3) You gain cash flow (essential portion of passive income)
4) You gain equity(ownership of the house)
5) You have near absolute control of the investment

I'll make a separate post later on discussing about each of the above mentioned pros of buying property but now allow me to explain how can property generate passive income.

In simple words, property generates income for you only when it is rented out to tenant. If you buy it cheap and sell them high, we categorize that as active income as you need to actively buy and sell the property.

Now, the general idea is to get yourself a property(house, condominium, shop lots, piece of land). The second most crucial part of property investment is perhaps the location and condition of the property itself! If you buy a 19-story bungalow but it is located beside a drainage sewer, chances are you might not be able to rent them out.

Secondly, the condition of the property. When you are about to purchase them, be sure to inspect the property thoroughly. Inspect every cracks that you see. It is advisable for you to bring a professional together with you to inspect the the property. Then, you can use the flaws of the property to your advantage when negotiating for a lower price of the property.

In passive income, we are aiming for cash flow, not capital gain. Cash flow here means getting the most amount of money per month and not getting the most profit by selling the property. The most effective way to achieve that is to spend as little as possible from your pocket and to earn as much as possible from rental.

How to spend as little as possible? Spend the lowest amount of down payment for the property and take the longest tenure (e.g 30 years). That way, you will entitled for the lowest monthly installment.

Next, comes the most important part of your property rental, finding a good tenant. In general, you have to do background checks on your tenant, call up their employers and ask about their work, if you can get their previous landlord, that is even better as you can ask about the tenant.

Now that you have got yourself a property and a tenant, be sure to make a legal agreement between the both of you. Be sure that the rental basis is agreed. Never rent on a month to month basis. Rent for at least a year or more. This would give you the opportunity to review your property and rental amount from year to year, increasing the rent if the chance arises.

To illustrate,

You bought yourself a condominium for RM100 000, you paid RM10 000 for the downpayment of the property and secure yourself a RM90 000 loan for 3.5% interest rate with a tenure of 30 years. Your monthly repayment works out to be RM404.14. Thus, you rent out the property for RM850.00, making you earn a net income of RM445.86 per month. Now, we can say that you property is generating a passive income as you do nothing but collect rent each month!

The example above illustrates the general idea but there are more factors to consider such as legal fees, repairs, deposits and taxes but the general idea is as above.

I do hope that you do more research and reading before investing in property as my post above is very superficial. But then again, this is one of the way by which many earn their passive income.

P/s: Due to my hectic schedule and tonnes of items to study, I will update during weekends only. Sorry to all for the trouble and thank you for staying with me. =D

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Passive Income (Part 2)

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Lets take a more precise look into each of the assets I mentioned in the previous post. We will begin with the first asset namely human asset.

Human asset basically generates active income but I'll explain on anyway.

Human asset is yourself! Yourself is the greatest asset ever given by Him. Not to mention you don't even have to pay anything or make much effort. Its given free!

We polish our human asset by acquiring new skills and knowledge. With the addition of new knowledge and skill, it makes us more marketable and then, we "sell" our knowledge and expertise and thus we get paid for.

Generally, humans are most productive between the age of 25 to 40. This is when one is imbued with endless enthusiasm, dreams and ambition which drives us to succeed. During this period is when we are able to work our asses off to get the best in life.

But as God dictates, we will eventually grow old and die. When we are old, we cannot work as hard as we did during our younger days, then our income is surely to decrease. As a result, we are not able to maintain our usual lifestyle if we don't have any other source of income.

Not to mention, not everyone is guaranteed to live to the golden age with perfect health. Some had accidents, diseases, acts of God etc which renders them unable to earn income. Thus, the risk of human asset a.k.a ourselves is there, we can get hurt, we can be paralyzed, we can be rendered incapable of working.

As I mentioned earlier, I will share some thoughts on how to acquire, protect and maximize its potentials.

Acquiring human asset is as simple as educating yourself on relevant knowledge! Such as reading books, going to classes. Adding more and more knowledge into yourself is a way of putting more "value" into yourself a.k.a human asset.

How to protect human asset? Human asset is exposed to dangers I mentioned earlier such as accidents, diseases which can damage your body and renders you unable to work. The solution for this is insurance. Insurance is the shield by which will protect your uncertainties. We'll look more into this in future posts.

How to maximize the potential of human asset? Now this is done by improving your soft skills! Communication is the key in job market as today, nearly everyone is equipped with knowledge but what distinguishes the outstanding from the crowd is the soft skill. So, join those soft skill workshops!

In a nutshell, human asset is basically your knowledge and your skill which would remain as your main source of income for a major portion of your life. Thus, protect it with insurance and maximize its potential by improving your interpersonal skills!

In the next post, we will look into properties...

Stay tuned!

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Passive Income (part 1)

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I duly apologize for the delay for this delay as I have just finished my orientation week here in IIUM Kuantan. It was indeed tiring but hey its informative!

The last post we have looked at passive income, now let us look into the other category of income namely passive income. Passive income is a type of income by which you don't spend much effort in maintaining it as compared to active income.

Passive income is the key to wealth building.
Passive income is usually obtained via income-generating assets. Do take note that I am referring to income-generating assets, your car is an asset but it will not generate money, in fact it drains money each month (fuel+monthly installments+insurance).

The same goes with the house that you are staying (if you bought it). It may be huge and beautiful but it is not generating money for you. In fact, it is the same as the car, it drains money from pocket as you need to pay for the installments, maintenance, electricity etc..

So what are income-generating assets?

Income-generating assets are:
1) Human asset (yourself!, your education, knowledge, skill)
2) Properties (other than your house)
3) Business or side business
4) Paper asset (funds, stocks, bonds)

The general idea is to acquire these assets, protect them and learn how to maximize their potential in order to maximize your income.

Out of the four assets, human asset in general is a source of active income as you use them daily to work in order to get paid each month.

We'll talk more in detail on how to maximize the potential of each assets that you are currently having.

Stay tuned for more!

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Active Income

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Generally, there are two types of income: active income and passive income. However in this post, I would like to highlight the former, active income.

Most of us make our daily lives via active income, we go to work and by the end of the month, we get paid. Active income is generated via human asset which is knowledge. We increase our active income by learning new skills and upgrading our current knowledge to a new level, thus resulting in a better pay for us.

In general, it can be said that active income is generated from our human asset, one which must work in order to get money. If we fail to turn up for work or is rendered unable to do so, we will not get paid for it.

The god thing about active income is usually we are equipped with the knowledge to do so via our education. Our parents would have educated us by sending is to school and then university. Thus, we don't think much of how to get this human asset, out parents do the hard work for us.

The drawback of active income is usually because it depends on our physical capabilities to some extent (move to work, type, write on letters, read statements), in the case of any accident which might injure our body, this type of income may be reduced or gone for an individual e.g paralyzed after accident.

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Debt! Debt! Debt!

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Last night in the news it is mentioned that 10% of the credit card users around the age of 25 and below are going bankrupt due to excessive usage of credit card. 10% is a huge number, a very huge number. Not to mention, those who are declared bankrupt would have a harder time to make a comeback due to the debt burden. Lets take a look how can this situation came to be.

From this point on, I'm assuming the attitude of a 25-year-old individual based on a person I know. Thus, this assumption may or may not apply to all 25-year-old individuals.

You're 25, you're young, you're energetic, a career ahead and you got the most important thing of this material world has to offer, money. Not to mention with your sound salary and little to no commitment, you're offered credit card. Well, credit card are seen as status symbol in our community by which whoever has one is indeed belongs to the elite of the society. So, this social status is too tempting and you took the credit card.

Amazed at your buying power now in which you can spend more than you actually have! In addition to that, you are only required to pay a minimum amount of your purchase! This is the deal of the lifetime! You can have a RM5000 plasma TV, and pay very minimal each month! You have found your pot of gold!

Then you start to indulge yourself, buying anything that your heart wishes with the swipe of a plastic card. Ahhhh... this is what enjoying life is defined you thought. You continue to purchase up to a point when your salary is just enough to cover the minimum pay for the credit card.

As time pass, you want to move to a bigger house, buy a new car, get married, save for retirement. But, when your pay comes in, you deducted your previous credit card installment and you wound up with 0. Your paycheck is used up just to pay your credit. Then you wait for the next month, still the same thing occur. And the next month, and the next month.. until you wondered why can't seem to finish paying your debt yet?

You inquired your credit company, and then you found out the bitter truth. If you pay just the minimum amount, you'll be charged with interest. Each year, you'll charged with interest on the outstanding amount. You're debt keeps on snowballing and you end up in the vicious debt cycle. You'll be a slave to your debt, each month you work is just to pay your outstanding debt. A sad life to lead for the rest of your life...

So think wisely before swiping that plastic money.

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