Equities, Lucrative Business, Fixed Incomes, Real Estate…..the list goes on, but what is the best strategy going forward?
You will often hear animated discussions which asset class is best for wealth accumulation specially to create a “passive income” stream. You will face with a myriad of collateral issues that will surface such as; assets diversification, optimum asset allocation, risk management, cost of holding assets (yes you are right, some assets cost you money by just holding them) and many more. Unfortunately, one very critical thing many investors usually forget is: context.
I would like to bring forth real estate as an example what I mean by “context” as many people are very passionate about real estate investment.
Considering the above big picture information, both Case A and Case B are close friends and they have decided to investment in another property. Let us simplify the facts and simply consider who is better place to invest in real estate, ignoring if it is residential, stamp duties etc. The intention here is focus on a very important issue which many people have ignored when they see their friend making big bucks in real estate investment……. the “context” – affordability.
They are considering procuring a property worth $2m individually. Who would be well place to make such an investment? Superficially, both can afford to place 20% deposit and with sufficient income to pay the mortgage, and therefore are well place to make such investment commitment, right?
I would think very hard if I were to be Case B, as I would need to take a bigger loan and deploy a greater proportion of my disposable cash. You might have noticed by now Case B would have left with $100,000 of disposable cash while Case A would have left with $600,000 of disposable cash. Case A has greater latitude in taking a smaller mortgage while Case B does not have such bandwidth. Case A seemingly disadvantage/risk of being single income paying for the mortgage can be overcome by taking a term insurance covering his mortgage obligation. Although Case B can pick up a similar insurance, his net cash position is less viable.
I do not intent to do a complete break down of case analysis and it is not the purpose of this article. The intention of this article is to encourage people to consider contexts when hearing friends or relatives making real estate purchases as investment for passive income. There could be many missing details that people may not divulge to you when they brag to you their latest investment and how lucrative it could be. We could be investing blind if we simply follow their advice or examples.
Disclaimer: All information are for informational purposes only and should not be relied upon as financial advice.