Passive Income vs Equity Growth Which Is Better? (Ep306)
Choosing between growing your passive income of aiming for equity growth is a decision all investors must make. What is best for you and your life?
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Passive Income versus Equity Growth. Which is the better option for you to pursue as a property investor?
Hey, I’m Ryan from onproperty.com.au, helping you find positive cash flow property. This is an issue that a lot of investors need to deal with. They don’t know whether they should invest in a negatively geared way, where they’re losing money every single month in the hopes to make good capital growth. Or if they should pursue positive cash flow properties and get the passive income from those but maybe not get as much growth in the future because of the type of property that they’re buying. This is something that you need to analyse and you need to make your decision on before you go ahead and invest in property. Because if you go down one path, it might not be the right path for you.
Often, we try and compare passive income to equity growth like comparing apples to apples. Like comparing, if I make X amount in passive income and I make Y amount in capital growth. If Y is better than X, then capital growth’s going to be a better option for me. Or if X is better than Y then passive income’s going to be a better option for me. But that’s not necessarily the best way to go about it. Because whether or not you’re getting passive income or you’re negatively geared is going to severely affect your life. It’s going to affect your cash flow, it’s going to affect how much money you have available to spend on the things that you want.
That’s something that not a lot of people consider when investing in property. We get the greed on, we get really excited about making money. We see that Sydney has grown 10-15% in the last 12 months and we hear about friends who bought property and it went up $100,000 in 6-12 months. And we say, “Well, $100,000, that’s more than I earn in a year. Capital growth is definitely the way to go.” But what we don’t think about is “Okay, what sort of life do I actually want for myself?” and “Is capital growth going to get me there or passive income going to get me there?”
I was talking to a customer of mine on the phone the other day who has a couple of investments himself, fully paid off his house and was getting some passive income from some other investment properties that he had. He has been talking to some people and some companies and have been encouraged to invest in negatively geared properties with high depreciation with the hopes that, over time, they will go up in value. I was talking to him about it, he was really umming and ahhing about whether this was the best investment strategy for him and he was thinking about the life that he has now.
You know, very low bills because he’s fully paid off his own mortgage. So he’s not paying any rent, not paying any mortgage. His properties are generating passive income that’s paying for his council rates and insurances and stuff at his house. So in terms of living expenses, the only money that he needs to come up with is the money that he wants to use for food and for entertainment and for his car and things like that.
Being in that position is actually a pretty exciting position to be in. I don’t know if you’ve ever been in that position yourself. But if you’re in the position where you don’t need to make a lot of money in order to get by, that’s a pretty fun place to be in. Because, in a way, the world is your oyster. It’s very exciting because you can do a lot of different things. You could start a business, if you want. You could grow your business or you could keep it as lifestyle business. You could quit your job and work in a lower paying job that was more fulfilling because you don’t need the income.
You may not make as much money in the long run, but in terms of growing your portfolio over time, for me, it just sounds like it gives you so many different options in your life as to whether you want to grow your portfolio, whether you want to change your job, whether you want to do all these different things. But then you look on the flip side, at capital growth and the potential for making lots of money quite quickly.
And that’s exactly what it is, it’s potential – it’s never guaranteed. And you think, “Okay, if I negatively gear, then I’ve got the potential to make hundreds of thousands of dollars some time in the future.” But then, you don’t necessarily think about the fact that if I start putting myself in a position where I need to pay $100, $200 a week to pay for my investment properties, what kind of cash position does that put me in and how does that affect the options that I have in my life?
So we’re in a position, let’s say we bought a few properties, $500 per week we’re paying for investment property. For a lot of people, that is rent for a family house. So, you’re probably paying rent and your this on top of that. What that does to a lot of people is kind of puts them and gives them tunnel vision. It puts them in a position in their life where they need to say, “Okay, I need to make more money in my job in order to pay for these properties that are going to create financial freedom for me in the future.”
So in terms of job progression, in terms of the way you live your life, the focus is always on working harder, always on trying to earn more money. In terms of progression, you really funnel down a path where you need to go into jobs that earn you more and more money. And earning more and more and growing your wealth over time, obviously, very important. But working, your spending the majority of your waking hours at your job. So, to be unfulfilled, to be unhappy, to be overstressed and the way that that can impact your life, is that actually worth it?
What I want to do, just in this video, is just encourage you to think about passive income and equity not from the standpoint of, “Which one’s going to make me more money in the long run?” but look over the span of your life and to say in the next 10, 20, 30 years – whenever it’s going to take me to become financially free. In the span of that time, “Which is going to give me the better outcome across the board?” If we invest in capital growth, we are negatively geared for years and years.
We work hard, we’re very stressed but then, all of a sudden, we’ve got a portfolio worth millions of dollars in terms of equity growth. We then quit our jobs, sell our portfolio and then live off the remainder. When you look at that, pretty stressful time, not super awesome. Is it worth it?
If you look at passive income, and you say “Okay, well, I’m investing in passive income. It gives me more flexibility in my life to move to another city or to travel or to spend more time with my kids or to work in a job that I find more fulfilment that doesn’t necessarily pay me as much. But at the end of the road, I might still become financially free. But I might become financially free earning $60,000 a year instead of earning $200,000 a year.” When you look over the span of that 10, 20, 30 years, which option do you think is going to give you a better quality of life over that time? And then, I would definitely look into that option.
Also consider the fact that when you’re investing for equity growth and you’re negatively gearing your properties, you’re putting yourself in that hole where you need to pay for these properties in the hope of the big pot of gold at the and of the rainbow. Something that you need to understand, is that you don’t actually know if that big pot of gold at the end of the rainbow is going to make you happy or is going to deliver you the particular life that you want.
Most people don’t necessarily think, “What kind of life do I want to live? What kind of life do I want to have? What kind of relationship do I want to have with my spouse or my family? What is going to make me happy?” They just think, “More money. More money solves everything, right? So, if I negatively gear my properties, if I get hundreds of thousands, millions of dollars of equity growth in 10 years’ time or in 20 years’ time, I’ll be rich. And then, thumbs up, I’ll be happy.”
But you need to understand that’s an assumption. You don’t know that having more money is going to make you achieve the level of happiness that you want. Studies have shown that money does make you happier but only up to about $75,000 per year.
Once you go over $75,000 per year, really, the math doesn’t work out in terms of more money making you happier. So, obviously, if you’re poor, you can’t afford clothes, you can’t afford food, you can’t afford vacations, it’s pretty miserable. But once you get to a point where you can afford some of those niceties in life, going well and beyond that won’t necessarily make you happier.
So, just understand that the pot of gold at the end, the fact that that will make you happy is an assumption that you have and that’s not necessarily the truth. And really question, “Will that make me happy?” and “If I had that, what kind of life would I live?”
That’s kind of exactly what I did. Is say, “Okay, if I got to the end and I was financially free, what kind of life will I want to live?” And then I kind of realised, “Okay, this is the life that I’m living at the moment.” And so, I don’t actually need to achieve excessive wealth in order to be happy. That really freed me up, to change the structure of my business, to change the way I live my life to spend more time with my family and kids. And to spend less time stressing about money.
So when it comes to passive income versus equity growth, one could make you more money than the other but I think it’s really important that you look at what’s going to give you a better quality of life and understand that you’re assuming more money will make you more money will make you happy but you don’t actually know that that’s true. And you really need to think about, “If I had all the money in the world, what sort of life would I want to live? And what will create me the most happiness that I can get?” And then, go and pursue that and consider, “Okay, which tack is going to get me towards the most happiness that I can have? The most impact on the world?” Whatever it is, whichever way you measure your life.
I hope that’s helpful for you. It’s a bit philosophical today, rather than talking about specific investment strategies, I just really wanted to question your thinking as to how should invest and why you should invest and just start thinking about things a little bit tweaked, a little bit different to hopefully get you a better outcome in the end.
So I’m Ryan from onproperty.com.au. If you’ve decided that passive income is the way that you want to go and you want help finding positive cash flow properties, I’ve just released a brand new course on the exact methods that I use to find positive cash flow properties. So, I actually list positive cash flow properties for members of mine inside OnProperty Listings and I use certain techniques to find those properties.
I actually share those techniques with you and I’ve got step-by-step video tutorials to show you how to do that. So if you’re after passive income, if you’re after positive cash flow properties and you think that that course is going to be good for you, check it out. Just go to onproperty.com.au/find in order to see all the details about that course and get access to it.
I hope that you guys have a great week. Until next time, stay positive.