I had dinner with an old friend of mine the other week.
Beginning with some family money, he’s built a property portfolio in Auckland worth north of $30m. His family rode the heyday of big lifts in capital value from the late 1990s until today.
Then, as I enjoyed my steak, he said something surprising.
‘The trouble is, I never seem to have much money. It’s all tied up in assets. As my ex-wife said, “For a rich guy — you have no money.”’
Now, it’s hard to take pity on a guy with a multimillion-dollar property portfolio. But as I sipped my wine, I made a mental note for another area of research.
Yield. Getting your money and assets working for you.
I’ve concluded there are 4 types of people when it comes to investing and money.
This has come from my experience working in an international finance centre. And travelling the world meeting people from different walks of life.
Which type of person are you?
- Payday scraper
You rely on your next pay cheque. You have little or no savings. You either don’t earn enough — or you’re not great with money. Maybe you’re building up some assets through home equity and KiwiSaver. Debt may be an issue you’re trying to get on top of.
- Household juggler
You have a mortgage on your home but are building up a portfolio of some other investments. These may include bank savings and retirement savings in mutual funds. Perhaps you also own a leveraged rental property. Insurance is important, since you couldn’t keep things afloat long without your pay cheque — probably both pay cheques.
- Comfortable coaster
The mortgage is paid off. You’re building up savings and looking for other investments. You may have a share portfolio and a rental property or two. Maybe even a business and commercial property. At various levels, you can keep going without working. Although for most, your lifestyle could suffer unless you dip into your capital.
- Investor tycoon
You live to invest and are obsessed with your net worth. You’re constantly chasing the prospect of capital growth. Some of your money attitude isn’t healthy and has impacted relationships. While you may have millions in assets, cash flow is not always what you expect due to tax planning, constant reinvestment and low yields on growth assets.
OK, I’ve missed a few. Like very high-earning people who spend all they have and drive the latest Mercedes. Although, at various levels, they will fit into the above. For example, big-spending high earners may be just high-risk ‘household jugglers.’
Yet one issue for all groups is how to generate more yield. And get whatever savings you have working for you to generate passive income. Often that’s a trade-off. It’s not easy to get growth and yield from the market. But not always.
So here are my top yield investment activities…
- Your own business
Most people don’t start with money. But you can get a yield on your time. By building a small or side business that could one day operate without too much input from you — you can generate passive income for the future.
In 2009, I built a small online training business. It involved a year or two of hard work producing all the content to kick it off. Yet, over the years, it has quietly ticked over, providing supplementary income while only taking an hour or so of my time each week.
Sometimes you can spot an opportunity, build a business and are then able to get someone else to run it. Perfect! That produces a good return on your time and investment.
A great example of investing well in your own business is blogging. Bloggers make money by doing very little, once they have built the initial structure of their website and brand. By implementing SEO strategies such as affiliate links and keywords, and hiring copywriters to produce content at a rapid rate, bloggers can make great money in a pretty much passive way. SEO return on investment is surprisingly high, although it takes some initial structural work to achieve this.
Putting your business to work in this way can be simple if you find the right niche. You could be making a passive income from your own business by getting the right opportunity and putting in the initial effort.
- Dividend-paying shares
A few good companies on the NZX, ASX and further afield pay dividends as high as 7-10% per annum. Furthermore, if you do your research and find a good opportunity in a favourable market, it can be possible to combine both dividend income and capital growth.
And public companies have management teams in place. They report regularly. Accounts are audited. You can attend shareholder meetings, eyeball the directors and eat sausage rolls.
You don’t have to take calls from rental property tenants that your spouting is blocked again, or the hedge has gotten too high…
- Rental property
After deducting all expenses, periods of vacancy and the management time involved, I reckon the return on many properties just isn’t there. When I was renting out houses, I struggled to earn 2% on the capital value.
But back then, the Auckland market was surging. So, with capital growth of 7 or 8%, you can live with 2% yield and some irritating tenancy and maintenance issues.
Now the tide is turning. Auckland values are slowing. And the government is bringing in a raft of measures that make both price speculation and landlording a whole lot trickier.
That’s not to say there still aren’t areas of opportunity. You might get a bigger yield in a regional town. If you can handle a larger purchase ticket, potentially less leverage and the vacancy risk — a good commercial property could generate a fine return.
- Fixed interest
This comes down to term deposits or bonds. The yield these days is generally pretty low unless you take on more repayment risk. For example, there are funds that invest in debt securities of varying degrees of quality. One I recently came across diversifies across corporate bonds to try and get a higher yield. But even these yields may only be in the region of 4-5% per annum.
Well, there you have it. Some ways to think about your money and investment situation. And get your money working for you through yield.
As you can probably guess, my preferred options lie with businesses. Either your own business or any number of good ones you can invest in on the markets — ideally ones that share growing profits through dividends.
Editor, Money Morning New Zealand
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