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Passive Income.

Discussion in 'Investing Strategies' started by Compleks, 26th May, 2008.

  1. Compleks

    Compleks Well-Known Member

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    I'm curious to hear how some of you guys would go about creating a line of passive income.

    Could you give some examples on how you might generate an extra $100 per week?
    (so I can get an idea of how much you may need to invest to make that kind of return).

    Could you also include some comments on the safety/risks of your method?


    Thanks :)
     
  2. ashwright

    ashwright Well-Known Member

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    Hi,

    A rough guide I have been using is that share dividends are about 5% before tax on average. So I would expect so $104,000 would generate $5200pa or $100 per week before tax.

    This could be done with $100K of STW (ASX200 index ETF).

    I am not sure how much you would need with property.

    Ashley
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    In the simplest form - if you can put $65,000 into a high interest savings account earning 8% per annum, you'll get $5,200 worth of interest per year, or $100 per week.

    The only real risk here is that interest rates drop, thus lowering your returns. There is very little risk of losing your capital.

    That should really be your benchmark when it comes to measuring risk.

    There are other income producing investments like debentures which produce marginally higher returns for (arguably) much higher risk (not worth it in my opinion).

    Then you look at dividend yields on shares ... $104,000 invested in shares returning an average of 5% yield will earn you $5,200 per year ($100 per week). There are possibly some tax advantages with this strategy though - imputation credits. There are risks here - a downturn in profits may see dividends reduced, and the capital value of your investment may also change too.

    Income producing funds like NavraInvest are a good source of higher income - if they can continue to produce 15%+ income per annum on average, then you only need $35,000 invested to return $5,200 per year in income. Again, the risks here are that a flat market may limit trading opportunities and thus income drops - and there is a chance of capital loss as well. I use 15% based on what it has actually returned in recent years - some people may prefer to use a lower figure for caution.

    Using leverage to help - if you leverage to 50% in something like Navra you can generate higher returns for less of your own money. Assuming 15% returns and 10% interest, you need around $26,000 of your own money plus $26,000 borrowed to generate your $5,200 per year. Risks here are that interest rates increase and returns decrease - you can potentially end up worse off if the market crashes and you get margin calls. Limiting your LVR and the typically cash-heavy nature of the Navra fund are factors which help guard against this happening.

    Cashflow positive real estate is another suggestion - but good luck finding any of that around right now (not impossible - but much more difficult than previously).

    These are just some suggestions and are not the only possibilities.
     
  4. Nigel Ward

    Nigel Ward Team InvestEd

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    Gross or after tax?
     
  5. Rodge

    Rodge Member

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    Thanks for the reality check Sim, nice summary of risk versus reward

    Roger
     
  6. eddyl

    eddyl Well-Known Member

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    I wouldn't bet on Navra fund to return 15% over the long term. Otherwise it would make sense to leverage yourself up to your eyeballs, because that certainally beats any interest rate out there.

    Invest in an ETF or a range of blue chips, you'll get approximately 5% partially or fully frank dividend. Combine this with capital growth in the long term, and your set for a very happy future. The only danger is that in the short term your money might fluctuate a bit, and no one likes to see 10% of their capital based lost in just a couple of bad days.

    Cheers.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Interest rates have been to 17% in my lifetime (not saying they are likely to ever get back there again though).

    ... and there is still the risk of capital loss if you gear very highly - margin calls can tend to put a nasty dent in your returns.
     
  8. ashwright

    ashwright Well-Known Member

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    There is one more risk to consider, which is inflation. If you just put your money in a bank account, and withdrawal all the interest earned then your passive income stream will soon not be worth very much.

    Maybe a better question would be how would you generate a passive income of $100 per week adjusted for inflation?
     
  9. eddyl

    eddyl Well-Known Member

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    I get what you mean. I guess the point I was trying to make was that its simple marco economics.

    If there is a massive discrepency between investment returns and cost of funds, the market will move to clear this discrepency. Which essentially means that is very unreasonable for Navra in the long term to beat the market average, with the extra cost of an MER. I guess thats why its better to buy ETF's or shares IMHO.

    Sorry about the confusion.