Gear up and receive more passive income.

I have mentioned before that I rather not have any debt in my life. 

This does not mean that I don't understand how debt can be good. 

It just means that I am more comfortable not having any.

I rather not borrow money to invest in stocks even though it could potentially give me higher returns.

I rather not borrow money to pay for consumption items which definitely is a road to wealth destruction and, in severe cases, obliteration.

However, in an environment of very low interest rates (still), some think I am being silly not to take advantage of the cheap money sloshing around.

For sure, used sensibly, debt can help to enhance gains in investments. 

Of course, if things should go wrong, the damage would also be magnified. 

So, as you can imagine, whenever the issue of debt crops up, inevitably, we will have debates.






We might not have debt in our personal lives but we might be invested in business entities which have debt. 

If we are invested in REITs and a business trust like Croesus Retail Trust, we are invested in entities which have debt.

Simplistically, debt could increase income available for distribution per share provided that the cost that comes from having it is lower than the income received from the additional investment. 

So, debt could make more money for us. This is probably a financially sensible reason to take on debt.

However, is it financially sensible to introduce debt in our personal balance sheet to invest in REITs and a business trust like Croesus Retail Trust?

A reader, let us call him Mr. Gear, told me that he could borrow cheaply at an interest rate of 2% per annum, invest in a REIT that offers a 7% distribution yield and the spread of 5% is free money. 

Sounds good, doesn't it? 

Well, as long as we have the status quo, yes.

So, how long will the status quo last? 

Does anyone know? I don't.





In the event that risk free rates go up which is more likely to happen than not and Mr. Market demands higher distribution yields from REITs, we could see unit prices declining again.

With a distribution yield of 7%, a 1% increase in risk free rate will mean that unit price will have to decline some 12% to give Mr. Market the 8% distribution yield that he demands. 

A 2% increase in risk free rate will mean a decline of 22% in unit price in order to give a 9% distribution yield.

So, all else remaining equal, if the risk free rate should go up by 1% within the next 2 years, Mr. Gear could lose almost all the income he would have collected. 

If the risk free rate should go up by 2% within the next 4 years, Mr. Gear could lose almost all the income he would have collected over the same period. 

If the risk free rate should go up sooner than expected by 1 or 2%, Mr. Gear could end up losing some money and not just the income collected.





Although I still believe that REITs are relevant for income investors, do we want to gear up our personal balance sheet to invest in REITs for passive income now?

To me, peace of mind is priceless and this is a risk I rather not take.

I would still invest in Croesus Retail Trust, for example, only if I have money to spare. 

To me, being able to get a non-leveraged property income yield of some 5% for owning malls in Japan is pretty attractive. 

This is the kind of yield that we would get if Croesus Retail Trust were debt free.

Investing in a Trust that distributes 90% to 100% of its income, we have to be prepared for the possibility of equity fund raising in the form of a rights issue. 

So, although the estimated distribution yield at 87.5c is about 10%, if we are prudent, we would put aside some of this income.

For someone like Mr. Gear who is thinking of borrowing to invest in REITs, he must be pretty sure that he is able to take on more low interest rate debt to fund his participation in a possible future rights issue.

So, gear up to receive more passive income? Not me.




Related posts:
1. The secret to avoiding financial ruin.
2. Don't think and grow rich.
3. Croesus Retail Trust: Much ado about Yen.

A movie treat from my stock broker: Captain America 2.

Great movie and in 3D too!




I got a free dinner, free tub of pop corn and a free bottle of Pepsi too!

Thumbs up!

"Value might fall but sure to come back up!"

Banker: Why put money in FD? You put money in this bond fund can make more money. About 5% per annum.

Sis: Is this 5% guaranteed?

Banker: Banks cannot say it is guaranteed one but if you look at the history, this fund is very good and have consistent returns.

Sis: But there is administration charge...

Banker: Don't worry, you will make more money, more than the admin charge.

Sis: Then, the value of the bonds might fall...

Banker: Value might fall but sure to come back up one. Don't worry.

The banker said "banks cannot say it is guaranteed" but how many verbal guarantees had she made in that short conversation?

This was my sister's recent experience. Was there any difference between this encounter and that from a year ago? Well, the only obvious difference between this encounter and that from a year ago was the bankers' genders.

Related posts:
1. Nobody cares more about our money than we do.
2. Know what is good for us.
3. A bad experience in a local bank.

Journey to financial freedom is not a race.

I get letters from readers of all ages. 

Obviously, all of them have different circumstances and they have different motivations for writing to me.

However, many are interested in achieving financial freedom on a sustainable basis. 

What does this mean? 




It means having regular and consistent passive income in sums big enough for them to stop working for an earned income, if they so wished it.

Questions such as, "Is this possible?" and "How is this possible?" are rather common. 

Of course, I have blogged about such topics often too.

Once in a while, I would get an email that is like a cry of despair. 

These emails are usually from people who are in their 40s like me or in their 50s. 

They are people who have yet to start or are "late" to start on their journey to financial freedom.




Although I have blogged about how we should start our journey to financial freedom as soon as possible and that the young have the advantage of time on their side, the best time to start our journey is always "now".


We might be 40 or we might be 50. It does not mean that because we are "late", we should give up.

Remember, we are not "late", we are only starting "later".


What we have lost in terms of time, we could compensate with a stronger determination to achieve financial freedom and by putting aside a bit more money each month, investing prudently in sound income generating assets.

Even if we are not able to generate sufficient income from our investments to replace our earned income, being able to have enough recurring passive income to take care of all our regular expenses by retirement is already an achievement. 

If we must delay our retirement by a couple of years to do this, so be it. 

Would we rather have at least this or nothing at all?




Don't be demoralised by how much someone in our age group has achieved. 

Don't envy people who have started the journey at a younger age. 

The journey to financial freedom is not a race.




Each of us have our own circumstances and priorities. What matters is that we achieve the goal of financial freedom. 

Some might get there faster. Some might be a bit slower. 

Everyone who arrives at the destination is a winner. There are no losers at the end point.

Unless severely disadvantaged, all of us can do it.

Believe it.



Related posts:
1. What is $1 million at retirement?
2. Achieving $1 million in retirement funds.
3. Save 100% of your take home pay. What?
4. Man collects rent from his boss.
5. 7 steps to creating passive income from stocks.

PCRT: St. James' RTO.

I feel that this is a good email correspondence to share because it shows how I look at my investments as to whether they are good to hold or divest.

Hi AK,

 

When last and first we exchanged descriptions of owners on the subject of first time car buyers, your thought of "obscene" seems appropriate now, including "greedy" and "grasping" (my opinion) on the issue of St. James' reverse takeover of PCRT.  Having been allocated a fair number of lots of PCRT at IPO and watching the price go down through the years has been painful for a retiree.  The dividends received so far has at least eased the loss.  With this latest development and a call to downgrade/sell the stock, I'm wondering if I will be stuck with a dud share for many years.

... Would you be so good as to comment on PCRT/St James and give some words of wisdom and perhaps comfort to shareholders like me?

Thanks so much.

 

AH

 

 

My reply:

 

Hi AH,

I have divested my remaining stake in PCRT and blogged about it. You might want to read the blog post, including the comments that follow. Search for "PCRT: Full divestment."

Try to recall what was your motivation for investing in PCRT and ask yourself if it still does the job you expected it to do. If it does not, what should you do? What if it does? I think you will have your answer then. :)

Best wishes,
AK

 

Related posts:

1. PCRT: Full divestment. 

2. Motivations and methods in investing.

Hotung, Venture and Singpost.

Hi Ak,

I was looking for high dividend yield coys for investment. Three coys caught my attention. What is your view about hotung investment, a Taiwan based VC. I understand the coy is in a net cash position, and been giving consistent dividend about 7 to 8%. Why the price of the stock is undervalued and at a discount?

The other two are venture corp and sing post.

Venture corp - a well managed coy providing consistent high dividend yield. Recovering from poor performance, and has added a new product mix - 3D printing. Do expect the coy to continue giving consistent good dividend.

Sing post, reasonable dividend yield, giving quarterly dividend. A coy that may grow with e- commerce which has growth potential.

Will you consider adding these coys to your portfolio? If yes or no, why?

Thank you for your time. Enjoy reading your blog.. which is getting more and more popular.

Cheers
P

My reply:

Hi P,

I know nothing about Hotung and Venture. :(
However, thanks for pointing them out to me. I will look at them if I find the time and inclination to do so. In the meantime, if you would like to guest blog your analyses, you are welcome to do so. :)

As for Singpost, yes, I have looked at it. I want to make sure that its efforts in diversification will work out. I think it is still early days and, so far, its efforts has burnt a lot of cash. We are seeing revenue improvements but at the expense of margins. We will really need a bigger volume in a lower margin business. Will we see the volume? I think the jury is still out on this one.

Best wishes,
AK

If anyone has any thoughts on these three stocks, please share generously. Thank you.

Securing risk free returns early for our retirement.

At the beginning of the new year, I said I would be making voluntary contributions (VC) to my CPF account in an effort to max out the annual limit of $30,600. The risk free returns of 2.5% to 4% per annum for the OA, SA and MA help to give me a peace of mind.

I used some of the dividends I received from my investments this quarter to make a contribution last week:

We can never be too sure about our investments and how they will do. However, the CPF gives us a measure of certainty which we need in our golden years. So, it is a good tool in retirement planning and we should make good use of it.

This is a topic that I blog about regularly and it has attracted many high quality comments from readers. I am glad that some readers were inspired enough by the discussions to take action.

Here is a recent example: Solidcore's comment.

Some people tell me that they do not trust the system.

Well, if the CPF should go kaput, we are pretty much sunk in all things Singapore anyway. So, we might want to have a bit of faith where it matters and the CPF, I believe, matters.

Latest update (26 March 2015):
Should I top up my CPF-SA, CPF-MA or SRS Account?

Related posts:
1. Voluntary contributions to CPF. (VC form.)
2. How to get free medical insurance?

Apartments with rental yields of 4.95% to 7.3%.

In the INVEST section of The Sunday Times, it was reported that more Singaporean investors are feeling bullish about investing in Japanese real estate. 

One agent who is marketing Japanese residential properties said that he would not have expected the craze he is seeing now when he started just a year ago.

It seems that local banks are also jumping onto the bandwagon as UOB and OCBC now provide loans to Singaporeans for purchases of Japanese real estate for up to 70% of the property's value. A year ago, only Bank of China was providing such loans.

Someone who bought a 275 sq ft studio apartment in Tokyo last year for $400,000 is very pleased that he did so. Apparently, similar apartments now go for some 9% higher in price.

I believe in investing in real estate for income. So, what I would like to know is how much is such a property able to generate in rental income. It was not reported in the article.

A search online shows that similar properties in central Tokyo could fetch some $1,800 a month in rent which gives a gross yield of 5.4% per annum. Not bad.

So, am I interested in buying an apartment in Japan now for rental income? Well, apart from the fact that prices are a bit higher now which means that the gross yield for the same 275 sq ft apartment is probably lower now in the region of 4.95%, everything else remaining equal, I am also not comfortable with the idea of plonking so much money in one single property in a country which arguably I am less familiar with than Singapore.

If we were to take a loan for 70% of the value of the property (current value being $436,000), we would still have to fork out $130,800, not including other costs related to the transaction. This is quite a bit of money for most average Singaporeans.

Of course, the beauty of this arrangement is leverage. Taking a 70% loan would mean amplifying the rental yield by more than 200%. So, the gross yield on cost, based on current prices of similar properties, could be above 10%. 

Another attraction of such a purchase is the possibility of selling the property for capital gains in future.

If we are pretty risk averse and would buy such properties without taking any loans, I believe that becoming unit holders in Saizen REIT would make more sense.

1. Buying into Saizen REIT means buying into a portfolio of more than 130 residential buildings (not individual apartments) across Japan which reduces concentration risk.

2. Buying into Saizen REIT means buying these residential buildings at a hefty 20% discount to valuation. I do not think we will be able to buy an apartment in Japan at 20% below valuation.

3. Buying into Saizen REIT means getting a 7.3% distribution yield with current unit price at about 88c. This could reduce to 5.7% if cash of up to 20c per unit were to be returned to unit holders. (Read related post number 1 below.)

4. Buying into Saizen REIT means having a team of managers take care of our properties and we don't have to worry ourselves with work such as rental collection, hedging against foreign exchange risk (if at all possible) and the repatriation of funds.

For someone who is investing for income, who does not wish to take on too much risk and who rather not have too much work in being a landlord, given a choice, investing in Saizen REIT seems like a pretty good idea compared to buying a single apartment in Japan.

Related posts:
1. Is the half yearly DPU of 3.25c sustainable?
2. Below valuation and replacement cost.
3. Fukushima and investing in Japanese real estate.

Fortune REIT: Price plunged to HK$5.60 a unit.

From a reader:

Hi AK, can I have your opinion on Fortune Reit at current price?
Sent from my iPad

My reply:

I was never interested in this REIT very much because it was listed in HK$.

I guess you are interested in Fortune REIT because its unit price plunged and closed at HK$5.60 a unit recently?

Looking at the numbers, an estimated annual DPU of 36c means a yield of 6.43%. This is in HK$ terms. What we get in S$ terms will depend on the exchange rate at your point of entry and also at the point when the distributions are made. Messy.

The REIT is trading at a significant discount to its NAV of HK$10.26 a unit. Gearing ratio at 32.7%. All this information, we can get from its presentation slides for year ended 31 Dec 2013.

Interest cover ratio has been declining.

We could see some form of equity fund raising soon since the REIT does not have a credit rating and could not exceed 35% in gearing.

Technically, unit price is resting on immediate support now and if that should break, the next support is at HK$5.30. The downtrend is pretty strong.

I won't say whether you should buy or sell this REIT now. You decide.

Click to enlarge.

Two questions which will help us build wealth.

UPDATED IN JULY 2018.

Very often, when people buy things, the thing they wonder about is whether they can afford it or how can they afford it?

Affordability should never be the main question.





Try these:

1. Is this necessary?

2. Is it value for money?

Simple questions.


Simple, right?

Simple to understand but not easy to do?

If we have the ability to do it, our will must be strong.

If we have the ability to do it and if we are serious about building wealth, don't squander it.








Always ask these two questions before we buy anything and, in all likelihood, we will be saving more money in future.





Related posts:
1. Three point turn.
2. Needs and wants.
3. If we are not rich, don't act rich.

Tea with Matthew Seah: The top 8% of the world's wealthy.

Son : Why are we not rich ?
Dad : Who says we're not rich ?
Dad :Being rich is not about how much you have , but how much you give .
Dad : Somehow when you give, you'll be happier .
Boy: *sulks, and after reflecting*, I wasn’t happy.

Watch this video:

https://www.youtube.com/watch?v=1DUYlHZsZfc

Do you feel like the boy, or the dad?

In Singapore, the circumstance is such that many live from paycheck to paycheck and have no money or worse, they are in debt. These people will be thinking like the boy.

The tax rebate on your taxable income is 2.5 times your donation for the year. This turns out to be an effective tax rate of 40%.

$1 donation / $2.5 income recognized by IRAS = 40%

Whenever you give, you are actually giving at a tax rate of 40%!

Now if you are thinking like this, you definitely won’t be happy as well.

If you can read and understand this, then count your blessings, give and be happy!

Let’s all show some beautiful display of free, gracious generosity.

Related posts:
1. Counting our blessings.
2. An appeal by AK71 for funds.
3. Ways to reduce income tax.
4. Make a donation to help needy students. 
(Added on 8 Oct 15).

Buy a bond fund that pays 7% a year?

UPDATED (December 2016):

In the last few years, I have been saying that we should avoid long term bonds and bond funds. Read comment dated 16 Dec 16 in the comments section at the end of the blog.
---------------------------------------

A banker has advised a reader, K, that he buys into a bond fund. This was what K wrote in his email to me:

Hi AK,

i read your post and i like your advise on bonds. im currently unemployed and i need a steady form of income for my family.

A citi banker suggested that i buy a fund that is comprised of bonds that pays abt 7 percent an annum. 

please give me your opinion on such investment comparing to shares.  since its little fluctuation and it gives me income

thanks
K

My reply:

Hi K,

Too little information for me to make an informed decision, unfortunately.

However, if I were to hazard a guess, for a basket of bonds to pay you 7% per annum, I guess these bonds are not of investment grade. They could be "junk" bonds. Risk level must be higher which explains a higher return.

A 10 year bond issued by the Singapore government has a coupon of 2.75%. Singapore has a AAA credit rating, of course. More recently, CapitaMalls Trust issued a 7 year bond that has a coupon of 3.08%. Of course, lending money to CapitaMalls Trust is riskier than lending money to the Singapore government. So, although the period is shorter, the coupon is higher.

I would suggest that you ask for more information and not just look at the 7% yield which the banker says you will get.

When we buy bonds, we are lenders, not investors.

So, when we lend money to a business, what should we do? 

We want to study the business and the reason why they need to borrow money. Is the business strong and stable enough to pay the coupons and to redeem the bonds when the time comes?

So, what are the bonds which make up the bond fund? You should find out.

Best wishes,
AK

" If you are going to buy a bond mutual fund, you have to be very careful because if interest rates go up, the value of that bond mutual fund will go down. And, in a mutual fund, there is absolutely not maturity date.


"So, what are you thinking? The worst thing you could do with your money right now is put it into a bond mutual fund." - Suze Orman (Read related post no. 1 below)

Related posts:
1. Nobody cares more about our money than we do.
2. A banker's advice on retirement income strategy.
3. CapitaMalls Trust: Buy the retail bond or the REIT?

Tea with ENZA: What is "window dressing"?

We often come across the phrase "window dressing" when we watch the business news on TV or read the "Money" section in the newspapers. What does it mean?

Does it mean buying some curtains and blinds for the windows in the buildings along Shenton Way?

Anyway, Solace, a guest blogger, asked that I put this question to ENZA and here is the reply:

Wow what a big question...

I assume your reader is asking about fund managers...

most fund managers do index hugging, only to what extend... So, there will be some winner and loser in the holding... they will normally look at the trend and decide. Trend in the sense of macro view, for example REITs is not going to do so well this year, they hold less...

They will never sell everything unless it is necessary (such as liquidation of funds or market correction)

FMs will sell the loss making fund and liquidate some of the profitable (due to client withdrawal or portfolio balancing after the selling of loss-making funds) However, this generally apply to big funds...

smaller Fund house don't do that due to the scale of the funds. (capital loss are deem to be eligible for a tax reduction at year end filing)

And window dressing normally occur for FMs at every quarter end.

No windows involved. Definitely, no curtains and blinds too.

Related post:
Tea with ENZA: Explaining Mr. Market's behaviour.

Tea with ENZA: Explaining Mr. Market's behaviour.

I chatted with a private banker on FB this evening and he shared some interesting stuff with me.

perhaps I know a little too much of how the inside job, so the more I m actually reluctant to share with the outsiders. because they don't know how to take advantage, but just make noise.

not the inside information, but more of how the institutional investor invest and how fund house and banks work... that's the big big thing coz we don't know why people do certain things and when price moves everyone panic etc...

an example is: sell in may and go away...

By using statistic, 32 out of 34 years actually proves to be true... But the thing is, why??? May is a summer period in Europe. They get 10% of monthly salary for summer holiday. So nobody would like to work during that period. institutional or retail, half of them would go for summer holiday.

So who is there to provide liquidity?? The remaining half. But before people go for holiday, they are worried about market fluctuation... so how to negate that, they hedge off or sell off... Market plunge...

That thing itself is actually a very common sense thing, but who would be able to link the entire picture until we are in the industry working...

Same thing for santa clause rally...

It seems like a simple thing, but those so called technical analysis bullshit to an extend people thought it is a kind of voodoo effect...

and of course the post-may period is a low period, few market data, few earning reporting release, TA guys get out of the fun... the entire duration is low volume and neither bull or bear...

When I suggested that I would like to share the above with readers in my blog, he said:

**send killer to hunt ASSI, burn the laptop and the house**

So, I am actually risking my life to share this here in my blog!

Kidding!

Don't worry because he finally agreed.

aahhh... ok ok go ahead and post ba hahaha

FB has allowed me to "meet" some really nice people.

Save 100% of your take home pay. What?

Oh my, is this another sign that AK is ageing? 

Did he just say save "100%" of our take home pay? 

Maybe he meant 10%.

Well, no, I really do mean 100%.







What? 

AK is not only ageing, he is growing senile! 

How is it possible to save 100% of our take home pay?








OK, assuming that we had a gross annual income of $50,000 and we took home $40,000 after CPF deduction, could we, at some point in time save $40,000 a year, assuming that our take home pay remains constant?

The answer is "yes". 

How?

1. Save 50% of our take home pay each year. This amounts to $20,000.

2. If we invest to enjoy at least a 6% yield a year, in the second year, we would be able to save $21,200 or 53% of our take home pay.

3. Invest again to enjoy at least a 6% yield a year and in the third year, we would be able to save $22,472 or 56.18% of our take home pay.





Just keep repeating the process and the numbers are:

4th year, $23,820. 59.55%.

5th year, $25,249. 63.12%.

6th year, $26,764. 66.91%.

7th year, $28,370. 70.925%.

8th year, $30,072. 75.18%.

9th year, $31,877. 79.69%

10th year, $33,789. 84.47%.

11th year, $35,816. 89.54%.

12th year, $37,965. 94.91%.

OK, for those who are superstitious about the number 13, this is where you might change your mind.

In the 13th year, we would be able to save $40,243 or 100.6% of our take home pay.

Would you like that?

Of course, there are many things we can say about this blog post and being unrealistic is one of them. 

For one, it is almost unthinkable not to get any increase in pay for over 13 years. 

Also, it is quite possible that there could be a period of unemployment (or two).




Instead of being unrealistic, let us try being realistically optimistic instead. 

If we should get an increase in pay, what should we do?

Maintain the same lifestyle, if possible. 

Then, we would be able to save more and invest more.




So, for example, if our take home pay became $50,000 a year in the 5th or 6th year, we should save $30,000. 

Of course, there will be things we can say about this being unrealistic as well. 

What about the higher costs of living, for example? 

What if we should start a family? 

What if there should be unexpected expenses?

What about an emergency fund?

Obviously, this blog post cannot take all circumstances into consideration and it has also dispensed with the consideration of having an emergency fund which, by the way, is very important to have.

All of us have different circumstances but I think we can all agree that the decisions in life, especially those which involve money, can either give us a boost or slow us down as we work towards a financially secure future.




Isn't it more important to get down to doing it and not keep thinking about how this is impossible and that it is unrealistic. 

There are too many "what ifs" in the world. 

For those who are still hanging on to the "what ifs", try this:

"What if this really works?"






Would we rather have a chance of making this work for us or not at all?

Now, if I have captured your imagination, let me add another dash of excitement.

Is there a possibility that at some point in time, we might save 200% of our take home pay?



Related posts (The prudent stuff.):
1. A common piece of advice on saving.
2. 5 points you ignore at your own risk.
3. Very first step to becoming richer.

Related posts (The scary stuff.):
4. Not enough money to be married.
5. From rich to broke?
6. Financially prepared to be married?