Real Estate Investment:Today

Why is it wrong to invest for income?

The goal for most investors is to accumulate enough wealth so their investment assets generate sufficient passive income to meet living expenses.

If this happens, it is no longer necessary for you to work for an income and you then have complete discretion over what you do with your time.

Wouldn’t that be wonderful!

However, an error that many investors make is that they invest for income when they begin their investment journey.

This is a slow and very inefficient way to achieve financial freedom. 

Using a golfing analogy, it’s akin to teeing off with a putter – you will probably get to the green eventually however it will take you too many shots.

Instead, a more efficient way to build wealth is to do it in two steps.

Firstly, you need to build your asset base.

Then, when you have a strong asset base, you can tilt your asset allocation towards income.

It’s easy to develop a retirement strategy for someone with a net worth of $4 million (invest it in cash at 3% p.a. will generate $120k p.a.).

It’s a lot harder to do it for someone with $400k.

The make-up of the total return is important

The problem with investing for income initially is you lose a lot of your return each year in tax.

If an investment pays me $10,000 in income, I’ll probably pay $4,000 in tax and have $6,000 leftover to reinvest.

Whereas, with capital growth, you don’t pay tax until the investment is sold so you get to reinvest the full $10,000.

The chart below demonstrates the impact of tax on two investments that provide the same total return of 10% p.a. – option 1 has more income and option 2 has less income.

Comparison… more growth versus less income

Your options

Many people that consider investing in either shares or property are unsure how to compare the two.

Assuming you adopt the right strategy, I think it’s reasonable to expect comparable overall returns from either shares or property.

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