Investing for Passive income / Cash Flow is a very useful strategy for Wealth Building in UAE.
Instead of waiting to receive an income at retirement, it is wise to invest in assets which can provide a regular income in the near future.
The following are the three broad types of income you can generate in UAE;
- Earned Income / Active Income
- Investment Income - Capital Gains / Portfolio Income
- Investment Income - Passive income / Cashflow
Earned income or Active income is any income received as a salary, profit, fees, gambling or from any other activity involving time and effort.
It is generated when you are at work, and it stops once you stop working or worse if you are unable to work due to health reasons
Earned income is directly proportionate to the amount of time you spend at work and the skills you develop.
It is also difficult to increase earned income without working longer hours or acquiring a new skill/knowledge.In spite of these challenges, a majority of the earning population largely depends on active income, as it does not involve an injection of capital.
Portfolio Income / Capital Gains
Portfolio income is any income generated by selling an investment at a higher price than you initially paid for it; plus the costs involved in maintaining the asset in resalable quality.
For example: If a salaried executive purchased a property for AED 1,000,000 and paid an amount of AED 50,000 towards maintenance, registration charges, mortgage fees and interest before he sold the property in 3 months for AED 1,100,000; his portfolio income from this transaction would be AED 50,000/-
It is usually generated by the trading of assets invested for the purpose of selling for profit in future. Some examples of portfolio income in UAE are;
- Trading (buying/selling) of Stocks, Bonds, Sukuks ( DFM, ADX and International Markets) Mutual Funds, Commodities, Currencies and other types of Futures / Derivatives.( Paper Assets)
- Buying and Selling of Real Estate: UAE property provides an ideal environment to benefit from the volatilities in property prices in short and medium terms. However, this can be a risky proposition as well.
- Buying and Selling of any other Assets like Antiques, art, cars, watches and other collectibles
Challenges with Portfolio Income
Persuing Portfolio income includes the following challenges;
- Capital Risks: It requires a lot of knowledge and experience to learn how to analyze risk, achieve optimal asset allocation and building a robust portfolio.
- Time-Consuming: Portfolio income through trading of paper assets involves a lot of time and effort in keeping an update on the macro and microeconomic developments across the globe.
- Liquidity Risk: A property portfolio investment can be illiquid, leaving little room for rebalancing the portfolio in response to the market changes.
In spite of the above-mentioned challenges, portfolio income has a definite advantage over earned income.
It allows you to benefit from the Power of compounding when investing for a medium to long term.
Once you have gained adequate knowledge and experience in trading of paper and tangible assets on a consistent basis, it can help you enhance your financial well-being much faster.
Such income can catapult your wealth to a large extent.
Regular cash flow generated from activities which require a little or no effort is called passive income. It is usually cash flow generated from assets owned or controlled by an individual.
Some examples of Passive income in UAE are;
The falling property prices and the surge in affordable housing in UAE have pushed the rental yields up. It would be wise to invest in a rent-yielding property in Dubai.
The following chart from Affordable Housing report by Core Savils; substantiates the fact that rental yield in Dubai is far better than its counterparts;
Also, the following chart from http://blog.reidin.com/ emphasizes the importance of investing for income vs investing for capital gains;
According to the report, the return from rental income had outpaced the income from capital appreciation between the years 2009 to 2015 and the trend is likely to be better, given the falling real estate prices in UAE.
Dividend from stocks (DFM, ADX or international) is a good source of cash flow. The following chart shows the average dividend yield from UAE stocks from 2011 to 2015.
- Interest from Deposits / Bonds / Sukuk
- Pension: From LIC International Plans or other variable or fixed annuity plans
- Royalties from an intellectual property like books, music etc...
There are some major benefits to passive income over the other two types of income:
- Passive income is usually a recurring income; although it takes some effort, capital and knowledge to set up. Once established passive income continues for a foreseeable future or till the asset is sold or worn out. It is an ideal source of income to achieve financial independence or Retirement.
- A passive income like rent grows with inflation.
- It eliminates the need to actively buying and selling of assets, instead, it shifts the focus to the yield from the asset. You can sell this assetfor a higher price at a later date when its capital gains outweigh the regular income.
Given these above benefits, many expats are now keen to build a portfolio of assets generating passive income. However, they face the following challenges;
- Lack of the necessary capital to invest in passive income generating assets, thanks to high initial investment/downpayment
- The minimum charges for buying and selling, stocks, bonds, and Sukuks remains high, dissuading small investors
- Insufficiency of knowledge, skills and time to create and manage a robust portfolio
- Dearth of dependable advice in this area
Accumulating capital for investing in assets generating passive income is the first and the most important step.
As simple as it seems, the most efficient strategy of capital accumulation is the saving from your active income.
As rightly stated by Robert Kiyosaki;
"The key to financial freedom and great wealth is a person's ability or skill to convert earned income into passive income and/or portfolio income.”
To know how to effectively accumulate capital and set up a robust passive income generation strategy, feel free to arrange a Free Initial Consultation with me.