Passive Income Streams Using High Yield Property & Active Shares – The Frugal Samurai

passive income streams by the frugal samurai

Thanks to for The Frugal Samurai for this week’s wealth building strategy: Building passive income streams with high yielding property and actively managed shares.

Each week, I have asked a finance blogger or podcaster to share their personal wealth building strategies. I am hoping these will be useful to compare lots of different strategies and perspectives to provide ideas and insight in your own investing journey.

The Frugal samurai is a financial services professional with more than decade’s worth of experience and a side hustle blogging and podcasting at The Frugal Samurai. I’m curious to hear what a real finance professional chooses to invest in himself.

The Frugal Samurai is the Side Hustle King! 

What Are Your Investing Goals?

  • I have 3 core goals which I focus on when it comes to the numbers side of things.
    • $150k p.a.in passive income streams or $6m in net assets using a conservative 2.5% withdrawal rate.
    • I like to use 2.5% because, even if we don’t hit that number – hopefully it will be close. I actually wrote a series on how to approach FIRE, the final part is here.
  • Option to fully retire at age 50
  • Option to work part-time from age 40
  • I recently achieved a personal goal I set myself of $1m in net assets by 30 (read here).

What is Your Wealth Building Time Frame? How far along are you?

As mentioned above, those are the numbers and goals I am looking to achieve in conjunction with MrsFrugalSamurai.

We are probably half-way or thereabouts currently, so on track. Although the end point would depend on kid(s), unexpected emergencies, life events, bonuses, winning the lotto (!) etc.

I do post about my net wealth ex-PPOR and ex-MrsFrugalSamurai’s numbers on the blog (latest here).

What is your Wealth Building strategy to achieve this?

Most of our equity is held in residential real estate. Although we do have a decent share portfolio as well as healthy superannuation balances (for our age group).

How long have you been using your strategy?

I first bought property when I was in my early 20’s, and even then I wish I had started sooner.

Compounding works better the earlier you do it, if only I bought when I was legally able to!

Growing up I never went all-out in terms of spending or travelling or anything major. I was a massive nerd (still am) who just picked up reading investment books as a hobby.

It’s ironic that I un-learnt everything I was taught at uni (B. Comm degree) when I first started working, and my personal investment philosophy and experience was self-taught because I actively wanted to learn more.

Were There Other Strategies Before?  If so, What Made You Pivot?

For sure, I really, really, really thought I was going to be a gun stock picker straight out of uni.

I entered the work-force smack bang in the GFC and saw some unbelievable valuations for individual stocks. Of course, like many young ‘un, I made some early and quick wins – and thought this was it.

Took a $40,000 mistake (read here) for me to realize, “hey, maybe you’re not y’know… good”. $40,000 was a lot of money back then (still is), but for someone with only a year or two of earnings – it was huge.

That’s when I decided I needed to properly research and educate myself before committing.

Property Passive Income Streams

When I was younger, I deliberately targeted higher yielding properties with at least an 8% gross rental yield in metro locations on a principal and interest loan.

This is because I wanted to mitigate the risk of not having enough cash-flow to support the mortgage if anything was to happen. As the loans are amortizing, I am both building equity and reducing my liabilities from day 1.

Further, I’d hope that metro locations would mitigate any rental vacancies as the population pool is big enough. And as the properties are also in affordable areas below the median price of their respective locations, I’d hope that there will always be tenants for them. It has helped tremendously with the lowering of the cash rate through this time – pure luck.

Stock Market Passive Income Streams

Our share portfolio is actively managed. This might cause some consternation among the FIRE community that we aren’t passively ETF’d.

But I’ve always believed that if one day I fail to outperform the index over the long-term – then I would revert to ETFs. I am ahead, but barely!

Incidentally, MrsFrugalSamurai’s portfolio is outperforming mine by leaps and bounds, so maybe you should interview her!

As an aside, I think residential real estate here in Australia is very unbalanced.

The housing market is literally “too big to fail” in my eyes, because 70% of the housing is owned by owner-occupiers, the vast majority of household wealth is in the primary residence for most families.

Coupled with the main drivers of profitability for the big 4 banks are in residential mortgages, and it’s in their interest to minimize loan defaults; and the fact that the property sector is a huge employer for jobs directly and indirectly – I think the risk of the property sector failing is minute given the chain reaction it would cause for the Australian economy.

Not to say that it won’t, but I think we’ll have many more things on our mind than the value of our investments if housing defaults. By then, it won’t matter what asset class we chose.

What makes your passive income streams strategy suit your personal situation?

After losing my shirt with shares, I read up on any investment books or material I could find. That’s when I realized that many billionaires and multi-millionaires own real estate. So I decided to give that a go. The more I learnt, the more comfortable I felt.

I guess it comes down to the fact of information asymmetry – in that with shares, key knowledge and information is retained by the company insiders, but with property, there is an abundance of publicly available information for the astute investor to find, to help you make the right decision.

Further, I’ve been called many names, cheap, frugal, tight, handsome… but there is one which I find particularly endearing albeit controversial, and that is “shark”.

Some reason, I have a decent nose for sniffing out a bargain or at least the art of negotiating.

You can’t buy BHP shares worth $35 for $30 at market, but in property – many things are negotiable.

I am certainly not a real estate purist though, it just happened that way.

Where do you Stand on Home Ownership vs Renting?  Why?

I did a Youtube video on this very topic! So exciting (watch here) but for those of you disinclined, ultimately it comes down to your life goals and financial position.

Although I think it makes sense that if the rent is cheaper than the mortgage repayments in the same location, using that free cash flow to invest elsewhere makes sense.

You could invest it on the stock market, either passive or active – or even become a rentvestor.

With credit so cheap though, if you can afford to – it probably makes more sense to own. Just be aware that we are at record low interest rates, which means they will rise at some point.

Where Do You Stand on the Great Property vs Shares Debate? Why?

This is indeed a great debate for the ages, and also the topic of a Youtube video! I don’t know why but whenever I read up on blogs, forums and social media groups – people are so adamant for one over the other.

I think both are fantastically good and should have an allocation to every portfolio.

There are some serious gains to be made with shares if you can out-perform the index.

But you can’t really beat the leverage you can receive from property, nor the generous tax benefits state and federal governments provide.

If you had to twist my arm, I would probably say property edges it here in Oz, based on what I mentioned a few questions earlier.

Where Do You Stand on Investing for CapitaI Growth vs for Passive Income streams?  Why?

This is probably the next great debate. Personally, for me income is king and capital growth is queen.

I get there are many commentators who say that capital growth is what helps you to achieve FIRE, but at the end of the day, I think income is what gives you options.

I would rather have many flowing streams of income than sitting on a huge paper gain. This is because with capital growth, you need to realize it via selling, which is akin to killing the golden goose.

What do you need to do then? Unless the gain has been extravagant, you would need to re-invest it elsewhere.

With income however, the aim is to buy back the most valuable commodity, that being time. No point sitting on $10m of paper at age 90 right!

That being said, don’t think for one second that I am against capital growth – no way, growth is a beautiful thing, the more the better.

Do you have any financial regrets?

Yes, so many to mention.

  • Not starting out investing earlier
  • Listening to the wrong people in the beginning, I’ve since learnt to only follow and listen to those who have achieved what I want to achieve.
  • Not buying more Sydney property during the 2012-2017 boom.
  • Many, many properties and stocks coulda, shoulda, woulda.
  • Not going into business on a couple occasions when the opportunities presented themselves.
  • Mucking around with my career in my 20s
  • Gosh, too many, I am becoming more and more depressed writing them out… will stop now.

Aussie Doc – Awww…... Sounds like you have big goals and are well on the way to achieving them despite a few errors!  

Any final suggestions?

I had many final quotes and quips which I thought would be a witty way to end this interview, but it’s late and I’m missing valuable English Premier League action, so would end it by saying that the absolute key to personal finance is to “spend less than you earn and invest the rest”.

Everything is a derivative of that equation. If you can always remember that rule and take action on it, you should come out OK.

To see all the wealth building strategies shared with Aussie doc freedom, check out the Ultimate Step by Step guide to Wealth building, with wealth building strategies.  Find out about the Victorian residential tenancy act changes.  

 

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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