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Sunday, July 22, 2012

Why You Should Invest in Income Generating Portfolios

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As a Civil servant in the early 1990s, John was among the top earners in his village (and the nearest town for that matter).  In fact he wasn’t just a top earner but an admired investor. During his workdays, he aggressively invested in land all over the country. John grew up with the belief that land investment was the way to go. If anything, he is now a happy owner of assets worth hundreds of thousands of dollars and has recovered his initial expenditure in buying the land several times over. John is an example of an investor many of us would like to emulate, right?

In his quest for wealth and in the whole process of asset accumulation, John has just forgotten one thing: the need for an investment which generates income. Yes, he owns large chunks of land but has never put that land into an income generating activity. Consequently, unless John sells his piece of land, he will forever depend on his job for survival.
In our pursuit of investment opportunities, we often overlook this vital aspect. Investments’ returns are in two forms: capital gains and income. Capital gains come in when the value of your property rises above what you paid for it and to realize this gain, you must sell the asset. With income, however, your investment return is not one-off but may continue into eternity. Another thing is that you do not have to sell your property to realize income gains.
Call it anything, financial freedom, financial security, planning for retirement e.t.c, but to realize it you will need what is referred to as replacement income. This is the amount of income your investments have to generate in order to cover your living expenses. Whether you are going to work or lying in a hospital bed that month, you will still receive this income. In John’s situation should anything happen which renders him unable to continue working; he will be forced to sell a portion of his land. You can guarantee that he is going to sell it at a good price or even get a buyer at that time of need. However, if he could have developed some of his plot into apartments and renting them out to tenants, he could make use of that income right away.  
Yours asset can also be your sole business. Ask yourself this question: how long can your business survive without you? A poorly structured business will require that you personal be there for it to thrive. Therefore, if this is the case, you need to change your business structure so as to go on generating income even in your absence.
Myth Busting
You may be wondering where you will get these investments which can sustain you. For beginners, do not kill yourself looking for an immediate solution that pays all your expenditure. This process takes time but you need to begin now.
We time and again overlook investments options which do not conform to our traditional investment myth. It may be the single-roomed studio flat that you buy as an alternative to the 4-bedroomed apartment in Kileleshwa that you wish to accumulate enough money to buy. Yo won't have to wait that long to be a real estate investor. Barely anything, even if it is just an adjustment which will bring in Ksh 5,000 per month – this money can settle your electricity bills.
Be open-minded and always remember that capital gain will always have its place in the investment industry but your investment should generate some income for your true future financial freedom and security.

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