How to Invest For Passive Income In UAE? - Financial Planning in Dubai

Passive Income Investment can be quite handy if you are looking to achieve Financial Independence and Well-being.

Instead of waiting to receive an income at retirement, it is wise to invest in assets that can supplement your salary/profits.

The following are the three broad types of income you can generate in UAE;

1. Earned Income / Active Income
2. Investment Income - Capital Gains / Portfolio Income
3. Investment Income - Passive income / Cashflow

Earned Income

Any income received as a salary, profit, fees, gambling or from any other activity involving time and effort is Earned income or Active income.

It is generated when you are at work.

It stops once you stop working or worse if you are unable to work due to health reasons

Earned income is directly proportional 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

Pursuing 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 build 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.

Advantages

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 the medium to long term.

Once you have gained adequate knowledge and experience in trading 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.

Passive Income

Regular cash flow generated from activities that require little or no effort is called passive income.

It is usually cash flow generated from assets owned or controlled by an individual.

The following are some of the passive income ideas in UAE;

Rent: 

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 the Affordable Housing report by Core Savills; 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 Investing

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.

• Dividend Investing in the US, Canadian and European stocks
• Interest from Deposits / Bonds / Sukuk
• Pension: From LIC International Plans or other variable or fixed annuity plans providing a risk-free income
• Royalties from an intellectual property like books, music, etc...

Benefits of Passive Income Investment

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.
• 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 asset for a higher price at a later date when its capital gains outweigh the regular income.

Challenges

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/down-payment
• Insufficiency of knowledge, skills, and time to create and manage a robust portfolio
• The dearth of dependable advice in this area

Capital Accumulation 

Accumulating capital for investing in assets generating passive income is the first and the most important step. You need to have a critical mass in the form of investable capital to generate sufficient passive income. 

As simple as it seems, the most efficient strategy of capital accumulation is 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.

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