Few things recently happened that made me (re)think about the concept of passive income.
The Italian stock broker I use since forever decided I cannot trade anymore multiple US listed ETFs, some of which I already own, because…of a regulation dated 2014? Apparently if under MiFid you are classified as a retail investor, you can trade those ETFs only if they publish some documentation in Italian, which obviously they do not (my issue is recent simply because they perform instrument reviews periodically, which in Italian means at random taking their time). I understood that the problem is the MiFid classification by myself, asking some friends and performing tests with other brokers in Italy; my broker is happier to lose a long term client instead of finding a solution. I understand I am not their best client because I am super-aware of commissions and only trade to rebalance my portfolio, but still I think is crazy that they did not even do the effort to either look at my track record, see that I grew my holdings in two decades so I probably know what I am doing, or asking me if what I do for a living (managing few billions for an insurance company) classify me as a professional investor.
Now I have to open an account with a new broker, which means: I have to find a reliable one, complete the KYC process, learn how to use their platform, transfer my holdings, understand if/how I have to pay taxes in UK, etc. It is not complicated but is a tedious process that will cost me hours only to finish in the same situation I was months ago, when I was free to trade. I structured my asset allocation as passive as possible, rebalancing yearly or when stocks drops significantly, but if you want to invest you have to also take care of the admin that comes with it. Still passive but not as passive as you would imagine.
I recently bought an apartment and there are already a ton of small (and not so small) things to fix. Micheal and Ben talk on the economics of owing real estate properties in one episode of their Animal Spirit podcast and I cannot agree more with them. People consider the buying and selling price but never the cost (and time) in between to maintain their property. My parents inherited some rental properties and they bring them more headaches than profits; when my grandparent bought them our hometown was booming but now the situation is the opposite: the multi-decade Italian economic depression combined with a constant supply of new buildings make finding good tenants a very hard task.
Buying a rental property is the poster child of passive income: your effort is concentrated at the beginning of the investment (finding the right property and a low mortgage), after that you can sit and collect your rent. This is how it is advertised everywhere, unfortunately the reality is way more complex than that. I have been a renter and owner, I have lived in different countries with regulations that sometimes protect more the owner and other the renter. As a landlord, you can either invest money, obliging to your renter requests, or time, dodging their requests, but neither approach is really passive (if you have a conscience, obviously). The only way to be really passive is if you find the perfect tenant, the one that does ordinary maintenance without asking anything to you and threat the property as his own…or if you are like Trump and you actually get pleasure in seeing other suffering.
I am not saying that is not a viable and profitable business, just do not plan to go lie on a beach on the other side of the world if you have 10 rented apartments, does not work like that. It is better than an office job that you hate and have 2 hours to commute to every day but if you take it as a side hustle, be prepared to get involved A LOT.
The other day was my niece birthday and during the party I stumbled in a conversation with a friend of my brother: he buys cheap apartments on bankruptcy auctions, usually in small markets / towns, fix and refurbish them and then resell. He talks about it like it is the easiest job in the world, free money; I bet you had a similar conversation too at least once in your life and I bet these topics were not covered from the other side of the table:
- deals that went sour and why
- skills you have to build in order to be effective
- if he/she had a prior network and how to create one
- market research vs luck of being in the right place at the right time
If done properly, you can double your investment for each transaction. But you have to consider all the above elements, which requires at minimum a lot of time…and will not get you anywhere if you do not have at least €40k to start with. Or you can invest in EstateGuru 😉
This is another good example to highlight a different set of possible issues (I do not know Nicole and my comments are based only on what she shares on her blog, can be that the reality is different). If you rent part of your house or a place close to it, managing tenants is easier due to proximity; it also increases the chance that you rent to someone that is part of your community and you have prior knowledge of, therefore diminishing the agency problem. It also means that you are taking a very concentrated (and leveraged) bet on the same market that your main source of income, your job, is linked to. Ireland economy relies 99% on its tax code: if tomorrow the EU decides that every country in the bloc has to harmonise its corporate tax or the US eliminates some loopholes in its tax code, what will be left are a bunch of names no one knows how to write (Siobhan?). Dublin risk might have fatter tails compared to other big cities (is Dublin big??) but I would be uncomfortable of going all-in on any single Real Estate market: I have friends that ‘work’ in Ireland and spent the last 6 months ‘working from home’ in Italy because of COVID. Maybe tomorrow your beach house investment will be a primary home for a new tenant…
P2P lending is then my last example of passive income that is not that passive. Almost every platform by now has an auto-invest feature, so you can send your money, set up your investment choices and go have fun while your money work for you? Not exactly. First, the sector is still young and unregulated, to protect you from bankruptcy risk you have to invest in five platforms at minimum. Then you might want to diversify by sector, consumer, business and real estate lending, then by geography and you can easily (and wisely) end up with ten plus investment vehicles. Each of them is not a static entity, they change their business model because they find better opportunities or they are forced to by external events (hello COVID-19, hello recession). The feedback loop to judge these investments is long, a five years cycle if not more, so you have to check and review your initial assumptions as your investments mature. Is the company still well capitalised to respect that buyback guarantee? Are their risk ratings performing as they forecasted?
Each month I read updates from p2p investors and their activity does not look so passive for the reasons listed above. As your interests, problems compound the more platforms you hold. Even when you reached a good diversification, you will want to divest from the poor performing and research what the rest of the market is doing: the job never ends.
I see all these ‘passive’ investments as the plants in my garden. They do not need my attention every day, sometimes not even every week (thanks God I can go on holidays) but if you want to try this at home, do not expect to buy some seeds, throw them in the ground and then think that Mother Nature will do the rest.
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