Buy a property and rent it out. Make sure the monthly rental income is more than the monthly mortgage loan repayment. In this way, there would be a positive cash flow from the investment. That is this investment would be earning a passive income. According to my understanding of the Rich Dad's series by Robert Kiyosaki, investing in assets that earn passive income is the way for me to become wealthy.
Other than real estates, are there alternative assets that can generate rental income? Yes, there are quite a few assets that can achieve that. For examples, I could buy a car and rent it out. I could buy a yacht and rent it out.
Do you know that it is possible to buy shares and rent them out too? When I first heard of the idea, I was very surprised and shocked to know that such a thing is possible. To understand how to rent out shares, there is a need to understand about options.
Based on my understanding, a call option is like a written agreement between a shares owner and the potential buyer. In the agreement, the agreed price and quantity are stated. Also, there is an expiry date on the agreement.
For example, I could write an agreement for the potential buyer to buy my shares at an agreed price within a 30 days period. Then I would sell this agreement to the potential buyer. The reason that a potential buyer would buy from me is because he thought that the shares price would go up in the future and he would miss the chance to buy at the greed price that is cheaper. If the potential buyer had decided not to buy the shares from me at the agreed price within the 30 days period, the agreement would expire and become worthless. That is I would earn the fee of selling this agreement as rental income. This is like leasing my property to a tenant for 30 days.
Buying shares and rent them out is not the same as buying property and rent it out. The risks involved maybe similar in some but different in others. By gaining financial literacy through financial education, I would be in a better position to identify and manage the risk. That is why I agreed with the Rich Dad's series by Robert Kiyosaki that financial education is essential.
What are the risks of renting out shares?
Firstly, a share price may go up or down or remain the same. Though I could earn rental income for my shares, if the price of the shares were to drop, I would end up losing money. Similarly the valuation of a property may go up or down or remain the same. I would be losing money if the price of my property were to drop.
The slight difference is that the share price is more volatile compare to a property. Thus, I would be able to see whether I making or losing money more quickly than a property investment.
Secondly, no one may want to rent my shares. That is no one is buying a call option on my shares. This is like having a property where I did not have any tenant. Thus, it is important to do proper research before buying the shares just like I would do a proper research before buying a property.
Thirdly, there is a risk that I would be forced to sell my shares at the agreed price if the option buyer were to exercise the option. Since a share price could either go up, go down or remain the same, the only situation where it make sense for the option buyer to exercise the option is when he could make a profit by exercising the option.
If the option buyer had bought a call option from me, then it would only make sense for him to exercise the option if the price of the shares increases beyond the agreed price. In other words, there is a probability of 1/3 that an option buyer may exercise to buy my shares.
Lastly, there is a risk that my shares would become worthless! If a listed company were to become bankrupt, then the shares of the listed company would become worthless. This is unlikely to happen to a property.
The above list of risks for renting out shares is incomplete. After reading the Rich Dad Series by Robert Kiyosaki, I feel that there is a need to keep on learning to be wealthy. In this case, I need to study more about option trading and share investments to get a more complete picture so that I could make better investment decisions.
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