Leaving work.

[waz11]

Hi,

I had a question mainly aimed for those who have ceased work full time in their 9 - 5.

The question is - at what point did you feel financially comfortable in leaving work. Was it when you had 5 , 6 , 7 times your yearly 9 - 5 income in the bank and the same in passive income coming in? Or did you wait until you had 3 or 4 times your salary coming in in passive income?

How difficult has it been to obtain more loans for property or other investments?

The reason I am asking is that I am currently on a salary that I know I could easily make up in 1 or 2 property deals in a year - but I dont know if I have the confidence to leave work for the reason of not being able to get more loans due to the fact that I wouldnt be employed ina 9-5.

How have people found ways to get around this situation?

Thanks for any help \ info.

Waz11

[Merovingian]

Hi,

I had a question mainly aimed for those who have ceased work full time in their 9 - 5.

The question is - at what point did you feel financially comfortable in leaving work. Was it when you had 5 , 6 , 7 times your yearly 9 - 5 income in the bank and the same in passive income coming in? Or did you wait until you had 3 or 4 times your salary coming in in passive income?

How difficult has it been to obtain more loans for property or other investments?

The reason I am asking is that I am currently on a salary that I know I could easily make up in 1 or 2 property deals in a year - but I dont know if I have the confidence to leave work for the reason of not being able to get more loans due to the fact that I wouldnt be employed ina 9-5.

How have people found ways to get around this situation?

Thanks for any help \ info.

Waz11

If I remember correctly, the DSR is calculated as:
DSR = (loan_repayments * 100%) / (30% * income + 80% * rental income)

So if the "30% * income" term in the formula above is removed, are you still able to service loans, i.e. is DSR <= 100%?

That's the way I see it anyway...

Also, if you're earning 6 times your job's income(*), in rental/passive income, then you have no financial reason to work, in my opinion.

I think it is more of a lifestyle choice, this question. Do you like your job? Do you just want to do it part time, or a couple of days a week?

From what your post says, (and if I have interpreted (*) right), you should be OK without a job, financially.

Just my thoughts... :)

[waz11]

hi,

the numbers I was quoting were not my own. I do not have that amount of passive income or money saved in the bank etc. I was actually just asking at what point people who have left their jobs have felt financially comfortable in doing so. - what amounts of passive income and assests \ cash they had before they felt they were ok to leave their jobs.

The only thing I mentioned about myself was I feel I am in a position where I could do 1 or 2 deals a year that would easily make me more than my current 9 - 5. But I am fearful of leaving my job because I may not be able to get loans in the future. So I was also wondering how people got around this fact.

Cheers,

Waz11

[keithj]

The question is - at what point did you feel financially comfortable in leaving work. Was it when you had 5 , 6 , 7 times your yearly 9 - 5 income in the bank and the same in passive income coming in? Or did you wait until you had 3 or 4 times your salary coming in in passive income?
- PPOR paid off & no other 'bad' debts.
- Substantial equity in passive investments.
- Reasonable level of cash/liquid investments to tide over any c/f problems (6 months).
- Passive income of 2/3rd personal services income - work uses up a fair bit of cash (transport, clothes, lunches, time constraints), so you don't need as much.
- Ability to reenter the workforce IF absolutely everything went pear shaped - not necessarily in the same field
- Diversified passive high yielding, low risk investments, with enough to growth to exceed inflation. NOT just IP.

How difficult has it been to obtain more loans for property or other investments?Generally speaking, in 'retirement', a more conservative LVR is appropriate - there are some Lo-Doc products that offer 'normal' interest rates, but they reduce their risk by offering a lower LVR. Servicability should not be too much of an issue if there's enough genuine c/f.

The reason I am asking is that I am currently on a salary that I know I could easily make up in 1 or 2 property deals in a year - but I dont know if I have the confidence to leave work for the reason of not being able to get more loans due to the fact that I wouldnt be employed ina 9-5.Can you keep your job and do 1-2 deals pa, work part time & do the deals, could you take a year off and try it & then go back to salary ?. What's the worst possible outcome if you try it ? OTOH, is this time in the cycle the right time to start ?

KJ

[waz11]

Keith,

Thanks for the advice - that was what I was after.

In response to your questions..

I can keep my job and do these deals. I have been doing these deals currently and I guess I could possibly take a year off and try it out to see how I go.

The main Reason I am asking this is that I see myself doing these deals that take only a couple of months and then I think - why the hell am I waking up every morning and fixing other peoples problems all day long when I could be spending my time working on more deals and earning more.

I dont have the diversified investment portfolio you advise - nor the passive income. Though I feel that I could do these deals and live off the profits from them. Basically I think my main problem is Im just sick of going to work for someone else each day and I can't think of a business idea that would be able to replace my 9-5 so im looking to try to focus my efforts on what has been rewarding to me in the past years.

Cheers,

Waz11

[Dragons]

Hi Waz11

My situation is exactly what you are talking about. I was thinking of leaving work after 22 years and doing the deals you are talking about. Fortunately at the time I was thinking of leaving a company restructure of middle management came about and I took voluntary redundancy, which included six months of LSL and 2 months of AL. the money came in handy now.

I have certainly enjoyed the break, my wife took her elderly parents overseas to see relatives while I looked after the kids. It also helps that she still works part time.

I have been trying to do some work on my property potfolio. I will tell you that both my banks and mortgage broker are no longer interested in me since I can't produce monthly salary slips.

I have merely tried to hold what I've got,

I've tried trading shares for a living with modest success.

I'm now working on my resume probably looking to rejoin the workforce again.

good luck

[waz11]

Dragons,

That is the type of thing I am afraid of.

This is basically why I have been asking the question - I would love to know how the people who have left work continue to invest.

I guess what i would like to know is how do full time property investors keep getting loans.. or what do I need to be able to make the decision to become a full time property investor and to continue getting the loans I need.

Waz11

[Pete]

Waz11,

I "sort of" retired last year and at the same time bought another IP. Finance was obtained using a "no doc" loan - although at the time I was not working. I had funds available to cover repayments for quite some time so was comfortable borrowing.

I say "sort of" retired 'cause I had a vague plan to resume work on a casual consulting basis and was happy to leave my employer of ~12 months as it was not exactly the work that I wanted.

With the new loan, I ended up limited to 65% LVR and had expected to be at 80%; hence I used more "cash" reserves than I was expecting. I resumed work in September, now doing consulting work through a company that I setup. The work is much more closely aligned to what I enjoy doing and it has now replaced the extra funds I used in the purchase. So, I'm back to the position of retirement being an option. I currently plan to keep working for a while as I am enjoying it and the income is handy to knock down my debt a little. Also, the engineering industry in which I work is currently very short of good people Australia-wide; I got quite a few offers of work.

I'm sure there are many ways to keep getting loans even without employment. Just set yourself up right. The "no doc" loans might have a place.

For me, I've targeted capital growth properties and in the recent market in WA have seen really good results. The equity allows no doc borrowings. Great use of equity has also been discussed by Steve Navra - suggest you search for "cashbonds" in other posts or attend a seminar. Or try Steve's website.

Make a plan, make it happen. Best wishes,

[investor]

The only thing I mentioned about myself was I feel I am in a position where I could do 1 or 2 deals a year that would easily make me more than my current 9 - 5. But I am fearful of leaving my job because I may not be able to get loans in the future. So I was also wondering how people got around this fact.



Hi
Firstly doing "1 or 2 deals" is not passive income, you're just replacing one job with another job. What if you can't do those deals for some reason or other, where's the passive income ?

Let's take a round figure of 200K per annum Gross as your combined salary (you and your spouse). If you're not married and have no kids yet, then you're a bit premature in thinking about leaving work.

Passive income from resi property will come in at a max of 5% say. (You will be buying in Sydney of course coz anywhere else is just regional and not worth it) :p

Therefore you will need a property portfolio worth 4 million at the least with NO LOANS, that is unencumbered.

Then there is your PPOR. In sydney a semi decent house will set you back 2 mil (alot more if you want to retire in style on the water east of the bridge with your motor yatch moored in front of you). Once again unencumber.

Also I would have around 200k-300k sitting in the bank, or in a very liquid low risk investment, for emergencies.

So that's 6mil in unencumbered assets and 200k-300k in the bank to replace a combined salary of 200k and leave work. :)

That will let you live comfortably, if 200k per year is what you're used to (won't do it for me :rolleyes: ) and you can do your 1 or 2 jobs a year at your own pace so you don't get too bored. :)

Regards

Investor :)

[Lissy]

Hi waz11
If you don't have a company or trust structure yet, then I would recommend that you get an ABN NOW - so that when you do leave work, you may well have had that ABN for 2 years. It's not vital, but when it comes to low doc loans it can make a big difference. So think ahead!
I reached a point where hubby's PAYG income wasn't making a difference to our borrowing capacity, I was already up to low docs and had maxed out mortgage insurance. So when a big juicy retrenchment package was offered - he took it. It was the equivalent of a year's income.
I wouldn't say we fit any of the formulae you've suggested, but his year is up now and he's not going to get another job. I know hubby worries more about this than I do, but I have a cash buffer, a good level of cashflow (although not quite up to his job income yet!) and lumps of money that come in regularly from various sources. So I'm confident that we will continue up and onward.
By the way, if you do get some sort of lump when you leave, I'd recommend you think long and hard about what you do with it. I ended up dividing hubby's payment by 12 (seeing it was roughly a year's income) then once a month I'd transfer 1/12th into our bank account and we'd live off that. No blowing it on a new car or big holiday etcetc (or even as a deposit for a house or two!). We did have to buy a $6k car to replace his company car though!
Maybe I should sum up with one word - discipline. If you're planning to leave work, you need to be confident you can live on your alternative sources of income (and think about worst case scenarios!!) and you have to be disciplined enough to stick to it, particularly if that income is going to come in only once or twice in the year in lumps.

[keithj]

Waz,
Thanks for the advice - that was what I was after.It's NOT advice - I'm not allowed to give advice, it's just what I may do if I was in a similar position.:)

I can keep my job and do these deals. I have been doing these deals currently and I guess I could possibly take a year off and try it out to see how I go. I'd get an ABN, set up a company to do these deals for a couple of years and keep the job full time. Only then with 2 yrs company a/c will lenders look at you seriously. Also by then you'd have 2 yrs worth of equity as a buffer. As other posters mentioned, you are replacing your (safe?) job with a (high risk?) start up company at an interesting time in the housing cycle, so lenders treat you as a high risk proposition.

Basically I think my main problem is Im just sick of going to work for someone else each day and I can't think of a business idea that would be able to replace my 9-5 so im looking to try to focus my efforts on what has been rewarding to me in the past years.It's called delayed gratification - we've all done it, we were all sick of fixing other people problems, you've gone a long way down the track of escaping all that, just don't jump ship to early.

KJ

[waz11]

Thanks for all the responses..

This may sound like a stupid question but here goes anyway.

Whats the idea behind getting an ABN and setting up a company?
Am I correct in understanding that if I buy property and operate through that structure for 2 years then I may have a better oppurtunity in obtaining loans after I leave my 9 - 5 because the loan applications etc will be based on the previous lending and workings of the company? Or am I just getting a little confused?

Cheers,

Waz11

[keithj]

Thanks for all the responses..

This may sound like a stupid question but here goes anyway. The only stupidi Qs are those you don't ask.

Whats the idea behind getting an ABN and setting up a company?

Am I correct in understanding that if I buy property and operate through that structure for 2 years then I may have a better oppurtunity in obtaining loans after I leave my 9 - 5 because the loan applications etc will be based on the previous lending and workings of the company? Or am I just getting a little confused?Spot on. It establishs a pattern. A lender will look at the last 2 yrs co a/cs and treat to company the same as it would treat any self employed person (or BHP etc). The key point is the income for the company that you're trying to establish.

[Pete]

Great comments, Keith.

In my case, and I think it is pretty standard, I believe the maximum LVR was 65% as I'd newly obtained the ABN.

For my particular loan, the lender (RAMS) had a rule that for ABN < 2 years maximum LVR 65%; for ABN >= 2 years maximum 80% LVR.

For simply having had the ABN for 2 years and they'd have lent me more money. Same interest rate.

regards,

[Pete]

Investor,

The desired passive income can be obtained on considerably smaller property equity. I'd suggest one could obtain the $200,000 per annum income on less than half the initial equity in your example.

Higher than 5% return should be obtainable.

Well selected, prime property should grow in capital value at well in excess of 5% per annum. In Perth for the last 30 years it is over 9% in most suburbs [96 suburbs out of 131 according to my analysis] and over 10% for many suburbs [57 out of 131]. Admittedly there has been higher inflation in those times, but it is an adequately long period to give confidence that prime suburbs should achieve 10% per annum over the next 30 years.

For this example, assume 10% growth (neglecting the rent) and by continually borrowing, say, 70% of this [and I think one could push for 80%], one will have 7% per annum of the WHOLE portfolio value - it does not have to be unencumbered. So a $4,000,000 portfolio will supply $280,000/year. The rent will be extra. The tax deductability of expenses (especially interest) will minimise tax obligations.

After all expenses, the funds left over from the rent can help service the loans. I'd say the $4,000,000 portfolio can include your PPOR if purchased in a suitable structure and you could owe money on the portfolio at the start. Say $2,000,000.

That is, equity of $2,000,000 instead of $6,000,000 in your example.

Obviously one might assume different growth rates, etc from me however I believe that even using more modest assumptions (and necessarily a more detailed, rigorous analysis - what I've shown is a little too simple) one can show the desired returns on a much smaller portfolio than you've indicated.

Please have a look at some excellent comments posted by Steve Navra in his post "A LENGTHY reply" of February 2003 on page 2 of a thread titled "How many properties to retire?". The start of the thread, if I've got this correct, is here (http://www.somersoft.com/forums/showthread.php?t=6759).

regards,

[investor]

Higher than 5% return should be obtainable.

For this example, assume 10% growth (neglecting the rent) and by continually borrowing, say, 70% of this [and I think one could push for 80%], one will have 7% per annum of the WHOLE portfolio value - it does not have to be unencumbered. So a $4,000,000 portfolio will supply $280,000/year. The rent will be extra. The tax deductability of expenses (especially interest) will minimise tax obligations.

Hi Pete

I have to disagree with you here. Of course it depends on what each individual investors perception of retirement is. We all consider retirement differently so I'm not arguing with you just have a different idea about how I would consider retirement and leaving the workplace.

Firstly when I leave the workforce and retire I don't want to think about loans(only doing the odd reno here and there so I don't get to bored). I don't want to have to follow the property market to see if there is negative or positive growth to be able to put food on the table.

I believe having to rely on growth to fund my lost salary is a very high risk strategy, others may disagree and I accept that, it's just my opinion.

Growth my be an average 10% per year but it is certainly not linear.

For eg. in 2004 in Sydney we had an average of -15% growth and in some investor driven areas we had -30% growth. That's negative.

Another example is between 1990 and 1997 we had no growth at all, we may be heading for another protracted period of slightly -ve and then 0% growth which may last a few years.

Sure there will be growth during a boom of 20%-40% per year which will average the growth to 10%, but what happens during the 6 -7 years of no growth ?

Do you go back to work ? :confused:

Very risky in my opinion. I would like the rental from my ips funding my lost salary not the cap growth. The cap growth is the bonus and will continually increase ones net worth. I consider eating away CG to fund retirement as going backwards especially if you plan to leave the workforce early, say at 40. Can you imagine what debt you will have by the time your 65 ? :eek:

What a headache !! :eek:

Therefore I stick by the 4mil + 2mil PPOR figure to fund 200K which is what you would need to live off (not invest with). Of course if you need less to live off or you are happy with a cheaper PPOR :eek: then that figure would decrease.

Also if you can find a quality resi ip in Sydney returning 5% NET please tell me about it and I will buy it. :cool: Curently resi in Sydney is returning 2-3% and commercial is returning 5% and those figures may not be net. :(

So retirement can be as risky as you want it to be. But I want NO RISK at all when I retire and leave the workforce. I want to lie on the beach and have no worry in the world. I don't want to have my bank manager or mortgage broker on speed-dial. ;)

Regards

Investor :)

[Brenda Irwin]

I believe your net worth or gross worth has nothing to do with retirement except it makes a great hedge for market fluctuations.

The real value is in passive, net income. How much is enough, plus a bit more for comfort and emergencies. It takes a lot to build up your passive income, and it certainly doesn't happen overnight. Property investment is one of the more secure modes of investing but certainly not the only way.

I pay interest payments of currently $80,200 which would do me very nicely as a passive income if the bank would just stop charging it, but miracles like that never happen. So, I need 'time' now to repay those loans, and reborrow at the other end too so my portfolio continues to be nicely geared for capital growth. Occasionally, I sell an IP, pay out the loan and use the profits to payout the loans on a few other loans. Then I reborrow with my new passive income which now has less interest to pay and more income for repayments.

Eventually the balance will be right but not just yet. Ignoring CGT my income would only be around $60k pa net and that is not quite enough for my hubby and I. Don't forget there is no holiday leave loading, superannuation, sick leave or health insurance in your income when you don't have a job.

I know many people who have left their job's forever but life is still a struggle and many don't seem to have as good a quality of life as they did when they were working in jobs. 'Timing', I believe is crucial in leaving your job. A job creates a great safety net, but not an absolutely necessary one. I admire those who start their own business and become the boss rather than the employee.

[keithj]

I believe having to rely on growth to fund my lost salary is a very high risk strategy, others may disagree and I accept that, it's just my opinion. I agree that living off equity & relying on growth is a risky way to retire.

Therefore I stick by the 4mil + 2mil PPOR figure to fund 200K which is what you would need to live off (not invest with). Of course if you need less to live off or you are happy with a cheaper PPOR :eek: then that figure would decrease.See this thread (http://www.somersoft.com/forums/showthread.php?t=18599) for ideas about how to create $200K nett income from $2M.

But I want NO RISK at all when I retire and leave the workforce. I want to lie on the beach and have no worry in the world.There is always some degree of risk with any investment whether borrowed funds are used or own cash. I believe solely investing in IP is risky - fire, vacancy, bad tenents, bad PM, bad neighbors, etc. I think borrowing money is a lower risk than some of these, so I'm prepared to borrow conservatively in retirement - LVR < 50%, long term fixed interest rates, able to pay it ALL off with other liquid investment if everything went pear shaped.

Do you intend to invest in US govt bonds or other 'risk-free' investments ?

Cheers,

KJ

[Andrew_A]

Hi waz11
<edit>
Maybe I should sum up with one word - discipline. If you're planning to leave work, you need to be confident you can live on your alternative sources of income (and think about worst case scenarios!!) and you have to be disciplined enough to stick to it, particularly if that income is going to come in only once or twice in the year in lumps.
Discipline is the key. Also there is the discipline of staying with your new course. A J O B provides structure and discipline automatically that is not so easy to replace when you strike out on your own as a full time investor, retiree or something similar.

I find it a big struggle to use lots of free time when I have it, and know that if I don't plan to fill the time well it will be wasted.

It's a funny concept when you have to get out of bed to get to work that having "freedom" can be just as challenging!

[markpatric]

Waz you say you have been making deals???, surely you can show some income from this, if not maybe you are moving ahead of yourself.
Many people would like to run thier own business in whatever form but most just don`t have the self motivation to do it as it needs to be done.
I had a couple of great years in R/E and quit my job (own business) for a year but now I`m back and struggling to catch up after a year of inaction and a bad R/E market.
I would say it`s not impossible to do but very few would really make a go of it, after all you are merely replacing your job with one in R/E, and in my experience without earning big dollars it is a lot of risk for little reward, and it`s not a such a great fun job to "do deals in R/E" imo.

[waz11]

Markpatric,

I can show some income from it. But I just wasn't sure how the banks would take that. Whether they would say - sure he hasn't got a 9 - 5 but he is doing a few really good deals a year and we trust that he can continue to do so - and maybe even do more now that he can focus more attention on it.

Waysolid - I only wait for the chance to see whether I would find my freedom a bit of a challenge... though I agree with what you are saying.

waz11

[Pete]

Investor & Brenda,

Some very good comments in your posts. Thank you. I appreciate your inputs to help me develop my financial strategy for retirement.

We each have different perspectives. I'm still fine tuning my strategy and a critical element of it is currently capital growth. The rent is a minor element to me. It seems that you each have the opposite priorities.

Recent market downturns in Sydney, the sustained flat prices of the early 90's - which certainly included periods of negative growth - are reminders of the dangers of reliance on regular capital growth.

I'll aim to address these in my strategy.

My long term debt I fully expect to be 60% or more of portfolio - even 50 years after retiring - and it will be focussed on high capital growth property.

As a rough idea - borrow to 80% LVR and have actual debt say 50% with the other 30% available, undrawn in a line of credit "buffer". Will vary with market cycle.

When I get to 65 (and I'm not yet 2/3 of the way there), my debt level might exceed $100,000,000. (I have a spreadsheet at home that would give me a proper estimate; but I haven't got it with me.) Whatever the value, it will be considerable. I can't imagine having lots of property, hence lots of equity and not utilising it.

We all have our different risk tolerance levels. Perhaps mine will decrease when I am seriously retired? Perhaps it will increase!

Best wishes of success to all.

regards,

[likewow]

waz

There are some major disadvantages to dealing in property using a company, you should talk to an accountant before doing it this way. The bank should consider your income no differently if it is in your own name as its still income to you but you have to present it them professionally. Like a professional business finance proposal.

[qaz]

I don't beleive living off equity is necessarily a risky strategy. I belive it really comes down to the margins you give yourself. If you

1. Only borrow against quality low risk assets. That old inner city property on the big block of land is great, but maybe that small 1 bedder in that mining town thats returning great at the moment, but will be virtually valueless once the local mine is exhausted might not be the best option.

2. Give yourself a good healthy buffer so that you can live through at least a full market cycle without requiring any growth. The more buffer you have, the safer you are.

3. Do your homework and find out the expected long term CG of each of your quality properties and only borrow against a perportion of that growth (if 7% CG maybe only borrow against 3-4% of it a year).

4. If you feel you require $50k a year net to live off, maybe ensure you have $70-80k a year net a year after the above considerations. that way if theres an emergency, your not blowing your budget.

5. Be fiscally responsible to your level of income. if you've set aside $80k a year net, dont spend more than it unless it really is an emergency. if you want more spending money, simply go back to work.

Im sure there are other measures you can take, but these seem like the most common sense ones. Of coarse you can't cover every possibility in life, but I think if you did all of the above, you can (depending on how much you have set aside) live well and not have to work without taking any great risks.

[keithj]

I don't beleive living off equity is necessarily a risky strategy. I belive it really comes down to the margins you give yourself. If you

1. Only borrow against quality low risk assets. That old inner city property on the big block of land is great, but maybe that small 1 bedder in that mining town thats returning great at the moment, but will be virtually valueless once the local mine is exhausted might not be the best option.

2. Give yourself a good healthy buffer so that you can live through at least a full market cycle without requiring any growth. The more buffer you have, the safer you are.

3. Do your homework and find out the expected long term CG of each of your quality properties and only borrow against a perportion of that growth (if 7% CG maybe only borrow against 3-4% of it a year).

4. If you feel you require $50k a year net to live off, maybe ensure you have $70-80k a year net a year after the above considerations. that way if theres an emergency, your not blowing your budget.

5. Be fiscally responsible to your level of income. if you've set aside $80k a year net, dont spend more than it unless it really is an emergency. if you want more spending money, simply go back to work.

Im sure there are other measures you can take, but these seem like the most common sense ones. Of coarse you can't cover every possibility in life, but I think if you did all of the above, you can (depending on how much you have set aside) live well and not have to work without taking any great risks.I agree that all the above are good risk mitigating points.

However,
- what if there's a credit squeeze & no-one will lend you money against your equity
- what if the next cycle takes twice as long as budgeted for - it would be pretty demoralising for me to watch my interest costs going up & equity going down as I draw down on the equity for 10 yrs & worry about if IP will ever come back into favour
- you'd need a diverse portfolio of 10+ props, so that problems with a couple of them (eg fire, extended vacancy) didn't have to great an impact. Income /vacancy protection insurance will reduce the risk, but it's an additional annual cost
- what if interest rates rise & stay high for a prolonged period. That is the biggest outgoing, so allowing for a high rate would skew projections.

Even if there's a 1% chance of any of the above happening, the risk would be to great for me personally. Living off equity is something I have considered, but I would not plan to use that strategy as a first choice.

3. Do your homework and find out the expected long term CG of each of your quality properties and only borrow against a perportion of that growth (if 7% CG maybe only borrow against 3-4% of it a year).You use the term expected - I'd want to be v. sure about projected growth - can it continue while wages only grow at inflation ?. I'd also do projections assuming no growth for the 1st 10 yrs of retirement followed by 3 yrs to make the 13 yr average back for 7% pa. I'd also be wary about drawing down over 50% of that growth p.a. despite what some 'gurus' suggest.

KJ

[Pete]

qaz - your comments are similar to my thinking. Thank you for clearly listing those points. A big enough buffer of funds is most important.

Keith - Yes, there are certainly some very real risks that must be considered. It is quite understandable that many people would agree with you and opt for alternatives to living off capital growth. Appropriate diversification also has an important place in any strategy.

It is impossible to accurately forecast future market cycles, interest rates, etc. Assumptions made of these critical elements must necessarily be conservative & intelligent; and should include sensitivity analyses.

There are long term (30 year) records of suburb by suburb median prices. Using such historical records provides not only knowledge of market cycles & growth rates, but to me, a confidence in future capital growth. However, maybe I need to do some further research and learn what happened in more serious downturns than have been experienced in the last 30 years? For example, in the great Depresssion of the early 1930's. Maybe I need to consider diversifying into other assets, too?

There is always more to learn.

[ani]

Hi,

I had a question mainly aimed for those who have ceased work full time in their 9 - 5.

The question is - at what point did you feel financially comfortable in leaving work. Was it when you had 5 , 6 , 7 times your yearly 9 - 5 income in the bank and the same in passive income coming in? Or did you wait until you had 3 or 4 times your salary coming in in passive income?

How difficult has it been to obtain more loans for property or other investments?

The reason I am asking is that I am currently on a salary that I know I could easily make up in 1 or 2 property deals in a year - but I dont know if I have the confidence to leave work for the reason of not being able to get more loans due to the fact that I wouldnt be employed ina 9-5.

How have people found ways to get around this situation?

Thanks for any help \ info.

Waz11

Hi Waz11


I would say the most important thing is your mind set. I was determined not to go back to 9-5 so I made it work..........it is amazing what you can achieve when you have to replace that 9-5 income.

You seem to be able to do the deals now and still work full time so back yourself that you can do it. When you can spend more time looking, the deals will be there to replace your income.

I have earned more since I left 9-5 than I did before.

cheers
ani

[likewow]

There are a couple of important things to remember:

Planning to retire on equity and actually doing it are two completely different things. Spreadsheets dont allow for major downturns in the property market or the economy or raging inflation or 17% interest rates.

If you are a single person with no major responsibilities beside yourself you can retire on not much cap. growth or income at all and can afford to take risks.

If you are married with a mortgage and a couple of kids you cant really take risks and rely on future hoped for cap. growth.

So what works for one person will not work for another. But one thing we all can agree on is for a large majority youre never going to get rich while working for someone else.

[keithj]

Planning to retire on equity and actually doing it are two completely different things. Spreadsheets dont allow for major downturns in the property market or the economy or raging inflation or 17% interest rates.There's a few ways to write spreadsheets that do take downturns into account. Just don't assume consistent 7% CG every year.
Options include -
- copy the last 30yrs CG to the next 30 yrs - do this for various KNOWN historical 30yr periods
- use randomise function so growth averages 7%
- manually enter 'perceived' worst case data e.g. -10%,-10%,-10%,-10%,...... +30%,+30%

I'm not a statistician, so there may be other or better ways.

If you are a single person with no major responsibilities beside yourself you can retire on not much cap. growth or income at all and can afford to take risks.

If you are married with a mortgage and a couple of kids you cant really take risks and rely on future hoped for cap. growth.Absolutely, I've become much more risk averse in the last 6 yrs (kids aged 6&4). Of course, if you are currently single, you should consider whether liviing off capital is of higher importance than having kids and other lifelong commitments..

[Monopoly]

The question is - at what point did you feel financially comfortable in leaving work.
When I was earning more money "sleeping in" than when I was getting up and going into work. :D

[Andrew_A]

- what if the next cycle takes twice as long as budgeted for - it would be pretty demoralising for me to watch my interest costs going up & equity going down as I draw down on the equity for 10 yrs & worry about if IP will ever come back into favour.

KJ
Interesting point Keith, I think such considerations would definitely have to be factored in to any calculations.

One Brisbane RE investor/land banker whom TheFirstBruce introduced me to had an interesting view point. He mentioned that it might be the case that this cycle until the next boom is a particularly long one, perhaps even twice as long! I think his reasoning was that the boom we had just experienced 01-03 was in itself quite an extended an unusual one.

I'm not sure what to believe myself but I know that potential long periods of nil or negative capital growth are a real possibility.

[qaz]

I dunno. But I do think the retiring baby boomers will play a substantial role in determining the direction of the residential real estate market over the next decade or so.

[Sunstone]

Hi waz11
If you don't have a company or trust structure yet, then I would recommend that you get an ABN NOW - so that when you do leave work, you may well have had that ABN for 2 years. It's not vital, but when it comes to low doc loans it can make a big difference. So think ahead!


Dear Lissy,

If you look in the right places it is possible to buy existing shelf companies with histories greater than 3 years +++. Agree that a 2-3 year history can make a significant difference although it does not have to necessarily be the ABN.

Cheers,

Sunstone.

[likewow]

Dear Lissy,

If you look in the right places it is possible to buy existing shelf companies with histories greater than 3 years +++. Agree that a 2-3 year history can make a significant difference although it does not have to necessarily be the ABN.

Cheers,

Sunstone.

I think a bank would want to see 2-3 years history of income to the individual, wether by a trust, company, ABN or whatever. Its the income thats important, not the vehicle.

[Sunstone]

I think a bank would want to see 2-3 years history of income to the individual, wether by a trust, company, ABN or whatever. Its the income thats important, not the vehicle.

Dear Likewow,

If you are on full-doc loans this may be the case. However if you are on lo-no doc loans like many of us this is not correct, the vehicle is certainly important.

Cheers,

Sunstone.

[likewow]

Dear Likewow,

If you are on full-doc loans this may be the case. However if you are on lo-no doc loans like many of us this is not correct, the vehicle is certainly important.

Cheers,

Sunstone.

hmmm...why is that Sunstone my man?

[Sunstone]

hmmm...why is that Sunstone?

Dear Likewow,

When you get up to taking out lo-no doc's you will understand when talking with lenders. The 2-3 year age is an important factor for quite a number of lenders. IE there is a perception that it is a lower risk than one that is 1 day old.

Cheers,

Sunstone.

[likewow]

Sunstone,

Its not 'when you get up to using no/low docs', Its more if one has to use them. But why is the vehicle for the income more important then the income itself?

[markpatric]

Markpatric,

I can show some income from it. But I just wasn't sure how the banks would take that. Whether they would say - sure he hasn't got a 9 - 5 but he is doing a few really good deals a year and we trust that he can continue to do so - and maybe even do more now that he can focus more attention on it.

Waysolid - I only wait for the chance to see whether I would find my freedom a bit of a challenge... though I agree with what you are saying.

waz11

Waz my understanding is that you need to be able to show figures over some period of time not just a few deals, the banks will likely see your new endeavors exactly as they would any new business and treat it that way, I had problems with this for yrs, in other words you`ll need figures for a few years at least and maybe proof of being in the business for considerably longer unless you go lo doc. The only other option is to have a partner who works or a business partner willing to get the finance required.
At the end of the day if you have made considerable money only in a booming market it may be a sign that you will struggle should you quit your job, no doubt it is a different ball game in the current market.

[Sunstone]

Sunstone,

Its not 'when you get up to using no/low docs', Its more if one has to use them. But why is the vehicle for the income more important then the income itself?

Dear Likewow,

Some will see the gem that I have given with regards to "aged shelf companies". Others will not.

It reminds myself of a true story of a farmer who sold his farm to go in search of riches. It was only after he had sold his farm did he discover that he was sitting on one of the largest deposits of natural diamonds. He simply didn't know when a gem was looking straight at him.

Enjoy the journey. I'm not looking to debate vehicles.

Cheers,

Sunstone.

[Andrew_A]

Dear Likewow,

Some will see the gem that I have given with regards to "aged shelf companies". Others will not.

It reminds myself of a true story of a farmer who sold his farm to go in search of riches. It was only after he had sold his farm did he discover that he was sitting on one of the largest deposits of natural diamonds. He simply didn't know when a gem was looking straight at him.

Enjoy the journey. I'm not looking to debate vehicles.

Cheers,

Sunstone.

There is truth to the diamonds in the back yard story? I'd always thought it was a bit of a ripping yarn with a moral attached.

A quick googling reveals http://members.aol.com/icgc/2004_INVENTION/2004-07-INVENTION.pdf

But the moral remains the same.

Where did I first read about that tale? Was it "Think and Grow Rich"? One of my dog eared classics anyway.

[markpatric]

I think the story goes that he in fact knew there was gold but gave up when he couldn`t find it, the person who bought the land discovered the farmer had stopped drilling one foot from the gold, it is a story in persistance, and also had he simply called in an expert he would have known.
The story I think is more a pointer to when in doubt seek expert council!. :D

[likewow]

Dear Likewow,

Some will see the gem that I have given with regards to "aged shelf companies". Others will not.

It reminds myself of a true story of a farmer who sold his farm to go in search of riches. It was only after he had sold his farm did he discover that he was sitting on one of the largest deposits of natural diamonds. He simply didn't know when a gem was looking straight at him.

Enjoy the journey. I'm not looking to debate vehicles.

Cheers,

Sunstone.

Sunstone,

I dont want to debate vehicles either. I just find it ludicrous that a financial institution would consider the vehicle more important than the income to the individual. Ive had a company registered since i cant remember and the bank doesnt care about the company, it only cares about the money coming into it (net profit) and hence the money flowing to me. But as i have posted earlier theer are some disadvantages with dealing with property using a company.

A shelf company is only a shelf company wether 2 months old or 2 years old, its still an empty $2 company. I cant see how that would make any difference to a bank. The only 'gem' i can see with your reply is that you are somehow trying to be deceptive by using a three year old shelf company, but i cant figure out how that would work either.

Maybe someone in the financial field could throw some light on Sunstones cryptic reply.
:confused: :confused:

[duncan_m]

The only 'gem' i can see with your reply is that you are somehow trying to be deceptive by using a three year old shelf company, but i cant figure out how that would work either.


Low Doc lenders who lend to people claiming to be self employed want to see that an ABN has existed for more than a few months.. 2 years or more. Given that most of us who have significant borrowing, but who still 'work' generally end up at the doors of Low Doc Lenders, have an 'aged' ABN eases things no end.

[likewow]

Low Doc lenders who lend to people claiming to be self employed want to see that an ABN has existed for more than a few months.. 2 years or more. Given that most of us who have significant borrowing, but who still 'work' generally end up at the doors of Low Doc Lenders, have an 'aged' ABN eases things no end.

Even if they cant see income from the ABN or ACN for the same length of time?
Do they just want to see a registered entity for a certain amount of time regardless of the income from it?

Admittedly i havnt ventured into the world of lo/no docs yet and find that concept very wierd.

[duncan_m]

Even if they cant see income from the ABN or ACN for the same length of time?


Correct..

I've done 2 low docs in the last few months, its a joyful process compared to a bank loan application, no running backwards and forwards with leases, bank statements, rental income, tax returns, company books etc etc.. A single page "income declaration" to complete and sign.

[quiggles]

And announcing the ultimate banking product - a no-doc derivex loan! :D