Could you achieve "financial freedom" without the use of debt?

Hi there,

In hindsight, given what you know now about investing, property, shares, tax, structures, market cycles, interest rates etc... , and if you were to start again from scratch...

Do you think you could achieve "financial freedom" without the use of debt?

Or, with minimal debt?

As opposed to borrowing as much as the banks will lend you and growing your portfolio size with debt?

Interested in your thoughts and ideas on this.

Thanks.
 
I can't see how that would work unless you earned a VERY high salary.

How long would it take to save $400K. 10 years? then the house prices would have doubled and you'd be back at square one.

The bigger your portfolio the more it grows.
ie a 5% pa growth of a $4mill property portfolio would have twice the growth of a $2mill portfolio.
So if you had a $4mill portfolio it would be worth $4.2mill after a year. Assuming your portfolio is cf neutral you'd be $200K in front.

A $2mill portfolio with no debt would give you $100K increase.

If your bigger portfolio is CF- of course you need to take that loss into account too. But you should be still way ahead with the bigger portfolio.
 
Hi there,

In hindsight, given what you know now about investing, property, shares, tax, structures, market cycles, interest rates etc... , and if you were to start again from scratch...

Do you think you could achieve "financial freedom" without the use of debt?

Or, with minimal debt?

As opposed to borrowing as much as the banks will lend you and growing your portfolio size with debt?

Interested in your thoughts and ideas on this.

Thanks.

Could you, or would you?

images
 
It would be difficult to build significant wealth without debt in property, although it could be done.

Plenty of people have acheived financial independance without debt via business and shares. It could be argued that this is potentially a more risky strategy with a higher failure rate though.

The only debt my business has is a credit card (with a smaller limit than many clients). The only reason it has a credit card is for practical purposes. My business is saleable, has a balance sheet and produces ongoing and significant cash flow - more than could be said for many property portfolios.
 
I've never used debt to invest and was "financial free" (around 50k passive income in today's dollars I guess?) around my late 20's. but I inherited 4 properties and a decent share portfolio in my early 20's and have had a high, but lumpy income over the years, and until recently invested most of what I earned.

I have been lucky, if I had not inherited a portfolio, but still had a high income I guess I would still 'have' to work till my mid 40's at a guess.

I do recognise that if I had used debt to invest over the years then my net wealth would probably be double, triple or quadruple what it is. But I may have lost it all in those years where I did not earn much.
 
Short answer, 'no'.

Debt has been a crucial factor to my building wealth. BUT along with 'buying well', the 'deal', 'leverage', my 'research', and ability to 'learn' and 'educate myself' and the actual 'doing' in this part of my life.
 
Hi there, yes, it can be done, both ways.

I borrowed to the max, much to the disgust of my sister.

My sister refused to touch her $1M LOC, much to my disgust.

In hindsight? If she had agreed to use that LOC to go halves with me on ANY of the purchases I literally begged her on, we'd each have another million to our names.

KY
 
As with most things in life, it's not what you do, it's how/when/why you do it.

Great fortunes and great bankruptcies start when borrowing for the seed to plant.
 
It's only possible through business. This is because a) new businesses are never allowed to borrow money anyway, and b) a good business doesn't need debt to survive.
 
It can be done on very low salaries but you have to be prepared to work hard and go without almost everything nice in life for a long time

We bought a block of land when we were 20 and hand dug the base, bought a small cement mixer, I mixed the cement for the slab and husband laid it. We both worked in very low paid jobs, so saved each week to buy the timber for the next bit of the house...working on the house after work each night and all weekend...and so on ...it took us a long time and a lot of work but at 23 we had our own house, built by our own hands and no debt.

That was the start for us, we did the same with our second house. We went on to buy houses already built from then on but we had rent to help with our low paid jobs.

It can be done but it takes a lot of discipline.

Now in my dotage I am enjoying the fruits of our labour and have to put up with friends telling me "How lucky" I am :D

Chris
 
Could be done in shares. Just keep buying till you reach the required dividend level - and consider the benefits of franking credits and the new tax thresholds.
 
Hi there,

In hindsight, given what you know now about investing, property, shares, tax, structures, market cycles, interest rates etc... , and if you were to start again from scratch...

Do you think you could achieve "financial freedom" without the use of debt?

Or, with minimal debt?

As opposed to borrowing as much as the banks will lend you and growing your portfolio size with debt?

Interested in your thoughts and ideas on this.

Thanks.

I've often thought about this. In terms of property investing, I think most people would need an initial loan to get started. The approach could be to pay off one property at a time and gradually add another etc. Rent would snowball after a while (it would take a while though) and time between purchases would gradually become a lot quicker.

I think the tax system we have in place encourages the use of debt to purchase assets as using the approach above would result in an investor paying a lot of tax. (Not saying there is anything wrong with this approach - but just stating the outcome of such).

Perhaps there is a time to use debt and a time not too. ie starting out leverage up - gradually reduce debt over time to produce the income you require to be financially free.

Great topic, Jit and certainly worthy of a mention in these current economic times. Its interesting to see how the topics have changed on the forum as the cycle has progressed. A few years ago it was all about leveraging up as much as possible. Now different approaches are being explored.

A lot of the long term investors take a cash flow approach - pay down loans and are cf +ve. Certainly can't go bankrupt doing this.

I doubt we'd be where we are today if we hadn't used debt - but we did so at a time in the cycle when growth was on steroids!

Regards Jason.
 
With buy and hold residential property? No, couldn't have done it without debt.

'Financial freedom', whatever your definition, means achieving much more than the average. Which means you have to have some form of leverage. That means using other people's resources. If it's not other people's money, it'll have to be other people's skills, other people's time, etc.

Asking the question another way, though, why would you buy resi IPs if you don't / won't use debt? For full time workers, resi IPs is a good investment because it allows relatively safe, high leverage without much time needed (compared to starting your own business, say).
 
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It can be done on very low salaries but you have to be prepared to work hard and go without almost everything nice in life for a long time

We bought a block of land when we were 20 and hand dug the base, bought a small cement mixer, I mixed the cement for the slab and husband laid it. We both worked in very low paid jobs, so saved each week to buy the timber for the next bit of the house...working on the house after work each night and all weekend...and so on ...it took us a long time and a lot of work but at 23 we had our own house, built by our own hands and no debt.

That was the start for us, we did the same with our second house. We went on to buy houses already built from then on but we had rent to help with our low paid jobs.

It can be done but it takes a lot of discipline.

Now in my dotage I am enjoying the fruits of our labour and have to put up with friends telling me "How lucky" I am :D

Chris

The good wife is the key to building a fortune.
 
I can't see how that would work unless you earned a VERY high salary.

How long would it take to save $400K. 10 years? then the house prices would have doubled and you'd be back at square one.

The bigger your portfolio the more it grows.
ie a 5% pa growth of a $4mill property portfolio would have twice the growth of a $2mill portfolio.
So if you had a $4mill portfolio it would be worth $4.2mill after a year. Assuming your portfolio is cf neutral you'd be $200K in front.

A $2mill portfolio with no debt would give you $100K increase.

If your bigger portfolio is CF- of course you need to take that loss into account too. But you should be still way ahead with the bigger portfolio.

The geared portfolio of 5% p.a. return on 4 million would do much worse than the non geared 2 million portfolio because the interest costs would at least be about 7% p.a. So for a geared portfolio, you actually have to make higher returns which always entails higher risk whether it is in property or shares.
 
I guess you could but would take much longer.

One of the key benefits of property is the leverage available. Without this leverage, the accumulation phase would take much longer.
 
Hi,

Thanks for all of your replies.

I agree with some of the sentiments here.

I think if you have a high salary or high business income, it could be done.

The higher savings capacity, along with investments in more income-generating assets like shares and commercial property, will make this easier to do.

But without the use of any leverage, you would still be limiting the kind of income you could potentially generate to give you financial freedom.

Financial freedom to me is having enough passive income to meet my lifestyle requirements.

Residential properties have their place in being a lower risk, leveraged and relatively simple and passive way to generate capital growth over long periods of time.

This capital can then be used for income generation down the track, in addition to any cash savings you put away and invest from your own salary or business.

The proviso of course is that the residential properties or portfolio is CF neutral or positive, or at worst very slightly CF negative.

Otherwise they become a noose around your neck and take away your freedom by chaining you to your job/business!

So the lesson for me, after being very aggressive with borrowings over the last 7 years is to now use leverage more modestly.

Borrowing more and more won't necessarily take you closer to financial freedom.

I'm in the process of selling two RIPs this year.

One that has had only modest growth over 5 years and has been a relative under-performer, and another I have held for 7 years with excellent growth but chronic maintenance issues.

This will give me a more CF neutral portfolio after tax and make the wealth accumulation process less restrictive, and give more flexibility and freedom in how it is done for me.
 
Yep. Not a problem. I have an above average wage( not huge) and the wife below.
Our current super contributions will see us living on $70,000 pa at 62 in todays money.

Thats financial freedom. just need to adjust your expectations.

property investing for me is just trying to add a little more on the top.
 
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