Hi Simon,
The first half of my story is all standard stuff that many here have done, buy IPs, watch then grow, draw down the equity, repeat. The 2nd half (LOE & shares) is what I've posted here about over the years. All the figures mentioned below are vaguely ballpark.
It all started with a Geoff Doidge seminar & breakfast in 2001 - $250 well spent. I had $250K of equity in my PPOR in 2001. Drew it down & bought $1M or so of slightly c/f -ve IP in Bris & Blue Mtns. I borrowed 105%. Nothing was particularly cheap, or a great bargain. It doubled in value, so there was the 1st $1M of equity. PPOR value increased too. I sold a couple of duds & kept the quality ones. Many people here will have done similarly well. I also hung around the SS chatroom & was inspired by many there - particularly TW.
I also did a couple of renos. However, I decided the effort I was putting into them was eclipsed by the growth I was getting from doing nothing, so I stopped. I kept depreciating the power tools though.
Some time around then I went to a Navra seminar - another $100 well spent. I liked the idea of LOE, but definitely NOT
his version of LOE with his income fund and/or cash bonds. Also bout this time I realised that IP wasn't going to give me a passive income ? it was great for creating wealth with low risk. But something else was needed to replace my income. I've always had an interest in the share market, particularly remember Telstra T1 ? I bought for $2 and sold at $2.79 ? a huge 40% gain
, and then watched them go to $9
. I also set up a discretionary trust around this time.
By 2003, IP was expensive & low yielding & I considered poor value, I had stopped buying more. And at that time I didn't believe that Bris IP could possibly get more expensive. Rents had gone up, so the IP was paying for itself after 2 years.
Shares were cheap & virtually paying for themselves, so I drew down as much of the IP equity as I could & invested in quality, blue chip, dividend paying shares. These included 4banks, LPTs, PPT, QBE, ASX, WES, HIL, ALS, ORI, MBL, BHP, AFI, ARG. I also set up a margin loan & bought some more, but kept the LVR to a v. conservative 33%. My plan was to live on the dividends & capitalise the margin interest ? a version of
living on equity.
At that time shares were yielding around 7.5% (after franking). That generated enough income to pay the IP interest & quit the job (just).
The rough figures -
Draw down $1M equity from IPs ? interest (5.95% fixed for 5 yrs!!) = $60K
Borrow $400K margin loan & buy shares ? interest $0 ? it's all capitalised (this is the LOE bit)
Dividends on $1.4M shares @7.5% - $105K
Nett income- $45K
NB The ATO considers that I pay the interest on the margin loan & borrow it again. So my taxable income is actually -ve.
As I need more than $45K income, I just draw it down from the margin loan.
I then had gross assets of $2.4M (+PPOR).
I was
hoping the shares/IP would grow by their long term average 7%ish or $180K the first year, therefore covering the drawdowns for personal use & also the margin interest. Diversifying into shares & IP reduced the volatility.
I was still 30 something, so I knew if it all went wrong I could go back to my IT job. I've posted previously that I favour
retiring as early as possible and
49% of SSers agree
Since 2003, share earnings/dividends have doubled & consequently shares prices have doubled.... and so more equity to available to buy more good value quality assets.
Since dividends increased by so much my LOE strategy really only lasted for a couple of years ? I now have enough passive income from them. IP rents increased a little - $50pw or so doesn't go far though. The initial plan of using LOE did have some risk to it over the short term, but my backup was my willingness to return to work.
The future
My spreadsheet tells me that my equity with double every 5 years, simply through leverage & investing in balanced growth/income assets. Passive income will more than double. I never need do anything except draw down more equity when it becomes available & invest in IP or shares when they are good value. It's a completely passive and fairly conservative strategy. I hold $0 cash, although I have $Ms available at 1 days notice in my margin loan if I see a bargain.
My philosophy
- I don't consider anything I've described above as risky or speculative.
- I'll never buy speculative shares only quality ASX200 companies.
- Margin LVR has always remained below 40% - I'm currently allowed a max of 72% - so it would take a >55% drop in the market before I got a margin call. I aim for 33% in the long term.
- My IP loans are partly fixed, partly var. I can handle huge interest rate increases for more than just the short term.
- I've diversified ? IP & shares & LPTs are vaguely counter cyclical, so there's always likely to be some spare equity somewhere.
- The diversified portfolio means reduced volatility ? good for LOE, good for reducing risk.
- I'm a big picture investor - I firmly believe in asset classes and the rising tide doing the work rather than me putting in the hard yards. I'm also fairly lazy ? the 80/20 rule is good enough for me.
- I don't invest in asset classes blindly, I only invest if they're good value.... IP was in 2001, ASX shares were in 2003, IP will be soon.
- I concentrate on historical trends when deciding what to buy, I concentrate on forcasts when deciding when to buy.
- I will never sell quality assets.
Things that haven't worked as well or at all
- Share Options ? wrong strategy at the wrong time
- Speculative shares ? it's gambling, not investing
- Share trading ? did my head in
- IPOs ? Rivkin said it best ?if you can get an allocation, you don't want it?
- Renos ? there's easier ways of making money
- IP fluff & flick ? it?s a lot of effort for little return especially after txn costs
- Selling quality assets - CGT
But I've learnt a lot & will return to some of them with more knowledge
Other things I stuffed up. Missed the Perth boom completely, missed the first couple of years of the resources boom. I don't feel bad about them though, as the equity was growing in other areas.
Have I been lucky ?
Yes - I've been lucky - that's what people tell me anyway. I've also been unlucky - see above. But I've tried stuff - some worked, some didn't.
Is this reproducable?
Yes. Buy good value IPs first. Wait for the rising tide. Draw down equity. Invest in the next good value asset class - it may be shares, china, resources. Convert the equity into c/f using LOE. The key is to
create equity safely & fast using IP, then invest generated equity in c/f assets or LOE.
The bottom line
In 2001 I had a vague plan about creating wealth using IPs a la Somers. The wealth creation bit worked, but I realised it needed modifying to provide me with income for an early retirement. By incorporating LOE the direction changed. And in 2003 the economic cycle dictated that shares were the asset class of choice.
Finally
If in 2001 anyone had told me I'd be writing this story in 2007 I'd never have believed them. So to all the gunnas out there, I was once one of you, then I bought a really average IP at the asking price....
......and I apologise for the sensationalist title.