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]

leaving work

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]

leaving work

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]

leaving work

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)

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 ) 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]

leaving work

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.

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 ?

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 ?

What a headache !!

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 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. 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 then that figure would decrease.

See this thread 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]

Discipline

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.