Leaving work.

[waz11]

leaving work

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.

 

[Andrew_A]

It could happen

- 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.