Ok totally got it now - thanks
This is a tax minimisation strategy used only when I am earning an income from renting out my PPOR whilst travelling
Ok totally got it now - thanks
This is a tax minimisation strategy used only when I am earning an income from renting out my PPOR whilst travelling
Can be used while eating potato chips and lounging on the lounge too. You don't have the cashflow to pay for your expenses so you could justify borrowing to pay. But seek your own tax advice on this.
You're right, I was thinking along the lines of various fixed interest products.
Regardless, without significant alternate sources of income other than rent, $20k pa isn't going to get you very far to service a property portfolio. $20k doesn't even cover the banks cost of living component in serviceability. You still need a lot more than $500k equity in the bank to pull it off and I still think with that kind of equity there's easier and less risky ways to give yourself a retirement income.
Honestly,
You seem to want the Mr Money Moustashe early retirement without making the necessary sacrifices. Sell the more expensive, close to beach property and buy a cheaper one such as in a nice more rural area with a bit a land so you can grow a lot of your own food etc. I occasionally check out his site and it has some great ideas on there. But I can't help but think that you want the best of both worlds. Something has to give. Either increase your capital base/equity/income and/or learn to live off a lot less.
One can live on very little if you develop a great self sufficiency mindset and skills. We haven't done it ourselves but I know a number of others that have with very little in the way of savings. However I have seen it come unstuck in a couple of cases when they suffered a major accident or illness which bled them of some of their savings and ability to actively carry out the necessary productive tasks for self sufficiency.
It has been mentioned that you could progressively sell some of the IPs and invest in higher yielding assets. In the case of LICs and shares etc the time to do this is when the market is well and truely on the nose especially when using leverage. Many who are well off get this way by buying excellent income producing assets when the yields are high (ie this usually equates to a bear market in that asset class) such as GFC with shares. So it is going to be more difficult to do this now that the sharemarket has improved significantly.
But despite sounding negative don't give up on your dream if it's important enough to you. Just work out what is the greatest priority and if retireing early is it then go back in re-read Mr Money Moustashe or similar sites and be prepared to make the necessary lifestyle changes.
You seem to want the Mr Money Moustashe early retirement without making the necessary sacrifices. Sell the more expensive, close to beach property and buy a cheaper one such as in a nice more rural area with a bit a land so you can grow a lot of your own food etc. I occasionally check out his site and it has some great ideas on there. But I can't help but think that you want the best of both worlds. Something has to give. Either increase your capital base/equity/income and/or learn to live off a lot less.
One can live on very little if you develop a great self sufficiency mindset and skills. We haven't done it ourselves but I know a number of others that have with very little in the way of savings. However I have seen it come unstuck in a couple of cases when they suffered a major accident or illness which bled them of some of their savings and ability to actively carry out the necessary productive tasks for self sufficiency.
It has been mentioned that you could progressively sell some of the IPs and invest in higher yielding assets. In the case of LICs and shares etc the time to do this is when the market is well and truely on the nose especially when using leverage. Many who are well off get this way by buying excellent income producing assets when the yields are high (ie this usually equates to a bear market in that asset class) such as GFC with shares. So it is going to be more difficult to do this now that the sharemarket has improved significantly.
But despite sounding negative don't give up on your dream if it's important enough to you. Just work out what is the greatest priority and if retireing early is it then go back in re-read Mr Money Moustashe or similar sites and be prepared to make the necessary lifestyle changes.
Hi PT_Bear,
I think the problem with residential property is that establishing a reliable income stream takes so long. The ongoing holding costs can be prohibitive, especially once body corporate fees, land tax, water, rates, pm fees, maintenance, etc etc are taken into account.
PT_Bear, do you have examples with numbers that you could share of investors selling down their property portfolios and reinvesting in shares? Will a carefully built up share portfolio be sustainable in the long term and be able to keep abreast of inflation etc?
Regards Jason.
Hi D Money,
How old are you?
I know, from experience, that getting frustrated with one's work environment is like having been there done that. Ended up leaving at the age of 46 and started out in business.
Looking at your situation almost all of your equity is in your PPOR. In effect your whole plan is based on the performance of this particular property.
LOE, without significant complementary income, as marketed by various groups is a dead duck. As others have said you need an income source to sustain additional borrowings.
Without the additional income streams you will then find yourself not being able to borrow additional money and being forced to sell off some of your assets.
At this stage the bank will want their funds back and the ATO will want their share of CGT back. You may well find that even with a staged sell off approach your profits are quickly eroded and a domino effects starts to occur.
Hang tough where you are or find something different to do. What do they say about delayed gratification.
How old are you?
I know, from experience, that getting frustrated with one's work environment is like having been there done that. Ended up leaving at the age of 46 and started out in business.
Looking at your situation almost all of your equity is in your PPOR. In effect your whole plan is based on the performance of this particular property.
LOE, without significant complementary income, as marketed by various groups is a dead duck. As others have said you need an income source to sustain additional borrowings.
Without the additional income streams you will then find yourself not being able to borrow additional money and being forced to sell off some of your assets.
At this stage the bank will want their funds back and the ATO will want their share of CGT back. You may well find that even with a staged sell off approach your profits are quickly eroded and a domino effects starts to occur.
Hang tough where you are or find something different to do. What do they say about delayed gratification.
D money
The only way I can see you having time off work is to rent out your PPOR or sell PPOR but where would you live?
a) Caravan would be more comfortable than a tent and you could travel. Maybe save the money you were going to use to pay off your PPOR into an offset account and sort out whether you want to buy a caravan and travel Oz or backpack overseas.
B) house sitting is definitely cheap eg no cost but has its drawbacks as there is usually a pet to look after and restricts your entertaining and travelling.
We opted to sell our PPOR and put the money in an offset account against IP loans so in essence we are living off rent money whilst we live in a caravan and travel.
Our loose plan is to move into an IP tidy up and sell one when convenient to us which is not in immediate future.
We could start work again and rebuild a new PPOR for us if we wanted.
I think the main issue for you is that it sounds like you actually want to live in your house and visit the beach which is OK we have a few friends with expensive houses that would like to do what we are doing but can't give up their house.
We have meet a few people who have sold all property to travel and have spent their PPOR money so can't get back into the property market. Not a wise move IMHO.
My thoughts are as long as you have an IP in an area you could live in you are in the market.
A couple we have met in our travels are about 35 years old travelling with 2 primary school kids they home school in their caravan and they mix up what they do.
Both work for 4-6 months and kids go to school then they move travelling and home schooling for the next 6-8 months.
In actual fact we have been surprised by the number of people taking a year or two off in their early thirties and travelling with kids, staying in budget or free camps most of the time as too expensive to stay in caravan parks with kids.
Most have just rented their houses out and brought a caravan and their one year of travel soon turns into 2 or more years.
The only way I can see you having time off work is to rent out your PPOR or sell PPOR but where would you live?
a) Caravan would be more comfortable than a tent and you could travel. Maybe save the money you were going to use to pay off your PPOR into an offset account and sort out whether you want to buy a caravan and travel Oz or backpack overseas.
B) house sitting is definitely cheap eg no cost but has its drawbacks as there is usually a pet to look after and restricts your entertaining and travelling.
We opted to sell our PPOR and put the money in an offset account against IP loans so in essence we are living off rent money whilst we live in a caravan and travel.
Our loose plan is to move into an IP tidy up and sell one when convenient to us which is not in immediate future.
We could start work again and rebuild a new PPOR for us if we wanted.
I think the main issue for you is that it sounds like you actually want to live in your house and visit the beach which is OK we have a few friends with expensive houses that would like to do what we are doing but can't give up their house.
We have meet a few people who have sold all property to travel and have spent their PPOR money so can't get back into the property market. Not a wise move IMHO.
My thoughts are as long as you have an IP in an area you could live in you are in the market.
A couple we have met in our travels are about 35 years old travelling with 2 primary school kids they home school in their caravan and they mix up what they do.
Both work for 4-6 months and kids go to school then they move travelling and home schooling for the next 6-8 months.
In actual fact we have been surprised by the number of people taking a year or two off in their early thirties and travelling with kids, staying in budget or free camps most of the time as too expensive to stay in caravan parks with kids.
Most have just rented their houses out and brought a caravan and their one year of travel soon turns into 2 or more years.
For something truly specific in this arena, you've probably got to get a financial plan done by a financial planner. Even then it probably won't really help.
Let's assume some very basic numbers and work backwards...
Desired income is $40k pa. It's reasonable to assume that there are plenty of ways that all sorts of investments can give you a cashflow return of 3% fully franked (tax already paid). Thus the capital base to be invested is $40k / 3% = $1.333M (let's assume you need $1.4M).
Keep in mind this is just the cashflow from a well diversified portfolio. Overall the investments will likely out perform inflation as will the dividends. There will be times when you won't get the targeted returns, but there will also be times when those targets will be exceeded.
The next question is, to achieve funds to invest of $1.4M, how do you get it through property. The obvious answer is to look for capital growth and then pay down debt to leave you with that much cash available. Keep in mind that you would have to pay CGT to achieve this, so your equity would need to be $1.4M + CGT + sales costs.
CGT is not going to be more than 22.5% and sales costs is possibly about 3%. Fair to assume you won't loose more than about 25% of your capital base to all this - you could actually do a lot better if you plan the sales over several years to minimize the CGT events.
Thus you need a capital base of $1.4M / (1-0.25) = $1.4M / 75% = $1.86M.
To be generous to ourselves (or conservative with the figures), let's assume a $2M capital base.
As a result, you need about $2M in equity. With a modest dividend return of 3% you can achieve at least a net income of $40k pa, which rises with inflation and no erosion of the capital. I'd be willing to bet that if planned out properly, you'd probably end up with a net income of $50k-$60. I'm confident that all of the figures above err on the side of caution.
You could even achieve the same thing via low yielding property. The difference is that if your property has a 3% gross rental yield, you then have to take out holding costs (rates, maintenance, etc) and then you'll pay tax, so you probably only get about 75% of the gross figure (if you're lucky).
Another option might be to get together a portfolio that achieves rental income of $60k pa, then simply work towards paying down the debt over 20-30 years. This is probably a lot easier than it sounds given that you're probably only talking about 3-4 IPs, and even negative geared property becomes positive geared eventually.
Thanks All for your feedback and suggestions!
PT Bear you have put forward some strong views re the disadvantages of LOE, mainly around securing finance with low servicability (even though equity might be ok) once the $560k runs. Thanks for your views. Is it still your view that Cashbonds wont be the solution?
My thinking is at the following at the moment:
Regarding a comment on delayed gratification, yes I could wait even longer to have more $1M equity (say 5 years?), but I strongly feel that the freedom and enjoyment of life I would have with the above plan is DEFINITELY worth waiting 5 years of mindnumbing torture in the office!!
Also I feel like I have been delaying gratification of escaping the ratrace for over 15 years now ever since I started the workforce.
cheers
PT Bear you have put forward some strong views re the disadvantages of LOE, mainly around securing finance with low servicability (even though equity might be ok) once the $560k runs. Thanks for your views. Is it still your view that Cashbonds wont be the solution?
My thinking is at the following at the moment:
- Definitely take 1 whole year off, we would travel o/s whilst renting out the PPOR for say 3 months, then use LOE for the other 9 months. Its going to be a good year!!
- 2nd year and onwards, work part time and use LOE as a CONTINGENCY ONLY. We would need to generate $40k income to cover expenses. My hourly rate would probably be around $110 and the missus around $40/hr. This would mean we would need to work around two days per week each to cover expenses - easily achievable and doable..
- Meanwhile and over the years $2.3M Assets should be growing and rent currently at $85k pa should at least be growing with inflation
- I have some business and app ideas that I want to explore so I am pretty confident that I should be able to generate more than $40k income.
- Could even have a dabble in buying undervalued property, living in it, add value to it then sell and make a profit.
- Ultimately if a property booms or if stockmarket is on sale, I may considering selliing , pay off debt and invest in good value income stream such as shares.
Regarding a comment on delayed gratification, yes I could wait even longer to have more $1M equity (say 5 years?), but I strongly feel that the freedom and enjoyment of life I would have with the above plan is DEFINITELY worth waiting 5 years of mindnumbing torture in the office!!
Also I feel like I have been delaying gratification of escaping the ratrace for over 15 years now ever since I started the workforce.
cheers
My view is that cashbonds can be part of a solution, but they're not a solution in isolation. Straight forward LOE isn't a viable way to retirement unless you add something else to the mix. It can be put together to complement other strategies and increase your retirement income. Regardless of how it's done, $500k isn't enough. I might argue that $1M isn't enough for many people.
Cashbonds are a reasonably innovative idea. When it comes to lending, a nasty period with high defaults tends to make the banks put an end to innovative ideas. You may remember a thing called the GFC. It destroyed no doc loans (they're actually illegal now), crippled lo doc loans (I haven't written on in years they're so pointless), non-conforming lending is only now starting to recover. There were even loans promoted for people specifically implementing a LOE strategy. These have all been called in and I imagine many of those people are now back in the workforce.
Suffice to say I think innovative strategies are highly reliant on lenders remaining favorable. There's plenty of ways to keep it simple and still be successful.
My views have been formed on this because I've seen quite a few people try to retire off their investments in various forms. Those who make the leap too early invariable end up back in the workforce, having spent all their equity prematurely. In a few cases, a little patience for a few more years might have seen them in a more sustainable situation.
If you talk to anyone who has implemented this strategy, I think you'll find they're not simply enjoying retirement and popping into the bank every few years for another loan, they're actively doing something almost all the time. They might be buying and selling, subdividing, renovating, running a small business on the side, etc. They're finding ways to put something onto their balance sheets and tax returns.
I really like the ideas you've outlined. It gives you time to take a breather, try a few different ideas and see what works. It may give you a whole new lease on life and what you do with it. I think that's great!
Keep in mind that people do have multiple careers these days. I've already had 3 different types of work and I'm not even halfway through my working life. I'm already making plans for the 4th career (although it may be better implemented as a serious hobby).
I also am an avid reader of mmm. Thoroughly enjoy his concepts and discussions.
As one of the other posters had outlined, your house price is well above your capital level from a mustache perspective. In saying that 30k of living expenses is very low, so well done.
I am not quite as ambitious as you, but like your thinking. Looking forward to hearing what your end result is. Btw do you mind sharing how early your retirement is ie. <40?
As one of the other posters had outlined, your house price is well above your capital level from a mustache perspective. In saying that 30k of living expenses is very low, so well done.
I am not quite as ambitious as you, but like your thinking. Looking forward to hearing what your end result is. Btw do you mind sharing how early your retirement is ie. <40?
Sorry correction, I have re-checked the maths as it did not look right. The missus and I would need to work an average of 1 whole day per week (not 2) to cover the $40k pa expenses!
cheers
Turning 38 this year, however have had the goal of escaping rat race for around 15 years.
Take a year off first. Kind of a trial period, don't pull all your cash out just enough for the year. Whats the worst that could happen, you go back to work?! Dont worry too much, everyone else is doing it too. You will certainly learn things from doing so and get a much better idea of what its really like without going bust. I certainly envy and congratulate you. We dont invest to be tightarses. We invest so that we CAN have freedom. Our plan is similar. We aim to sell off three ips in a few years and pay out our mortgage. Take some time off and use our equity to borrow for a new portfolio while were still young. As much as i hate selling. The money we save on mort pay ments is well worth it and makes us FREE with near a Mil equity and 0lvr
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Loe
Hiya
May i suggest you read Tim Ferriss book "the 4 hour workweek?" his concept of mini-retirement helped to turn my hubby's head
also read this blog by Mr Financial Samurai:http://www.financialsamurai.com/2012/04/16/achieve-financial-freedom-slice/
There are 2 ways to early retirement; many financial planners quote huge base amounts of savings (3% withdrawal rate anyone?) in order to retire; often these people have their own agenda too...
there is however an (often overlooked) alternative and that is to create passive income a (small) slice at a time...i believe that is the "easier" alternative
i am happy to say that using this method; i should be nearly there
Hiya
May i suggest you read Tim Ferriss book "the 4 hour workweek?" his concept of mini-retirement helped to turn my hubby's head
also read this blog by Mr Financial Samurai:http://www.financialsamurai.com/2012/04/16/achieve-financial-freedom-slice/
There are 2 ways to early retirement; many financial planners quote huge base amounts of savings (3% withdrawal rate anyone?
) in order to retire; often these people have their own agenda too...there is however an (often overlooked) alternative and that is to create passive income a (small) slice at a time...i believe that is the "easier" alternative
i am happy to say that using this method; i should be nearly there
Yes, Tim Ferris' Book is brilliant. I also recommend the "Lifestyle Business" Podcast, Entreprenuers Journey, and other like it, the internet is full of sites like this as the "make Money online niche' is huge and worth exploring.
I liked Ferris' book too but have never been able to make easy riches oline.. nor even easy small change. Great concepts but ss usual if it was easy everyone would be doing it. Just like retiring early with property or shares. It tskes a long tine or someone to get lucky somewhat. The game to an early finish is different for all and id rather have less money in rrturn for more free time but not at the cost of missed opportunity. Theres a balance thats differeny for all
