Using a buy & hold strategy, in how many years did you reach financial independence?
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Thanks Rixter for clarifying! So with the 230k cash flow positive, take away about 100k in IP costs, you end up with around 130k pa ... That's a really good number! I would be happy to exit the workforce with that kind of income stream
.Would you consider this more as an LOR strategy than LOE?
Pardon my ignorance, I thought LOE involves refi to draw out more equity for living expenses? But this one sounds like you're just collecting rent to pay for IP expenses and left over for living costs, without the need to refi? Please feel free to correct me if I've misunderstood!
Sorry for my incessant questions but I'm trying to understand the different options / strategies as my partner and I appear not too far from the scenario. I was under the (incorrect?) impression we require a significantly larger portfolio to achieve this level of income in 10 years time, but if these numbers work then my goal seems more achievable. Greatly appreciate the insight and feedback from experienced investors like yourself and skater. Thanks in advance.
Gotta luv property........and a glass of wine
Nah, keep the wine, but I'll have the odd Bailey's.
Thanks Rixter for clarifying! So with the 230k cash flow positive, take away about 100k in IP costs, you end up with around 130k pa ... That's a really good number! I would be happy to exit the workforce with that kind of income stream
It sure beats getting out of bed each morning selling your life away for it.
After possibly utilising LOE to exit the rat race earlier, one could LOR at this stage if that's what suited them.
It sure beats getting out of bed each morning selling your life away for it.
After possibly utilising LOE to exit the rat race earlier, one could LOR at this stage if that's what suited them.
Similar to my current strategy as well Rixter and a lot of similarities to me.
Whilst I would PREFER to LOR, I'd rather leave the JOB a few years early....and if the JOB doesn't bring you fulfilment, then freedom from it may. That's what's driving me at present.
IMHO the safest way to LOE is to make the equity withdrawals ONCE (and never ever again) before you call it quits. Thus, you have to ensure the withdrawal is sizeable and your overall LVR's at a palatable level.
What's a palatable LVR pre retirement? My personal view is that depends on the quality (and size) of your portfolio eg a portfolio peppered with properties in towns like Moree and Tamworth etc is inherently more risky than one filled with metro properties in the best of our major cities.
Having said that, there are no guarantees in life and past performance isn't a reflection of what comes next. But I'd rather bet on a unit or house 10kms out of the CBD doing its thing overtime for example than a stock standard regional property surrounded by oodles of land and a fairly stagnant population base. That's why the drivers for growth (rent and/or CG) are so important and you have to get this right before you purchase anything.
Part of me also thinks that if you weren't aiming to aggressively grow your portfolio in retirement (and it mightn't even be an option without PAYG/business income), what's the benefit of becoming wealthier each yr from an equity standpoint? Just so one can claim at their deathbed that they're worth $5 or $10m or $20m net? If you're in a position to use that equity to transform your life why not - you deserve to after spending 10-20 yrs building it.
That's why I think LOE is a strategy that shouldn't be dismissed but as said, with the caveats of :
1) a large portfolio - flock made up of quality IPs
2) manageable cashflow - it doesn't have to be $120K net + (otherwise you'd LOR) but it sure as hell can't be $120K negative
I think the sweet spot is > $40K net +3) one shot at LOE withdrawal
4) LVR at about 70% or less
5) conservative projection that in x years after retirement, you will be LOR in earnest
This isn't fin advice of course and its not for everyone, just a glimpse of what I intend to execute for myself.
ie At least one property cycle min and top up where ever possible throughout. ie enough to last at least 10 years is my risk profile preference.
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Similar to my current strategy as well Rixter and a lot of similarities to me.
Whilst I would PREFER to LOR, I'd rather leave the JOB a few years early....and if the JOB doesn't bring you fulfilment, then freedom from it may. That's what's driving me at present.
IMHO the safest way to LOE is to make the equity withdrawals ONCE (and never ever again) before you call it quits. Thus, you have to ensure the withdrawal is sizeable and your overall LVR's at a palatable level.
What's a palatable LVR pre retirement? My personal view is that depends on the quality (and size) of your portfolio eg a portfolio peppered with properties in towns like Moree and Tamworth etc is inherently more risky than one filled with metro properties in the best of our major cities.
Having said that, there are no guarantees in life and past performance isn't a reflection of what comes next. But I'd rather bet on a unit or house 10kms out of the CBD doing its thing overtime for example than a stock standard regional property surrounded by oodles of land and a fairly stagnant population base. That's why the drivers for growth (rent and/or CG) are so important and you have to get this right before you purchase anything.
Part of me also thinks that if you weren't aiming to aggressively grow your portfolio in retirement (and it mightn't even be an option without PAYG/business income), what's the benefit of becoming wealthier each yr from an equity standpoint? Just so one can claim at their deathbed that they're worth $5 or $10m or $20m net? If you're in a position to use that equity to transform your life why not - you deserve to after spending 10-20 yrs building it.
That's why I think LOE is a strategy that shouldn't be dismissed but as said, with the caveats of :
1) a large portfolio - flock made up of quality IPs
2) manageable cashflow - it doesn't have to be $120K net + (otherwise you'd LOR) but it sure as hell can't be $120K negative
3) one shot at LOE withdrawal
4) LVR at about 70% or less
5) conservative projection that in x years after retirement, you will be LOR in earnest
This isn't fin advice of course and its not for everyone, just a glimpse of what I intend to execute for myself.
The one shot at LOE withdrawal?? don't really get that one, what happens when you have chewed up "one off shot equity"?? do you then intend to sell down properties?? otherwise you are at the mercy of banks and their policies at that time, with no job it will be a tough gig.
70% LVR is too high, because you are accessing equity at this point so the LVR will end up higher, perhaps 80%+.
You are also only playing in 1 market in Australia, right?? Sydney, which means you are dependent on this cycle. If you play in 3 markets you at least can capture growth elsewhere. One market could be going sideways while another market is rising etc.
Being devils advocate here -
As per HG scenario, still have to be able to service/access funds of $2.1M at 70% on $10M portfolio with a day job with no additional securities, that's a tough one.
Also has anyone worked out compounding interest on $100,000 pa over a 10 year period, I don't see IR at all time lows of 5% staying at this rate forever. Compounding interest is very scary, watching your debt continually rise.
Need to incorporate all the taxes, rates, insurance, maintenance, property management pa. and this is also compounding debt on top of the interest.
It's all lovely stuff when you watch your properties rising, but when the market tanks, then reality check, review your bank statements. Debt rising but the properties are falling in value.
This would scare the hell out of me, because that end value of 10M portfolio could drop by 20%, which means even with a day job you probably wont be able to access equity and you can not sell if your debt is greater than the value of the property. If all you know is a rising market then is very easy to think that if you buy blue chip you are safe and they never fall in value, its a fallacy.
LOE is a strategy that may or may not work its dependent on so many factors, most importantly growth and funding and we have no control over these that's the problem and why its risky. I also assume that is why I don't see many investors go down this road.
Be interested to hear from anyone who has been using this strategy for 10 years plus.
MTR
As per HG scenario, still have to be able to service/access funds of $2.1M at 70% on $10M portfolio with a day job with no additional securities, that's a tough one.
Also has anyone worked out compounding interest on $100,000 pa over a 10 year period, I don't see IR at all time lows of 5% staying at this rate forever. Compounding interest is very scary, watching your debt continually rise.
Need to incorporate all the taxes, rates, insurance, maintenance, property management pa. and this is also compounding debt on top of the interest.
It's all lovely stuff when you watch your properties rising, but when the market tanks, then reality check, review your bank statements. Debt rising but the properties are falling in value.
This would scare the hell out of me, because that end value of 10M portfolio could drop by 20%, which means even with a day job you probably wont be able to access equity and you can not sell if your debt is greater than the value of the property. If all you know is a rising market then is very easy to think that if you buy blue chip you are safe and they never fall in value, its a fallacy.
LOE is a strategy that may or may not work its dependent on so many factors, most importantly growth and funding and we have no control over these that's the problem and why its risky. I also assume that is why I don't see many investors go down this road.
Be interested to hear from anyone who has been using this strategy for 10 years plus.
MTR
That's how cycles work isn't it? 80% of growth in last 20% of time.
Being devils advocate here -
As per HG scenario, still have to be able to service/access funds of $2.1M at 70% on $10M portfolio with a day job with no additional securities, that's a tough one.
Also has anyone worked out compounding interest on $100,000 pa over a 10 year period, I don't see IR at all time lows of 5% staying at this rate forever. Compounding interest is very scary, watching your debt continually rise.
Need to incorporate all the taxes, rates, insurance, maintenance, property management pa. and this is also compounding debt on top of the interest.
It's all lovely stuff when you watch your properties rising, but when the market tanks, then reality check, review your bank statements. Debt rising but the properties are falling in value.
This would scare the hell out of me, because that end value of 10M portfolio could drop by 20%, which means even with a day job you probably wont be able to access equity and you can not sell if your debt is greater than the value of the property. If all you know is a rising market then is very easy to think that if you buy blue chip you are safe and they never fall in value, its a fallacy.
LOE is a strategy that may or may not work its dependent on so many factors, most importantly growth and funding and we have no control over these that's the problem and why its risky. I also assume that is why I don't see many investors go down this road.
Be interested to hear from anyone who has been using this strategy for 10 years plus.
MTR
Hi MTR, I've pretty much modeled all the numbers over the next x years and as long as modest rent increases take place and interest rates are mitigated then it is doable. At some point in the future, LOE will transition to LOR as rents rise. But you're right it is more risky in that what you model won't transpire in reality eg rents don't rise, catastrophic falls in property values, etc etc. But one has to make the judgement call of how much risk one is prepared to tolerate.
I don't think any one investment strategy is 100% foolproof eg what if the locales of your Atlanta portfolio turn into the new Detroit, what happens if demographic changes take hold and property values crash 50% etc. What if you can't rent the property out for months at any price? Pretty unlikely and doomsday scenarios but I'm merely making the point that there's risk in everything we do. Having said that I know/think your US portfolio only makes up a small % of what you own so it's probably not a fantastic example.
Re; the LOE cashout, I intend to do all top ups whilst I'm gainfully employed - I don't intend to refi and cash out after retirement bc put simply, the bank's 'computer says no'. So that top up has to be large enough and last long enough to get me to LOR.
Or I could stay in the game for an additional 10 yrs for example and play it safe. More surity but what value do you place on happiness.
I don't have all the answers of course but of all the options staring me in the face, this is the only one that'll get me to my goal sooner. What happens after that will be a combo of factors I can control and ones I can't. I don't require stellar growth in property values or rents but as long as it keeps up with CPI, that would be adequate.
A diversified portfolio is important - I'm spread across 3 but mainly 2 (in Oz). I intend to add Perth to the mix in a while. Is that diversified enough - who knows? Time will tell I guess.
My fear is Rixter the 10 year period might be extended to 14-15 years before they double in value. In a low interest rate/inflation environment there is a real possibility where average growth in property reduces and takes way longer to double in price.
Ofcourse, there will always be exceptions to the rule. The question is whether a property that has grown at 7-8% over the past 10 years will do the same over next 10 years or not? I sincerely hope it does, I have a lot of skin in game as well with many IPs.
If average growth slows down, a lot of assumptions / calculations will have to be reworked.
Have you got any examples of a property last sold in peak of Sydney boom (2003) and recently sold for double the price without any major renovations? This is a genuine question.
Cheers,
Oracle.
All the props I have held for 10 years have double/tripled along with their yields..those particular ones are not Sydney tho as I purchase there 4 years just gone so dont have first hand experience in that market of the time required.
Ok.
Most of sample data I used for Sydney is between 2002-03 till 2012-13 there was barely 2-3% growth. The last 3 or so years have produced around 25-30% growth. They are just approaching doubling mark now. That means the doubling has taken 12-13 years. But when you look at the same property from 1992-2002 they all comfortably doubled in value.
Cheers,
Oracle.
My Sydney portfolio is anywhere between 5-6% from 2003 to now (using a pseudo conservative val today, not frothy). So it's nothing t write home about from peak to peak. Timing the market is important.
Would be interesting to see the historic rates for areas in and immediately adjacent to Sydney's metropolitan area Satellite cbd's.
Correct, timing can make a huge difference. Also remember thread on Somersoft warning there could be a potential correction coming to Sydney market over next 2-3 years. That will bring your average growth down even more.
When you are in your retirement phase and doing LOE..you are not going to be actively buying/selling timing the market. You need to factor in conservative growth estimates to your portfolio growth going from peak to peak. The question is what if that cycle (peak to peak) keeps getting longer and longer and even your most conservative growth estimates turn out to be too high?
Cheers,
Oracle.
My Sydney IP has had a conservative 50% CG in 4 years... and 35% yield increase.
