The shock market is too volatile an asset class and too out of my control for my liking, therefore does not fit my personal risk profile. I prefer the safety of bricks and mortar where I can control what?s happening on a day to day level within my portfolio. If I want to make changes I simply look in the mirror and the board of directors has just met, as opposed to voicing my opinion at a company AGM.
Buy & Hold for financial independence is not a short term investment, rather a long term one and needs to be structured accordingly.
Nothing is risk free, no matter what the investment. One should always work towards maximising cash flows and minimising risks whenever possible.
As such, one method to minimise exposure risk in relation harvesting of capital growth for the purpose of LOE is to structure one?s portfolio so as to provide more than sufficient funds to maintain their chosen level of lifestyle for a period 10 years or over and have those funds already approved, secured and available for ready access.
For example, with a $4 Million 65% LVR portfolio, structured for CG and cash flow neutral/+ , with a chosen lifestyle budget of $1000 income tax free per week (equiv to $1280 Gross payg) the calculation would look like this ?
$1000 x 52 weeks = $52k.
$52k x 10 years = 520k.
Interest on Interest component for $52k per year over the decade @ say 6.5% avg = $90k
Secured equity required for LOE across the decade = $610k (520k + 90k).
Portfolio Position starting LOE.
Value $4,000,000 less $2,610,000 ($2,000,000 (50%LVR) + $610,000 credit limit secured for progressive draw down of $52k per year over the following 10 years ( 15% LVR )) = TOTAL $1,390,000 equity (65% LVR )
Portfolio Position after 10 Years of LOE.
Value $8,000,000 less $2,610,000 (debt) = TOTAL $5,390,000 equity (17% LVR)
So let's now look at an example on the cash flow component and use a very conservative 5% rental yield on the $4,000,000 asset base, with a 6.5% bank interest rate, starting the LOE harvesting phase.
$4,000.000 x 5% = $200,000 rental income.
$2,000,000 (debt) x 6.5% = $130,000 +( $3,300 p/a interest on the $52k LOE per year)compounding for 10 years.
At the completion of 10 years Portfolio Value = $8,000,000 with debt TOTAL of $2,610,000 x 6.5% bank interest = $169,650.
$8,000,000 x 5% conservative rental yield = $400,000.
$400,000 minus $169,650 = $230,350 cash flow positive.
Property investing / Portfolio building is not about property - it's about finance! Property is merely what banks take hold over as security for loaning you the finance in the first instance. As such, financially structuring oneself correctly so as to place yourself a position of being able to continually access funds whenever you need/want is vital - whether it be for investment/business and/or lifestyle.
You need to have the foresight to plan ahead years in advance. You don?t want to paint yourself into the proverbial DSR corner with no options left to go - it's too late then.
However, let's play devils advocate and after 10 years say you don't meet bank DSR requirements for LOC credit limit top ups for the next 10 year round - you can always sell down a portion to pay out the $2,610,000 debt and see out your remaining days LOR with a $5,390,000 mortgage free property portfolio (less selling costs).
One of the LOE advantages people don't realise is once you're financially structured correctly you only need sufficient cash flow to cover the interest component on your lifestyle & portfolio holding expenses, and not the actual lifestyle & portfolio expenses themselves.
As such it allows the option, should one elect to, exit the rat with financial independence years earlier in comparison to waiting for sufficient positive cash flow from rental income.
It's a totally different paradigm than most of society is accustomed to. The poor/middle class are raised within a cash for income paradigm, where as the wealthy are raised within a capital for income paradigm.
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