Has anyone here paid P&I and executed a living off rents strategy and paid their loans down to zero? I'm just thinking about longer term strategy and thinking what would be the advantage of keeping a low LVR (say 30-40%)?
Say you have 2m assets no debt. Whats different if you have 3m assets and 1m debt? More assets to make or lose money. Whats good about zero lvr? No impact from rate rises. However its interesting to ask if its safer to have some debt thats fully offset compared to no debt. The former gives you more cash for emergencies. Harder to get a new loan when retired. Its just a risk return thing. Do you want or need the additional exposure?
If you start early, it's not that difficult to build a portfolio where you can comfortably live of the rent. 4-5 properties with no debt, plus your own home can easily give you a very good lifestyle in retirement. It's hard to buy 5 good properties all at once these days, but if you give yourself 30 years it's fairly easy. It just requires consistency and commitment. Of course there's plenty of strategies that can achieve a lot more in that time frame, or shorten it dramatically. Retaining some debt in lieu of extra cash certainly has its merits as well. Having cash for an outright purchase might give you access to some excellent opportunities.
I am not a fan of paying everything off and living on rents as it will take too long and not be tax effective. Another solution might be to offset loans instead as when the money is used any interest becomes deductible. 5 Living Off Equity Strategies to Speed up Retirement 5 Living Off Equity Strategies to Speed up Retirement
^^^^ I see both viewpoints here and can share my own story. I'm under 40 years old and no I don't live off rents-only as of yet. Still a full-time employee and still rely on that PAYG income coming in. But; my position has expanded so much in calendar-2019 so far; moreso than any other investment year of my life (I've been investing for 12 years now). In fact, through hard work, smart investing, smart spending (frugality and efficiency-hacking expense-items in my daily and annual life); I'm much closer to a LOR reality than ever before. In fact; a LOR 'baseline' salary (as in, enough to 'keep the lights on' strategy should I wish to cease working full time), will be possible for me, either on or just before my 40th birthday. This is the beauty of compounding gains: the acceleration speeds up exponentially. Also to add that a LOR strategy is possible and attainable if: 1) As Pete says - you start early 2) You use your (more recently limited) borrowing power wisely; on deals from the get-go that produce both 'decent' gain but also good capital growth to enable you to quickly acquire equity for downpayments on further yield-spinners 3) You diversify your markets across state borders to negate land-tax threshold-exceeding. Land-tax SUCKS and is an annoyingly annualised tax that eats into your profits (and thus inhibits your annual Live-off-rents ability because it literally eats into your rental income every year). A multi-state spread can avoid land tax being triggered in many cases 4) Something that is sadly SELDOM mentioned on this forum is the need to tandem your investment efforts and your investment working hard to spin yield/rents your way; with an element of frugality in your personal spending, and to do this earlier on. It really is true, the saying "a dollar saved is a dollar earned" and its even TRUER if that dollar now earned is then re-invested asap after saving/earning it! (Or at least, shoving those dollars in one of the offsets thus reducing your interest-payable meaning more dollars compound into either more 'principal' paydowns or simply more spending-$$$ in your pockets). The big component here is the 'FIRE' movement (financial independence, retire early) that essentially combines the ethos of investment providing you income; with frugality in areas of life where you can be frugal without taking away from your passion-based/joy-seeking-based expenditure items; and then the 'delta' in income derived from both strategies, gets reinvested where it compounds faster and faster and faster. It is really magical. If you combine both elements from early; on, then even in a country with as crappy-a-rental-return %-average like Australia, a LOR is absolutely achievable
Good share ... at what point do you anticipate full LOR, at 40? And then what, is it an eternal frugal mindset you need to keep?
Great questions. Frugality is something that is oft-misunderstood. There is a massive difference between being frugal and being tight: - A tight person simply doesnt want to spend money on anything at all. Often to the detriment of their own happiness as they restrict themselves from hobbies or passions that do derive them happiness, because they are unwilling to spend any money on even those things! - Instead, a proper frugal approach to living, first begins with some deep introspection. I've done a lot of this. The way it works is: first you identify the thing or few things in life that you know TRULY brings you happiness. Some examples could include: regular travel, or keeping a fancy car, or yes perhaps the latest fashions if you truly value that and it genuinely brings you fulfilment and happiness. For me personally, it is world travel. Whatever your joy-based passion is; frugality begins with identifying that. And then, not compromising on that or restricting yourself financially from enjoying that!! Yes, I spend a lot on travel for this reason. But where frugality comes in is to say 'ok, outside of that thing that truly brings me happiness; all of these other areas of my life where I spend lots of money but they DON'T increase my actual net-happiness... how can I economize these greatly, so as to save money to use for more investment purposes, so as to compound and expedite my journey towards no longer needing to work full time anymore. In my life for example, I view a car as purely a functional, utilitarian purpose. Honestly, for me personally, whether I drove a reliable $5K vehicle that is well cared for and serviced regularly (as I do), or a flashy $50K or $100K luxury car, would make NO difference to me! Both will reliably get me from a to b for the purpose i require it for. That $45K extra that I DON'T spend on a vehicle when im younger? You guessed it, it goes straight into asset investment where it grows and compounds exponentially. Now, there's nothing wrong with indulging in a flashy car that TRULY brings you long term sustained joy/happiness (I can tell you, driving a new Tesla off the lot for me would be fun for all of about 1 week, sure, but after that?? That fun fades and zero incremental happiness follows). Frugality is also about not being dumb with money nor paying a cent more in interest on ANYTHING you don't need to. For instance, putting a $5K Holiday on a credit card (smart for points, if paid off in the 55 day interest free period, but dumb dumb dumb if you pay it off over a 12 month period at 20% interest etc.). Saving up hard and buying that dream car cash-outright is smart. Taking out a car loan at 8 or 10% over 5 years on a massively depreciating 'asset'? Dumb, dumb, dumb. Those are big dumb ones that frugalists who also invest (i.e. FIRE folks); just don't do. But it bleeds into the much smaller financial decisions that all add up. E.g. annually making a calendar reminder to check/compare all insurance products you currently have (e.g. car health pet life etc.), in search of better deals and switching when you find them (to avoid the 'laziness' tax that insurers increment upwards, quietly, every extra year you stay 'loyal' to them..), right through to grocery decisions. E.g. The home brand bottle of bathroom bleach is $1.49 yet the White King 'branded' bottle of the same active-ingredient-product is $3.49. Why the eff would you buy the White King one? Seriously, when guests come over are you going to proudly display the White King bleach to 'show off' that you buy fancier household items? No! For younger folks (say 20's) house-hacking if you are open minded to it, is wonderful! I did a bit of this when i was younger and teo years of share-housing or house hacking (whereby for example you rent a 3 bed property; you live in one room and rent out the other two rooms so as to have their rents almost pay for the entire property's rent so as to massively minimise your entire personal rent paid. You then, you guessed it, invest that saving and compound it onwards); these are all examples of how a frugalist approach, in ADDITION/TANDEM to your general investing pursuits, speeds it up in the longer term!
And just on LVR in an LOR lifestyle, I cannot give you a % number. It is silly to attempt to answer that with a general % number, without understanding the $$$-amounts involved and the consequence of that LVR on those $- amounts. What I would say is: your risk profile and debt-comfortability level needs to be spreadsheet-ed out in multiple scenarios first, prior to quitting the day job and moving into LOR.
I must also add and be VERY clear on this: At 40 I will not simply stop working altogether and lay on a beach or sit in a fattened-out-netflix-vortex like a lazy-arse for the rest of my life! I will likely always work until I'm no longer physically able. What I mean by that is.. I will 'work' on projects of MY choosing, on MY terms, when I choose to, and for MY pursuit of stimulatory-satisfaction. This will mean sometimes I work for zero 'money' but rather for the joy and satisfaction of the completion of projects. This could include aid or community work, or other pursuits. All the ambition I've had over the last two decades doesn't just die when I quit the PAYG conventional 'job', rather, it continues and moves into other passion-based projects, throughout my remaining living years
