Starting with $3,900,000 - what would you do?

Hello everyone - thanks again for your very thoughtful, constructive, and helpful responses. I really appreciate it.

You've all provided some excellent suggestions and questions. I'll begin by addressing some of the questions, and then move on from there:

1) How did we get our money?

The short answer is that we received a lot of help, and with the guidance of those wiser than us we were able make more good decisions than bad along the way.

- We both inherited money early on and instead of spending it or living lavish lifestyles we invested it, basically pretending it didn't exist and choosing to live well within our earned means.

- We spent most of our adult lives living overseas in jobs where most of our expenses were covered, so we were able to save almost everything we earned.

- Almost everything we earned we saved, and almost everything we saved we invested.

- We were very lucky that the companies we invested in did very well, significantly outperforming the market - Apple, Google, Facebook, Bidu, Amazon, Netflix, etc

- We have been and continue to be very frugal. We spend very little and own almost nothing. We earn more than we spend and invest the remainder.


2) What shares investment strategies would we recommend to others?

I don't believe there is any sure-fire get-rich-quickly method of investing in shares. Our success has been based on both luck and discipline:

Luck -
- We inherited money
- We invested in shares that did extremely well

Discipline -
- We've invested what we inherited, rather than spending it
- We've resisted the urge to live off the inheritence, instead committing ourselves to work
- We've lived frugally, living well within our earned means, saving as much as possible, and investing almost everything we've saved

Acknowledging the above, I think investing in individual companies is really risky, especially in the short term. Maybe you'll get lucky, but probably you won't. What I would recommend instead to most investors, and what we are doing now, is automatically investing a portion of every dollar earned into a low-cost mutual fund or ETF - such as those from Vanguard. I'm a big fan of VTI - which tracks the entire US market, and VOO - which tracks the S&P 500. Good places to learn more about this style of investing are at Bogleheads Investing Advice and Info and Mr. Money Mustache

The bottom line is that there's no magic secret to overnight wealth - other than getting lucky through an inheritence, lottery winnings, or picking a stock that performs extraordinarily well. There is, however, a time-tested and reliable method to building wealth over time, and that's through saving as much as we can and taking a disiplined approach to investing it long-term in low-cost market tracking ETFs. This approach should provide an 8-9% return annually.

To explore some scenarios check out these sites: Compound Interest Calculator | The Calculator Site and FIRECalc: A different kind of retirement calculator

3) What's the deal with our income / cashflow?

Since settling in Australia both of us are earning signicantly less than we have previously, with much higher expenses, and this is resulting in a cash-flow situation which is less than ideal.

We see our expenses growing over time - especially if/when we have children and want/need a bigger home (whether to rent or buy) - but don't have a lot of options within our chosen professions to increase our incomes while remaining in Australia.

Altogether we currently have around AUD 162,000 annually in income pre-tax - my AUD 45,000 salary, her AUD 65,000 salary, and AUD 52,000 of dividend income at today's exchange rate.

This more than meets our immediate needs, but we're aware that it could get tight quickly if we decided to have a kid, which is something we'd like to do before it's too late. If we do have a kid my partner will have to quit her job indefinitely, which will signficantly reduce our joint income, and we'll have the additional costs of needing a bigger house and and having to pay for all the extra things a baby/child needs.

The above is directly relevant to our goals...


4) What are we trying to achieve?

This is the key.

- We want to live in a lovely home in Melbourne and raise a family there

- We want to achieve financial freedom - so we can have a lovely home in a good area, raise a family, send our children to good schools, continue our own education, pick and choose the work which is most meaningful and fulfilling to us, spend time visiting my family in the USA and hers inter-state on a regular basis, support our parents as they get older (none of them have the sort of money we do), and do some travel and adventuring from time to time. (What we don't want is a huge, extravagant home or lots of expensive stuff...)

Considering the above, we want to use our existing assets and income strategically, recognizing that once our money is spent it will be very difficult to replenish unless we get much more lucrative jobs and/or spend it on assets which also produce wealth.

Basically, what we want to do is find the way to most strategically use our existing wealth and income to a) produce additional cash-flow to support a home purchase and living expenses, especially if we start a family, and b) grow our wealth and asset-base.

What we don't want to do is to take a big bite out of our assets to buy a non-productive or less-productive asset, nor to slow-drain our existing wealth. We want to grow and expand, not reduce.

So, essentially, the reason why we're interested in investing in residential property is that we see it as a potential way of enabling the above - and at minimum we want to do something productive with our AUD 482,000 in cash which is currently uninvested.

***

So that's our story for now. I've got to do some work, but I'll put more thought into your questions and try to share more later, as well as put forward some questions. Thanks to all of you for your thoughts and guidance. I really appreciate it.


Best,
FFTB

 

@Fortune Favors the Bold - your dividend income seems extraordinarily low for that volume of shareholdings.

Anyway, if you're looking at making the most of your loose change, talk to a broker (plenty of great ones on here) and see what's possible in terms of putting the $482k to use. Your combined income is a bit out of proportion to your cash at hand (and net assets) so you'll need to be strategic to make the most of your capital.

And think about what you're willing to do if property makes sense e.g. are renovations/subdivisions something you'd consider to fast track your financial freedom.

Would you consider selling some shares to diversify into other assets like property or plan on holding the lot?

 

Hi Steven, good observations and questions. Thank you.

Regarding dividends - my portfolio is made up 100% of US-based companies, which as whole pay significantly lower dividends than Australian companies. The total dividend yield for my current portfolio is 1.79%. One of my holdings is Vanguard's High Dividend Yield ETF (VYM), and even that only pays 3.11%. A special consideration when it comes to dividend yields as that they are fully treated as earned income for tax purpose, and receive no longterm CGT discount, so in many ways it's better for me to have lower yields and higher growth, much like with property investing.

When it comes to mortgage brokers - are there good brokers who focus specifically on enabling property investment strategies? It would also be particularly important for us to have someone sophisticated enough to consider the implications of my US-citizenship / Australian-residence, and having funds in both countries.

I'm definitely willing to consider a range of ways of approaching property, including renovations, subdivisions, development, etc. My job doesn't pay very well and I don't like it very much, so I'd be happy to devote myself to property investment if it made me more than I do now.

I would consider selling some shares to diversify into other assets like property, but would prefer to hold as much as I reasonably can, or as much as it makes sense to strategically. I need some help identifying the sweet-spot. A big consideration is losing money to taxes if/when I sell shares.

 

A few other considerations:

- Learning resources - I'm finding it really hard to find honest, unbiased information about property investment in Australia. Nearly everything I've found seems to come from people who are self-interested at best, and spruikers/scammers at worst. Can anyone recommend a few good, honest, legitimate books or other sources?

- Portfolio margin - One thing I forgot to mention is that I am able to borrow money in the US (USD) on margin against my portfolio value for 2% flat rate. Unfortunately they won't let me borrow in AUD, otherwise I'd seriously consider buying property on margin. My concern is that if I borrow in USD to buy in AUD and the AUD then falls significantly against the USD I will have lost a lot of value. Also it's a really risky strategy to borrow against something liquid to buy something illiquid and which can't easily be made liquid to pay off debt if things go sour.

 

Basically, I know that I've been extremely fortunate / lucky so far, and I'm deeply grateful. I also know that if I make bad decisions moving forward I can lose a lot of money, really screw myself and my family, and will be unlikely to ever recover my current financial position, especially given my low foreseeable earned income for the future. That recognized, I am 110% committed to doing this right and not screwing things up, while at the same time I recognize that investing in property may represent a significant and potentially transformative opportunity if done right from the start, and I don't want to miss that opportunity.

So I want to do things right... measure twice, cut once

 

Hi FFTB,

Very inspirational story. One of the best examples of proven strategy to build wealth. Spend less than you earn and keep investing all the savings.

TBH, I think there is nothing wrong with your current strategy and you should continue doing what you are doing. Only suggestion is to talk to a good Financial Planner who can advise on best structure going forward if you are currently investing in your personal name. Having the right structure in place will make a huge difference in the long run.

I take note of your goals to have a nice PPOR to live in and raise your kids. I think you can certainly use your cash buffer as deposit to a buy nice place without having to sell your share investments. Try and setup a debt re-cycling strategy with help of brokers and financial planner to maximise your investment dollars and tax deductions.

If you really want to get into residential investing/developing there is a wealth of information on this site and previous (somersoft forums) site. Spend time reading posts in particular the interview section. It will give you heaps of ideas on how investors have adopted various strategies to succeed with residential property.

Hope that helps.

Cheers,
Oracle.

 

There is no one correct way to invest in property , so there isn't a text book per se on property investing .

Most books are written by people who have been successful investors and then say how they did it . Some make the mistake of trying to tell you that this is ( the only ) way today .

Jan Somers is well respected .

search on the forum for books and you'll find lots of posts .

Given the proliferation of spruikers , educators and mentors selling their services you have to wonder how successful they are .

there is a well known example of a financial advisor from the forum who went bankrupt and is now selling his services as an educator . Going bankrupt doesn't restrict his ability to do that unfortunately ... There is a post on the forum at the moment about him and he is Melbourne based ....

Cliff

 

Hi Oracle, this is super helpful. Thank you. A few points -

First, while I do hope that there is some positive inspiration element of my story for others here when it comes to time-tested investment strategies, I also do want to be clear that I received a lot of help (money and advice) early on, and would absolutely not be in as strong a position now without it. That said, I do think the advice helped us to make good, frugal, investment focused decisions along the way, which anyone can apply regardless of circumstances.

Regarding the debt-recycling strategy - of the top of your mind is there a good place for me to start in understanding how this works when it comes to property? I can certainly employ a broker / adviser for this purpose, but I'd like to do some self-education first.

 

Steve, US market offers much lower dividend because of double taxation of dividend income (They don't have franking credits like we have in Australia). So company pays tax on their profits and then distribute some of the profits as dividends which are again taxed at individual tax rate.Hence, US companies avoid paying big dividends and instead use cash to buy back shares or continue investing within company which means higher returns in the form of Capital Gains rather than income.

Cheers,
Oracle.

 

Just quickly ;

as others have said, you need specific tax advice. And not just from the accountant down the road. You have a few things at play here, US citizen, AU citizen, structures (trusts/company/SMSF) you can employ etc. Complicated stuff, and we are talking easy 6 figure impacts for getting it wrong.

Personally, i'd be looking to get that PPOR asap from your retained cash ($486k), and then liquidating highest cost base asset to minimise CGT...now this is where you need specific advice. Just get your PPOR asap and buy it outright, (will $1.5m do it?). Would leave between say AUD 2-2.5M. Allow your US stock portfolio to continue to compound, and take that dividend income and diversify into Australian ETFs...the franking credits and higher payout ratio will really work for you guys on low incomes, and further diversify your risk (market and currency). Note a discretionary trust is worth considering to hold these new assets so you can stream income and franking credits to most suitable beneficiary. At the same time, continue to work on your earning power, which is important. You clearly naturally get it (reduce costs / save hard / compounding) so don't need to say anything on that.

Now, on to the property ; you now have a huge chunk of equity in your home (c.$1m) that can be used for investments in Australian property. This is now deductible debt, at home loan rates secured by the property (do not, repeat do not do the USD Margin thing!) Continue to DYOR until you are at a point where you are comfortable easing into things. I cant give you any advice whatsoever on that, but many here can. By my way of thinking for someone who has your asset base, but low income, the first (only?) priority is to not blow yourself up!

 

I'd be bold and make a fortune.

 

Also..."Apple, Google, Facebook, Bidu, Amazon, Netflix, etc", most seem to be growth based companies so unlikely to have high payout ratios, with their balance sheets being used to fund growth.

FWIW my equity portfolio is substantial, yet my dividends are zilch

I get the impression despite the equities OP has that they may be somewhat risk averse (or becoming increasingly so), especially given their preference for index funds.

As such I agree with Falcon above to be getting the PPoR as quick as possible, using the cash as well as liquidating equities...though for me deciding which equities to sell would be on a personal expectation about company going forward with tax situation being a secondary consideration. But I'm confident in my ability to determine a company's future investment performance so might be different situation.

Going forward you can then start to look at leveraging equity in your family home to buy IPs.

PS: Don't be stingy with the PPoR, treat it as an investment itself. A well located PPoR can give you a VERY good asset return exceeding most blue chip equities. As an example, my parents family home purchased 40 years based on current value has achieved average return of around 12% p.a.

 

Now that's the spirit!

 

To a large extent I would agree on this. The reality is that I'm entering a new stage in life - settling down, recently married, and hoping to have a child - where my risk tolerance is quite a bit lower than it was previously. Considering this, I am slowly but surely moving towards a more diversified portfolio - about 50% individual shares and 50% ETFs. I understand that this reduces my opportunities for aggressive growth, but it also reduces the changes of significant loss, which at this point is most important.

 

Well in that case, you best get reading up on property investment in Australia. No better place to start than right here on this forum and the parent forum it came from.

Allocate a proportion you are comfortable with of your portfolio to this, so long as you dont mind it taking awhile, and let the cap gains take you to a whole new level of fortune in 20 years time.
Boring but pretty safe, especially if you pick the right property in major cap cities, as close to the CBD as you can afford, or as close to the "new" CBD's that are to be formed in the future.

Tax, legal and finance(broker) advice is paramount.
Put together a great team, who are all over this property investing in Australia and you should be good to go.

be bold, we did, from a very low base like $5k savings (nothing to lose).
We are in a position I would never have thought possible just 20 years ago.

Read up on TerryW and his prolific postings of the highest quality, Rolf Latham the broker, plus there are many accountants on here as well.
It's all ready to go.

Go for it!

 

Hi FFTB,
I read with interest as I am the same age as you, in a very similar position financially and am struggling with many of the same questions as you are. In my case, I made the money in my 20s and have been struggling to achieve much more than bank interest returns despite taking large amounts of risk.
If I could have my time again I would have adopted a different approach over the past 10 years where I have mostly tread water. I too worry about supporting ageing parents and using my wealth to improve my lifestyle (I'm working fulltime as an employee).
The best advice I can give you is:
* Don't overcomplicate things (I did - and underperformed)
* Invest in what you know (I failed here - and made mistakes by blindly following "experts")
* Grasp risk rather than trying to avoid it (but manage it closely).
I split my time between Melbourne and Sydney and would be happy to share stories if you have the time.

 

1) Hedge your shares and 2) buy a farm

Edited to add: 3) I haven't been following the residential market in any other cities, but if Melbourne is a few months behind Sydney, like usual, then it's near its peak, so no need to rush in.

 

Interesting. What large risks did you take for mediocre returns?

 

Cheers for the info–I like when I learn stuff that isn't property-related here

 

If he's not sure and keeps renting, what would the LOC be secured against?