Reaching FI as soon as possible!

[bob999]

Could you please provide feedback on my current financial situation? I would like to know how you would go about achieving FI as quickly as possible.

I consider us FI when:
1.   We have AUD $1.5M assets outside of family home. (shares, investment properties with equity etc.) AND
2.   Have our principle place of residence paid off OR have assets that offset our mortgage (e.g. home mortgage = $1.3 M and have $1.3 M of shares) 

Our situation:
Income: Combined income from jobs ~$600k per annum. This can vary, as we are both contractors and could go down by 100-200k. Foreseeable future looks good and we are hoping to maintain income between 500-600k.

Assets: 3 investment properties worth ~$2M. Debt of around 1.1M on these properties. Income from properties = expenses/interest and principle loan repayment. With an interest only loan I could be cash flow positive by about $30-40k per annum. This is not something I would like to do as I am worried about interest rates rising in the future.

Shares/bonds: 300k

Superannuation (similar to 401k in USA): 300k combined but we cannot access this money until age 60.

Cash: 300k (offsetting our existing IP mortgage)

We would like to buy a house to live in as we are currently renting. Hence why I am saving cash to reduce required mortgage. Cost of property in the area we want is about $1.3M

No bad debts.

Annual Expenses= ~$100k of which 25k is rent and another 20-25k is kids day care / school fees.
Other details: Our income has only recently gone up. We are 40 and 35 years old with two young kids. Current net worth ~1.7 to 1.8M. We will continue to work part time for 10-20 years but we don’t want to go part-time until we achieve FI. I think our saving rate is consistently around 70-75% after tax.

Current plan options:
1.   Keep saving cash until I buy a house (over the next 6-12 months). Pay down mortgage over the next 2-3 years until it is at about 250k and then start buying shares. I will continue to put 50k into Superannuation each year during this time to get the tax break.
2.   Buy house and put half the savings into mortgage and the other half into shares (index funds)
3.   Buy house and put all the savings into mortgage and take out a 100k loan to buy shares at 10k per month. After one year refinance for another 100k and repeat until house completely paid off.

Any other options? I am leaning towards option 3 at this stage.

Thanks.

[reeshau]

I'm going to guess that since you have 60 views and 0 responses at this point, that I am not the only one totally confused by this post.  You have the barest bones of a case study, start off with a very broad question, but by the end have penned yourself into such specific options that I am a little nauseous from the spin.

You lost me, man.


To try and get somewhere with this, here are some things to think about, regarding your case study:

1)  $100k of annual spend would generally be considered to need $2.5M of assets.  Granted, the 4% rule was formulated on US data, but how do you conclude 1.5M is enough?  I understand you have said you wanted to work part-time, but you have included no detail on what level of income that will bring, or what changes you may make to post-FI spending.

2)  A $1.3M house is just not Mustachian.  Even in a global coastal city.  I think numbers like this are going to lose people here, even if It's affordable for someone with your income.

3)  Your rentals are just breaking even, apparently without even considering maintenance and vacancy cost.  And, a quick Google search comes up with a lot of recent articles that Australia's property market has peaked, and will be declining for the next 12-18 months.  (and, in the context of a lot of global worries, too)  You also have a majority of your wealth tied into these low-yielding investments.  How certain are you about them?

4)  Of your options posed at the end, #3 has to be the worst.  Cash-out Refi's of secured debt to buy risk assets 10 years into a global bull market that is definitely showing its age?  That is the quickest way to 0, not FI.

Given the information presented, my answer to your original question is that the quickest way to FI is to stop trying so hard.  You are already above your target asset level.  Sell your investment property before the market cools another 10% as more supply comes online.  Buy some simple index funds.  And buy a reasonable house in the next year with your giant income.  Or, move into one of your rentals, particularly if the market makes them hard to sell.  You don't have to get fancy.

[bob999]

Hi Reeshau,

Thanks for replying. Currently messaging from my phone. So will keep it short but once I get in front of a computer I’ll give full reply.

First please take all the figures in AUD and take out about 30-40% to arrive at a USA equivalent. Note that cost of living in Australia is higher than USA. Specially housing. It is a shock to an Aussies system to see USA house prices so low.

As for our expenses, a paid off house and kids out of school will result in our living expenses being 50k. Which is about 30-35k USD. (Again note that cost of living is higher here)

25k rent gets me a two bedroom home with no yard and a single detached garage. Before this we were in a one bedroom home. Wife’s work is 5min away and it takes about 45 min for me.

Of the school fees 3.5k is the actual school fee and rest is daycare / after school care. A high end school would cost 50k in school fees alone.

I am just trying to give Australia perspective here and hoping for direction/ guidance.

As for part time income, it will be about 300k combined.

[marty998]

I'm going to presume you are in Sydney. This matters because the cost of living outside of Sydney and Melbourne is nothing like the major cities, and moving out of town gives you even more options (assuming you don't work in Finance / Management).

If you are earning $600k (~$400k after tax) and saving $300k of it, I'm not really sure why you are here. All you need is time and patience to get to FI. If you are going to work for another 10-20 years you could end up with $5-$10 million at this rate.

You suffer from the tragedy of having too many ways to skin a cat.

[bob999]

I'm going to presume you are in Sydney. This matters because the cost of living outside of Sydney and Melbourne is nothing like the major cities, and moving out of town gives you even more options (assuming you don't work in Finance / Management).

If you are earning $600k (~$400k after tax) and saving $300k of it, I'm not really sure why you are here. All you need is time and patience to get to FI. If you are going to work for another 10-20 years you could end up with $5-$10 million at this rate.

You suffer from the tragedy of having too many ways to skin a cat.

I agree with to many ways of skinning the cat and being impatient. As for  why I am here is to work out the most optimal / quick way of reaching FI. We want to go part time because our kids are young and we want to spend time with them. I understand we could do that even now but we both come from poor upbringing and “security” is ingrained into our DNA. Hard to shake it so we want to reach FI and then just work part time.

[former player]

Buying shares with borrowed money is what had people jumping off high buildings in 1929.  I don't see how you can find MMM (how much of the blog have you read?) and even so much as think about it.  DON'T DO IT!!!!!!  EVER!!!!  (Yes, I''m shouting.  In the hopes that you will hear me in the upside down part of the world.)

You haven't specified how much you are saving each year (no after tax income figure to calculate from).  That makes forward-facing advice difficult. But if you continue on your current course -

1.  Your kids are young.  You have what, another 10 years of school fees at $25k a year?  And you want to swap $25k a year in rent for a lump sum of $1.3m which would put your housing costs up to an equivalent of $30k+ a year plus maintenance costs, for life.  So your expenses are going up for the next 10 or so years and then going down by a little, maybe.

2.  You will need to save 1.1m to pay off the rentals.  That would give you an income of $35k approx plus whatever you are paying each year in principal.

3.  You have investments/retirement/cash of $900k, generating a notional $20k a year in passive income.  Add paid off rentals and you would be about half way to where you need to be.  After saving another $1.1m to pay off the rentals.  Ouch.

My view would be: sell the rentals (or move into one of them, if suitable).  Your $900k principal could be earning you % in the stock market instead, plus you don't need to save the extra $1.1m to pay off the capital.  Instant improvement on both your capital and income needs.  Also, if you buy a home while keeping your rentals you would be greatly over invested in property - at the moment 100% of your assets are tied up in property/property debt, and buying a $1.3m house on top of your rentals gives you $3.3m in property, $2.1m in property debt and investment assets of $600k of which only $300k is accessible.  That just doesn't look like a good investment position to me.

Buying a house: if you can get a fixed mortgage of under the % return the stock market gets on average the advice here is not to pay it down, but to put the money into the stock market instead, as that is the mathematically better return.  But you are looking at such a big mortgage, even relative to your big income, that I personally would be looking at a $1m mortgage as jump off a high building territory if things go wrong, and would pay it down as soon as possible.  If you have sold the rentals your paying the mortgage on your own property would be offset by having invested the rental principal in the stock market.