FIRE,  Life,  Work

7 Thoughts on How to Approach FIRE (Final Part)

*This is a longer post but well worth it in my humble opinion. Allow 8-10 minutes.

女士们, 先生们 你们好!

Welcome back to another edition offfffff…


Cue drums, and music and elephants and dancers and other wild shit.

I hope you all have been loving life the way it should be loved since we met last.

What a difference a couple of days make eh – here in Australia, we’ve past an annual milestone date of 30th June – the New Year’s Eve for accountants.

Yes that’s right – accountants around the nation were rejoicing and singing Auld Lang Syne under the mistletoe last night.

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“Should we kiss?”, “Nah, stuff that – let’s eat it.”

But not you and I of course, we were sitting in anticipation for the latest post from The Frugal Samurai. The modest and humble personal finance blogger fast becoming a family favourite.

Following on from the last post, I wanted to continue my own personal plan as to how I would approach FIRE and shed some insight to the workings of a complicated and brilliant mind (modest too).

Previously, I discussed that with a 2.5% withdrawal rate (conservative), to achieve $150,000 passive income in 20 years – I would require $6m in net assets.

Currently the number stands at $1.1m, which means a 8.85% annual compound return figure is required…

Great! Shall we continue then? (please read the last post if you haven’t yet).

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Sorry Dr Strange, I just need to go wash my hands first.

…The beauty of real estate is returns come from both capital gains and also rental income. The use of leverage allows these returns to be magnified (losses too).

My profession allows me to borrow 90% of the property’s value without incurring LMI or Lender’s Mortgage Insurance (insurance the borrower takes out to protect… the lender – WTF right?).

You can still borrow up to 90% these days, but you may be liable for LMI (check with your lender).

BUT, the key with leverage is control – that is in my example, for every $1 which I put into the transaction, I control an additional $9.

This is why I have deliberately targeted higher yielding properties in capital city locations around Australia.

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A high yield property.

Because I’ve forecasted that in 20 years time, these properties will be fully paid off and I’ll be owning mortgage-free assets spinning out cash flow to supplement my income.

Here are the assumptions, forecasts and calculations:

Residential real estate growth at 8% p.a.

This was taken from the ASX/Russell 2016 Long term investment report whereby it stated that “Australian residential investment property…was the strongest performing asset over the 10-year period, producing 8.0% on a before tax, after fees basis” to December 2015.

Now I know that past performance is not an indicator of future performance, that we shouldn’t be driving using rear view mirrors – but we have to go off something right?

The growth across my portfolio has been higher than that, but that’s due to dumb luck, fortunate timing and buying under market value as opposed to calculated or strategic moves.

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British accent on, “Oh, indeed?” British accent off.

Going forward, given the locations I’ve invested in – I’m going to be conservative and label a 5% growth appreciation. Hence lower than the average but well achievable I would hope.

Don’t forget about rental yield!

But TheFrugalSamurai you crazy nutter – even with 8%, you’re abit short there.

I…I can do basic arithmetic sir.

The main return from real estate is the growth AND rental income, so we have the 8% growth and the relative yields are reported here from Business Insider.

You’ll see that they differ across each capital city, that’s because yield is a reflection on value – that is, the higher the value, the lower the yield (generally).

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W…wrong yield there…

Rental income * 52 weeks/property value

It’s very difficult to judge what any particular yield would be, given it is property specific, but gross yields across my portfolio sits around 8% – told you it was relatively high.

Mind you, I’m sacrificing the growth element.

Tying it together!

So taking the 5% growth with the 8% yields gives us a return figure of 13% – but these are gross numbers.

With my properties, historically I’ve paid out around 40% of the income as outgoings in the form of loan repayments, maintenance, fees and other expenditure.

Therefore 13% * 0.6 = 7.8% return.

Still slightly off the magic 8.85%…

Yeah alright relax honcho.

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Just chill.

Because here in Australia, we also have the tax concept such as negative gearing whereby an investor can claim deductions against costs incurred in holding their investments, I’m hoping to squeeze a little bit back from the bastards tax office each year, as well as claiming depreciation.

That’s where the remaining 1% or so of return comes from, courtesy of the Australian Tax Office.

Paying it back.

The main expense with real estate is the loan repayments – I’ve deliberately stuck to the higher yielding properties because the rental yield as a proportion of the loan is higher.

This has kindly translated into most if not all the current rent received paying back the interest AND principle portion of the loan.

Hence the portfolio value is artificially increasing as the loans are reducing every day (hmm should blog about this).

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Was Master Yoda a bank loan? Discuss.

This will change of course, with interest rate hikes and (hopefully) rental income growth, but using the bank calculator you can work out how quickly the loan is paid off if you pay more than the required amount each cycle (should blog about this as well, far out).

Using the calculator, I’ve worked out that I should be able to pay all the loans off in 20 years.

Going forward.

Remember how I have around $40k to invest each year? Well, I’ve talked to a few lenders and it seems my borrowing capacity as it stands can squeeze out another $400k or so of additional lending.

That means in the next few years, I should be able to further add to the portfolio with more income generating assets.

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You know nothing handsome young man who came back from the dead and gets to sleep with the Mother of Dragons and will probably rule the Seven Kingdoms but die again just like everyone he knows.

Maybe go into commercial, or multi-lot unit blocks or if I’m really game/stupid/bored – development (very risky, but another blog idea!).

Oh, and don’t forget about job promotions (please let it be so) and rises in income.

FIRE is not EASY!

No siree – hells no, but nothing worth achieving in life is, to be honest.

There are many obstacles and unforeseen circumstances which could derail the plan.

Having children, buying a home to live in (no deductions there), job loss, a recession (or worse, depression), high interest and inflation rates, medical bills (touch fooking WOOD), change in family circumstances – any and everything could appear.

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Maybe some things more than others…

But you’ll notice that I haven’t included MrsFrugalSamurai’s income anywhere in the calculations.

This is because I wanted to work out our goals based solely on my own. Hers would be a bonus but as you may have figured – I try to be conservative with planning, assumptions and investing.

The same applies with my share portfolio and superannuation balance, nice to have but discounted. Although if there is a GFC 2.0, you bet your sweet ass I’ll be sniffing around the stock market for a bargain or two.

Go for it! 

But remember – these numbers are solely my own, your number could be more – it could be less, but ultimately its yours, that’s why its called personal finance.

Your time horizon could be 40 years, it could be 20, 10, maybe 5, heck it could be tomorrow, in which case – well done! You deserve it. PARTY PEOPLE!!! WOOP WOOP!

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Geez… don’t party too hard.

But whichever way you go understand that FIRE is not easy, have a plan – recognize it, grasp it, and harness it so you achieve it.

And you know, worse comes to worse, if I don’t reach the $150,000 figure then I know that I’ll be closer to that goal than if I didn’t have any – you can only try right!

There ya go Bugzy, without understanding your specifics, hopefully I’ve provided a more detailed response to your question – as you can see, there are no right or wrong answers, but be prepared to plan and most importantly take action with whichever path you lead.

Good Luck!

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  • Bugzy

    Read every word sir, thank you for your diligent response.

    Now, any final words of advice for the fantasy world cup?

    There is this team called the Hwangers that’s blitzing the comp… I have decided to bet on every one of their attacking players scoring a goal, and every defender/gkper to get a clean sheet. And even got a columbian defender who scored a goal AND got a cleansheet… handsome $35.50 return (1 step closer to FIRE yo)

    Anyway, gotta go put on my bed socks and wait for Spain vs Mexico (pronounced Methiho). Thanks again Mr Samurai

    • The Frugal Samurai

      Was a pleasure, was a pleasure.

      Hm as for this team named Hwangars or Hwangurs or whatever they are called – a wise man once told me about reversion to the mean, which is when a team/player who punches above their weight inevitably drops back down to their “real” ability.

      Nothing to see here, let is pass, let it pass.

      BTW… Spain is not… not playing Mexico…

  • Bugzy

    REALLLY… then who were those guys in red… geography wasnt my strong point but pretty sure white blue red is Methiho…

  • William

    This has been a puzzle I’ve been trying to solve for a while. The problem becomes more complex when throwing equity returns into the mix. Couldn’t visualise it, so built a spreadsheet for it. Cos y’know, spreadsheets solve everything.

    Interesting takeaways for me were:
    1. Growth rates of the portfolio don’t matter (unless the exit strategy is to sell down part of the portfolio).
    2. Inflation plays a huge part on ETA to FIRE. Lower is better. A small 0.5% increase in expected inflation blows out the timeline by years.
    3. Other big factors: rate of income growth (rent or dividends), rate of deb reduction
    4. The interest rate paid across all debts barely makes a difference.

    Assuming that borrowing capacity is put to good use, numbers look a bit like this:

    Thanks for being transparent with the numbers! :)

    • The Frugal Samurai

      wow thats amazing – thanks for the share, esp the google spreadsheet – I might borrow it myself!

      Ultimately it’s about having a plan to work towards regarding FIRE, which you certainly have!

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