No, this is not click-bait. I’m serious!
The Strong Money household is in a bit of a pickle. And maybe you can help (more on that later).
Something has recently come up and now we’re thinking about whether we should sell our share portfolio.
There are a list of pros and cons associated with that, which I’ll get into shortly. And before you worry, it’s nothing bad. Just something we’re thinking of doing.
So, what is it?
As many people do, we occasionally browse realestate.com from time to time. We’re in Australia after all 😉
Not long ago, the federal government announced grants of $25,000 for people who build a new property or spend at least $150,000 on a renovation.
Does anyone else think that level of renovation is a little bit, um, insane? I assume you’d need to add multiple bedrooms, complete with their own ensuite and solid-gold toilet to get to that level of reno. But I digress.
Here in WA, our government also announced a further $20,000 boost for those who build new houses, or buy a new place that is under construction. So all up, the total benefit is around $45,000. Pretty decent!
That got us thinking…
We started looking at the limited parcels of land in our suburb and a few other places. But then we realised something.
Even if we could get an ideal block of land, building a house seems like a lot more hassle than its worth.
Besides, as demand for building picks up with these generous grants, I’m almost certain we’re not getting $45,000 of ‘extra’ value here.
Building quotes will likely be inflated to take advantage of these stimulus measures. Or am I being too cynical?
On top of that, I’d probably want to modify the design to our own taste (which makes things more expensive), as the designs I’ve seen are awful. So much wasted space and unnecessary nonsense.
For example, a 4 bedroom house might have 1 decent size bedroom and 3 which are more like a kid’s room or micro office at best.
But then these genius designers are happy to go and piss away tons of space on a ridiculous theatre room (what the hell is a lounge room for then?), a butler’s kitchen (which I assume is so your normal kitchen looks photo-ready when you have guests over, because who the fuck has a butler?), and a bunch of other questionable uses of space.
But I guess it’s not the designers fault, they’re just giving people what they want.
Okay, so the building option didn’t exactly get us excited. In our area, established houses are much better value without the headache. But we continued browsing since the ‘buy a house’ thought had stayed in our minds.
As it turns out, there have been a few which are in the location we like (large block, very close to the lake, parklands, and 5 minute bike ride from the shops/town centre), that come with a FIRE friendly price tag: $400k or less.
That’s cheaper than I thought, and is what’s causing me to re-consider buying much earlier than expected.
But here’s the dilemma. Given our situation – low income, high debt – we’re obviously unable to borrow. That means we’d need to liquidate our entire share portfolio and buy with cash.
This creates an internal struggle and I’m feeling very conflicted! So this is where you can help. I’d really like to get the FIRE community’s thoughts on this.
I’ll list the main pros and cons that come to mind with this approach. And then you can let me know what you think in the comments! 🙂
— Our housing cost would be zero. Well, not zero, because home ownership comes with plenty of other costs, but you get the idea!
No rent to pay, and no mortgage payment. This means permanently lower expenses, which is exciting for an oddball like me! For us, rent is about half of our current annual spending of $40,000.
— We can do whatever we want. Hang pictures. Build veggie patches. Get solar panels. All sorts of stuff! And there’ll be no ‘move-on’ notice from the landlord, if they want to sell the property etc. Having said that, we’ve had a great run staying in this place for 3 years so far.
— Peace of mind. Whatever happens, we’d have a paid-off place to live. Even if our investments turn to shit and our remaining equity/savings disappear, at least half our current spending is already paid for. There’s comfort and security in that.
Even in a worst case scenario, we’d only have to work minimally (which we’re already doing) to cover the rest of our expenses. I suppose the technical classification would move from FI to semi-FI, haha.
— Keeps Mrs SMA happy. She’s keen on having our own place for the freedom to invest her time in a garden that’s actually ours. And little things like decorating the home. This could be seen as a reward for living a sensible and frugal life in other areas.
— The implied return is actually not that bad. Housing cost now = $21,000 per year. Housing costs after purchase = $5,000 per year (rates, insurance, maintenance). Less $1,000 due to solar panel savings. Improvement in cashflow compared to now = $17,000 per year.
If we keep the cost under $400,000, the implied return is at least 4.25%. Plus long term rental growth of say 2% per annum is avoided. We can debate the inputs of this calculation. But if we use this simple math, it implies a total return of 6%+, which in modern times isn’t too bad.
— This would be a hit to our cashflow. Even though we’d save on rent, we’d have ownership costs and ongoing maintenance/improvement expenses to deal with.
Right now, the money we’d use is delivering more income than we’re paying in rent since it’s in Aussie shares. But it’s possible we save money in other ways – solar panels, working on the house/garden instead of going out to eat, etc.
— Our share portfolio would be $0. We’d sell our current holdings to buy a house. Obviously, this means we’re buying more property and selling shares. That’s the exact opposite of what we’re trying to do!
So, we’d have to start building our shares up from zero again. And given this move would hurt our cashflow, and we’re paying P&I on our remaining investment mortgages, that would be very slow going.
— We’d be selling shares at a less than favourable time. The ASX is still down around 15% from the peak after the large fall a few months ago. Even though others are somehow 100% certain, I have no clue what will happen in the next couple of years. Either way, given the poor recent run, it doesn’t seem like the best time to cash in.
— Our asset allocation would be MUCH less diverse. Related to the earlier point, we’d then have no shares at all (except our super). Our accessible equity would be mostly in our house and remaining properties, with a small amount in Ratesetter.
Now, I wouldn’t really care about movements in the value of our home. But it still means we almost go back to an all-property portfolio in the short term, which isn’t ideal. In fact, it’s extremely concentrated. And given our efforts to increase our diversification over time, this is a step back.
— Increases the risk that our sell-down strategy doesn’t go as well as we hope. Because of the change in plan and the hit to cashflow, we’d probably need to sell the remaining properties a little sooner than planned, as our pile of cash would run out quicker (as per the property-to-shares transition strategy).
Our situation is complex as many of you know. The short summary is, this would leave us with less flexibility in how we dispose of the rest of our properties.
But as mentioned earlier, worst case we end up with a house paid-off, a modest share portfolio and are mostly-FI, while we continue our enjoyable part-time gigs.
In case you’re wondering the reason we wouldn’t sell our other properties to fund the purchase…
— Most of the loans are on fixed rates, so selling would attract large penalties.
— We have multiple leases which are nowhere near expiring, so we’d only be able to sell to other investors.
— Trying to sell multiple properties at once would be difficult and very stressful.
— Perhaps the largest reason of all, after the last 5-6 years of Perth’s downturn, now doesn’t seem like a good time to offload (I’m not sure I could stomach it, lol).
At the moment, we’re not sure which way to go. If we can get something decent without paying too much, we might buy. But I’m very torn!
Even though we’d build our share portfolio again over time, it would be very sad to see our shares disappear in the short term. But we’d get to enjoy a paid-off house in the meantime.
I’m probably more fussy about the location, whereas Mrs SMA is more particular about the features/condition.
Two nice properties we enquired about have had a high level of interest, according to the agent. I know, they always say that! But one is under offer after getting a handful of offers within days of being listed, and the other has apparently had 80 enquiries so far.
Maybe people aren’t so broke due to the ‘economic crisis’ after all? I think mortgage rates at 2%-odd have A LOT to do with it!
Okay, here’s where you come in! I’d like to open up the conversation in the comments section…
What would you do in this situation? Do you have any advice for me?
Are there other pros and cons which I haven’t listed? Let me know your thoughts 🙂
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Lots of Q’s here Dave. Would you have a large CGT bill by selling all your shares? Would you have the capacity to take out a home equity loan against your new home to buy back shares (especially if you are going back to work)? What about selling down only some of the shares and borrowing, say, 50% to buy your home, with the dividends covering interest?
CGT bill, no not large at all. New loan, not possible (we’re not ‘going back to work’ we just have some part time income, nowhere near enough to increase our current borrowings which are already very large!). Question 3, is a no as well due to no borrowing capacity.
If it was me… and it’s not, I’d wait until you sell down the investment properties to buy a home. No rush, as you’re not getting kicked out of your current home, you’re not taking advantage of the government stimulus anyway and you’ll always be selling and buying into the same market. Keeps you diversified. Keeps the cashflow ticking over.
+1
+1 yep. Wait – there’s no rush!
A big decision to sell your current shares you have have worked hard to build, especially while the index is down 15%.
However crystal ball here, will it go up in the short term and crash back down further than where we at now later on?
On the house buy now question, how do you sit with the ‘there will still be opportunities for better buys down the track’.
I.e will there be more forced selling on the housing market when the mortgage holidays are done and dusted? Although these more than likely might be investment properties.
If you wait it out will it give you opportunity to swap a current IP in your portfolio or PPOR thereby letting you keep your shares.
Note though I entered the property market a long time ago and was fortunate to see house prices more than double in a couple of years, will we ever see that again?
Who knows probably not in Melb or Sydney.
Sounds strange but it should feel like a blessing that you are not able to borrow more atm, that way you can maintain more freedom I reckon.
Good luck with throwing the idea around Dave.
Out of interest. How do you calculate the CGT when selling a large amount of shares.
Big decision. Not sure what to do.
Hi Dave, 1st time commenter. Thanks for the great information. Have you thought of going back to work full time for 6 months or so and saving as much as you can? Would you then be eligible for a bank loan? Get the loan, then retire again.
Thanks for commenting 🙂
Interesting idea. Extremely uninterested in going back to a full time job lol, not worth it. Even then, not sure we could borrow more, as we’re now paying P&I on all loans which kills borrowing power.
Putting aside the emotional and security of owning your own house that you can touch and improve the 4 walls of, I would definitely NOT be selling your shares now. It’s definitely poor timing and there are so many more costs once you actually get into purchasing a house and getting it to the point where you WANT it to be.
On top of that you will end up in the exact place that you blogged about some time ago – equity rich and cash flow poor!
Even though your housing costs will be lowered you will still have all the other costs with no income. Double down on those dividends while they are on sale = more income.
Cheers Matt. We’re still in the boat of equity rich cashflow poor. So buying a place would solidify that in a way, whereas we’re currently improving on that slowly. Thanks for your view!
I’m with Matt but it really comes down to what’s important to you, home ownership isn’t all it’s cracked up to be, being a property investor and being an owner occupier are vastly different things one carries emotion the latter not so much .I’m guessing if you are torn it’s because deep down you feel it means giving up something you really don’t want too in order to achieve a goal your not completely convinced U want. I’m not against home ownership but I think alot of people view it through rose coloured glasses I would ask you is buying a home going to make you happier to warrant the loss of the shares and the cash flow, less cash flow equals less quality of life …. Will owning the house make up for it? if not the novelty will quickly wear thin ….
Jack
+1
Any reason why you think building is such a hassle? It really isn’t. We built back in the GFC with a 36.5k FHOG. And the builders didn’t bump up their prices. They knew they were competing with other builders and were desperate to keep their staff costs covered even without a profit on some builds until the economy recovered.
You got this mate!
Check out a podcast called The Perth Property Show. They talk a fair bit about building, and the new grants. In short, most of the grants will be eaten up by increased land and builders costs – the grants are for the builders, not the buyers.
Hi Dave , no real advice apart from sometime in the future you will want to own your own home , who wants to deal with landlords when your 70 .
Also selling shares when they are still down won’t really matter much if your can get a cheaper house in a depressed market . Buy and sell in the same market .
Cheers Mal
Mate, no offence but you are going a full 180. Everything your were pitching to us about owning your home and all the expenses Etc of doing so are no longer a problem. Your blog is pretty useless to me know.
So with no income you will have to go back to work…so much for the FIRE lifestyle…
You should be a comedian because you looking like a clown now…I’ll let everyone I know about this also, run you name in mud!
Wow…that’s a bit harsh!
I Agree with you Martyn. Mr Anonymous should just disappear again! Dave has provided so much informative information for years. Thanks .
Owning a home costs more than renting generally, that hasn’t changed. I said right here it will cost more. Why are you so worked up about it? This is simply an idea…
No, we won’t be going back to work full time at all. You either don’t know how the numbers work, or you’re just upset and jumping to conclusions.
If this blog is useless, then leave. You’re showing everyone exactly what type of person you are with your hateful comment. You can think what you like of me and this blog, but the FIRE community is full of positive helpful people. I think you belong in a miserable trolls group somewhere 😉
Thanks Dave. Well said Mate.
Brad
Whoa calm you farm mate!
That’s a tad harsh but I have to say I agree with the overall sentiment. Many of us have followed SMA for a long time and regularly read your articles which simplify down to pro-dividends, no property. I’ve been following your blog, even down to choosing the same LIC’s/ETF’s as you, and am 19 months away from FIRE-ing. So this article is concerning as it’s true that your new view represents a complete 180. I’m hoping you’ve secretly been kidnapped and forced to write this article under duress 😉
Hey Mr Bin. Thanks for your more reasonable comment 😉
There seems to be some confusion. I’ve always said renting is cheaper than owning most of the time. And that is still true. I’ve also said that we’d likely buy a house later after we’d sold off our other properties. So the only real change is the possibility of bringing that date forward (and having to use shares to buy it since we can’t get a mortgage).
The end point would be the same – a 100% share investment portfolio and a most-likely purchased home. I am pro shares and no property in terms of investing… but I’ve never been against home ownership – again renting is just usually cheaper.
If you had retired, were renting, and could then afford to still stay retired or mostly retired and buy a house, is that so crazy?
To be clear, there has been no decision made, this is just an ‘idea’ article to open a discussion. Will be sure to keep you (and everyone) in the loop 🙂
What a horrid response. This is no place for trolls!
Everyone is entitled to different opinions but don’t be rude and use language like that
I wasn’t going to comment but I seriously need to defend Dave here. It’s entirely rational and reasonable to test one’s approach to life. Expecting perfect consistency from a human is a great recipe for stagnation. Surely one of the reasons we are lucky enough to have Dave’s brilliant perspectives is his willingness to question orthodoxy, take risks and reveal his positions.
Personally I enjoyed reading this and I look forward to hearing where he lands. He’s earned my respect and him questioning his path does not diminish that in the slightest.
Agree. No point rigidly sticking to one position when life and the world keeps changing. Respect.
Well said Girt.
Brad
Seconded. Well said.
Somebody far wiser than ‘Who cares’ once remarked; “What’s the point in having an open mind if you can’t change it?” Go back to Russian-bot/troll land where you belong.
I’d wait until you have sold out of the other properties. This seems rushed. Bad decisions are made in a hurry. Think about it for 6 months.
Hey Dave…tricky spot you find yourself in. My 2 cents worth….once you (or Mrs SMA) have that property bug, it will hard to shake…I reckon you already know that. Being as young as you are, I would say…wait for it (drum roll)…get the property! I understand the “backward step” scenario you may wrestle with, but owning that property outright will provide you with all the comfort features you have already mentioned. Next step would be to (groan groan) start the share building again with rental savings and any extra funds that come along. You already have the right mindset so that part will come easy. Once the other (investment) properties are in a better position to be sold (over time), those funds can be poured into shares as well (as originally planned).
Don’t think I’ve actually mentioned anything that you hadn’t already thrown about above, lol, but just saying that I think as you get older, you will be thankful for your OWN property.
Whichever way you go…best of luck.
Kind Regards
Martyn
Hey Dave, I think you need to work out how you can do both. I would work out how much cash flow on top of my paid work I need to live (without constant stress). This will determine how much you need to keep in shares to produce the required amount of fully franked dividend income. The value of the remaining shares when sold will determine how much you can spend on a home. There are many places in Australia where you don’t need to spend 400k. We live in an excellent location with a very safe community where you can buy a nice home for $250 – $300k.
Forget building, bro in law is in the trade and those grants are going on the price as all the tradies are down on work and will be making it up at the customers expense. Bit like nongs who buy off the plan and think they are saving..its all built in the price.
I like owning my own home for reasons you discussed and we recently upgraded thinking we had the perfect house…about 50k later its about where we want it and the all the hidden faults are now fixed so expect if you buy your dream home it will come with a few nightmares that need fixing and allow for that.
Property is falling everywhere so its a good time to buy but if you think you made a mistake buying and want out then you may lose if prices keep dropping so you need to be sure about what you are buying.
Shame to sell such a carefully crafted Share Portfolio and I think your loyal followers would be sad to see it go and deny them of the pearls of wisdom that you share when looking after and building such a portfolio .Not a great time to sell either as you discussed but also the market may drop after you sell and you are the winner there…its swings and roundabouts.
In Conclusion…you are younger than me and can take a few more risks so if you are going to do it then do it now while you can still rebuild the finances if it all turns nasty. I’m older and more income focused so would be keeping the shares and keeping it simple.
Remember thousands of would be Firey’s are going to be watching you and hanging off your every move so dont feck it up..????????????..Good luck to you both…
I think you got to ask yourself, what would make you happier? Try that game of pretending you have a house and of pretending you dont have a house and sit with it for as long as you can.
For me, it is pretty hard to put a price on that feeling of having a place to call your own, to decorate, garden, solar panels, or whatever else you want to do. I think it is quite a natural human desire to put a stake in the ground and call it your own. There is a certain amount of peace that comes from that.
Sure, you need to balance that with your other freedoms that you currently enjoy. I think as long as you can manage your day to day living expenses and not have to go back to being a corporate slave or similar, then you should go for it.
Not to mention, keeping Mrs SMA happy is always a good thing. 😉
Stay off Realestate.com.au, it just leads to these things haha.
Seriously though, there’s merits to both sides and I’m glad this discussion has come up because we discuss it daily. Nothing is black and white, and people shouldn’t be ‘following’ you for step by step guidance, they should be following your blog (and many others) for inspiration they can apply to their personal circumstances.
Personally I’d avoid buying a house in cash when the interest rates are so low for owner occupier, I understand why that’s the situation for you but you’re at a significant disadvantage.
But this is very personal, and you don’t have to optimise every decision so who cares what I say i’d do 🙂
If you’re in no rush, then maybe the compromise would be to transition out of the investment properties over time as you were planning and then use those funds rather than selling out of shares.
And don’t feel the need to stick to anything for the sake of the community. Life priorities change over time, and it’s a sign of strength (Not weakness) that you’re challenging beliefs so publicly.
Well said Martyn.
Brad
I would consider buying the house and then taking a line of credit against it to buy back some shares. E.g. Bank of US (Tas) offer 1.9% against your home. Grossed up shares return 6.5% with 7 years dividend cover (WHF). A good deal?
Cheers Greg. Maybe for others. But no borrowing power rules that out for us.
Ok, coming from the other end of the age spectrum to most here (being 53) if I could live my life again I’d rent till I found my forever place, location, city, country…. we’ve just found that yet I have two houses I need to get rid of now… and yes we are building to downsize.
Why rent?? Instant flexibility… you don’t like Perth het try Melbourne easily… babies on the way… hey rent a bigger place…. want to pick up your bags and do the travel nomad thing…. easy… you’re young so many decisions coming your way in the future… personally having flexibility is worth it,
We’ve had big houses, even bigger houses now all we want with no kids at home is a small three bedroom place, lovely kitchen, nice bedroom and views of the sunset… simple things.
Oh and do decide to build don’t design with a builder we tried that… they design what they want to build!! Find a house designer draughtsperson on your wavelength… discuss how you want to live in the house, what you want to do…. laundry… we didn’t bother we only use the machine once a week so why have a whole room for it…. we’ve put it in a small scullery off the kitchen with the dishwasher????????
Upside of that route is you hold copyright of the plans and can take round various builders to quote rather than being tied to one.
Oh and the grants… we qualify for the WA one, they are paid back to you… not the builder so like instant cash back once your slab is down… can use for instant landscaping, fencing etc ????????
I’m 53. Thanks for making me not feel so alone. Best to you (and to Dave!). Greg
Im not sure about your work situation but have you considered getting a full time job for 3 months, apply for a home loan, get it and then quit?
I did this a couple of years ago with a ‘full time’ casual role, the bank only needed evidence of 3 months of continuous work and then as soon as we received the loan and moved in I quit the job. the bank at that stage doesnt care as long as you keep paying the mortgage 🙂
Your other properties may hinder this though so best to talk to your bank and see if having a full time job (and what pay rate) would allow the servicability to be high enough for another loan.
Good Luck!
Thanks 🙂 It’s a good idea, but going back to work full time is so unappealing it’s hard to describe lol. That’s not on the cards, I’d much rather just wait and buy later!
Hi Dave
I never comment on these forums but i felt pretty strongly on this one. Purely from a money perspective it would be costly to sell your shares and buy a home. Having a home is great, but selling the shares will ruin any capital gains potential. Make sure you dont confuse a home as an investment (even though it is a grey area as there are real financial benefits like not paying rent as you have mentioned). Be carfull you are not making an emotional and rushed choice due to the grants being offered for a limited time, and yes as tradie and ex realestate agent prices do get inflated during these times. This may be completely off the cards for you but with interest rates so low, you could take a 350k loan at a cost of $8750pa (interest only 2.5%). This would me my option, way cheaper than your rent and you get the benefits of home ownership. Speak to a good mortgage broker, (i can recommend one) about your options, may mean taking a full time job for 6 or 12 months to make it happen but the benefits would be high. Then you could consider selling part of the portfolio, (property or shares) at a more suitable time when prices increase. Good luck!
I appreciate your comment Piet!
We wouldn’t build so the grants don’t matter. And yes, 100% aware it wouldn’t be an ‘investment’ 😉
Getting a mortgage I have no problem with, but we have no ability to borrow so that’s not on the cards unfortunately. Definitely not going back to work, haha!
Hi Dave! Banks usually want you employed for 12 mths or so. my2bobs worth ? You have time on your side, so dont feel rushed into any decisions where possible Mate..
Always enjoy your Blog Dave.
Thanks… Brad
Hi Dave Life never goes as always planned so there is nothing wrong with your approach. Plus completely relate your decision as benefits of an owned home go way over a rented house…I can’t ever go back to renting no matter what…but would warn you that by selling your shares you will stop the snowball effect of compounding…would advise you to talk to a really smart Mortage broker as without doing job there are ways to show abn income and get a home loan. The rates such as 2.19 are like free money and personally I wouldn’t kill the snowball you have built for such low cost interest rates. Let me know if you want lead to a friend of mine who is a super smart mortage broker who may be able to work it out for you. Hope this helps.
If you do buy a house and have to start your share portfolio from scratch I think it would be great to be able to follow you on that journey. There is something deeply satisfying about having a place that you own. Make the decision that is right for you, you don’t have to answer to anyone else on this blog. It’s not a subscriber service after all. Good luck!
Thanks for your support and sharing your view Andy!
I agree with Andy . Your blog is about your financial journey or part of it anyways , and from what i can see you have not been offering financial advice to anyone -just sharing thoughts and ideas . You are certainly allowed to do a 180 degree U turn if you like and sometimes life spits out opportunities when you do not expect it. Doing a 180 degree may be the right path at the time . Personally i think that owning something you like could be deeply satisfying that Renting may not have .( unless you have an exceptional deal from your landlord) . There are advantages to owning if you wish to renovate and value add to flog off later if your wish or have a Vegetable garden that can save you a few dollars in the fruit and veg bill . Good luck with it look forward to more postings
Here here. I have been reading your blogs for a couple of years Dave, and will continue to do so no matter where you are at in your journey. Your blogs are always well thought through and I love your candor! Keep going and do what is right for you guys, I am sure there are plenty of people in a similar situation!
Hi Dave,
Depending on when you fixed your investment loans, early repayment costs for breaking the fixed loan might not as bad as you think due to interest rates being so low. Might be worth checking with your bank what these costs are.
Love the blog and new podcast!
Hey Friend. We recently fixed a number of them this year, so it would be pretty large I’d say! And thanks – glad you like the content 🙂
Hi Dave,
I really value your efforts to help educate people on taking the road to FI and how your journey has progressed so far, big fan of your podcast with Pat also.
In saying that I think it’s worth trying to help with giving my two cents as you have helped me on my path, not that I am an expert in any way and I have just begun my journey really.
Anyway to the point. As you say selling your properties doesn’t seem like a good option, selling your shares in my humble opinion seems like even less of a good option as you have worked up your portfolio to give you solid returns. I know both the property market and share market are kinda at the bottom at the moment so if anything it is time to buy into them but you have to try and weigh up which has more potential for growth and what has the better return in the overall master plan. If it was me I’d look at selling one of your properties over selling your shares and with that you get on your creating a home journey that you and your partner want, you are buying a property and selling a property at the bottom so it kinda evens out. I guess in reality it depends on how much equity you have in your properties though and as you say they are on a fixed term which doesn’t help.
In summary I’d say sell a property or just position yourself to be able to sell a property as soon as makes financial sense to and buy the house you want to make a home and keep on the path you have with your share portfolio. Otherwise selling a property and a portion of your share portfolio when the time is right.
Regarding the grants, the reality of these is that they are not really beneficial, the timelines are too tight to get them and everyone as usual are jumping on the bandwagon like the sheep of the toilet paper saga.
Please have a listen to Trent who I find helpful on the following podcast, he is a solid expert of reference on the Perth property market.
https://podcasts.apple.com/au/podcast/the-perth-property-show/id1442065821?i=1000478982782
I hope my little essay has something of value for you mate as you have definately helped me begin my journey.
James.
Really enjoyed this post. Shows that you are flexible and open to change with changing life events and the changing world. Does not in any way detract from your previous positions.
I strongly recommend you buy the house. In Australia, no matter what happens, if you own the roof over your head, the government will take care of the rest. If you own a 100 million house and nothing else, you will still get the full pension or other benefits if you are young. So owning your own home really gives you a security both psychological and financial that is priceless. As you have mentioned, as you are young, the house, if it is in the right suburb, will have capital growth and an ongoing return(rent savings) that is comparable to most share portfolios.
This is also a great time to buy property and shares. Prices are off their high points. You can always build back your share portfolio when you sell off other properties and generate other income sources.
The sooner you buy, the longer you get to enjoy all the other benefits of homeownership which are non financial that have been detailed above.
Go for it. Would love to see the photos of your new home when it happens
The most frustrating part about your blog is that you never divulge the numbers.
Such a strange mentality when you are all about sharing your FI journey and helping others.
Anyway, its a good read and I will continue to follow, however just thought i would voice my opinion 🙂
Cheers
Sorry Steve, but it’s just something that feels strange to have on the screen for everyone to look at. I’m not anonymous like many other bloggers so it would just feel uncomfortable to be declaring to everyone our net worth (with little benefit other than to satisfy others curiosity). I understand the interest but this is a personal choice I’ve made. Hope you understand 🙂
Some great comments are here already, it hardly leaves me much to say. 😉
Life is an adventure, and at a time when we can’t really travel to far anyway, as they say a change is as good as a holiday. I can see you seem pretty excited about the idea of buying and really you’re just looking for some extra confirmation. In the past when I’ve researched to buy or not to buy, it’s been really too close to call and that just leaves you with your emotions and what option would give you best feel good feeling.
For the record I purchased a place of my own. I put down a 60% deposit, and still got a 30yr loan at a time when I was on just a trainee-ship wage of $19 an hour (2 years ago) working just part-time and single. I’m in WA too and can give you the contact details of a great mortgage broker. It’s free to have a chat and see what he thinks if he could get you a loan. It doesn’t hurt to see if that is an option to you. My mortgage is way cheaper than rent but I never want to pay it off as I find having the redraw account is really useful for my situation.
The only downside to buying, is knowing that once you’ve made the decision to do so, you really want to be happy to stay there for very long time. That means, make sure you’re happy with the neighbours. Once you have found a place you’re interested in, visit the street, day and night and listen for sounds … for me a quiet place is very important as my home is my sanctuary. I am very lucky to have great neighbours who are also quiet and friendly.
As with the shares, take my advice with a grain of salt, but I don’t think they’re going to be doing much over the next few years anyway. It may actually turn out to be a great time to sell out and start again. *shrugs*
I’m with Mrs SMA.
I bought our first house in 1996 for 136K. Paid it off. Sold it in 2015 for 1.7M.
It wasn’t bought as an investment but it certainly ended up that way!
Bought a bigger and better house by the beach 16kms away for 750K and am currently doing renovations to make it retirement-ready. There’s something so satisfying about putting in the veggie gardens and picking the produce to go in tonight’s dinner. Having no rent or mortgage makes life so much cheaper!! Plus I absolutely love the security of knowing that no one can ever kick me out and that my boys always have somewhere to come to if life gets tough.
(I really bought it because of the pets. Landlords aren’t fond of families with 3 dogs…)
I remember reading in this blog that buying a house was always on the cards. Perpetually renting would wear you down if, like Mrs SMA, you want to put down roots and have a place that is totally yours to do with as you please.
Life isn’t always about the investment returns. My view is that we do the investing so that we can then have the freedom to do what we want. 🙂
Hey Dave life is short, you are young. Not everything is about the money. do what feels right to you and your partner. You have time on your side to turn things around and rebuild your assets. Your so far ahead of the average Joe and have a good head for finance so do what makes you both happy. Who knows what’s around the corner. Good luck
Mate!! have a baby 🙂
Hi Dave,
I have always appreciated your sharing. So I’d like to chip in my thoughts. Anything to do with houses involves HUGE transaction costs and tax. Also, a house is not an investment until you sold it because it consumes money and doesn’t bring in cash unless you rent out a room or carpark or storage space. Also, beware of the carrot that the government dangles in front of you. You might end up saving peanuts and losing coconuts. Especially with new houses. Think of the rate of depreciation of new cars. Also, I saw my neighbour putting in solar panels. I think it is foolish. It might save you some electricity but the panels are not an investment. There’s depreciation and maintenance/replacement costs. Takes a few years to break even. The money used could generate more money from shares. Just like the rain water tanks rebate years ago. Not worth it. Drains out too fast. No rain in summer when you need the water. Takes up space. Solar panels, when too many people installed it, electricity demand goes down, electricity prices will go down too. I own my own house because I like gardening and grow lots of fruit and vegetables. So I don’t have high grocery bills. Only need to buy meat. I also sell plants and seeds from my garden, so it is another stream of income. Have you thought of moving into one of your investment properties? Might be less costly to break the lease compared to the transaction costs of buying another property. My other neighbour works for ANZ bank and she told me nowadays it is very difficult to borrow money even if you have collateral. They want you to have an income and can demonstrate you have the capability to service the loan. Once you sold your portfolio and bought a house, where are you going to get the money to buy more shares? Just like cars, every time you make a change, you lose money. If I were you, I’d focus on building the share portfolio, then later sell shares to fund a house purchase and not be enticed by the government grant. Government tends to give from one hand and takes it back with another. Good luck.
Sorry I meant later sell your other properties to fund a house purchase. But ultimately, you should go with your heart as you will be the one answerable to your own decisions/actions. I always get this when I ask a question. I can seek advice, but I am not obliged to follow any advice I have been given because I know I am the one who will ultimately bear the consequences.
Hey mate, tough situation in you’re in…
Having recently bought my own place I can testify to all the stress it takes off of your shoulders. But it does also come with a LOT of misc costs, especially if you want to work more on those projects. But you can keep that in check. You’re smart.
Personally I’d wait a few months for a few reasons. The housing market might quieten down a bit after the initial hype so you might get a better deal, shares will have hopefully kept creeping up slightly and closed a bit of the gap on that 15%. But get in before September. I know it errs on market timing but a risk mitigation strategy would be to assume its going to be an iffy time to sell off after then when all the subsidies have ceased, and businesses struggle more and unemployment will likely creep up etc.
Waiting a few months will also give you time to let the decision sit in your gut, and see what comes out feeling best… Then just commit! Yeh you’ll lose some readers probs, but that’s natural attrition… Good to clean out some of the negative. As you said, this is meant to be a supportive community.
This all sounds a bit speculative as I read back on it, unfortunately. But at the end of the day, it’s going to be a guessing man’s game either way you go.
No doubt waiting til you can sell your other places would be a better bet financially, but it’s hard to weigh that against having your own place. Sense is you won’t be able to shake that property bug too easily, and if Mrs SMA wants it, you might be a smart man to pull the trigger.
Why not instead of renting, just move into one of your investment property, then use reno grants to renovate it the way you want? The impact will be the different from your rent versus the rental income. For sure it will be less than the cost of you selling shares.
The power of being in the strong position you are in, Dave, is the ability to be able to change course and continue to reflect on what you want and iterate as makes sense
Totally appreciate the pull of home ownership given what you guys aspire to do and the freedom that comes with that. I now for myself and my family this has been important and as a result, probably also due to discovering FI later in life, we didn’t seriously start investing outside of super in shares until we paid off our home at age 45. No regrets for us and a great source of comfort and freedom in knowing our living expenses don’t include housing. apart from maintenance and insurance. If I had my time again, knowing FI at he start, I reckon I’d still buy a place and opt to pay the house off first before investing in shares outside of super, though have salary sacrificed to super from an early age and am a proponent of doing that as early as you can
Sounds like you will be in a strong position either way and you can build u your shares agan. My only thought was CGT implications, but you note above that CGT won’t be an issue
Thanks again for the way you support conversations in this space. Much appreciated and very helpful!
There is no right or wrong choice.
Do what’s right for you and your wife, plenty of time to build up shares or build up savings for future house.
As I have said before, I am in a little different position. We sold our two investment properties we had in WA to focus on paying off our PPOR (4 years to go). Then we will reduce our expenses by 50% and focus on building up our share portfolio outside of super.
It will delay our eventual FIRE date but the reduced living costs is locked in return, regardless of what happens in my career or the future interest rates.
Hi Dave, I would buy a home personally as the security of having your own paid for home is priceless in my opinion! I don’t know where you live but is there much demand for Air bnb there? Perhaps if you get a place that has a seperate or guest room that could be user friendly for Air bnb then you could rent it at holiday time to cover the costs of ownership?
Wait till one of your investment lease ends. Live in investment and see how you feel. A first home together doesn’t have to be perfect. Just change what you want and make it a home. Exactly what we did. Still have property investments. Have a home and building up share portfolio by following your advice
Ps. Change in plans because you are expecting?? Congrats if so 😉
Great post and good on your for being so open. Some ideas below so hopefully helpful.
You’ve framed the decision almost like a false dilemma, either “sell all shares” or “sell most/all investment properties” both at depressed prices. I wonder if there is a more balanced option in between? Maybe selling your 1-2 worst performing properties, even if at lower prices than you’d hoped in order to reduce the amount of shares you need to see? Yes, breaking leases and fixed interest agreements carries fees, but it is not impossible to do. Also, reducing your total debt would help in making a loan more of a possibility.
You’ve said above that going back to work isn’t an option for you, but maybe you could consider different work to your old jobs? You have new skills now such as writing, digital, audio editing (kind of… :)). You could even consider a job in financial advisory/support given your knowledge in this field, such as being a financial counsellor for people who struggle, and may even enjoy this work more and find it quite satisfying, similar to Mrs. SMA. Speaking of, seeing as she does enjoy her job, maybe part of the equation could include her going full time at her work for 1-2 years to help with cash flow and catching up total investments in the stock market again.
It sounds like you’ve got a bit of FOMO, which is totally normal (I’m the same age and have been thinking more about property too, recently). This might be an opportunity to buy at a good time but there will be more opportunities in the future and your situation might be simpler then and you’d have more options available to you ie a loan. Mal Smith above is right, no one wants to be dealing with landlords in old age, but surely you’ll get other opportunities to buy your forever home in your 40’s or 50’s.
Lastly, ignore that previous wanker or other doubters. You’re clearly just considering your options and being transparent about it as a thought experiment. If people think that constitutes a “180” imagine how they’d react if you starting promoting property investing and the latest crypto Git-coin!? You do you mate.
I often tell my husband’Happy wife, Happy life!’ Of course he agrees! ????
There is alot to be said for knowing you have a home that is yours and no one can ever kick you out. We bought our first home in 1999 and have bought and sold several times, such that now we are mortgage free. Sure I wish I had known more about FI when I was your age, but I still would have bought our homes. Having a couple of kids and all the things that come with that, means we will be working for a few more years, but we will still be able to retire sooner than many of our friends.
I agree with op, sit with it for a while. Always go for the location first, if you don’t like where you live, the house features are moot. Once you’ve found a place in the preferred location, visit the street at different times of day/night. Talk to the neighbours about why they like living in the street. Take you bikes and see what the local tracks are like.
Best of luck
Thanks for posing a very interesting problem. If I were you, I would definitely sell the rentals and use that money to buy a house, but I don’t think the timing is necessarily an issue as it’s already money invested in property. Perhaps if they’re owned in deferent parts of Australia, the market situation could be timed profitably. My opinion is that owning one’s own home has more benefits than owning rental properties and renting oneself, for the reasons you give above, not having to pay CGT if/when ones sells up, not having to worry about getting properties rented and how renters will treat your property.
Given you already own a large Perth property portfolio, I really don’t see why you want to add one more.. the concentration risk is too high for my liking …. but as you said, this is a house to settle in so the emotional side of things can be more important than just looking at numbers….
You probably know a lot more about property than most people so I’m sure your decision will be sound…
Perth is probably a better buy now than Melbourne or Sydney but we don’t have a crystal ball. There is nothing to say about expensive cannot get more dearer or cheap can get cheaper.There are still plenty of land on the outskirts of the city, just drive north of butler and you can see how much land is available and how cheap they are….
Another risk I see with property is the changing of rules favouring tenants more and more and also regulatory risks when government runs out of money, they have a perception that property owners are rich bitches and can always increase rates and taxes to fix their budget
I don’t have such a big problem with increasing income tax per se because in order for them to collect more tax you will need to have more income… property tax is different, they are assessed based on land value or property value and the valuation can be grossly wrong, you can argue with them but it’s not always easy. So you can have lower rent and income but higher expenses
I have also recently just fixed the gutters and roof to one of my properties and that cost around 5k, plus the air conditioning needs replacing before summer and that’s at least 3k… so almost a full years rent gone… shows how unreliable properties can be…
So yeah, buying a property is a massive decision and the only property that I would ever buy will be for living and never for investing….
I would suggest you speak to your broker as my broker mentioned that dividend income can be counted towards your income if it’s proven to be consistent and reliable….
If I was in your shoe, selling shares will be the last thing I would do…
Great idea to sell and then buy the properties in the same market Jack! This comment struck me, it seems like a great way to keep your property exposure (or potentially even decrease it – achieving your goal) in the same market. I know it might suck to crystallise some of those rental property capital losses – but you can use them on your share capital gains one day.
And rather than seeing any investment property sales as losses, you can see it as the price of getting out of properties that aren’t right for you and into a property that is. You could also see it as a small increase in the purchase price of the place you’re looking at which is currently a bargain in the depressed Perth market. Therefore forget about those losses and:
– enjoy your money giving you emotional joy; and
– stop worrying about the pressure on the equity increase in property which doesn’t help with cash flow (which isn’t needed here because the cash is serving another purpose!).
Hi Dave
Plenty for you to think about if I was in your position I think the Idea to own your own digs is good , but I would put it on hold for 8 years , hopefully the Investment property’s have got better in that time , then have a look at it again then , for the moment I would be just trying to build the Share Portfolio up
Good Luck Mate which ever way you go
Just an obersavation from someone that wasn’t born / raised in Australia: I’ve been following this blog for over 2 years now, and I don’t think I’ve ever seen such a responsiveness in such a short period of time (over 55 comments in less than 3 hours since the post has been published – unbelievable!!!)
Australians obsession with property is puzzling – the reations above just confirm that property in this country is a religion and evokes all types of emotions….
SMA has produced far greater content on other topics, such as dividend investing, int shares, strategies, etc, with far greater insights, but this one seems to trump them all….
Just unbelievable reaction and something to take a step back and reflect upon…. just shows what is wrong with this country when it comes to these ridiculous property prices – just look yourself in the mirror, and you’ll know who is causing it
Hi Alberto
Not sure what you’re trying to say here
Do you mean interest in property is what causes high property prices? That’s an underwhelming observation. Exactly what do you suggest prospective home buyers reflect upon?
Regardless, thanks for your emotional (dare I say “religious”) and reactionary contribution
Your own reaction just confirms my point: any anti-property views are quickly dismissed.
Buying property in Australia is and always will be a dumb decision, you just need to come from another country to see it. The usual argument of bought my place for $x thousands in 19xx something and now sold for $y million in 2020, just fails to ignore time value of money, holding costs, opportunity cost, the role of inflation,etc, etc
Even trying to have a rational conversation about it is tough…. forget it! Hoping that Corona will deliver a hard dose of reality for Australia’s inflated property prices
Ouch! Was that directed at me?? LOL.
For me, the emotional reasons far outweigh the mathematical reasons of the buy vs rent debate.
The security (as a single mother with 4 boys this was paramount) and the ability to craft your own space to suit your own lifestyle and values is what makes owning a home preferable for me, rather than renting.
Just pressed ‘publish’ on a monster post about this – thanks Dave! This particular post of yours certainly got me thinking!
I think you’ll find a lot of the reaction is because of the change in direction, not just because it’s property per se.
Also, why so angry? Seriously chill out.
As for this pearler…. “ Hoping that Corona will deliver a hard dose of reality for Australia’s inflated property prices” – you may want to reflect on that comment a bit, and what sort of person you are and want to be….
No Simon, I don’t have to reflect on any statement, thank you very much. Perhaps if you were better informed, you would know that it’s not just me that has this view, Simon – the recently revealed RBA documents share the same concerns; property prices in Australia are hugely inflated (period). In face of that information, one has 2 options: a. bury their head in the sand and take no action, pretending nothing is happening; b. avoid overexposure to such an overvalued asset and diversify their wealth into income producing shares.
The problem is that in Australia, everytime property is mentioned, a flurry of emotional reactions is triggered; but it shouldn’t be that way, if people were rational and looked at some form of relative valuation metric (i.e. avg. house price as a multiple of avg. income, etc) – these are facts, not a matter of opinion
Hi Dave
Long time reader (and now listener), first time commenter.
Thanks for sharing your decision-making process. It highlights the fact there are many ways to skin the investor/FIRE cat, and the importance is knowing the options, considering the pros/cons, and tailoring it to your personal situation.
I’m a rentvestor (live as a tenant, x2 rental properties with high equity, using the cashflow to chip money into the share market now). It suits my lifestyle atm, but if/when I settle down with family, especially if I was confident that I was in the same location I intend to retire, then I’d be looking at buying. The psychological benefits are pretty hard to argue with, and why wait until you’re 70?
In your case, you’ll lose a huge opportunity in taking dollars out of the share market that will surely climb. The current value of the real estate market is questionable too. The big upside is the savings you’ll get from the rental savings (although I’m not sure how 15-17k / year compares to you current dividend income), and you’ll be siting on property as a long term investment.
If I was in your situation I’d buy a PPOR, being cautious not to fall victim to FOMO and rush in (ie. sit on the idea for 3-6 months, having my ducks in a row to buy at short notice). Decide on a price range and be firm with that. Totally respect your decision not to work. I suppose if I was in your situation I’d go back to 10-20h a week or look at buying a place that would afford the option to rent a room out. Not supplementing the passive income would make getting back into the sharemarket frustratingly slow.
Mate you have to ask yourself whether you go with your heart and the fluffy feeling of home ownership (remembering it’s human nature to become bored of the best things in life once you get used to them), or your head, knowing that you started down the path of dividends and shares for a reason.
If you don’t set clear and concise goals then you are destined for sub optimal results.
Stay the path. Fight the urges – and maybe speak to your accountant. If you can looking him/her in the eye adyer making your decision after their advice, then go for it.
Good luck.
Hi Dave, first time commenter here but (not creepy at all) longtime lurker. I think once you become FI and have RE as you have done, you have the flexibility to pursue the things that make you happy. Not everything in life has to be the ‘best deal’ and make the most financial sense. If having a home with solar panels, a veggie patch and a place to call your own is what makes you happy, then I say go for it.
If it’s not long until the fixed interest periods on your IP’s or the tenancies end, then in your shoes I would wait until these end, sell an IP (or two) and use the equity from these, along with partial sell down of your share portfolio to fund the purchase. Just hurts less compared to selling the whole thing and you are still diversified in shares, while receiving some dividend income.
It is an interesting dilemma.
We have just retired, both 60 years old now and have spent our lives working our butts off. We followed the advice of the day (back then) and bought investment properties. We only reached the stage of paying off the family home recently due to the burden of the IP’s. We would never advise going down that route again.
However, there are many many positives to owning your own home and making paying it off a priority. You are young and still have many many more years to invest wisely.
Some interesting things we have noticed lately in regard to the Perth market.
Rentals are becoming very scarce
Reasonably priced housing is being snapped up over there!
We have been watching the market closely and anything good is only on the market for a few days. Prices seem to be on the rise.
We have just sold our house in NSW and bought a block in WA. Since we started to talking to different builders their prices have been heading north. (We think mainly due to the government incentives).
Who knows what is going to happen with house prices, or share prices for that matter, but sometimes you just have to set your priorities and go for it. I don’t think you will ever regret buying your own home.
We regret buying IP’s constantly and still own 2 that are worth about 35% less than when we built them…… Do you fancy living in South Guildford by any chance 🙂 🙂
I’m fairly new to all this but here are my basic calculations.
House costs 400k. House expenses 5-10k per year. Rent costs 40k per year. Dividends on 400k shares at 10% per year = 40k. This equals free living (in so far as rental expenses are concerned). Owning the house will leave you out of pocket by 5-10k per year, hurting your capacity to rebuild your share portfolio.
As an alternative, the Perth property market has taken a bit of a beating which hurts your sale price for your investment properties. Are the investment properties unable to be lived in? Were they commercial properties or something? Since the share market has also taken a hit, selling up those properties (even at a loss) could help you to buy into more shares increasing your overall dividend yield, further improving your cashflow until you choose to buy your own primary residence. Impossible?
My main reason for wanting to own a home is probably the garden. Especially the vegetable garden. Fortunately many things that can grow in a vegetable garden can also grow in planter boxes..
My main advise would be play it calm, make your decisions from what you really want, not from what you think the market is presenting you at the moment. I personally can live on cashflow, but not on equity.
My two cents mate; try and find the place and street you want, cold call with letters. Find someone with the big block thats getting old and wants to sell. Try and organise vendor finance or rent with option to buy. That way you can start your garden – plant the trees. Alternatively, collect barerooted fruit trees in a temp garden so you can take them when ready to move. Think outside the box as I know you can. Cheers Mick
Your proposition indicates one of the dilemmas of FI/RE, particularly in Australia (it’s kind of a “money or the box” situation) about whether owning a home and RE are compatible. Unlike our American cousins who have ample choice for low cost locations / lower cost housing, it’s much more of a challenge here in Australia. There are many advantages of living in your own home, not just financial ones, as many have pointed out. Some considerations:
1. FI/RE is a philosophy, it’s not the law. It’s about saving/investing, spending within our means (for the ability to save/invest) and identifying what’s important in life. FI is achievable longer term where the RE part can be more difficult in the short term. So one needs to consider a flexible approach to FI/RE, there is not one approach and people’s situations and aspirations do change as the years move on.
2. You also have to realise that you are not the same person you were before, you have a whole bunch of different skill-sets. You’re not the guy doing those jobs you use to do before. As one of the other commentators above mentioned, you can consider new opportunities in digital media, journalism, communication, financial planning / counselling etc. You might need to study to get some qualifications, but you could do something that you like doing in building your own brand, business, or even working in an area you like. RE is a statement of mind really – if you are doing something you like and getting paid for it – that’s kind of RE compared to doing something you don’t like.
3. As for the current situation about whether to buy the property or not, it does seem Perth prices have hit rock-bottom and there are some ‘green shoots’. Moreover, rental vacancy rates are very tight in some areas (e.g. northern suburbs of Perth), so can see why you may want to buy back into the market. Selling one or two of your other properties makes sense, but can see that the timing may not be right.
i. Perhaps a slightly risky strategy (but feasible), would be to offer all your shares as security for a margin loan but instead of borrowing to buy more shares, draw down on the account to buy the property, with the view of selling one or two of your other properties later to pay down that loan that has been drawn. In this way, you don’t need to sell your shares. With an LVR of 70%, would need about $600K shares to do a $400K loan draw down. Interest rates on margin loans are high and hence would need the dividends to pay for this, and may need a buffer in case there is a drop. Would only consider such strategy short-term with an action plan to sell off one or two of your other properties to decrease the drawn down loan.
ii. Alternatively, yes – would need to sell down your shares, get the cash, buy the property, and look at re-investing in equities again, or getting a LoC to buy back into the market, and also selling your other properties in a timely manner.
ii. To get a LoC, likely to require other income (job, having a business etc) but this could also be time to re-group about the next steps in the journey from a skill-set / business development perspective and moving forward. Most entrepreneurs do a few things first before hitting their stride. While you have achieved FIRE from the efforts expended to date, also need to reflect whether that level of FIRE is sustainable in the medium to long term or whether it’s best to re-group / re-strategise for the next steps. There are no rules, only the rules that make you happy.
I really like this comment.
It’s balanced and thoughtful, and offers some alternative strategies to look at.
Hey Dave,
There’s really no wrong answer. If you continue renting, your FI number will be elevated due to monthly rent which would be funded from your shares. If you buy a home outright, your FI number will drastically be lower and the smaller amount can likely be funded by your rental properties.
We house hacked and had roommates live with us for a few years to pay off our mortgage in 2.5 years so that’s something you could consider. You could buy say a 3-4 bedroom home and rent out a few rooms for a few years (much easier to do pre-kiddo if that’s in your future plans) to bring in some passive income to help build back up your share portfolio.
Also, ensure you vet the area and can picture yourself there for at least 5-10 years. Look at how the neighbors treat their exterior even their cars. Try to figure out as much about your potential neighbors as possible. If you’re looking at land with a view, ensure the view cant get built up on in the future (i.e. conservation area).
The costs associated to buying/selling are the bigger overall items you will face so you’ll want to ensure you’re there for a bit. And keep in mind if you do want to move elsewhere, be a nomad for a year, explore another part of Australia, etc. you can always rent your home out for a year or two if you don’t want to sell it at that time.
There’s definitely pros and cons to both routes as you’ve mentioned but it seems like you’re on team buy and there’s absolutely nothing wrong with that. Embrace it and do what is right for you and your family.
Very interesting situation and replies.
Provided you are really happy with the suburb, area, neighbours, and the house—buy it! You also need to satisfy yourself that any work to be done, painting, garden development etc. you can do yourself.
There is amazing satisfaction in owning ones own pad which is not always expressed in money terms.
I would then look very carefully at your rental places and see if any can be sold or in any event sell earlier than you planned. Any equity goes to starting, building the longer term share portfolio. You have many years to easily establish full FIRE and with your attitudes and spending habits it will happen relatively easily.
Although we are retired and FIRE please keep up your weekly releases they are always interesting and full of food for thought!
Hey Dave,
Mate – what a dilemma!
And what a stream of comments! ????
Obviously the decision is an incredibly personal one, but the following thoughts came to mind on my end:
– 4% yield vs 0% yield also creates stress… How would the income gap be filled?
– Government advantages started you thinking about this, but not clear on what government advantages you are taking advantage of?
– I think the last (“biggest”) point against selling IPs is an irrational one! If they’re in the same area/same market, any loss on one (or two) properties will be made up for by a gain in your new purchase – selling some assets to buy similar assets at the same valuation that you get more value from is arbitrage. You’d also get tax benefits too – this is know as ‘tax loss harvesting’. It’s like selling some VAS now to realise a loss and then immediately buying A200 (but also, doing that is illegal, so pls don’t! ???? – see tax washing here: https://www.sharesight.com/blog/tax-loss-selling-for-australian-investors/#avoiding-wash-sales)
– You want to live where you want to live though – that’s the joy of being FIRE’d! So if where you’re living at the moment isn’t doing it for you and Mrs SMA, make the move!!
– But don’t go cash-flow negative to do it ????
Cheers mate! ????
Hi Dave,
First time poster, given that you have ruled out making use of the government/state building subsidies what is the rush? You mentioned that your other investment properties are time barred though lease arrangements and fixed rate mortgages, surely you can either (a) Wait out the length of the lease, and/or (b) Wait for the end of the fixed mortgage contract. You would know how long this would be, but surely not longer than 3 years? Why not wait this period, sell your other investment properties and only then purchase a PPOR. This would have the benefit of not incurring CGT on your taxes and/or not selling them for a bad price.
Lastly I agree with the general sentiment of the comments, it is a 180ish stance, not saying you haven’t ever precluded this option however the general feel of your investment strategy has been to avoid property.
There are a lot of comments, which I haven’t read all, but here are some things you may not have considered:
a) Is it possible to borrow from a related party such as a parent? You could buy the place and slowly pay them off.
b) Could a related party buy it and immediately sell to you with a long term settlement. Later you can transfer title to yourself without triggering CGT.
c) Would it be possible to borrow even just a small part of the price to enable you keep some shares.
d) sell IPs. Selling will improve serviceability too. as well as giving you cash.
Long term owning a main residence will be much better than renting as rents will continue to rise, plus it is a tax free asset which can be sold later on.
Is security substitution an option?
If so, (wacky idea) could you crowd fund the $s to bridge the buy and sale? What could you possibly have to offer several hundred followers to lend you $1000 ea for 6-12months…. ????
I think the important thing here to remember that either property or shares is only a vehicle to get you to your destination. If you can gain financial independence then it does not matter how. Do what you feel comfortable with.
Dave you and anyone else has the right to change your mind and go in another direction if that is what you feel best.
Thanks for bring up this, it reminds FIRE community to buy own home before completely quitting jobs as borrowing power will be zero. Once you don’t have full time job, bank won’t loan you money, it is serious trouble if you want to buy more properties.
For us, owning properties and shares are way to go. You can park your money at offset account of property, earning interest is equal to loan interest. Depreciation gives you tax benefits. It provides cash flow. Property and share have cycles. Share provides cash flow but not as frequently as property.
I could understand your wife’s thinking. I am fuss too and i like own my own home. I prefer build own rather than buying existing home as you can build to suit your own lifestyle and needs. Have you checked the cost of building and land price in WA or the area you are intend to live. When you buy old home, you have to pay higher stamp duty and on top of that you probably have to spend another big chunk of money to renovate the house.
Back 10 years ago, we would only afford to own small and old house due to our low borrowing capacity if we decided to buy existing home, therefore we decided to buy land and build. New build home is nearly double size and 20/30 years newer, everything is more up to date, wall is insulated so house is warm in winter and cool in summer. We didn’t have money to do garden so we did it over the years. We had own chicken pen, over 50 fruit trees, hundreds flowers, and heaps veg patches, solar panel generated more than we need so we did not need to pay electricity. Water tanks gave us enough water if it rained once a while. It really reduced cost of owning home. Over the year, it showed that we made right decision.
Don’t rush to make decision at short term. It probably not the best decision to sale investment house or share at the moment. Changing own mindset might be the way to go. We are renting house at overseas and rented houses out in Australia. We are not thinking buying own home here as it is way cheaper to rent rather than buying own home and we only here for few years.
Good time to buy, I thought about doing it myself…but then I thought why are they giving the grants? Because they are scared shitless of the property prices having a massive pullback, which will crush the wealth effect, smash banks and the broad economy. If it doesn’t work? They will give bigger grants. What if it does work ? It will push prices higher, meaning that everything else will need to rise to make house prices look normal ( so shares benefit). Your already pretty diversified, I would stay that way myself. I’m stopping investing in shares now and moving to save up a 20% deposit for our house, my portfolio will cover the payments and costs of having a house. So I’m not fire, but doing ok. Once we have our place I will draw a line of credit to put into more shares, having the cash flow from the shares gives me more security then having a property, that’s why we sold our last one. I’m loving renting but, owning a property is a pretty much a must, going into retirement…. (unfortunately, re: Scott papes thoughts on property in the don Bradman strategy) which is why we will buy again. Having a decent cash flow not dependent on a job gives me a decent amount of flexibility, which is where I think the security comes from.
“NOTHING WILL BEAT THE CASHFLOW OF GOOD QUALITY BUSINESSES , RENT WONT RISE AS QUICK AS THE INCOME FROM QUALITY SHARES” Peter Thornhill….. might not be word for word, but I loved this type of thinking. Peter also talks about using the cash flow from stocks to wipe out mortgages.. love this guys thinking.
The biggest mistakes Peter said he made were sell decisions, having done the same mistakes, I won’t make then again. I regret selling shares but not property. Think hard about your decision, think about what future Dave would think about today’s Dave’s thoughts. If it turns out you make a mistake, don’t retreat it, just learn from it. You decisions are made based on the best information you currently have. I recommend re-listening to some of Peters thoughts on the firebug podcast, I get lots of sage advice from that guy, like an Aussie buffet. Sage advice.
I’d go further and ask Peter Thornhill directly for advice!
Hey Dave. Nothing like mentioning property to open up a can of worms and bring out some very nasty trolls.
It comes down to everyone’s personal circumstances but basically, I would continue doing what you are doing but make the firm decision to start selling down you 1 IP per year until they are gone despite what the market is doing. You’ll lose more money over time owning property than you will owning shares.
Take whatever is left and keep building that share portfolio. There will come a time in the future if you keep building you share portfolio where you’re annual dividends will be enough to pay for a house outright in 1 year if you plan things right and keep contributing to it. Be patient. Look at Peter Thornhill.
Market timing is a fool’s game and waiting until the property market rises to sell property could mean you are waiting a while plus IPs are just a pain in the arse. I had 3 IP too and sold 1 a year until they were gone. The freedom and flexibility you feel once you don’t have to deal with property again is amazing. The progress I have made towards my share portfolio since has been nothing short of epic especially with the current downturn. Obviously you have freedom and flexibility already so it will be a personal choice of what pulls the heart strings more but if I was ever going to own a PPoR again I would buy it outright with dividends which might be a while down the track or make a plan to get a job and pay it or most of it in a few years. Your still young and working a couple more years to pay off a house and reduce your expenses further wouldn’t be the worst outcome. You have plenty of choices. Work 1 year have a break for a year rinse repeat. Or knuckle down and just get it done in 3 – 4 years if you want to be hardcore but doesnt sound like you do.
No easy choices here but there is no way I would be selling appreciating assets (shares) to pay for a depreciating lifestyle choice (house) that’s going to continuing taking money out of your pocket over time. Shares kick arse! Good luck buddy.
Your second paragraph reminds me of selling winners short and holding on to losers in stock market talk. Normally when one makes a mistake in normal situations, one apologises and make things right. But when people make a mistake in investing, they just sit and hope that the mistake rights itself. I saw somewhere that hope is a major killer in investing. Easy to say, hard to execute I must say.
Well said Girt.
Brad
Just had a look at what you can get for around $400k in Perth. Jeepers. Old houses on a postage stamp. This is where FIRE falls over. Living on $40k a year between you doesn’t sound like the sustainable carefree living I’d be interested in either.
Hey Dave,
first of all very nice post.
Also, everyday we learn new things and the environmental factors around us change and we should have the flexibility to change our plan.
so, if you think after selling the shares and buying property, your current lifestyle wont be impacted , I think you should buy your house. If you make a good deal you would love that feeling. Who knows what will keep us happy later. So take that happy hit now in a sensible way.
If its going to impact your current lifestyle wait for some more time. The shares value may increase or you could sell your investment property or some other option will open up.
you could go backwards in your strategy, but try not to go backwards with your current lifestyle.
Hi Dave,
We both seem to have a lot of similarities in our housing/investing situation. I own a few investment properties and share portfolio (index funds) inside and outside super. We are also renting and about to start building our principle place of residence. We are aiming for Fat FI and will be achieving it in 2 years. We could FIRE today but we do not want to RE for another 20+ years. We will go part-time in 2 years once we get to Fat FI.
Just like you we have debts on our IPs and I was thinking should I sell an IP or shares to buy the PPOR or take on additional debt. We decided to take on debt instead of selling shares/IPs.
The main thing to consider is that you are buying a non productive asset (liability?) and selling your productive asset (shares). Debt is the (interest rate ~2%) cheapest it has been in history and therefore financially it makes little sense to sell shares (best asset class) for a implied 2% savings against debt.
The main issue for you is that this would require going back to work to get a loan. Is that really that big a deal? Even if you went back and then applied for a loan. You could perhaps work part-time after your loan has been approved?
Another option would be to sell your IPs and fund your PPOR that way. If I had to sell an asset to buy then I would have thought you would have gone the route of selling an IP. Again a few things to consider are that you reduce your debt on IPs but more importantly you reduce your risk. I personally think IPs are more risky compared to stocks. For example, I just had a major repair done on one of my IPs $7k worth. Now I didn’t anticipate this or plan for it.
IP future growth is suburb specific and it is harder to get a ‘market return’ on your individual property. Whereas index/LIC would give you a better chance at getting a average return.
Another thing to consider is your capital gains tax. The longer you hold a IP the greater your CGT is likely to be due to growth (not a bad thing in itself) but you have no control over the CGT event. It takes a hit in one go. Whereas you have much better control over CGT with shares. For example you could sell them in small quantities to reduce your CGT hit in 10-20 years. Which would not be an option for you with selling IPs later on.
Again, IPs are in my view a less productive asset than shares and there are more risks involved due to leverage, unforeseen maintenance and general management headache.
Just some food for thought. Good luck with your decision.
Hmmmmm…… I like your thinking/reasoning. Thumbs up.
Hi Dave Just my personal view,Do not sell your income sell investment houses or move in to one yourself.
I feel someone is getting clucky. Man is a silly bugger he spends his younger years chasing chicks but still ends up with an old chook.In the days gone by when we had a clucky chook we would sit her on a wet bag overnight she would go off the cluck overnight.I am sure it would still work.Whatever is in the wind I wish you and yours all the very best until next time Chester
I’m with Mrs SMA – having your own home provides security, stability and peace of mind. The psychological benefits outweigh the maths any day, provided you buy a house you can afford. There is something very satisfying about doing what you want, how you like, when you like to end up with a space that is totally yours, that no one can kick you out of.
As others have pointed out, you are young so time is still on your side to rebuild your shares portfolio. That rent money will be a good start! Though there always seem to be unforeseen expenses with owning a home 🙂
You should never let irrational emotions influence your investment decision. Dave’s situation is not one where he is vulnerable to landlords kicking him out and he becomes homeless. He has $400K+ in shares – with only $20K a year rent. If the landlord wants the tenant to move out, notice has to be given and Dave would have no trouble finding somewhere else to rent in this market, probably can negotiate a better price even. He also likes the place he rents so there’s no desperation to leave. The ‘peace of mind’ element of homeownership does have value but how does it compare with the freedom, diversification and flexibility of having $400K growing liquid asset?
???? I feel really strongly about this one Dave! Homeloan interest rates are going to stay low for a loooong time, property prices may very well go even lower. Even if they don’t, they certainly won’t be increasing the way they had been in the last 10 years. Don’t make any rash decisions right now.
My tuppence worth…
The world is the throes of a major pandemic not seen in over 100 years. Don’t make any major life choices just yet Dave and don’t ‘sell the farm’ you have been cultivating. Sit and wait for 6 months or so. Who knows? Perhaps we will have gotten out of the grip of coronavirus and a new normality (new cycle?) will begin. Some professional tax advice from a specialist accountant might be a worthwhile investment in the meantime with some modelling scenarios. Offset CGT gains and losses selling shares vs selling your Investment Properties and the like. There is always a Third Way; a middle ground, an idea you haven’t thought about. Sit back, sip a corona and chill-ax as the kids say!!
Great advice!
What this shows, is that you should not think of your investment plan as rigid. Time changes everything, perspective and needs. No long term investment strategy should be fixed, and you’ve reached a crossroads, left, or right. At the end of the day what makes you and your family happy, and enables you to sleep at night. You can go along the way you are now, or head in a new direction. There is something to be said for owning the roof over your head, and if you can do it debt free, probably worth considering. You’re never going to sell your shares at the peak, if you can buy your home debt free, then, they’ve served their purpose.
Hi Dave,
I may have only commented once or twice before but I thought to add a couple of cents into the mix – and sitting in our 50s and 60s in an apartment bought outright 30 years ago immediately disqualifies me for a meaningful say. However, if you are only thinking about buying a house because of “incentives”, I’d be wary. Firstly, the “savings” possibly won’t materialise because of inflated quotes, there’ll be supply chain issues with materials – spend an hour in Bunnings to see what’s happening there. Tradies are purported to be struggling to find stuff to finish jobs etc, so a rush on renovations won’t be helping. Secondly, the Gov’ment does like to keep property buoyed in this country, and have a think about the size of some Ministers’ IP portfolios and why these $$ may be being tossed about! These schemes invariably become major headaches as something unforeseen transpires. But, if you both want to put down roots now and you both find the Dream House, by all means go for it. You’re young and can rebuild your share portfolios. Do your research into an area, stake out neighbourhoods day and night, etc etc. Be prepared that all homes become black holes for expenses. But, speaking as a home owner, especially in Interesting Times like now, having your own place is a comfortable position to be in.
Personally, I’d wait and see what happens after the economy is left to get back to its own devices. Will prices tank further? There’s bound to be many forced sales in the pipeline. To raise the capital, I’d take the slow approach and try selling your IPs. We did 15 years of IP ownership and it was the worst investment decision ever made. Took forever to sell them, ultimately, even when the market was booming and the holding costs were just awful in retrospect. If any or all are in an area or condition you could bear to live in, move into one and do the one-year residency to get around the CGT. I imagine that using the incentive $ to fix one up will mean over-capitalising so maybe ignore the dangling carrot. You’ve so much time on your side, stripling!
The advice YOU always give me is what is more important to you, e.g. prioritize. Is that house really important to you or are you just bored and played the numbers and they actually look good?
I am European so I don’t have this australian obsession with property. I enjoy freedom. With a nice share portfolio you have so much freedom and flexibility I wouldn’t care about government grants. In Europe no one gives you a ‘move-on’ notice so you have the flexibility there and could even live there for a few years. I know that you said that WA is home but selling your entire share portfolio now? Next pandemic is coming anyway (swine flu 2)
You are basically basing your decision on timing. Almost the same as “timing the market”. “Should I buy share because they are high/low?” Is basically the same as your question of “should i buy a house because it is so low?” I think you should stick to your plan. Don’t let attractive rates distract you. Because how do you feel if in 12 months you will get $55,000?
Agree, see my post above on this topic. For non-Australians, it is really hard to rationalise this obsession with property. It’s a local phenomenon I’ll tell you that. Why would you swap your freedom for a money-draining, over-valued, highly leveraged asset? Which, if you believe in the concept of reversion to the mean, is more likely than not to go downhill from here – using historical growth rates to project the future is always a dangerous play, and with property in particular, there is trend to extrapolate past return into the future (i.e. “it doubles every 7-10 years” – will it?!??)
Firstly this is your life and you can change your plans to suit you at any stage regardless of the “perfect scenario” for FIRE. If you derive your income from shares and you sell them and buy your house outright then others mentioned to get a line of credit against the house however if you have no income the bank won’t loan you the money even if you are asset rich. It would all depend on your income – maybe you could borrow $50,000 against the house vs huge amounts. Banks want “income” so you can pay back loans regardless of your assets. Buying a house in a depressed market is a good idea however I know the Perth housing market has been depressed for many years – there may be more bargains to have and come September there may be more on the market because jobkeeper will finish and therefore many people may be forced to sell their homes so holding out for 3 more months you could pick up an even better bargain. As you say real estate agents will always tell you they have lots of buyers so make you quicken up your decision. Regardless of your advice if you want to buy a house then you should buy a house. All the best.
Your comment on banks wanting “income” got me thinking …. that one can live on high income but not on high equity. And this coming from the banks, the heart of the financial institution. And I compare this to the stock market where so many people are banking on pure capital gains without any dividend. It’s like having imaginary wealth until you sold your shares. But you shouldn’t sell your winners but ride it. So how? Catch 22.
Hi Dave,
Woah, that was unexpected! 🙂
Thanks for sharing your thoughts with us, and it’s certainly your life and your right to make any choices that make sense to you regardless of what everyone else thinks.
A couple of questions if you don’t mind answering them…
1) If you sell your entire share portfolio, where would your income come from? Even with your costs being much lower, as you predict, these costs will have to be covered by some sort of income. Or do you intend to live on your cash buffer (savings) for the time being?
2) How soon after selling your portfolio and buying a house would you expect to return to buying shares? e.g. start buying straight away and build it over time or wait a few years until you sell one (or more) of your IPs and invest a decent amount at once and pretty much get to where you would have been if you didn’t sell your share portfolio?
Hey,
Really enjoyed this post, I am working full time but aiming towards FIRE because working full time is not a good time. I am in the same dilemma. I think depending on your circumstances, views change. I look forward to hearing your decision!
Hey Dave,
Love your work, best FI blogger in OZ.
Have you explored the possibility of using ‘loan portability’? You may be able to sell one IP and transfer the existing loan to a new residence, without breaking the fixed period. I don’t think the bank will need you to show that you can service the loan either, so no need to work more.
You can also generally use a term deposit as security for the loan to keep it open if you sell before buying.
I won’t worry too much about selling at a bad time if you are buying a similar asset in the same market, as the net effect is likely to be small. As mentioned above.
Home ownership is hard to pass up with current interest rates, particularly if you can realise significant cash flow savings.
Keep up the content, always a highlight on the weekend.
So is this end of SMA I guess?
You wouldn’t be eligible any more to preach other about Fire and share investments, if you yourself couldn’t practice it yourself.
Anyways, I wish you the best.
Hi Dave
Good on you for being so honest. We just moved into our our rental property after a few years of rentvesting. Slowly going to renovate it over the next year or so. It’s a lovely feeling to be in our own place, just sayin.
My views are pretty well covered by many others – DON’T DO IT DON’T DO IT!!!
That’s coming from someone who is a super happy recent owner-occupier of a property. I definitely get the emotional element of ‘we won’t need to pay rent and it’ll be ours to decorate’.
But your current situation has freedom and flexibility. You have an enviable $400k+ share portfolio – a liquid asset you are adding to and that you can sell down if you need. You live in a home you like (including a garden) but you have the option to move out and downgrade if things go south, or upgrade if things go well. Take some inspo from the sharing economy, you don’t have to own something to get the full enjoyment of it.
Freedom is the most valuable thing which you’ve worked so hard to accomplish. Don’t throw it away just coz the government is giving a $45K freebie.
Oh to clarify, I do agree you should own the home you live in at some point. I just think with the world in such an uncertain state right now – not knowing which way shares or property values are going to go- it’s best to wait a bit. Especially when you don’t hate where you currently live and you have investment properties you can sell later to help you buy a place outright.
If I remember correctly from Peter Thornhill’s Motivated Money, you can apply for Home Equity Line of Credit (HELOC) and use it to buy shares. The interest costs would be fully tax-deductible.
Ex: Assume that you pay in full for a House around $350K (the remaining $50k for any related costs and shopping), the home equity would be $350K.
HELOC Max = 75-80% Home Equity = $262-280K; let’s take $260K
HELOC Interest of 5% = 260K * 5% = $13K
I have never done this myself, but if what Peter Thornhill teaches is true, this may be an effective strategy if you have higher tax than the HELOC’s Interest cost.
You end up with:
– A fully paid house = $350K
– Shares portfolio = $260K
– $13K of Tax utilised more effectively.
– HELOC that remain the same which you can repay far out in the future when you have a much bigger nest egg (from additional investment and stocks’ price appreciation)
Hi Benny. Nice thoughts. Dave has mentioned that he would have a hard time getting a loan. Are there different requirements to access the HELOC?
Hi Martyn. As I have stated above, I haven’t done it before so I don’t have a definitive answer for that.
But here’re what I know (or I think I know) about HELOC:
– HELOC is based on the total Equity one has on the house.
– From the equity, a limit will be set on the HELOC account. Maximum 70-80% of the Equity.
– As you gain more Equity (ie pay off more mortgage), you can apply for higher Max amount ($).
– HELOC works kinda like a credit card: you have a maximum amount, but you are only charged the interest from the amount you actually used/withdrew –> it’s different from a loan where you receive the total max amount upfront.
Since HELOC is technically different from a Mortgage loan, I don’t believe that Dave would have difficulty in applying for HELOC, as long he has proofs on the amount of Equity he has on the house, and on the decent level of cashflow more than enough to cover the interest cost.
But once again, I do not have intimate knowledge on this (I wish I do though).
Hi Dave again .
l started out by saving for a house and then built one to my own design with cash , and later built a share portfolio .
B U T , l SHOULD HAVE REVERSED THE PROCESS !!!
Needless to say l would have become self-retired at an earlier age than l did .
Each to his own , yes , but l just give my own experience , not advice , on this topic .
Good luck and best wishes . Ramon .
My opinion – don’t do it. You can have your cake and eat it too – just wait a lil’ bit 🙂
As a few others have said, you’re swapping incoming producing assets that will likely appreciate for a non-income producing asset that may not appreciate in value for some time.
Your post indicates a sense of urgency which I don’t think is necessary. The Perth property market is generally stagnant with capital values and rental yields falling or going nowhere. Yes, there’s sales activity, there’s always people who are in a position to capitalise on current market conditions. Don’t get caught up in FOMO. As a Property Valuer, the losses I’ve seen over the last 10 years makes me sick to my stomach.
BUT, you’re goal in the short term is property ownership and I think I read somewhere that you’ve achieve some appreciation in your property portfolio. So, once your fixed term mortgages revert back to variable, I would suggest you sell one of your investment properties to fund the purchase of your PPOR. Increase your disposable income (no rent) + reduce your debt + home ownership = win/win/win.
Whilst you may feel like you backed yourself into a corner by fixing your mortgages, I think it’s a blessing in disguise. Use this time to include a ‘PPOR levy’ in your budget that will pay for renovations on your future home. That way, when you finally buy a house, you can fully realise the $21,000 savings from not paying rent from the get-go.
P.S. Location, location, location. You can change the improvements but you can’t change the location.
Hi Dave, I am probably one of your oldest readers and I have been through the mill several times. I live in Queensland where laws may be different but I have done three property transactions privately without the agents fees. If an agent introduces you to the property, they are entitled to the fees. If you walk in off the street and introduce yourself to the owner they are not. There is a bonus saving immediately. I have also shared the same solicitor with the owner for the settlement. Investment properties have been my worst investments, 8.5% straight off the rental return and due to changing circumstances, I have had to sell in market downturns. I am not a FIRE person, I had 60 years in the full time work force doing a job that I loved and it was like having a well paid hobby. I was fortunate but did not take full advantage of my financial situation. However, looking back,I would not change a thing as the slightest change may have landed me in a different and perhaps unhappy situation.
I bring to mind a couple of quotes of wisdom you may reflect upon:
Occams Razor,purportedly attributed to William of Occam a thirteenth century English friar and philosopher, to the effect,” When there are multiple solutions to a problem choose the simplest one as it is usually the best”.
The other from Jack Bogle Founder of Vanguard Investments: “It’s a long journey,Stay The Course”.
Human beings are emotional, but adaptable, whatever you do, you will adapt to the circumstances.
Good luck,you have inspired many people, you deserve the best.
Hi Dave,
It is a wonder your email inbox hasn’t exploded!!
No advice here other than a thanks for your blog and your multiple replies to my questions over the last year on my journey to just an easier retirement without any money dramas.
There is one option though..
Why dont you go hit up Pat the Shuffler to spot you a loan. ????. He seems a lot better than a bank. Jokes..
You present the logical arguments well as always. I wonder why some people are reacting so strongly to your possible change of focus? Life changes and it also changes us. You have clearly considered the options, now go do what is right for you now.
Given the upheaval that has happened why wouldn’t you both be reacting and reexamining your focus? Maybe it is time for a change. What is the worst that will happen? Buy a house then decide ooops not for me. So then you sell it. In all fairness, big deal. You aren’t going into debt so either way you’ll both be fine.
I say do what addresses the need that has arisen and enjoy.
I love a great debate, even if its an internal one.
This debate is even greater because even after you beautifully articulated your thought processes, the numbers that you have worked through and the emotional machinations that go with homeownership (or renting), you have inspired this wonderful melange of thoughtfulness and support.
FIRE is different for everyone so I am attracted to the comments around not tearing down what you have built, as equally as I am drawn to the comments about one’s situation changing.
I have recently considered selling up and renting, and investing the cash from the sale.
It is a pretty popular move from those of us in the LATE 2 FIRE camp.
In the end, we chose to stick with homeownership, for now.
When I first moved to Sydney over a decade ago, I rented the apartment exactly 2 stores directly above the one I now own. For all intents and purposes, identical apartments (apart from that damn shelf in the new kitchen that was 5 whole millimetres shorter than the one in the old kitchen meaning my old wine glasses no longer fit).
The difference between the two apartments was both psychological and emotional.
In the old one, i was a tenant and in this new one, I was the homeowner.
It was ‘mine’ and the only reason I would have to leave was if I chose to, or if the bank made me cos i couldn’t pay the mortgage, or if the building burned down.
It felt amazing.
You can’t buy that feeling and that sense of security.
To back that up, I saw a doco on the ABC recently, about the growing number of older (40+) people renting. Lots of stories of single mums and pensioners struggling because they rented and were financially depleted by the costs incurred every time they were forced to move. And they could no longer afford to buy, ever.
They also interviewed a family who had sold the family home to invest the money from the sale, and renting a similar property. He was a financial planner so you just know he had a fairly good handle on the numbers. Let me tell you – these people were emotionally crippled, after having been moved on 3 times in as many years. And they too struggled to get back into the housing market.
Here in Sydney, an iconic social housing block in the Rocks was recently sold to developers.
Some of the residents had lived there for their entire adult lives, raising children, becoming grandparents and retiring. It took over a year to get them all out – this was there home and they were distraught at having to leave.
I know that if my own mother had to sell up and leave the house which she has called home for nearly 60 years would be the end of her.
So yeah – I’m an advocate for homeownership. I don’t think you can say you have retired if you don’t own your home, whatever the numbers say.
That being said, timing is everything.
There might be (might) be other ways of transitioning across to homeownership eventually rather than immediately, particularly if you are not taking benefit of the government grants.
Having options is both a blessing and a horrible curse.
Enjoy the process as always.
Lucky you and Mrs SMA have each other and can work it out together.
Best of luck.
Shaun
Yes, agree. I believe that definition of FIRE in Australia should really be ownership of a place of residence debt free PLUS X dollars of investable passive income generating assets. Or equivalent.
Hi Dave
Great article and a lot to think about. There are a few things which when looked at together spell out a possible compromise:
-if you did buy now you would have to increase your income one way or another
-you plan on selling the IPs at some point but can’t stomach it right now
-fire is all about delayed gratification
So, why not increase your income now (part time job, contract work etc) as if you’d bought the property, but put all extra earnings into a HISA. After x amount of thinking time, say 6 months, re-evaluate the situation and see if the extra work is something you could consider longer term and if a property would be worth it. If so, then go for it, and at least you shouldn’t have to sell ALL your shares as you’ll have some cash saved. Also in 6 months it might be more favourable to sell an IP. In addition, it would definitely be worth speaking to a couple of mortgage brokers before you 100% rule out the possibility of a mortgage.
I’m looking forward to the next post and seeing what you end up deciding!
Lots to think about here, Dave – funnily enough, I only just got around to listening to Ep 3 of FIRE & Chill this morning, so this post seems quite ironic! Or possibly serendipitous. And, like others, I’m now wondering if you and Mrs SMA are expecting the pitter patter of tiny SMA feet – congratulations if so! 🙂
I get the urge to take advantage of the current economic situation – low interest rates (the likes of which we may never see again once they start going back up) plus potential government grants. I don’t think you’re being at all cynical when you say the grants are likely to be priced in to properties, though. That’s what I recall happening when the First Home Owner’s Grants started, and subsequent government grants for other things have produced the same results. I have to admit, though, home ownership gives you a very firm footing for financial independence, especially as you get older. (Your money’s still strong, just in a different asset!)
I would say not to get put off the idea of building. It’s not really as much of a hassle as you might think, especially if you go with one of the big, established building companies. I know I commented only recently on another of your posts that they say you have to build three times to get it right, but that quote comes from pre-internet days. These days, there’s a wealth of experience out there that you can draw on to help avoid any potential pitfalls. (Feel free to DM me on Twitter if you want the low-down on my experience.) I think someone commented earlier about using a draughtsperson rather than an architect if you want to design your own place, which sounds like a good option. That said, the big builders can always accommodate modifications to their designs – I made a couple of changes to the standard plan for my house.
Also, although you’re not keen on the idea of going back to work, it may be the more effective option – even if you consider it to be an avenue done purely for the purpose of smashing a mortgage, and you leave once the mortgage is paid. Plenty of younger FIRE folk seem to take this approach, so if you and Mrs SMA can live on her income plus dividends (you guys are already pretty frugal), you could probably pay off a mortgage in a fairly short space of time and still end up fully retired by 40 or so. You have a whole set of new skills now that you can draw on, too. (Check out some of Four Pillar Freedom’s income-generating ideas – there might be something there for you. Optimising websites for income is one of them.)
Anyway, this is just my two cents’ worth. Whatever you and Mrs SMA decide to do, I wish you all the best and will be interested to continue following your blog to see how things pan out. If you do change direction it will certainly give you plenty of blog post fodder. 🙂
What an exciting opportunity to be in to be able to purchase a home with essentially cash.
I have to say it definitely feels like you might be getting a bit caught up in the emotion of home ownership, and and rushing ahead.
while I don’t know the numbers, if you have to liquidate everything and that would only leave you with a property portfolio. While that’s hardly a bad place to be, home paid off and an investment property is basically the Australian dream of baby boomers.
But doesn’t sound very FIRE oriented, to give up your money maker.
But this is your FIRE journey not ours, maybe this is the right call, only you can make the decision.
Worse case you can sell the house and reinvest in shares ( obviously with tax downsides) but it’s not really the end of the world if you choose to buy.
Good luck!
+1
My two bobs worth… As a mid 50’s retiree who owns their own house but is otherwise fully invested in shares (mostly index funds), I think it’s great to own your house. However, maybe just chill for a while. The opportunity of a lifetime comes around once a week. There’s no hurry – especially at your age.
Consider setting some parameters that might guide you to purchase a property at a more opportune time – perhaps when the index reaches a particular level, or when your leases and/or fixed term loans end, giving you additional funding options.
One final consideration is that the “we can do whatever we want” costs can really blow out sometimes.
Give this a re-read https://strongmoneyaustralia.com/rent-vs-buy-aussie-housing-dilemma/
Don’t do it Dave.
I think property is to uncertain at this time, so i reckon just keep doing whats working and come back to this thought down the track…
Seems to me that there is more downside to purchasing
My suggestion, which is one I’ve posted before, is to read Garth Turner’s blog, Greater Fool.
He’s an ex-politician from Canada who’s tried lots of things in his career but has settled on being a financial adviser. He gets presented with conundrums like this daily and his emotionless, ruthlessly funny responses are great for understanding how we can be our own worst enemy sometimes.
He advocates buying a house, in certain circumstances such as when you can afford it and if it meets the Rule of 90. That is, 90 minus your age is the percentage of your net worth you should have allocated to residential real estate.
He says: “The point of this rule is simple. It’s a guideline to not putting too much of your net worth into a single, immoveable, costly, potentially-deflating asset the financing of which will only grow more costly in years to come. At the same time, it’s a reminder you need to be building wealth in the form of liquid, diversified, balanced assets that will inevitably provide you with security and an income stream. Remember the Rule of 90, for example, and you won’t be shoving every dollar you have against the mortgage. The rule is age-specific for a reason. The older you get, the less exposure you should have to a house and the bigger your wad of financial stuff should be. After all, what everyone needs in retirement is income, not a roof. You can rent one of those.”
Some of comments on this thread already are as wiser or even wiser than Garth’s, but he lives and breathes this stuff and if you want to cut through all the emotion that comes with buying a house, read 100 or so of his posts. Or if you don’t, buy the house 🙂
Hi Dave,
Long time listener, first time caller.
Have loved your advice and perspective on financial topics.
I see realestate.com has claimed another victim, that won’t go away but you can draw out the process, keep browsing and go for some inspections to find out what you like and don’t like.
A few comments:
1. The main attractions to property at the moment (aside from the emotional aspects) are low interest rates and government grants, as you’ve said you won’t be using either so those points are void.
2. Your share portfolio is a bit like the golden goose, if you trade it in for something you want in the short term it will be a long road to receiving those golden eggs again. Without knowing the specifics it seems like you will be very income poor without the dividends, meaning it will be hard to start a new portfolio and as you know the snowball moves slowly at the start. Do what you do best and spreadsheet some scenarios to help with decision making.
3. In lieu of a crystal ball it seems like a poor time to sell while markets are down, i’m sure I could go back and dig out multiple quotes of yours on this topic. Also, maybe wait to see what the property market does once the some people are weaned from the teat of the government later in the year.
My advice would be to keep the dividend factory ticking away, divert any future share purchases into a savings account for a home, wait until those fixed term interest periods are over and convert an investment property or 2 into a PPOR to call your own. Buying and selling in the same market will de-risk that strategy also.
It is hard to wait when you decide you want something but delayed gratification is core to the FIRE movement and something you have been a strong exponent of in the past, all the best.
Some sensible advice there!
Holy sheet, there’s a lot of responses here
How about moving into one of your rentals Dave if you are that keen to get into your own home ? You can always rent it out again when you decide to move :o)
Plus if you do sell it you can save on some CGT for the time in there as Owner Occupier (PPoR) who knwos you may even get a better interest rate
Balancing your wealth across multiple asset classes is an optimal strategy for robust long term wealth creation & protection.
Eliminating all your shares to buy a lifestyle asset will make you completely vulnerable to rental income decline as further downward pressure in the Perth property market caused by COVID19 job losses.
If government subsidies end, tenant defaults will escalate and you may be forced to go back to work to make up the lost dividend income and earn enough to service the investment property loans with vacant tenants.
You would be better to sacrifice an investment property to reduce your overall debt level to buy the home rather than losing your passive. Dividend stream.
I am in a similar boat to you in that I saw a “perfect single level living, freshly renovated, 3 Bedroom 2 Bath 2 Garage 322 sqm 20 year old townhouse“ up my street for auction on the Sat 18 July 2020.
What is less perfect is the vendor wants boom time price of A$1.375M, which only a few years earlier last sold for A$1M.
I am facing the dilemma of sacrificing more income producing shares to meet the asking price.
I value not working more than buying my first home and keep saving to buy a higher priced “forever home“ when my shares recover the 16% capital fall since the 21 Feb 2020 market peak so I can pay cash with no debt and preserve my financial freedom from achieving FIRE 14 years ago.
Wow – that’s a lot of comments!
I know I’m only new around these parts, and we own our house and have just begun our share portfolio with a view to earning passive income over time so we can reduce our work commitments, so I feel like we’ve done things in reverse to you, but I can definitely understand both sides you’ve presented here.
1) There is definitely security and comfort in owning your own place. I have rented for about 10 years, and twice was ‘moved on’ when the owners sold within 18 months of me moving in. The stress of trying to find a suitable, affordable place in just a few weeks was awful (not to mention the $ cost of moving house, packing, unpacking, changing addresses etc). Buying my own place removed that hassle and constant fear every time I got a call or letter from the letting agent – is this just for an inspection, or a rent increase, or are they selling on me again? There is also freedom in owning your own place, to decorate or garden as you wish, to make it your own, to make it truly home. It’s a great feeling!
2) There is also security and freedom in having a large diversified share portfolio, returning significant income to you each year without you needing to do anything. It’s just a different type of security and a different type of freedom. Remember how much you enjoy dividend season, and putting your half yearly reports together showing how your portfolio and returns are growing – that is also a great feeling!
3) Part of me wishes I had learnt more about the share market at a younger age, and the power of compounding over 20-50 years. It gets SO much more powerful as time goes on. I’m very new to the FI concept and I have been scared (uninformed, uneducated) about the share market in the past – to the point where I had ~200k sitting in HISAs and term deposits (back when you could get 4-5% returns though). I kind of regret not putting some of that into the share market back then (10-15 years ago) because of how much closer to FI we would be now, but I also kind of don’t regret it as it gave us the opportunities to purchase the houses we did comfortably.
4) If you & Mrs SMA have your hearts set on buying a PPOR, the #1 BEST piece of advice I can give is to talk to either a mortage broker or one of your existing lenders about whether you could port your existing mortgage from an IP to a PPOR. Find out if it is a workable option on any of your existing mortgages (preferably BEFORE you find your dream house, so you know whether you can ‘safely’ start looking or not before getting too emotionally invested in “the one”). Some mortgages don’t include a security substitution option, while others do. While it would mean selling an IP at maybe a less than opportune time, you generally don’t need to prove your income to do a security substitution on a mortgage. We did a security substitution on our mortgage when we bought our “forever” home (we sold a PPOR to buy a new PPOR). Like you, we had no hope of getting a new loan or extra borrowings based on our income at the time – hubby was on a relatively low income, I was on no income at the time (and we had 2 dependents), but we were able to just move the mortgage from one property to the other. No income/expenses questions asked. It is a little trickier as you have to align the settlement of both properties to occur on the same day but it can definitely be done. Find yourself a good selling agent who understands your situation re: the mortgage substitution and who is prepared to work with you or even negotiate with agent you buy through for extended settlements etc so the dates can align. Both agents need to understand that the transaction CANNOT proceed if the settlement dates do not align, and then work to make it happen.
5) I’ve read you’ve always intended to buy your own place eventually, but I’m not sure exactly what’s behind the desire to do it right now. How were you intending to pay for your PPOR in the end? Selling shares, or selling IP?
6) If it was me, I don’t think I’d be selling the entirety of a $400k share portfolio to fund a house purchase, even though I completely understand the emotional feeling of owning your own place and the feeling of security it brings (and keeping Mrs SMA happy is also important). Several commenters above have good suggestions for trying to find another way to buy the PPOR if that’s what you decide to do, even if it involves selling part (less than half?) of the portfolio. I don’t know how many years you’ve been working at setting up this portfolio, but I feel like it would be really hard for you to start again from $0, especially as it takes a few years for the compounding effect to start building and being noticeable.
7) Something to think about : is yours and Mrs SMAs combined “dissatisfaction” with renting in terms of lack of freedom to garden and decorate worth decimating your $400k share portfolio for? Is the increase in lifestyle/satisfaction/happiness you believe you will feel after buying your own place worth sacrificing the entirety of your $400k investment in a long term passive income stream? If it’s not, then I would be looking at other options or waiting until I was in a better position.
8) The other side of the same coin is you can’t take your money with you. Money in a bank account, or on a piece of paper doesn’t and can’t make you happy in the long term. It can give security and freedom, but not actual happiness. It’s made round to go round 😉 Spend your money on things you believe will truly make you happier. Just don’t spend it all – you still need enough income (whether that’s a regular pay packet or passive income) to live.
Sorry that was so long. I hope it gives you food for thought and some ideas. I hope you actually read it! Especially #4. I’m sure you’ll make the best decision you can for Mrs SMA and yourself with the information you have available. You won’t lose this reader, regardless of the decision you make.
G’Day Dave. As many have already observed nothing else brings out the posts in Aussie finance more than property. There has been much good advice given above and my thoughts would simply just be drowned out.
Some have already said that it’s your choice and yours alone. Buying a home is an emotional decision, not necessarily financial.
Good luck with your decision and if there is only one thing I could say, it would be, “You can have anything you want, but you can’t have everything you want”.
Hi Dave!
Just my two cents worth….
We owned our own home/s in Melbourne for 27 years, before selling everything to travel in our caravan around Oz (as you know).
We have talked about buying another house (perhaps in the country, so cheaper), but I’m very hesitant to sell our shares to do that!! Particularly since they are worth less now.
My freedom means much more to me, and like you, I absolutely do not want to go back to work again!
Currently we’re living in our caravan at my parent’s place on five acres, but we’d like more living space…. I’m leaning towards renting or long-term house sitting before buying anything.
Do not ignore the costs of maintenance and all the extra time needed when you own your own place. There is always something that needs fixing or replacing.
Good luck, whatever you end up doing! Might see you again one day. 🙂
Love your blog Dave, will be a reader no matter what direction you choose!
Honestly, seems a bit silly. What’s the rush to buy a house *now*? Why not just wait till a more opportune time to sell your investment property and then buy a residential house after that? Liquidating the share portfolio to buy a home is just counterproductive, especially right now.
Wow that`s a lot of comments.
@Dave tough decision. I am a rent investor too. As a couple is very important to have a common vision, what are your priorities, what`s your vision, what you want to do with your life. There is no right or wrong, it is just about happiness and life and trust me happiness will not come from money, FIRE, investments and so on. So many unhappy rich people around us. You are skilled enough to understand what makes more sense financially, you also have a partner on your side to share this beautiful journey called “life”.
Gday Dave,
I commend you for your ability to question your way of doing things. You went from doing real estate, to old LIC’s then back to real estate. That flexibility of mind with a firm focus on the end goal (after all, you are financially independent in your early 30’s) is truly rare and i believe explains your success on the FI journey.
I have no out of the box perfect answer to your question as you have probably more time than myself to do in depth study of the pro’s and con’s you listed so i will solely focus on broadening your thinking with more questions:
1) Is the end goal a fetish version of FI or your own happiness, a meaningful life? I listened to a very smart independent consultant who ridiculed the notion of early retirement for the sake of it, as opposed to finding your calling in life and do something meaningful out of his time.
The guy achieved some financial independence and travelled for a year, but did not find any meaning to it. He got into the Italian jet set meeting the best choice of women and entertainment you can imagine but did not find meaning in it either. He then created his own job, working insanely hard at it but finding all the meaning and happiness in that.
2) About life, i personally think in growth assets and insurance assets. It works for a portfolio too.
Growth (owning stocks,training for performance, bitcoin, being a business owner, leaving your country to start a new life, having kids, reading good books and learning)
It brings no certainty and can make you lose everything but at the same time is the only way to become really rich emotionally and financially.
Insurance (having lotta assets,training to be healthy, investing in bonds, gold or real estate, having a property in the country with a farm that brings energy and food independence, working on a paycheck, having a diploma)
It allows you to prepare for an uncertain future and be able to take a few hits. Insurance matters, i left my job in Feb and having assets allowed me to be relaxed about my finances. It was also the best way to turn my wife into a more frugal person as she finally understood how much my saving had saved our household from dire consequences ( i was not eligible for job keeper and her little salary barely covered our Sydney rent). I was not desperate and could therefore negotiate a decent hourly rate on my current contracting job.
Being happy in life is to find a good balance between growth and insurance. And remembering that nothing is certain. Does it bring an additional perspective to your decision?
If you want to be truly successful, keep Mrs SMA happy.
Happy wife, happy life.
Hi Dave,
Long time follower, first time commenter. I like the fact as a lot of others have stated that you have gone back to the well to question real estate again as an option. I do however believe that you might be “selling the farm” to satisfy this urge.
I have heavily invested in real eatate my whole working life and it has been relatively kind to me. I had only recently stumbled onto the FIRE mentality and I have to say, loved it. Many times over my RE journey I had questioned the constant payouts for rates, maintenance and fees for agents etc. After reading your blog and others who have a similar philosophy I questioned the whole game and in particular, negative gearing. More on that another time perhaps. I have loved reading about your journey and others who have gone the FIRE path and the fact there could be an end date for working that didn’t start with a six.
I say don’t rule out building a house as it can be significantly cheaper if you also add in stamp duty savings. Depending on how long you plan on owning said property for, you can also consider the owner builder scenario. Likely to save another 20% possibly on building costs. Now, some would argue its too hard without experience, but thats the same argument for those that say you can’t possibly retire in your 30’s with an income of 40k PA..? I believe with some sound advice and the right location, you could buy and build at 20% below market, do lots of the bits yourself like painting and landscaping. Quite possible to have equity of 80-100k after build plus add on some of the other sweetners from government and you can see where this is going.
Is it worth selling all of your portfolio to do it? Well, thats the big question and I think in your initial spiel you sounded unconvinced? All I am saying is that with GOOD advice, you could have both but I’m not sure that its in your best interest to sell up now with the current market. As they say, “there is always another house”
My suggestion is go away, do the numbers on building ideally as an owner builder, find and get some sound advice from someone who has built and the pitfalls, wait until the shares come back a little, then reconsider. Interest rates are not going up any time soon and shares seems a better option for returns in the immediate future? Best of luck with your decision
Hi Dave,
I really enjoy your blog. Selling all your shares and buying a house? A tricky one. I wonder if COVID has made a lot of people think about exerting some control over their lives where they can. In that regard, owning your own home gives you greater control over your surroundings and a sense of security. Shares are great, but they can be a rocky road – and I think the worst is yet to come for shares over the next few years. That said, I left my crystal ball at home! One option would be to sell the shares, buy a house and then use the proceeds of selling your rental Properties to get back into the share market. Just do what your gut says. However, “if in doubt, do nowt “, often works. Best of luck.
Build, buy, keep or sell. Whichever you chose.
But…..as one who has never had an IP and has no intention of ever doing so.
Flick the IP’s, extinguish debt, view any payout costs or loss as a sunk cost and the price of doing business then get on with it.
An investing life without debt. Dwell on the positives of that (an awful pun but it’ll do) – no one will come knocking on your door demanding their money. Plus not having to deal or concern yourselves with tenants.
Bliss on a stick. 🙂
I think you should not buy the house. If you think buying is cheaper than renting then simply live in one of your investment properties when the lease ends. You can do the garden and do renovations in that property. Keeping the shares means you are not all in property, and you need to think about how you’re going to unwind everything to retire. Shares are easy, quick and cheap to unwind for retirement. You can spread out capital gains tax liabilities. Unwinding property means being hit with real estate agent commissions when you sell, and because you’re selling so much at once you’re concentrating CGT liability into one year rather than having the ability sell off in smaller chunks.
I live in WA and we took advantage of the Shared Home Ownership scheme, which may be compatible with the other offers:
http://www.housing.wa.gov.au/sharedstart/Pages/default.aspx
We purchased a new house worth $400k with the government owning 10% ($40k). We only pay interest on the remaining $360k. And as a bonus we don’t have to pay for Mortgage Lenders Insurance. We can pay down the governments $40k at our leisure; but there’s no obligation to unless we want to sell or refinance.
The major downside of this arrangement is our interest rate is higher than the competition (currently 4.54%).
So many comment. Wanted to add one of my own.
Great article. Cheers