July 4, 2020
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 🙂