August 1, 2022
Imagine you just bought yourself a home to live in for the foreseeable future.
It’s in the spot you want, and you can turn this house into a really liveable and comfortable headquarters for you and your family.
Better yet, let’s imagine you were somehow able to buy this home with cash! No mortgage or debt of any kind. You didn’t kill anyone for it. You get to keep all your organs. And you don’t owe Fat Tony a questionable favour at some unexpected point in the future.
Just you and this debt-free home. Who in their right mind would alter such a sweet scenario?
Well, we did! And in this post I’ll explain why. What we’ve done is unusual, but it’s not as silly as it might seem at first.
Earlier this year, I discussed how we managed to buy a home despite not having proper jobs anymore. You can go back and read the full story here, but the short version of our plan was:
Step 1: Buy a house with cash, by selling shares and using our large cash buffer.
Step 2: Sell an investment property (IP) which we were going to do anyway.
Step 3: Upon settlement of IP, transfer the existing loan to the home we had just purchased with cash (this is called ‘security substitution’ or ‘porting a loan’).
Step 4: We receive the sales proceeds from the IP (after costs and some loan adjustments).
Step 5: Reinvest this lump sum back into shares, and top up our bank account.
Step 6: Continue monthly investing into shares and slowly selling down our IPs as per our plan.
Thankfully, we’re now on the other side after moving through all the steps! So I’m now fleshing out some of the details on what this means for our situation and why we’re doing this versus sticking with a debt-free home.
As you might guess, we could have stopped at Step 1 and kept a paid-off home. Then, with the proceeds of our IP sale, invest this money into shares, top up our cash, etc.
So why did we bother with the rest of these steps? Two big reasons.
Reason 1: By keeping the loan facility open, and transferring it across to our home, we get to keep almost the entire proceeds from the sale of our investment property. That’s a shitload of money, to reinvest into shares and maintain access to and control over that we otherwise wouldn’t.
Reason 2: Before reinvesting this huge chunk of cash, we’re able to pay down the loan facility to zero, then pull the money back out to invest it. The outcome of that is the loan becomes tax-deductible because it was used for investment purposes.
Basically, we’re choosing to have a larger share portfolio and keep the debt, compared to the opposite. The idea being we will earn a higher long term return from our investments than the interest we pay. It’s the classic decision of whether you should pay off your mortgage or invest.
Obviously, with interest rates rising, that calculation has changed a bit. But shares are also cheaper which balances that out to some extent. It’s still my view that, on average and over time, the after-tax return from shares is likely to comfortably exceed mortgage interest rates.
Without going into things, I was hesitant to do so because it would’ve been rather messy with our previous accounts. So, the best solution was to simplify our investing accounts by moving to a single joint account (to match our joint home loan). This meant offloading the rest of our shares, but thanks to the market downturn, there was no capital gains tax.
In practice though, this means we had a very large pile of cash to invest/reinvest after the above process. Funds from the property sale, plus our liquidated share accounts.
Regular readers will know I like to invest our cash steadily over time. So did we really invest such a big lump in one hit?
Well, yes, but not really. Due to our bank we were only able to transfer $50k per day, so it still took a few weeks. That’s a lot less scary than doing it all at once, but it’s still a speedy way to deploy cash!
To be honest, it wasn’t nerve-racking at all. And while that makes no sense on teh surface, I think that’s due to two main reasons…
Lump sum investing stomach-calming reason #1: A lot of it was reinvesting money we had only just taken out. Our portfolio now is about 30% bigger than pre-house-purchase at the beginning of this year.
Lump sum investing stomach-calming reason #2: The market was down 10-20%, so we were investing and increasing our portfolio at much cheaper prices (and yes, I’m very grateful bout that!)
In addition to this, I’m also approaching our ongoing cashflow slightly differently to before.
Did I take the opportunity to change anything with my portfolio?
Actually, no. I basically replaced everything the way it was before, only bigger. But there is a different type of change that’s worth mentioning.
Regular readers might recall how our cash situation works. I detailed it in this article, but until now here’s how we’ve been operating:
Sell an investment property. Invest from this cash pile each month to grow our share portfolio, while covering other property expenses and our living costs depending on investment income and part-time work.
After a few years, sell the next IP and repeat the process, until we’re 100% invested in shares.
So what’s the change? Well, after this latest property sale and lump sum investment, we’ve moved to being fully invested.
Why? Well, our portfolio income and part-time is more than enough to cover our expenses, the remaining property outflows and have some cash leftover to invest each month.
Our part time income (mostly Mrs SMA, to be fair!), doesn’t seem to be disappearing, which is obviously very useful and hugely reduces the need for any sort of cash buffer as a backup.
If we decide to stop earning any sort of personal income whatsoever, we can just live off our investment income, and sell our remaining properties to get more cash while also removing a possible headache and risk.
Having less properties and more shares has reduced our outgoings and greatly improved our cashflow, which is fantastic and is the main reason behind this move. ‘
Our cash now is about 1% of our net worth, which feels good after it being elevated for so long. There are now three properties left, which we will probably offload in something like two-year intervals.
The outcome of all this is:
We have a beefed up share portfolio that roughly covers our personal expenses. We now have a tax-deductible home loan. And we’re almost fully-invested and have very little cash.
It took a bit of fluffing around to get here, but the end result has been worth it. Having said that, I’m sure we would’ve also been happy with a paid-off home and a smaller portfolio.
Well, I hope that all made sense! Let me know if you would like me to elaborate or clarify anything and I’ll do my best.
To be clear, our house is still being paid off over time. We could decide to pay if off early with future property sales. Or we may even increase the loan later to invest even more.
Both options are attractive, so we’ll see what’s happening at the time and which option feels like the right move. And that’s probably the greatest part of all… having options.
What are your own mortgage plans? Destroy it as fast as possible? Cruise along with regular repayments? Use leverage to invest further? Let me know in the comments.