So, About Last Week’s Post…

Holy moly! 

As you know, last week I wrote about the idea of selling our shares to buy a house with cash.  At the end, I asked you all to chime in and let me know your thoughts on that strategy.

Well, the response was overwhelming!  The comments section lit up like a bloody Christmas tree!

Some of you thought the idea was perfectly sensible.  Others thought it was utterly insane.  There was some great discussion, with interesting points on both sides.

And that was the point of the post really.  To share the thoughts I’ve been having and open up the conversation to see what others think.

 

Over 150 comments in less than a week!

I’ve never received this many comments so quickly on a post, ever!  But most interesting of all was the huge divergence in views and how strongly some people felt about this issue.

Funny side note:  I could barely keep up with reading the comments because they just kept coming and we were busy cleaning our house for a rent inspection… how ironic!

Anyway, I really appreciate all the thoughtful responses.  It’s great to have such a helpful community here 🙂

We had some awesome ideas thrown around.  Even some innovative ones like suggesting I should crowdfund the purchase by getting readers to chip in, or ask my podcast partner Pat the Shuffler for a loan.  Hahaha!

Some commenters were clearly new to our situation or how the numbers work, while others just plain didn’t read the post properly.

I am genuinely shocked at the number of responses.  But then again, we are talking about Aussie property, so things got passionate. 

It was even suggested that you can’t be considered financially independent at all UNLESS you have a paid-off house.  I get the thinking behind it in terms of security etc., but this statement is of course, nonsense.  We’ve already discussed that you don’t need to own a house to retire early.

There were clearly emotional reactions accusing us (ironically) of making an emotional decision, when we’ve done… absolutely nothing different at this stage.  It’s just an idea.  Relax 😉

My views on housing and property ownership seem to have been misconstrued.  So, today I want to clarify some of these points.  We’ll also clear up some incorrect conclusions that were drawn from the idea.

 

I’ve never been against home ownership

From the very start of this blog, my message has been consistent. 

In most places, renting is generally cheaper than owning, once all costs are included.  That hasn’t changed (although with mortgage rates now at 2%-odd you can rightly argue otherwise).

So, for most people looking at the numbers, renting has been the way to maximise your savings rate and therefore retire earlier. 

This has been twisted into “SMA says to always rent and invest instead.”  But actually, here’s a quote from one of my first posts on housing: 

My preferred housing strategy is, pick a low-cost house to buy, or rent until you’re rich.”  Rent vs Buy – The Aussie Housing Dilemma

Clearly, the level of spending is what I’m most concerned with.  Not whether you buy or rent! 

I couldn’t care less which you choose.  You can rent a flash house and still blow all your money, just like you can own a modest house and save a ton of money.

Later, once you’ve established yourself financially and got some freedom in your life, you can then do whatever the hell you like.  Because your choice to buy in a certain location will no longer be something that forces you to work X hours per week to keep paying the mortgage.

So, if we did buy a house, this doesn’t go against my previous stance on home ownership at all.  I also did an in-depth podcast on the topic recently:  “How to Deal with the Cost of Housing in Australia.”

If you listen, you’ll hear the same balanced views, where my focus is on the effect this choice has on your life – not which damn side of this religious debate you pick.

 

We don’t suddenly hate renting

Some folks suggested we move into an investment property to get the benefits of home ownership.  But this idea wasn’t sparked because we now hate renting.

The idea has really come about because we’ve now rented in this particular location for about 3 years and love it.  So we’ve finally decided that this is the area we’d like to stay in for a long time.

So, it’s not a case of wanting to own for the sake of avoiding being a renter.  If it was, of course we could move into one of our investment properties.  But renting has actually been quite a good experience overall.  

As a side point, it also wouldn’t be feasible as we own townhouses and villas, whereas we’d be looking to have a decent sized garden and yard.

 

“But you’re always talking up shares and talking down property”

Okay this wasn’t a comment, but I got the strong vibe that this house-buying idea confused the shit out of people.

To be clear, I do suggest that for good savers an income-producing share portfolio is a more reliable and simpler way to reach FI in 10 years or so, compared to investing in property. 

My stance on that hasn’t changed either.  Instead, the key difference here is…

THIS WOULD NOT BE AN INVESTMENT PURCHASE!

It is not a “vote” for property investing and I am not “going back” to real estate as an investment choice.  

Instead, my asset allocation would change in an unfavourable way (which is exactly how I framed it) because of a home purchase, which by definition, is a lifestyle choice!

We would continue to work towards a 100% share portfolio and any investible money would go to buy shares.  I simply can’t make that any clearer.

Over the long term, we’d end up with the same result: a share portfolio and likely living in a paid-off house (as above).  The only thing that is different is the order of those things. 

It would be a case of bringing that home purchase date forward, much like we’ve decided to do with buying international shares sooner than expected.  Basically the same long term result, different sequence of events.

My position on investing in property has not changed.  As mentioned here several times, starting again I wouldn’t use real estate as an investment.

 

“FIRE is ruined, back to work you go!”

Um, what?  Do you really think I would buy a house if it meant I’d have to go back to work full-time and our freedom disappeared?  Come on.

I have an almost irrational love of freedom for its own sake, so the idea that I’d voluntarily give that up to go back to the drudgery of a mandatory full-time job just so I can own the walls around me is absurd.

Things would continue on as before.  We would sell properties over time to buy shares.  It’s just that we’d have a bunch of cash tied up in home ownership first, rather than in shares.  When you net those things out, only the order of things has changed. 

Obviously, we could debate the numbers, but the cashflow outcome is not dramatically different.   If that’s confusing, I’m sorry, but you suck at maths.  The numbers were explained in the post.

Remember, the amount needed in shares would then be about half as much, due to not having to pay rent.

 

“But, but, this is so different to what you said before!!!!”

Is it though?  This argument is starting to look a little shaky.  Let’s take a look.

I didn’t have to search hard to find the following sentences sprinkled around this blog in various places:

“…we will figure out exactly where we want to live long term and most likely buy a house.”  Rent vs Buy: The Aussie Housing Dilemma

“Despite enjoying renting, we’ll almost certainly buy a place later, if we’re happy committing to the location.”  Do You Need to Own A House to Retire Early?

“If I was just starting out, I’d probably buy a place at current ultra-low interest rates.  But only if it was clear we’d like to stay there for ten years.”  Paying Off Your Mortgage vs Investing

“It’s still a matter of preference and everyone’s situation is different. But depending on your location, renting may no longer allow a higher savings rate compared to owning.”  Paying Off Your Mortgage vs Investing

Hmm, doesn’t seem like I’m such a fanatical renter after all.  I can see both sides of this debate and frankly would be happy either way.  

Clearly, I’ve made no commitment to renting forever.  I’ve simply defended the idea of doing so, and debunked the myth that you can’t be FI as a renter in Australia (see above link).

Maybe some people are just getting a little emotional because it seemed like I was on their ‘side’ and have taken something I’ve said to an extreme conclusion.

 

“You’re just experiencing FOMO”

Perhaps.  But I don’t think so.

I mentioned in the last post that Perth property seems to be picking up as of late.  So am I worried prices are going to take off and I won’t be able to afford a particular house in the future?

Well, that would be an odd thing to worry about, because we’d get 4 times the benefit of price rises in Perth, given what we already own.

 

“You can’t blog about investing anymore”

Really?  That’s a bit unfair.  But I probably will anyway 😉

Again, if we did buy a place, we would still be investing every month to build up our share portfolio again. 

Or are we not allowed to do that?  Are we banned from the share investors club?

 

“FIRE and home ownership are not compatible”

Somehow, my last post is proof that you can’t retire early AND own your own house.  Like the two things operate like some bizarre reverse magnet!

This is also nonsense.  You can own a property and still retire early.  Depending on your property choice, it may just take a bit longer.  See the important part of that sentence?

It’s a big stretch to say FIRE is not possible when you want to own a house (post on this coming soon!).  That’s the same whiny argument as, “life is expensive these days, especially in Australia, so FIRE doesn’t work here.”

For some people, in some locations, with certain expectations and tastes, buying a house and retiring early will absolutely NOT be possible for them.  I totally agree.  But for many, it is still achievable.

 

So what are we going to do?

Just so you know we had been thinking about this in the background for a little while.  I didn’t just dream it up on the Thursday and pump out a blog post ready for Saturday!

After mulling it over for another week, thinking about our situation and the most feasible options available, we’ve decided to leave things as they are

But rather than wait until all properties are sold before we look to buy our own place (as per initial plan with rough estimate of 10 years), we may try something else…

We’ll keep adding to our shares over time exactly as planned.  These will remain untouched. 

A few years down the track when the numbers line up, we may look to sell a Perth property where we can do a security substitution.  (Thanks to a few astute readers who pointed this out.  I’d heard of it before, but not really looked into it.)

A security substitution is where you sell a property, and the bank keeps the loan proceeds in a term deposit, while also keeping the loan facility open. 

When you find a new property, typically of a similar value where you can keep the loan balance the same (the loan must stay the same to avoid a fresh credit assessment), the bank will release the proceeds to fund the house purchase and take the new property as security for the mortgage. 

It’s not the simplest option and right now it wouldn’t really suit us (high LVR loans, fixed rates, need to reduce loan balance to fit the property we’d buy).  Besides being a headache, currently that would still require us to still tip in a bunch of cash which we’re not willing to do.

But this does seem like a suitable option for us down the track, when our LVR and loan balances have fallen, we’re no longer on fixed rates, and our properties have risen (if we need extra cash).  Definitely something to research further.

 

Final thoughts

Again, thanks very much for all your support, ideas and helpful comments.  Strong Money readers sure are a thoughtful bunch!

I hope this post clears up any confusion about my supposed wild change in stance on home ownership, investment property etc.  And after all the drama, things will be staying the same around here after all.  

But it’s good to have found a workable option which we can utilise in the future without touching our shares!

Mrs SMA is pleased with this plan too given the shorter time-frame involved.  And best of all, we won’t be disturbing our existing passive income stream.  Speaking of which, it’s about time for a portfolio update. 

I’ll get cracking on that now… have a great weekend 🙂


P.S.  And no, there is no “pitter-patter” on the way.  We’re more than happy with our dog which keeps us on our toes…

24 comments

  1. I honestly can’t believe people think home ownership and FIRE aren’t compatible. At the end of the day as long as the decision doesn’t provide excessive stress, it’s the right decision for you. It’s also always fun to browse realestate.com and ponder what ifs, let’s be honest, we all do it 😉

  2. Hi Dave,
    I say good on you mate. You have been very generous with all your info. If you want to change your thoughts or plans then that is up to you.
    You have helped guide my wife and I to seriously look at making a sea-change. We are looking at doing this end of this year. I am also looking at selling one of our under-performing IP’s and putting proceeds into shares.

  3. There will always be people who read this blog and think they can retire without a house and with a small amount of capital invested, giving them a minimal income. But really, that’s not living. I don’t know how much you are worth but if you don’t own a home and are still living on $45k a year, quite frankly I don’t think you are ready to retire. It sounds like you are scrimping and saving to make this work, not something I aspire to. I want to enjoy my retirement, not have to watch where every cent is going. I apologise if I have missed something (I haven’t read everything), but it seems to me you are just getting by and going without to make this work. Even suggesting selling your entire portfolio to buy a home speaks volumes about how unready you really are to abandon paid employment. Sorry, but that is my opinion. I hope I’m wrong and it works for you.

    1. Hi Sam,

      Dave is a DINK ( Dual Income No Kids) without any mortgage & education expenses to cover. His cost of living in the west is a lot less than us Easterners. So A$45K is plenty for a middle class couple spending on food and domestic travel.

      He already said rent of $20K is the biggest spend of that $45K annual living expenses.

      Generational low mortgage rates and comparatively affordable Perth house prices means his buy vs rent equation will balance out much better than in Melbourne or Sydney were he to divert his rental payments into a home mortgage loan with eventual full ownership as a benefit.

      I think the only flaw to his plan was selling good shares and keeping bad investment properties to do so.

      His intent now to wait until his rental properties can be sold at break even is a much better idea.

      It is similar to my current strategy of selling down any over valued shares in my SMSF portfolio to build up cash in anticipation of moving to 50:50 share/property split.

      I am currently sitting at 55:45 Shares/Cash and hope that my cash component will eventually exceed the net cost of buying my forever house.

  4. If you need to travel to the city, why not buy outer suburbs close to trains. That’s what we did almost 20 years ago, slowly renovated. Still not the home of our dreams but I can’t afford Toorak!!!!

    1. Dave, please think about Mandurah! 🙂 Property prices are depressed here, you’d probably pay $100,000 less than in the city at the moment, have more choice and get a larger block. We have the beach, the river (with dolphins) and estuary, TAFE, Uni campus, community garden, hospital, train to Perth on the Joondalup line, you can ride nearly everywhere. I moved here 5 years ago and love it. We’d be happy to give you a tour.

  5. Hi Sam,
    I am I am in different position to some here as I do own my own home, have a number of investment properties and a decent share portfolio. I think the point Dave and others are making is you need to work out what is important to you and work a way around that to take advantage of this. For example if spending my time reading a book is most important to me, I should try to be in a position to be able to do this as soon as possible. If your needs are simple ones then you ability to retire may be some what easier. However if you like the more expensive things in life and value them you may have to work longer to be able to achieve this. Everyone will have a different idea of what is really important, this just shows there is another way.

    1. Exactly. Well said 🙂

      Thinking that a good life can only come from some arbitrary level of spending each year is ridiculous. It certainly lacks imagination, and an awareness of our already fortunate place in the world (and history) and usually comes from ppl still wedded to the consumption = happiness misnomer.

  6. SO glad our comments were helpful. Especially the security substitution! Yay! I’ve been hanging for this update to see how you would react to ALL those comments.

  7. Sounds like you’ve given it a lot of thought and have it sorted. Of course things change and our ideas and plans are not set in stone.
    The great thing about blogs like yours is that we can all still learn from each other.

  8. I found most shocking, NOT your intent to buy a lifestyle asset, but your intention to liquidate the entirety of your best performing share portfolio while continuing to holding on to your worst performing Australian townhouses to satisfy a “Want” rather than a “Need”!

    Having achieved FIRE, I am concerned that I may also succumb to the FOMO temptation to “BUY NOW” my “Forever townhouse” at the Sat 18th July 2020 online Auction.

    I put at risk my hard won financial freedom by sacrificing current income/asset “need” for a lifestyle “want“ and increasing the risk of being forced to wear again “wage slave shackles” to pay for my folly.

    If I keep compounding my SMSF, I expect in retirement to be able to withdraw the excess cash over the A$1.6M tax free limit to buy my “Forever House” in my expensive Inner Eastern Melbourne suburb.

    1. One further comment is the nature of Dave’s heavy exposure to investment properties means there is a significant debt component that underpins the positively geared passive rental income that funds his FIRE lifestyle.

      As a self funded retiree, he would not meet the current stringent assessment criteria that would allow the banks to increase his overall debt position to fund a lifestyle asset in a location of his choosing.

      Had is investment portfolio been built using ETFs, he could easily liquidate part of his assets without the property/debt constraints.

      So the simplest path to home ownership was to sell his entire share portfolio rather than try to untie the Gordian knot of property debt covenants underpinning his passive income.

      The side effect would be to bind his future lifestyle even closer to the attitude of his bank lenders on his ability to service his loans.

  9. Hi Dave,
    You are the best !
    You are like some sort of genius savant in your understanding and writing on finance at your age.
    I think it is great to think things like this over.
    It is always good to pick the best option at the time for YOU. Who knows what will happen in the future, my crystal ball is a bit cloudy at the moment!
    Figure out if you are definitely short a house in this city. If you are, I would seriously consider covering it. From my experience (which was bad, maybe others have better experience), I am never going to be short a house ever again.
     
    I was short a house and a housing boom whipped my ass thoroughly. Admittedly, I live in Sydney and the last boom was more insane than I thought imaginable. I had a chance to buy the house my wife wanted in 2010, but was stingy and wouldn’t move my offer by 10k and I let it fall through.

    Doh! I tried to forget about buying a house for a few years and then my wife communicated that she really wanted/had to have a house. Maybe she communicated this, but I didn’t want to listen for a while. Eventually, her need to live in a house we owned became a bigger deal. We bought a comparable house for about twice as much in 2016 as the one I let go in 2010. This was a hard thing to do, but it was either that or probably our relationship would have really suffered. Sometimes you gotta take one for the team if your partner really wants a house !

    Being short 1 house during a housing boom can screw you up your plans and expectations. I guess you could also find that if you sell the shares, they could double in the next 5 years, and doh ! Murphy’s law…Whatever you do, be able to cope with the various scenarios.

    Also, factor into account the capital gains free nature of the PPOR in Australia.

    I am all for shares and I own a lot in my super (VAS), but I also see the benefit of having a house to live in. Particularly, if my partner is dead set on a house, if I was short one, I would want to cover that as soon as I could afford it. Perth actually might be due for a boom at some stage one would tend to think.

    Sydney house price valuations stink and buying that during the peak in 2016 was like eating a turd sandwich, but I did it and survived… Buying a house now in Perth, that would be like eating a normal burger or even a steak sandwich !

  10. Actually, thinking about it more, the problem in your case is not as bad as mine.
    I think where I made a bad mistake was engaging in market timing the PPOR purchase. I had the cash for a deposit and borrowing capacity, but didn’t buy when I could (due to … valuation…which got worse).
    Still, if Perth property booms, you could find yourself in the hole Vs buying now, if shares do not increase by the same amount (after taxes-CGT and income tax).

    But yeah, I don’t think the decision is as clear as : shares always win (as they may not).

  11. Hi Dave,

    Long time reader, first time commenter. Thanks for the quality content as always. Aussie property sure does bring out a lot of emotion in us Aussies.

    My fiancé and I recently bought a house after a fair few years of saving diligently and putting some towards shares and most to the deposit.

    Now we have bought a house, our mortgage repayments are FAR less than what we were saving every fortnight so now we are getting ahead on the loan and putting MORE money towards shares whilst saving the same amount.

    Buying a house was an emotional decision and the emotional benefit so far has been huge ; planting veggies and planning renovations.

    Statistically the value of our home has probably gone down since settlement in April 2020 but we don’t care as we don’t plan on selling for decades.

    FIRE is our ultimate goal but the manner in which we are to get there was always going to include home ownership and then building our share portfolio. That is going to make our journey (probably longer but) more enjoyable.

    There’s more than one way to skin a cat.

    Keep doing your thing SMA.

    Joe

    1. We followed a similar path, Joe. Aggressively focused on paying off our mortgage which we extinguished about four years ago and since then have been solidly building a share portfolio in index funds. It will take us a bit longer to reach FIRE perhaps than others but for us, having the peace of mind that our house is fully paid off and 100% ours is priceless, especially in times like these.

  12. Brilliant article! Really spoke to us as we are in the same position as you guys with having rentals, but renting our family home whilst investing every cent possible. Keep it coming mate!!!

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