Our Investing Strategy Explained

by Aussie Firebug | Jun 29, 2018 | Classics, Financial Independence, Investing, Mindset

If you follow any online FIRE blogger whether it be an Aussie or international, you might start to see a pattern that emerges more often than not.

The majority of these early retirees are living off an income stream generated by returns from Index Investing.

In this post, I’m going to go into detail about how I first started investing for financial independence and how my strategy evolved over the years.

In the Beginning

I first came across the term and concept of financial independence in a book called ‘Rich Dad Poor Dad’ by Robert Kiyosaki. It really struck a chord with me because it was so simple. You buy assets that make you money and eventually you will get to a point where you have so many assets that make so much money that you don’t have to work to live.

Mind = blown.

Now I was already pretty good at the saving and frugal part. But I had never invested in anything outside of a savings account. This leads me to pick up my next book in my quest towards FIRE, ‘From 0 To 130 Properties In 3.5 Years’ By Steve McKnight. Because if you live in Australia the most popular investing class by a country mile is without a doubt, Real Estate.

It makes sense too, most of our parents have seen/experienced incredible real estate booms without any real crashes in the last 25 years. My parents also invested in real estate so there was a comforting sense of guidance I could draw from when choosing this asset class. Mum and dad had been through it before and could mentor me.

Real estate is easy to grasp too. You buy a house, you rent it out and collect rent, the rent covers the expenses (hopefully), you sell it later at a higher price and make a profit. The other popular strategy with real estate is that you buy strong cash flow properties (where there is a surplus of rent after all expenses) and live off the rent, but this strategy is very hard to do in today’s market because of the low rental yields in Australia.

With time on my side for letting my investments grow for decades, my first investing strategy was to create an income stream through real estate.

Strategy 1 – Real Estate

The very first investing strategy I had, went something like this.

If I could buy 10 investment properties (IP) and hold them for 10 years, I could sell half of them and pay off all my debts. I would then have 5 houses pulling in rent with no interest repayments which would mean the majority would come to me.

The maths roughly looked like this:

	Equity	Loans	Rent @ 5.2 Yield	Expenses
10 X IP	$3M	$2.4	$156K	$175K

And after 10 years, assuming that rent and expenses (but not interest repayments) have increased with inflation @ 2.5%

	Equity	Loans	Rent	Expenses
10 X IP	$6M	$2.4	$200K	$180K

It’s important to note that while some expenses like rates, maintenance, water bills etc. would increase with inflation, the loan amount never changes. This is actually an advantage of leveraging your investments. You take out a loan in today’s dollars but can pay them off years later after inflation has eroded them. Which is often why you hear people say that debt is a good hedge against inflation.

And then I would sell 5 IPs and it would look like this

	Equity	Loans	Rent	Expenses
5 X IP	$3M	$0	$100K	$15K

I was well on my way with this strategy and bought my third IP in 2015 which was around the same time as I discovered MMM and index investing which I will go into later.

This strategy has worked for thousands of Aussie and isn’t anything new.

So why did I decide to change my strategy?

Strategy 1 relies on capital growth.
- You can see in the first table that there is nearly a $20K difference between the rent and expenses. What is not factored in here is negative gearing. All my properties right now are negatively geared but cash flow positive. Because of the tax refund I receive, the properties pay for themselves. But I could never actually retire off this cash flow which is why the capital gains are imperative. Without it, the strategy simply doesn’t work. And capital gains only works if someone buys your assets at a higher price than what you paid for it. I never felt comfortable breaking even or making a tiny profit each year with the hopes that 10 years down the track it would all pay off. I felt that investing should be a snowball approach where you start with a small trickle of passive income and see it grow into a raging torrent over the years.
Active Investment
- There’s no way around it. Managing property requires time and effort. When I first started I had all the enthusiasm and motivation in the world and wanted to do everything I could to reach FIRE as quickly as possible. If that meant some sweat equity then I was all for it. But roughly 5 years later my motivation for doing all the extra stuff has fallen off a cliff. I would much rather focus on other things than worrying about and managing my investments. To be fair, my properties aren’t too much of a hassle, but getting to 10 IPs would be a lot.
Lending conditions changed
- It was around about 2016 when the APRA (Australian Prudential Regulation Authority) really made it hard for investors to withdraw equity and refinance their loans. This was to try and curb risky lending and make it harder for property investors. Interest rates were raised on all of my loans and the number of hoops I had to jump through for my last equity withdrawal was 10 times harder than in 2014 and 2015. Looking back now, I was very fortunate to get into property when I did. Interest rates were being cut and banks were financing loans a lot easier. In mid-2016 I could not get another loan for a 4th property which meant my dream of 10 properties was out of reach.

But if I’m not going to reach financial independence through real estate, then how else am I going to create a passive income stream?

Strategy 2 – Index Investing

I think I can speak for a lot of people when I say Mr. Money Mustache has a way of writing that people relate to. I guess it’s why he is so popular. When I read The Shockingly Simple Math Behind Early Retirement it just made sense. And his article about Index Investing really clicked with me and would be what I consider the catalyst for my desire to learn more about the stock market.

It’s quite funny to see peoples reactions when they discover you have 6 figure sums invested in the stock market.

“That’s so risky though. Don’t you ever get scared you’re going to lose it all? One minute it’s there, next it just vanishes. I wouldn’t feel safe having so much money in the stock market, I only invest in things I can see and touch.”

I too once thought like this because of the constant news outlets reporting on the stock market crashes and how billions were wiped out in mere hours. Scary stuff.

But if you actually take the time to understand how the stock market works and what index investing is, I think you would be pleasantly surprised to find out all the positives that come with this investing approach.

What is an Index?

Indices cover almost every industry sector and asset class, including Australian and international shares, property, bonds, and cash. There are companies that conduct and publish financial research and analysis on stocks, bonds, and commodities to create indices. One of the more popular companies that publish these indices is Standard & Poor’s (S&P).

Have you ever listened to the news and heard them talk about the All Ordinaries (also know as All Ords) and wondered what it is? The All Ords is Australia’s oldest index of shares and consist of the 500 largest companies by market capitalization.

Let’s take a look at the S&P/ASX 200 (top 200 companies trading on the ASX by market cap) historic data since 1992:

Here is the Dow Jones (US index) for around the last 60 years.

And lastly, here is the Financial Times Stock Exchange (FTSE) 100 Index which is the top 100 companies listed on the London Stock Exchange by market cap.

What is Index Investing?

You might notice a few trends from the above graphs like the dot-com crash around 1999 to 2003, or the GFC in 2008 or the constant peaks and troughs through the years.

But what is glaringly obvious is the overall trend in each countries index is up.

And these graphs don’t include the most important part. The entire time throughout these decades, those companies that are trending up or down, are paying dividends (or reinvesting them) each year! So combine the capital growth from the above graphs with dividends and you get the idea. The overall markets, given enough time, trend upwards!

This is a fundamental principle of index investing.

It’s hard to predict which companies are going to do well over the next 20-30 years. In fact, it’s almost impossible. A lot of active fund managers try to outperform the index and charge you exuberant management fees with the promise of higher returns. The thinking behind this makes enough sense. The fund managers have an army of analysts working 12 hour days using the latest analytical tools and datasets to ensure that they only choose the ‘best’ companies to invest your money in. But as history has shown, only a very small % of investors/fund managers are able to consistently over a long period of time (20 years+) beat the index.

Rather than trying to guess which investments will outperform in the future, index managers replicate a particular market or sector. This means they invest in all or most of the securities in the index.

Indexing is based on the theory that investors as a group cannot beat the market – because they are the market.

ETFs/Vanguard

So how do you invest in an entire index?

You could, in theory, buy all the companies within an index at the appropriate weightings. You would get killed in brokerage fees but I guess technically you could do it. But luckily there’s a much easier way.

There exists investment companies that cater to the index investing style and offer investment products that mimic an index with rock-bottom management fees. One of the biggest investment companies that offer these products is Vanguard.

The reason Vanguard and other companies can offer these products at such a low cost is that there is no money spent researching and analyzing which stocks to invest in. Index investing companies simply look at the index data provided by companies such as S&P and remove or add companies from the index plus a bit of paperwork. That’s it!

To put the management fees into perspective, a hedge fund’s fees might be as high as 2.00%. Vanguard charges me 0.04% for my US index ETF that I invest in.

To put it another way, if I had $1M in the hedge fund. They would charge me $20K a year for management fees. Vanguard would charge me $400 bucks. The difference of $19,600 reinvested at 8% over 30 years is $2.4 Million!!!

You can either invest directly with the Vanguards fund or you can buy ETFs which are exactly the same investment products but traded on the stock exchange. There is also a difference in management fees. You can read up a bit more about the difference in this article How To Buy ETFs.

Why We Decided To Move To Index Investing

I joined finances with my partner in 2016 and we made the decision to start investing in ETFs (index investing). After reviewing the two asset classes a year later, we knew that we wanted to continue to go down the path of index investing. Here are the reasons why we decided to move away from real estate:

Diversification
- With our current three fund portfolio, we have exposure to over 6,000 companies in over 30 different countries. Our three properties are all located within Australia (different states mind you) and while I think it’s unlikely that they would all tank at the same time there is the possibility of a recession to hit Australia. If that were the case, those properties would almost certainly drop in value. And Investing Strategy 1 relies on capital gains to work. If something like that did happen, they have enough cash flow to make it through but who knows how long it might take for them to recover and ultimately gain enough value for the strategy to work. I might be waiting for decades.
  The odds of the entire world tanking over a long period of time is not completely out of the realms of possibilities, but it’s a lot less likely than one country going into recession.
Liquidity
- If we ever needed the money that was locked in the properties. It might take 6+ months to sell them and go through the whole process. With ETFs, I can put in a sell order and literally have the money in my account within 3 days. This means that selling off parts of your portfolio to fund your retirement is possible.
Cash flow
- This is probably the biggest reason why we made the move. The path towards freedom is a lot clearer with ETFs. We know that we will need roughly $1 million in the market to generate enough returns each year to live off forever. The high cash flow/liquidity makes index investing a popular choice for FIRE chasers.
No more banks
- Investing in ETFs does not require lengthy loaning processes. Leverage can have its place but it’s not required.
Passive income
- Some may argue that real estate can be passive, and to some degree, I guess it is. But from my experiences with real estate, such jobs as collecting rent, doing paperwork, dealing with tenants, responding to emails, maintaining the properties etc. can add up to be a part-time job. You will not find a more passive income stream with the same returns as what ETFs offer. And I also love the fact that the more ETFs you have does not mean more work. More properties = more work. But you will do the same amount of paperwork come tax time on a $50K portfolio vs a $3M one.
I don’t have to be an expert
- I believe that you need to know your shit when investing in real estate. I wouldn’t be comfortable investing in a property unless I knew the ins and outs of the area like the back of my hand. Where are the jobs coming from? What’s the population growth like? What’s the unemployment rate like? And on and on I could go.
  The only thing I have to work out each time I buy ETFs is what I need to buy to rebalance my portfolio. That’s it! I don’t need to keep up to date with the latest trends or what’s the hot stock right now or any of that crap.

Our Plan Detailed

If you read my monthly net worth posts you can see that we invest in a three-fund portfolio. I’m going to go into details about why we invest in each fund and how ultimately they will enable us to reach FIRE.

Management Fees: I prioritize a low MER (Management Expense Ratio aka management fees) above almost everything else because paying less in management fees is a guaranteed returned and when it comes to investing in general, almost everything else is speculation to a certain degree.

Given my obsession with management fees, you can understand that Vanguard was an easy choice as an ETF provider since they offer some of the lowest MERs in Australia.

This is what our Strategy 2 looks like in pie form

Let me explain each fund and why it’s in our portfolio

VAS
MER: 0.14%
Benchmark: S&P/ASX 300 Index

Why it’s in our portfolio:
Some people will argue that Australia is such a small percentage of the world’s markets (around 2% last time I checked) that it’s not diversified enough and you’re better off going global for that diversification. I generally agree with that and what’s even worse is that out of my three funds, VAS has the highest MER at 0.14%.

So why do I invest in it?

Two words… Franking credits.

I’m not going to go into the technical details of how they work (Pat wrote a great article about that if you’re interested) but essentially they are an advantage that Australian companies can give Australia investors.

Australian companies for whatever reason emphasize higher dividends vs capital growth. I’m not 100% sure why this is, but please feel free to let me know in the comments for all those smarty pants out there. Anyway, this high dividends plus franking credits means that VAS pumps out a solid stream of dividends each year. The franking credits are too good of an opportunity to pass upon and are why VAS takes up 40% of our portfolio.

**A200**

A few months ago BetaShares released the A200 ETF.

It is essentially the same product as Vanguards VAS ETF except the A200 invests in the top 200 companies of the ASX instead of the top 300. Something to note is that the bottom 100 companies in VAS only make up 2.5% of the total in terms of market cap. So while the A200 is less diversified than VAS, it’s not as bad as it sounds.

The A200 boasts a MER of just 0.07%.

That’s half the price in management fees vs VAS!

I will be moving to the A200 if Vanguard does not respond with a lower MER next time we buy.

No one knows if VAS is going to outperform A200 moving forward. But what we all know, is that right now you will be paying double the price in management fees if you invest with VAS.

I won’t sell VAS moving forward, but I will be buying A200 instead.

VTS
MER: 0.04%
Benchmark: CRSP US Total Market Index

Why it’s in our portfolio:
Diversification? Tick (the US make up around 40% of the entire world market)
Good Returns? Tick
Rock bottom MER? Tick!

How can you possibly go past this ETF if you’re looking for a low-cost diversified ETF? At 0.04%, that’s the lowest management fee of any ASX ETF I can think of off the top of my head. I have often thought about going 100% VTS because I value a low MER with the highest regard. But the franking credits keep pulling me back to VAS and complete world exposure is why we finish with VEU.

VEU
MER: 0.11%
Benchmark: FTSE All-World ex US Index

Why it’s in our portfolio:
VEU rounds off our diversification by giving us the entire world minus the US at a very reasonable MER of 0.11%. And since we also invest in VTS, this means that with just three funds, we have exposure to the largest companies on planet earth.

Think about what would need to happen for us to lose all our money. Companies like Apple, Microsoft, Google, Exxon, Facebook, Commonwealth Bank, ANZ, Westpac, Shell, Samsung, Toyota, GM Motors, Telstra, Johnson & Johnson etc. would all have to go bust. All of them! I just can’t see that happening. And if some of those companies do go down the drain, they are simply replaced in the index by the next company with the highest market cap. And because the index is only giving a small weighting to individual companies (less than 1%), you won’t see it affect your portfolio. The only time a significant drop occurs is when the entire market as a whole is down (like what happened in 2008).

The 4% rule

The 4% rule is based on the 1998 paper called the Trinity Study and to put it simply, it means you should, in theory, be able to live off 4% of your portfolio. It’s an American study and is meant to last for 30 years so it’s not full proof by any means. But this is what we are using when calculating ‘our’ financial independence number.

So if we have a portfolio of $1M, we could live on $40K a year and never run out of money (it also factors in inflation).

How Much Do We Need?

We are currently on track for this F/Y to have spent a touch under $50K. That’s absolutely everything we spend to live our current life. It also factors in rent.

We do plan to own our own home one day which means that factoring in a fully paid off house, we spend about $38K a year.

Which would mean that we need a fully paid off house plus $950,000 in ETFs to generate enough income each year (factoring in inflation) to become financially independent! But being on the conservative side of things, I think a cool one million will be the target.

How It’s Going To Work

Let’s imagine, for argument’s sake, that we had reached our $1M portfolio goal with all the appropriate weightings for VAS (40%), VTS (30%), and VEU (30%) exactly one year ago (19/06/2017).

After one year, this is what the performance of that portfolio would look like thanks to ShareSights amazing ability to create dummy portfolios with historical data.

And if we look at how each fund performed for the last 12 months we get this.

Total Return for the 3 funds was $131,276 for the last 12 months!!!

A few things to remember though:

We need to factor in inflation. If we assume 2.5%, that means that our real return was $127,964.
The last few years have basically been a bull run for the whole world. This portfolio is not going to return these numbers every year. But that’s ok, what we need to do in the good years is not spend extra, but keep that surplus in the portfolio so when the bear market does come (and it will) there is enough to carry us through to the next bull.
By looking at the total return, it would appear that VEU did really bad and VTS did really well. But how we actually should measure the returns is in percentage. Which looks like this

VAS and VEU are a lot closer when comparing % returns. VAS has a higher weighting which is why it returns more dollars when it’s very close in percentage terms.
We are aiming to achieve around an 8% return on average from the stock market. So 13.13% is a fantastic year!

The Dividend Part

You can see from the above graph that we received $34,265 from dividends in 12 months… This is pretty good but you can clearly see from the fund breakdown where the majority of the dividends came from. VAS of course. Australian shares just pump out those juicy franked dividends like no other which is great.

But what’s probably even more important to note, is how low the dividends were for VEU and especially VTS considering VTS made an overall gain of 18.92%! You won’t get much better than that and it still only paid out a lousy 1.83% yield.

We needed $38K last year. But this year inflation (2.5%) adds another $950 dollars. So we now need $38,950 to maintain our lifestyle.

The dividends cover $34,265, which means we’re short $4,685.

The Captial Gains Part

You know how I was just bagging out VTS because of its putrid dividend yield? Well, boy does it make up for it in the capital gains department!

VTS alone smashed our FIRE number of $38,950 and returned a whopping $51,295 (17.09% Gain!!!). Combine the other two funds and last year well and truly exceeded the 4% rule.

But how do we harvest these capital gains to actually live? The dividends are straightforward because they are paid directly into your account without you having to do anything. The capital gains part is a tad different.

We need to sell off units from our portfolio and realize a capital gain.

This is the part where a lot of people either don’t fully understand or are not comfortable with.

“Wait, I thought we reach a certain size portfolio and it pumps out a passive income stream we can live off? I don’t want to sell part of my portfolio. What happens if I have to sell it all”

It’s perfectly fine to sell off parts of your portfolio as long as it has the time to recover those losses.

For example, in the above scenario, I need an extra $4,685 which I must get from selling some units from one of the three funds or parts of all of them.

The most obvious fund to sell some units is VTS because it had the best return in the capital gains department and we can lock in those profits by selling. Each unit is now worth $193.190. So a bit of quick maths means I need to sell 24.25 units. Rounding it off and factoring in brokerage fees lets just say we sell 25 units.

$193.19 X 25 = $4,829

We have now made up what we needed to live for that year.

“But we are now down 25 units right?”… Technically right, but the wrong way to look at it.

Firstly, the portfolio grew by $131,276 dollars. We took $38,950 out of that growth to live on which leaves us still up $92,326. When next year rolls around, because of the power of compound interest, it doesn’t matter that we are 25 units down. Assuming we get the exact same returns in percentage terms, we will make more money next year because the starting value of our portfolio is higher than last year even factoring in 25 fewer units.

“But what if I run out of units?”

Highly unlikely. Each year you will have less and less units, but those units should be worth more unless it’s a bad bear market. Even so, we will have over 11,000 units spread across the 3 funds. Every few years they will be worth more and more meaning we will have to sell fewer units each time to make up the difference.

What Happens If We Retire And Another GFC Hits

This is the worst case scenario for our plan. Because it relies partly on capital gains, a huge downturn in the market straight after we pull the pin would mean we potentially would have to sell units at a rock bottom prices. And it’s possible that our portfolio might shrink too much in the early years and never make a full recovery when the bull markets come back around.

In this situation, I think the answer is pretty obvious.

At absolute worst, I’ll pick up some part-time work. Shit, even 200-300 bucks extra a week would dramatically reduce our reliance on ETFs. $300 a week for a year is over $15K which is 40% of our expenses!

Retirement

When our portfolio reaches $1M and we have the house fully paid off, I will at that point, declare financial independence.

But what will we then do?

If we are enjoying our lives to the fullest, then there would be no reason to change anything. But what I most likely will do immediately is drop my working days down to 2-3 days a week. From there the possibilities are really endless. Do I want to continue working at my current job? Maybe I only want to do part of my job 2 days a week? Maybe my boss won’t like that, but since I have reached FIRE I will have the power to quit my job without worrying at all.

I don’t plan to ever stop working, to be honest. It will just be 100% enjoyable work and probably not full time unless it’s a passion project. So the odds of neither Mrs. Firebug or I receiving some form of income post retirement is extremely low. This blog is even pulling in some $$$ now and I absolutely love working on it. I couldn’t imagine where it could go if I worked full time on it!

We will always have the portfolio there knowing we are financially independent, but there’s a good chance we will still earn some form of income from something fun 🙂

Strategy 3..?

Ok, long read so far I know. But we’re nearly there.

I’m a big believer in the following quote:

I’m constantly looking for new ways to invest, reduce our spendings, find tax efficient methods etc. It’s half the reason I started this blog. So a whole bunch of people way smarter than me could critique my strategies and explain better ways to do things. And it’s worked an absolute treat so far. The Australian FIRE community is the best for sharing information that will help you get wealthy a lot quicker than if you had gone at it alone.

So when I come across something that makes sense to me and is even better than what I’m currently doing. Why wouldn’t I adopt it?

Enter Thornhill

The entire reason I invest money is to reach the end goal of financial independence.

To have my assets generate enough income for my partner and I to live off forever.

The key word here is income. In Strategy 2, capital gains are still required because VTS and VEU predominately return capital gains vs dividends. VAS is the cash flow king out of the three because that’s the Australian index and Australia has a high rate of dividends.

Peter Thornhill is the author of the best seller ‘Motivated Money’ which details his investment approach to investing for dividends (mainly in the industrial sector) and not for capital growth.

He explains in his book that dividends are a lot more stable and less impacted by market swings as opposed to the share price. Something that really struck a chord with me is the way he explains intrinsic value. In a nutshell, the real value of a company or any investment, in general, should be determined by how much income it is able to produce over a long period of time. It’s the income that is key. And it’s the income that will either pay the investor (you) the dividend or be retained by the company and consequently have the share prices go up.

This is how it should work, but as we all know. Humans tend to speculate a lot and you end up with assets that have potential but no solid foundation of cash flow being traded for ludicrous amounts of money (BitCoin, Sydney Real Estate etc.).

I’m not saying these assets don’t have value, but the only way that an investor can make a decent return is if they find someone that is willing to buy it at a higher price than what they paid for it.

If the goal is income, why don’t we focus only on investments that yield the best dividends?

Why not go 100% Australian stocks?

Australian shares yield the best dividends AND they give you the bonus of franking credits. These two reasons make a very appealing case for any Aussie investor.

I encourage everyone to read Thornhill’s book ‘Motivated Money’ because he explains the dividend approach a lot better than I can.

Here is a little video of Peter explaining why he looks forward to a GFC event.

The more I listen to this guy, the more convinced I am with his approach to investing in Australia.

“Watching the share prices drop is a totally different thing to the cash flow that’s coming out of the portfolio. That is what we are living on, we are not living using the capital as the source of income, it’s generating the income for us” -Peter Thornhill

UPDATE: We have since officially moved to strategy 3 a few months after this article was published.

Conclusion

Hopefully, you can come away from this post with a much clearer understanding of how we are planning to reach FIRE in the next coming years. I really wanted to include as much detail in this as possible and try to convey our thoughts behind the investment decisions we are making.

I think it’s common for a lot of Australians to start with real estate but finish with shares. I feel like that is the natural progression that as we get older and don’t have the time or energy required for active investing, the share markets offer a fantastic passive alternative with many other benefits. We are on track with strategy 2 at the moment. But the more I think about strategy 3, the more I’m liking it.

$1M is our official FIRE number. When we reach that plus a house paid off, the goal will be reached. It’s still a few years away no doubt, but we are enjoying the journey and each month we move closer to our destination.

What about your strategy? Are you on a similar path? I would love to hear about how you’re going to reach financial independence in the comment section below.

Property vs Shares: The Ultimate Guide

by Aussie Firebug | Jun 30, 2017 | Classics, Investing, Real Estate

Preface: When I talk about shares in this article, I really mean ETFs. I don’t buy individual shares or day trade.

Collingwood vs Carlton

Sydney vs Melbourne

Magic vs Bird

Just some of the biggest rivalries the world’s ever seen.

But in the investing world, there is not a more hotly debated topic among avid investors. Property vs shares is a topic that everyone seems to have an opinion on, no matter how ill-informed they are.

Owning 3 investment properties and nearly $90K worth of ETFs (shares), I feel I have tasted the best of both worlds (and the worst) and can give you perspective to what I’ve learned over the last 5+ years of investing in these two asset classes. Both are great when used right, with pros and cons for various financial situations/types of investors.

But which one is right for you?…

Contestant 1: Property

The hometown favorite. This guy has been around longer than the stock market has existed!

You can touch and feel him, and your mum most likely loves the idea of you being with him. He has a strong track record in Australia and there is a firm belief that his value never goes down.

Now for realz:

Property is a great investment class but you need to be the right type of investor and have the financial stability for it to be used correctly. It’s an active investment. You’re going to have to do some sort of work to keep this investment running. You can minimize the work needed by hiring people but there are still headaches trust me.

However! Property has BY FAR the most potential to accelerate your wealth compared to shares for three reasons.

Cheap leverage
Ability to physically add value to your asset
Skill and experience actually mean something (more on this below)

Cheap leverage is often misunderstood. Too often an article is published with statistics on how shares have outperformed property by comparing the % of capital growth and rental/dividend returns.

This is a dumb way to compare the two because I don’t know any property investors that buy real estate outright. It’s almost always bought with a loan. Which means the asset is leverage.

But what does this have to do with returns you might ask?

Here’s an example (for simplicity we are ignoring buying and selling costs and tax):

Property 1 is brought in 2016 for $500K with a 20% deposit of $100K. That same investor also buys $100K of shares in 2016 too.

Fast forward 1 year and the house is now worth $600K and the shares worth $150K

Let’s make it simple and say that the shares have no dividends and that the house had $0 net gain/loss factoring in everything.

The shares made a whopping 50% return in one year. The property on the other hand only made a 20% return.

Which investment did better?

Going percent wise the shares beat the pants of the house. More than doubled its return. But hold on.

If we actually compare how much money each investment made, it tells a different story.

It cost the investor both $100K to buy each asset. Property made a total of $100K in a year whereas the shares only made $50K.

This is because of the power of leverage. You technically can leverage with shares but not for the same cheap rate and you get nasty margin calls which you don’t get with property.

The ability to physically add value to your asset is where I would say active investors have a clear choice with which investment they choose.

Sweat equity is a proven wealth building technique that’s been around for centuries. You would have to be extremely unlucky to physically add value to your property and not have it go up in value.

Experience and skill is a very interesting point to look at when comparing shares and real state.

The entire premise of index-style investing goes something along the lines of:

“It’s impossible to beat the market over a long period of time unless your names Warren Buffett. Even if you do manage to do so, it’s almost always luck. People spend all day every day studying stocks and graphs and still get it wrong. So what hope do you have as an ordinary Joe Blow? Don’t even try to become a master of the stock market because there is only such a very very small percent of humans alive that seems to be able to get it right the majority of the time”

Now, here’s the difference. Skill and experience actually matter in real estate.

A skilled and experienced property investor has a very good chance of repeating his/her success over and over again. In fact, they most likely get better at it as times goes on. The same cannot be said for the stock market (except for those very rare people like Buffett). A skilled and experienced property investor will beat the pants off a skilled and experienced stock trader over a 7-10 year period 9 times out 10.

You can’t really be skillful in picking stocks. You definitely can’t be skillful in picking ETFs either. Sure, you can be smart about your allocations to reduce risk. But it’s not like an ETF investor of 30 years is going to blow out a brand new ETF investor in terms of returns. In fact, they should get relatively the same return. And that’s not a bad thing either.

Contestant 2: Shares

3 things.

Diversification
Low buy in and selling costs
Easy peasy with hardly any management required

Have you ever heard the phrase ‘don’t keep all your eggs in one basket’?

The stock market gives you the ability to buy things called ETFs which is a slice of a lot (>200) of companies bundled up into one very convenient share. So instead of buying 200 individual shares. You can just buy things like ETFs and you get that vast diversification in one transaction. Couldn’t be any easier.

And the good thing about the stock market is the low buy in and sell costs. I pay $20 for around $5K of ETFs. Times that by 40 and I would have paid $800 for $200K worth of shares.

Think about how much it would cost you to buy a unit for $200K. Probably around $10K if we use the 5% rule.

And then you would have to sell it for anywhere between 2-3%.

When you want to sell shares there is another brokerage cost of around $20 per sell (depending on how much you sell).

This low buy in and sell costs are very convenient when compared to real estate.

And the last point I want to make is also one of the most important points. How little of your time and effort you have to put in for it to make you money.

You buy some shares, ETFs of course and turn on DRP (dividend reinvestment plan) .

You sit back.

Walk the dog.

Go on a holiday.

Get married.

Have a child.

And check up on your shares after about 7-10 years and get a pleasant surprise that on average, they have increased by around 9%

They only thing required during these 7-10 years is declaring the income earned through dividends on your tax returns which you can download electronically. No need to keep your own records.

THAT’S IT.

You didn’t have to manage anything and your investments returned a respectable 9% over 7-10 years. This extremely low management style is a phenomenal advantage.

Pros and Cons

Property

Pros

Cons

Leverage on low-interest rate
Ability to physically add value to investment
Skill and experience can be leveraged
High return potential for an active investor
Tax advantages such as neg gearing, depreciation and PPOR capital gains exclusion
Good protection against inflation
Less volatile than other asset classes

Active investment.
Requires a lot of capital to get started
Big buy-in (5%) and exist (2-3%) costs
Not diversified. One asset class in one location
Loan stress
Potential for things to go wrong. Leaking pipes, dog pees on the carpet, house burns down etc.
Not very liquid. May take you 6-12 months to cash out of this investment
Cash flow dependent. Needs a big buffer for incidents
If something goes horribly wrong. It can ruin you financially

Shares (ETFs)

Pros	Cons
Passive investment. Very little time and effort involved (less than one day a year) Extremely diversified Low entry and exit fees Very liquid. Can break up shares and sell only a few units if that’s what you need Easy peasy to do a tax return. No bookkeeping required Franked dividends At worst you can only lose what you have invested	Can’t physically improve investment or add value to asset No influence on how your investment performs. If the market is down there’s not much you can do Can’t leverage at the same low-interest rate as property If you do leverage (which I wouldn’t recommend), you may get margin calls More volatile Fewer tax advantages than property

So Which Ones Right For Me?

It all comes down to what type of investor you are. Are you an active or defensive (passive) investor?

To quote The Intelligent Investor by Ben Graham:

‘The defensive investor is unwilling, or unable, to put in the time and effort required to be an enterprising investor. Instead of an active approach, the defensive investor seeks a portfolio that requires minimal effort, research, and monitoring.’

My rough guess is around 95% of people are passive investors.

That’s because the majority of everyday people don’t really care for finance in general and would rather be doing others things they find interesting.

But since you’re on this blog, it means you find finance stuff interesting. What a sad bunch we are ?!

If you’re a passive investor I think the answer is clear.

Shares are clearly suited for the passive investing style while still giving the investor a great return.

Coupled with great diversification, low buy-in and selling costs, no loan stress, liquid asset (can get your money out in 2-3 days), it makes for the ultimate passive style investment!

But if you’re in that very small group of investors that want to take an active approach, you’ve gotta ask yourself.

Are you REALLY an active investor? Do you REALLY want to manage your investments for potentially the next 10-15 years? Will your circumstances change? What happens if you have a few kids? Do you still want to be managing your investments on 4 hours sleep?

Do you have a lot of capital lying around for a deposit?

How’s your cash flow position? Could you afford to pay an extra $1,400 a month when you don’t have a tenant in?

Is your job stable?

Do you have a big cash buffer in case anything goes wrong?

If you answered yes to all the above then maybe you are suited for investing in property.

I have made money using both investment classes. They each have their own merits and downfalls.

Whichever one you choose to invest in, just make sure you educate yourself before taking the plunge.

Good luck!

Financial Goals 2017

by Aussie Firebug | Dec 30, 2016 | Financial Independence, Mindset

As 2016 comes to an end I’d like to reflect back on what was achieved and set new goals for the coming year.

I’m a big believer in setting goals and making deadlines for them.

One of my favourite quotes:

I really like it because everyone has dreams, but very few actually put in the work required to realise those dreams. Too many people (myself included) think of doing something great but it just never happens because you don’t put any pressure on yourself and rely purely on motivation.

Motivation only lasts so long and when it runs out you should be relying on habit/routine to get the job done. “I’m just not motivated today” is the wrong attitude. Everyone starts the project with motivation, but it’s the habits formed that will see the project completed.

It’s so important to actually map out a plan of attack for your dream no matter how small it is and say to yourself:

“I’m going to have X done by this time next week/month/year”

And then break the task up into smaller sub tasks if it’s a big project. But make sure you set a time and date that you want it completed by or else it will get pushed to the side every time.

I have a rule with this blog that I MUST write a minimum of two posts per month no matter what! No excuses!

This has led to me publishing a new post at 11:30PM once with work on the next day. That’s the price I pay for not being more organised.

What Did I Achieve In 2016?

2016 was a huge year for me personally and financially.

Moved into a share house
Watched as the RBA cut the cash rate twice to 1.5%
Watched Malcolm Turnbull and the Liberal party get elected
Had 2 properties gain and one lose value over the course of the year
Joined financial forces with my partner
Bought around $50K worth of ETFs
Moved in with my partner
Broke into the $200K net worth club (so close to the $250K damit!)

I originally wanted to buy another investment property and dip my toes into ETFs for 2016. But the more I thought about it, the more I was leaning towards ETFS.

2017 Financial Goals

My big financial goals that I want to achieve by the end of the year are

Obtain a savings rate of 65% or better
Reach $100K in ETFs

They are both very measurable goals and are something I can review monthly to track how I’m going.

My big goals for the blog are:

Try to release a podcast every month. It’s the number one thing I get requests for. I love doing them too I just find it hard to find guests
Revamp the home page
Write more about Super

What Are Your Goals?

What do you hope to achieve financially on your way towards FIRE in 2017?

The Dangers Of Cross Collateralisation

by Aussie Firebug | Sep 30, 2016 | Real Estate

If/when you get to a point in your life where you own multiple properties, you will no doubt come across the term ‘cross collateralisation’. It’s a very important loan structure issue that you must fully understand if you ever do decide that it’s the best option for you. Many mortgage brokers (my first included) don’t actually understand the full implications themselves and are more than happy to sign you up for it because it’s usually an easier process. Cross collateralisation can very rarely be a good option, the majority of the time it simply increases the investors risk and strengthens the banks position of power.

Cross Collateralisation Explained

Cross collateralisation is when you use house A as security for purchasing house B.

Lets look at how you buy a house in the first place. THE most important thing when buying is….THE DEPOSIT! Banks love that shit. If the deposit is big enough you can pretty much guarantee that the bank will approve your loan.

No Job? No Education? No prospects?

Got a huge deposit, no worries. (I’m talking like >70% here guys)

It’s important to understand what the actual deposit means to the banks. It’s their way of lowering their exposure to risk.

Think about this. If you buy a $400K house with a 20% deposit that means the banks lent you $320K. Worst case scenario for the banks is you default on your loan and they are forced to sell to recoup their investment (the loan). They are not worried in the slightest about making money from this property, they just want their money back asap.

Ever wonder why you always hear of these stories of foreclosure bargains? It’s because the banks could not give two shits about an extra $10K, $20K or $40K. That’s pocket change to them. They just want to get back what’s theirs.

So now they have this house which the owner paid $400K for. Unless there has been a big downward swing in the market you would surely think that the banks could at the very least sell it for somewhere near the $320K mark. If they do then relatively no harm done, they loaned out $320K and got back their investment. No money made but minimal lost…except if you’re the poor sod that applied for the loan. You’re probably down the shitter now but like the banks care right?

So as you can see, the deposit is king to the banks and without a decent sized one (at least 20%) you are likely to pay exuberant fees to get the loan approved.

So why have I explained the above? Well as I have already mention, deposit is king. But what if I told you there was a way to get a loan approved without having to fork out one dollar? With the flick of a pen you can have access to hundreds of thousands of dollars.

Sounds too good to be true.

Enter Cross Collateralisation.

No Such Thing As A Free Lunch

Cross Collateralisation uses equity as the ‘down payment’ instead of cold hard cash. To simplify things, lets assume we have $200K of untapped equity on our family home (House A). We want to buy House B for $400K but don’t have a deposit.

To secure the loan we can use the equity from House A as collateral. This essentially does the same job of lowering the banks risks, just utilizing a different method.

House A Loan: $300K
House A Value: $500K

House B Loan: $420K (loan includes 5% buying costs)
House B Value: $400K

Security: $500K + $400K (the value of both properties)

LVR : $300K + $400K = $700K
. $500K + $400K = $900K

= 77% LVR (loan value ratio)

There will be a section in the loan contract that details that this loan is secure using another property over which the lender holds it’s mortgage.

‘Wow that’s pretty cool isn’t it? Didn’t even have to save any money to buy another property and the banks made the loan contract a breeze. I’m going to buy all my properties from now on using this method’

You must consider the ramifications first.

1. Selling Headaches

Every wonder what happens when you want to sell the property that you used to secured the others?

To put it simply…Whatever the bank decides is going to happen.

They have complete control over the proceeds of the sale. I hope you didn’t have anything planned for the money you were going to get when you sell House A. Because the bank has just decided that House B is at a higher risk than when you first bought it and now requires your loan to be at 70% LVR. So that $200K you just received is going straight to the loan on House B…Nothing you can do about it.

And if you think that’s bad. Imagine a situation where you have secured multiple houses with multiple other houses…shit show.

2. Equity Withdrawals

At the moment, if I want to withdraw equity from one of my properties it’s super simple. I apply for the withdrawal and as long as I’m keeping it under 80% LVR there are minimal hoops I have to jump through. I’ve done this three times now (once for each of my IPs) and it’s been very straight forward.

There has been times though where one of my properties have gone up in value and the others have gone down. Because my properties are not cross collateralised I am able to access the equity from the IP that went up because they are seen by the banks as separate .

If you have all your properties cross collateralised however the bank views all of them as the same. You might have had one IP go up by $50K but the others go down by $30K each. This would mean you can’t access the equity on the one that went up which may impact your opportunities moving forward.

3. Want To Swap Lenders?

‘Hey look at that! CBA has been ripping me off with their high interest rate. I’m going to move all my loans to the lower rate at Ubank’

People do this all the time. The problem with Cross Collateralisation is that you can’t just move one or two loans across. You have to either move everything or nothing. Depending on who you’re going to they may not want that level of risk exposure. They might charge extra fees for having to value all the properties to determine the position.

In short it’s a pain in the ass for a process that is so much easier for stand alone loans.

4. Complicates Things

The extra paper work you have to complete only increases the more you cross collateralise.

Want to sell? Complete evaluation of your entire portfolio (assuming you have cross collateralised your entire portfolio).

Want to withdraw equity? Complete review of your financial position on all properties.

Want to move banks?…. You get the picture.

What To Do?

If you discover cross collateralisation exists in your portfolio without you even knowing it (happens all the time) there are a few things to consider.

Cross collateralisation isn’t a problem… until is it.

What I mean by that is that it’s perfectly fine to cross collateralise if nothing goes wrong. But the odds of something undesirable happening increase when you cross collateralise and it usually only benefits the bank.

If you want to uncross your loans go see a mortgage broker who can assist you and work out a plan of attack.

Stand Alone Loans

You really want all your loans stand alone. The only advantage I really see for cross collateralisation is the convenience of setting them up. The banks really like to strengthen their position so they make it super easy to cross collateralise.

The thing is, if you have equity. You can withdraw the equity as cash and use that cash as a down payment for a new loan. I have utilized this method in the past and have had great success with it.

You have to check with your lender on the conditions for equity withdrawal but if you can do it, it’s a much smarter way to buy your next investment as opposed to using cross collateralisation.

Wrapping Up

Cross collateralisation may be convenient and appealing for investors looking to buy a new property without using their own money. However, cross collateralisation rarely is a good thing and the majority of the time it does nothing but cause headaches later down the track. The banks prefer cross collateralisation because it strengthens their position of power and they have all the control.

If you have equity available, look to withdraw this equity as cash to use as the down payment for the new loan. You might have some short term pain with a bit more paperwork and a few more hoops to jump through but your future self will thank you for laying the foundations of a strong portfolio now rather than later.

Podcast – Ben Everingham: The Stars Align In Paris…

by Aussie Firebug | Feb 2, 2016 | Financial Independence, Investing, Mindset, Podcast, Real Estate

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In this episode I chat to Ben Everingham who was able to retire from full time work at the age of 29.

Ben knew he was not wired the same as everyone else when he started working full time and quickly discovered that the ‘normal’ working life was never going to make him happy. After a Euro trip at 19 and finishing Uni, Ben was able to land a great job in Sydney earning over 6 figures. Most would think that they have it made with a great job straight out of Uni but after working a while Ben knew that this job was never going to satisfy him long term and whilst the money was great, he was miserable.

After reading Rich Dad Poor Dad, Ben’s eyes had been opened up to the possibility of investing and business ownership. Eager to get started, Ben was able to purchase 6 properties within 4 years and started his own business, thus achieving his goal of quitting full time work before the age of thirty…

Transcript:

Aussie Firebug

Welcome to the Aussie Firebug podcast where we talk about finical Independence in Australia

Today’s guest is Ben Everingham who managed to retire froem full time work at the amazing age of 29

Welcome to the podcast Ben

Ben

Thank you so much, excited to be here

Aussie Firebug

I guess we’ll start with, lets just go back to the very beginning

When did you know you wanted to be financially independent?

Or when did you even discover the concept of being financially independent?

Ben

That’s a really interesting question, so there is probably two key stories for me that really stand out from things that have happened over the last ten years that were really meaningful

One was when I was 19, we were sitting around having some beers with about 20 of my mates at the times at the age when you still have the big crew of people that you hang out with at the weekend.

We were sitting around and someone suggested that we book a trip to Europe in a couple of months, so the next day four boys and myself went and booked the trip and two months later we were over there.

It was the exact sort of trip that you would imagine a 19 year old would sort of do and that was sort of the partying and having a fun time.

I got to this point actually it was probably 6 weeks into the 8 week trip and I’m sitting watching the sun set on my own in Paris watching the sun set behind the Eiffel tower and I was sitting there and I know this may sound a little strange but as I was looking at the Eiffel tower and I was looking at the sky and at that time the sky looked extremely chaotic to me and all of a sudden, I looked up again and it was almost like it was…this is really odd especially for me…it was almost like the starts had become straighter and align themselves and it was like my future was opened up to me and I knew at that point I had to do something difference it was a massive transformation experience for me

Aussie Firebug
Wow that’s quite the epiphany

Ben

Haha I don’t even know if I believe in this stuff. but it was one strange moment that, like it was literally like it was my future was mapped out in front of me and I knew not at the time what I needed but I knew that was on my way and so I came back and moved to Queensland from Sydney. I thought that in that time of my life I needed to get away from lot of influences in my life that were, you know a lot of party people and not a lot of people that were really going anywhere and so I started fresh and that was the first major experience

Aussie Firebug

Wow that’s crazy

So let’s just rewind a bit, so you were 19, were you working full time at that stage or at Uni?

Ben

Yeah I dropped out of Uni about 6 months into my course and it was my second gap year. I took two gap years basically. So I had been working full time for about six month saving for the trip

Aussie Firebug

And was that an eye opener? Because I know for me when I first started working full time, it was mind blowing. I always knew the hours and I know people went off and worked 8-5 Monday to Friday but it’s not until you actually start doing it I think…it’s such a full on experience…OMG it’s just so much time I’m at work. And I quite like my job. I don’t know if you went through a same experience. But I remember my first year that I was just like “this is crazy!” and I don’t even work that many hours.

I have mates that do the fly in fly out work and their working 4 weeks straight with one week off. This is mental! It’s wasting so much life?

Did you have a similar experience in them 6 months when you were saving for your trip?

Ben
Absolutely I knew from the first day I started my first job that I wasn’t wired the same way as the people I was working with. My first job was with the major elevator company as a laborer or a laccy one of the electricians and I just realised I was wired differently straight away like I wasn’t interested in taking breaks I was just interested in interested in getting the job done as quickly as possible and getting the hell out of there. I worked in that job for the six months before a left and I used to have this guy who was about sixty years of age who used to ride me every day and the day that I left he said sorry to see you go, you were the best young employee we have had here and I really thought you could have gone a long way. And I was like your half the reason I was bailing on this job because you are such an ass to me for that period of time. Ha ha hah. It’s funny how, how things come around like. It was definitely an eye-opener and it is something I would definitely never want to do it again.

Aussie Firebug

Right so you knew that you didn’t want work full-time for the rest of your life. And you go on this trip and the stars align and your like something is happening here I need to change my path so then how do you then, from that moment… because a lot of people don’t realise that financial independence is a thing. I remember reading about it, I was like my mind was just blown, I was like you just keep buying these things that make you money assets, and if you buy enough assets they can replace your income. My mind was just blowing when I read that I was like that so simple why hasn’t anyone told me about that before or why haven’t I heard that before. Then I had my doubts, I’m interested to know your experience with that. Was that something that you’ve always been around all is their family members that had reached it would do you discover that on your own?

Ben
No unfortunately I had to discover that my own not a lot of people that I grew up with all their families or my families had a huge amount of surplus money at the end of the week or the months so fast forward from Europe four years I was finishing a university degree in about six months before finishing the degree I picked up this book by Robert Kawasaki called Rich dad poor dad. I’m sure a lot of people listen and have read that book it such a foundational book for a lot of people as well. And I read this book and I just said, holy shit. It completely opened up my eyes to what is possible and from that moment forward I knew that assets and businesses were better than wages and jobs. I focused on buying assets as soon as I finish university with the intention as soon as I have the right skill set to go out to succeed to leave full-time work and start a business.

Aussie Firebug
Yeah I almost had an identical experience. Rich dad poor dad was actually the second financial book but I ever read. I originally read Stephen McKnight’s book 0 to 135 properties in 3.5 years. That’s an awesome book. I remember the same sort of thing, just reading that and your like this is like so up my alley and why isn’t everyone doing this. Rich dad poor at is a really good mindset one I think, gets you to think about things differently. It just makes so much sense, when I was reading that I was like this this is exactly what I wanted to do. You know trading your time for money for 40 or 50 years and relying on the government to help you out with retirement just seemed crazy to me. I always have in the back of my head, that people were actually retiring early and that just blew my mind. And I just had to get there as soon as possible. Yes that book was a big eye-opener for me as well

Ben
I remember something that happened to me post university. I was lucky, I got accepted into one of the big companies in Sydney’s graduate programs, for a lot of people that’s a fast track way to make a career. I realise that once I finished high school, done the degree gone and worked the big corporate job I still was never going to be fulfilled doing that. It was at that point I went on a trip with my girlfriend who is now my wife to Bali after working with IBM for a couple of years. She said your miserable and you’ve got to leave and at that point again we packed up a second time and moved from Sydney to Queensland and from that moment forward I didn’t make a single decision again based on fear or lack or something that wasn’t in alignment to where I truly wanted to be. And I just decided from that point on I would actively gain the skills required to actually be a business owner as opposed to an employee long-term.

Aussie Firebug
Right so you knew that working for someone else and doing the normal 9-to-5 day grind career sort of thing wasn’t for you. So you read Rich dad poor dad, was investing or businesses your first preference. Where did you sort of go from there?

Ben
So investing was definitely my first preference because I came from mindset which is probably like a huge amount people in your audience which is you have to follow a certain path to achieve a certain result and that path is School, University, great job paying a huge amount of money, and maybe investing in a couple of properties and retiring.

For me I listen to this guy a huge amount when I exercised called Jim Ronan who talks about financial independence and achieving financial independence. His first goal for every employee is to replace their full-time wage while their working in their job. And then he goes on to say that he replaced his full-time wage by three times before he left his job. That was always my goal, so I was earning good money over six figures by the time I was 23/24. And I was looking to replace my wage by three times which was a ridiculous goal. I don’t know why I had that goal, it was probably because I was listening to him so much and I thought that was financial independence. Where it ended up being someone further down the track that convinced me to leave my job because I replace my basic living expenses and I was ready to move on and do what I love full time.

Aussie Firebug
Right so you went down that investing road first and you discovered property, why properties what attracted you to property?

Ben
I think the number one attraction to me was that I understood it. I have met people during university that were millionaires through property and I knew that they weren’t smarter than me, I knew that you didn’t have to be a rocket scientist. And I just love it, I love the concept of buying something of average quality with potential and manufacturing potential into the deal. And I also thought the one thing you can do with property was use leverage. I only had a $20,000 deposit within the first year of leaving uni and I knew that 20 grand leveraged in shares might have only been about $40,000 I could buy whereas with property at the time I could buy a 400,000 asset using first home buyers grants and things like that. So for me that was extremely attractive because leveraged and compound interest to me is what it’s all about

Aussie Firebug
So what sort of property investor would you say that you are? Are you buy and hold sort of guy or are you into developments or renovations?

Ben
I’m all about buying and holding now but by buying and holding I develop or renovate. I will never just buy and hold something and hope that the market goes up I will make sure I can manufacture at least $100,000 plus into the deal before I even buy.

Aussie Firebug
You retired from full-time work at 29 do you work at all these days?

Ben
I actually work harder than I have ever before. But I actually work doing what I love every single day which is helping other people buy property. It’s my passion I am absolutely obsessed with this stuff it’s all about contribution now as opposed to making cash though.

Aussie Firebug
It’s funny that you say that work harder than you ever have before because I read a lot about people that have made it to the end goal. They’ve reach financial independence… because some people do it without ever starting their own business. They just work their 9-to-5 today job and they slug it until they have enough investments to cover their living expenses which is totally Ok way to do it. It’s interesting to read about those people into a like that is a lot of say that when they get to the end of the journey, like they only have six months to go and theoretically should be able to retire really soon. Suddenly working this job is a lot better and waking up to go to the job is suddenly not as difficult and not so much doom and gloom as it was before like it was 10 years earlier and couldn’t see the light at the end of the tunnel. Is that psyche sort of in your mind, you could turn around tomorrow and say hey I don’t want to do this I have enough money from my investments to retire and not work whenever I want to. Do you think that plays any part of it in what you doing now and why you work as hard as you do?

Ben
For me I would never be content it’s just not my nature. I come from a competitive sports background type, I can’t help it I love being involved in the game. I don’t want to be a spectator to life. For me I get a lot of my needs for significance and contributions through my day job now. For me those basic needs like survival and basic living needs are met and those things that are a little bit further up the chain to me get met through work. I’ve tried to sort of kickback, saying that. We have taken at least 12 weeks off in the last 12 months to travel and holiday and spent time the family. We will work extremely hard but will work extremely focused as well. It changes the way you work from 9-to-5 to working extremely hard for stints and then playing or relaxing extremely hard to stints as well.

Aussie Firebug
That’s awesome that you have the flexibility to do that and is one of the main things that attracts me to strive for financial independence so it can give you just that, the independence to do whatever you want and go on holidays and spend more time with your family. I know now I’m working full-time and it’s crazy, like I have a partner and I play footy, I swear I hardly have any time as it is now. I commute now each way to work which doesn’t help that but still, I’m thinking down the track and see people having kids now and am thinking how am I going to get the time to do everything I enjoy, seeing I already don’t have enough time as it is now and I know what people do when that happens they have to give up something, they drop the gym they drop the footy they drop something they like doing this just like work kids and there is very little fun time in between for yourself. And I just did not want to be in that position which is why am trying to get to where I’m going. Having children now yourself, you have two kids, that must be an absolute pleasure to you and your wife to know that you have that flexibility.

Ben
absolutely to me a huge part of our motivation now comes from our kids. Kids changed everything. One thing growing up is that my dad worked really really hard he come from absolutely nothing. From the time I was one half to the time I was four and a half we literally lived in a caravan while they saved for their first property. They bought their first property when interest rates were at 18%. My dad couldn’t buy a beer at the end of week that how hard it was. I learn’t from observing them that one, I don’t want to miss those early stages which is why I left work when my daughter was a year and a half, I’ve already felt like I’ve lost more than enough time in her life.
And secondly my dad ended up turning his situation around by turning around buying some great investment properties and starting some really successful businesses that are still running 15-20 years later. Listening to them and seeing the things that they missed out on that if they have made decisions at the age that you and I are their time now would be completely different. I don’t want to trade time for money and I don’t want to miss out the most important things which is being able to say yes to most of to the things that you really care about and to find time for the things that inspire you to do your best work and not to just exist there for a pay cheque.

Aussie Firebug
Sounds like he was a bit of an entrepreneur himself. Sounds like you’re a bit of a chip off the old block. Sounds like your old man had some influence on you.

Ben
Yeah sure he showed me it’s possible and he didn’t have a businesses that failed. I never looked at business is a risk as I could see how it could work.

Aussie Firebug
Absolutely and I think it’s a big thing about it to see people who have actually done it. Before I knew any about anything to do with financial investing and financial freedom and all that. Once you discover it, I went to a heap of property conferences and I’m meeting all these people and it’s like whoa they’re actually out there, these people actually doing it and now I’m interviewing yourself that retired from work at 29 its crazy. It’s awesome, you have that the back your mind that this might be possible, you read about it but when you meet someone who is actually doing it that puts it into perspective and it really validates it that this is the actual thing. You manage to retire from full-time work at 29. Your parents managed to buy a property when interest rates at 18%. Do you think properties in the two capital cities are unattainable and what would you say to people for people looking to buy properties in the two capital cities where the prices are very very high at the moment. What are your thoughts on that and that current situation.

Ben

I wouldn’t touch Sydney or Melbourne personally with a 10 fioot pole. I mean if you paid me to invest their down there now I wouldn’t even considerate it. And that’s because something that I read by Warren Buffett a long time ago is don’t rush into markets that are at their peak and don’t buy markets where everybody else has just bought. Like the successful people in Sydney and Melbourne are the people that have own properties the 10 years and have cashed out or made equity through this boom. They are not the people who have just bought in the last 12 months. My thoughts is that there are parts of both of those markets that of extremely affordable and extremely attainable now. But you’re probably got to be a little bit more creative in the product that you’re buying. Maybe the dream of buying the four-bedroom two bathroom home on a 600 m² block for a lot of people in our age group is completely unattainable now but there is still plenty of value in the right sort of town houses in the right sort of suburbs. I think that the good buying in areas like that will be in 3 to 4 years times where you have these people that earning 100 grand a year who now own million-dollar properties and interest rates go up to 7 or eight or 9% and all of a sudden these people can’t afford to service the interest let alone the principal repayments on their loan and a huge amount of distress property comes back on the market. That will be a good time to buy if you can financially put yourself in the position to capitalise on that.

Aussie Firebug

Sure

Ben
It’s all about timing. Right now doesn’t represent good timing in the market.

Aussie Firebug
Your talking about an investment point of view, what about someone who just wants to buy a house to live in. So there not looking to invest. What advice would you give to people that are looking to break away from that renters, not trap…but that renting for the rest of your life. Do you have any tips or tricks? If you were a young man in Melbourne right now earning around $80-$90,000 dollars what would you sort of do? Would you move to an outer suburb or look to advance your career? How would you tackle that?

Ben

Through my businesses I to get to speak to a lot of young motivated people. So what I generally suggest is that, put ice on trying to buy the property that you want to live in in Melbourne for the next five years, and over that five-year period focus on the building of a fantastic business is that’s the way you orientated which most people aren’t. If you’re not orientated that way focus on making on making as absolutely as much money as you can over the next five years through better in yourself in your career. The great thing about Sydney or Melbourne is that you can live a 1,000,000 dollar life style for about $700 in rent.
And owning your own home only works if the market is consistently increasing during the time that you own it. There is nothing to guarantee that Melbourne or Sydney because it’s had 8 years of growth in the last three are going to increase in value over the next five years at all. So you would be far better off if you are not making money through your principal place of residence, renting the lifestyle you want a lead now and forgetting about buying and then investing in other areas or other states that can provide you.. say you buy one two 3 properties over the next five years that can make you let’s say make you $300,000 in equity over that five years, redrawing that equity as a larger down payment on the home that you want to own once you’re earning the income that you are able to justify that and when the marketplace is isn’t as ridiculously hot as it is now. That’s my thoughts on that.

Aussie Firebug

It is a really interesting topic. It’s funny those two markets you know, as I have said I know people in Melbourne who are trying to buy and it’s so expensive and Sydney is even worse like you said, renting just seems like such the logical choice now because you break it down into rental yield, if you rent a joint in Sydney it’s so much cheaper for you to do that like if you were to actually buy the same place that you rent your repayments would be double, triple of what you currently renting it for.
And if you just saved the difference if you’re discipline enough to save the difference between how much you pay for rent and how much your leftover savings you can clean up you can totally become a lot wealthier by renting and investing the difference then you can by over stretching yourself with this massive mortgage and having to make these huge repayments each month. I guess it’s sort of ingrained into a lot of people in Australia that your home is your castle and everyone hasn’t made it until they buy their own home. Which is properly not true, but it’s definitely an Australian mantra. I met someone once at a property conference, he was a multi millionaire, financially retired years ago and he rents, he still rents! He still rents his place of residence too, and it is exactly same thing that you said. I live in Sydney I can rent this $1.7 million apartment on the bloody waterfront or wherever it was, why would I buy a place and pay all that money repayments when I could happily rent it and live in a much better placed than if I bought.

Ben

Like I can understand psychology of people wanting to own their own home and the pressure that mum and dad’s and people in the community place on that. I tell you what, if I knew that my million-dollar house that I just bought was going double in value in seven years like it has done historically then I would be owning my own house in Sydney or Melbourne and making it work. But those old days are gone. The best you can… When I look at the numbers my properties the best I can hope for is a growth rate of 4% and if it’s not going to give me at least 4% I won’t invest. I think anything above 4% vote these days is definitely cherry on top of the cake because I don’t think need a 400,000 or place leveraged to increase in value by 10% every year like you did $100,000 how house because you’re still getting the same dollar for dollar return out of it.

Aussie Firebug

It’s funny because you would probably be of similar age, in terms of property life cycles. Have you ever seen a major crash in Australian property because I haven’t since I’ve been alive, my parents may have, but I don’t think there’s been one for a long long time, they have had that massive surge between 2001 to 2004 2005 and then it slowly slowly increase and then Sydney’s gone bananas in the last couple of years it’s almost you know due for a bit of flat line or a bit of a decline some would think?

Ben

Well Sydney market was in correction from 2005 basically through to 2013 and I suppose Brisbane sat flat for five years Gold Coast sat flat for nine years, Melbourne’s consistently sort of ticked along. All the markets have done what people projected they would do, there is no way that the sort of growth that they saw between 2001 to 2003/04/05 will occur again like it’s almost impossible for that to occur again. That’s why I’m so into that manufactured growth and having multiple strategies on properties and options now. Because the old days of just hoping you are going to make 100 grand on a property are over unless you’ve got a huge amount of time which I don’t think any young person really wants to wait 30 or 40 years before they retire these days.

Aussie Firebug

Australia was pretty much largely unaffected by the global financial crisis in 2008. I don’t know you’ve watched the movie, there was a new movie it just came out it’s basically about that financial crisis and a whole bunch of blokes betting against that. I’m trying to think, it’s… The name escapes me.

Ben

Is it the one with Brad Pitt in it?

Aussie Firebug

Yes that’s the one

Ben

Yeah I haven’t watched it

Aussie Firebug

Yet it’s a really good movie. But it’s really scary. Their property market just went completely underwater, like it wasn’t exactly the same as Australia. I invest in property myself and do you, does anything like that scare you or does anything like that come on your radar in Australia that you worry about that?

Ben

Is the movies called the big Short is that the one?

Aussie Firebug

Yes that’s the one! did you just Google That?

Ben

Yes I did ha ha ha. I’m constantly driven by risk and fear from the upbringing I had I still am always preparing for a rainy day I suppose. The way that I prepare is to overcapitalise for example a revenue stream in my business that is recession proof which is a property management business. So you’re going to have your high sales value which is the business I’m into which is buying agency but than you can buffer that with let’s say a million-dollar property management business that regardless of what happens in the world people are still going to need to rent and maybe rent will decrease by 50 bucks a week but you’re still going to get your 7% eveyr single week for the year for those properties.
I’m always concerned with that as well, like if I can’t manufactured growth into my portfolio, if my LVR is ever below 70% and I’m seriously concerned and won’t proceed with that property at that time. I’ve seen a global financial crisis I’ve brought five properties. I bought in Sydney a property which was 20% below which what the same property was worth 12 months before so there was a slight correction in Sydney. You know I read about the stuff that happened in Japan for example they lost over 50% overnight and their economy was as stable as Australia and that sort of stuff scares the shit out of me. It’s all about trying to create an income stream that generates income regardless of the marketplace. So that when things happen, and they will, you’re in a position to capitalise on that you’ve got cash funds and liquid funds that you can go out and buy the distressed assets that other people need to move. I look at something like a GFC now as an amazing opportunity. Where five years ago I would have been seriously concerned about it. I, like every investor, look forward to those opportunities where I can pick up distressed assets.

Aussie Firebug

It’s like what Warren Buffett says, be greedy when people are fearful and fearful when people are greedy. I think that was a famous quote or something along those lines and it’s definitely true. Only a few people know what I’m trying to do you know, I’ve got three properties myself. There are two people and I find I come across, one of them is supportive and want you to succeed and are all for it, but I just find that there’s a lot of people that are just Doomsdayer’s. People who have absolutely no idea about property and who have never invested in a single property in their entire lives and then suddenly they are telling me how just made the biggest mistake of my life. Just naysayer s. Did you ever come across those on your journey and how did you deal with them?

Ben

Yes absolutely and it’s really sad because most of those people were good friends and most of the people in my life still think I’m ridiculous and crazy but now they seem in living on waterfront house without having to work now like maybe if I did stay along for the journey. They have kind of come back around and gone Ok dude what are you actually doing because I’m on the train commuting two hours every day to work and you’re sitting in your house and… I don’t mean to be a dickhead and sound like an arrogant person but the difference is I made choices from about four years ago based on happiness and what was on in-line with my value system when a lot of people in my life make choices based on fear. With a lot of those naysayer’ s, I think about this a lot, I think as you begin to… I don’t know you could call it vibrating on a different frequency or getting yourself in a different mental head-space, like you’re going to attract hundreds of thousands of amazing people to this POD cast over time and your community will become people that are just like you. When I started my journey I had a goal for eight years which was to sit down with five people worth between one and $50 million per week and to sit with them for an hour and interview them and learn and try to find a pattern and it’s very simple what the pattern is and it’s about replicating that.

Aussie Firebug

And I think as while you have to take a risk to get somewhere in life like if it was easy everyone would be doing it so it doesn’t matter what you’re doing. Even if you put savings into a savings account to earn money through interest that’s a very small risk but it still a risk. It slightly annoys me when people have a go at something and that so many people around that are trying to pull them down, you see it all the time not even in investing but also in sports, tall poppy syndrome. Like you said I guess you just have to focus where you want to be, make the plan and just go for it and hey if it doesn’t work out it doesn’t work out. I’m sure this can be bumps along the road but at least you can say you had a go. Even if you fail, even of it all comes crashing down you can say that you had a crack and you’re not going to…

Ben

I think you know the one thing you have is the skill set to rebuild it. If it all comes crashing down and you don’t have the skills to get back on your feet that’s where you see these poor people with marginalised loans that end up on the pension.
When you talk about risk it’s really funny because I used to think about risk as buying a $400,000 property now I see risk as not making that decision because I see that the long-term impact of what not achieving financial independence does and that is less time doing things you love that means less time with your family that means less time doing you know things that you’re passionate about less time contributing to the world. Money comes and it goes, you notice that the people that spend the most time focusing on money are the people that have the least. The people that have the money are pretty happy with everything sort of just it’s really weird that I suppose just been in flow with money and also having the skill set to make it and it is a skill set it’s not something that anyone’s born with unless you come from a family that is worth over $15 million and it’s then brought up to you through family.

Aussie Firebug

Yeah absolutely and I could agree with you any more. When I was younger you think that the guy with the flashy car or the guy that dresses really well they are the ones that are wealthy. But when I got older all my friends whose parents that I know do really well who have businesses in everything, they’re wearing 10-year-old trackies and the driving just normal cars, like what’s going on here? Movies have lied to me my whole life and everything I thought about rich people has been the opposite. Have you ever read the millionaire next door?

Ben

I have actually and that’s an awesome book as well.

Aussie Firebug

Yeah it’s so true though. The people that have to have the latest Mercedes-Benz every year they don’t own any growth assets some of them do. But I know a lot of people in my life that have the latest car and the latest this and the latest that but they don’t actually own anything, they’re not actually wealthy. They have all the latest toys and gadgets and stuff. It’s almost like their living… not a lie. But their portraying themselves as something that they’re not. Because the really wealthy don’t need to do that and half the time they are very simple people and they porbably spend less than most people spend on themselves.

Ben

I don’t think I’ve ever met someone with serious money that cares about too much of things like that. Because most people that have got money realise that those things aren’t what make you happy. Relationships, contributions, doing things you’re passionate about and fulfilling whatever it is you want to do with the world makes me happy personally. I’ve talked to you know, I get to speak to a lot of people and I would say like the high income earners that are earning wages between 200 to 500 grand per year and I probably speak to about 30 of them a month through our business are the ones that may own one property that have the most personal debt, that have the most car debts, that have the most credit card debts. Whether they are earning 80 grand or 500 K a year they still spend that. And their friends think they are absolutely killing that and I look at those people and go why the hell didn’t you retire 5 to 10 years ago and what are you still doing working? And they’re complaining about their job and they could have a way out of that job within two years if they were smart.

Aussie Firebug

That’s crazy. Time is just about wrapping up so my final question to you is if you had to start again let’s rewind back to when you are 19, the stars are aligning in Europe. You’re sitting there in front of the Eiffel tower. What would you do differently knowing what you know now to reach financial independence as quickly as possible?

Ben

I would have not gone to university I would have gone and got a job straight away in real estate and I would become a property investor from that exact moment. The other thing that I would have done is to have the belief in myself that I didn’t need the approval and I didn’t need all these skills that I thought I needed and that I already have those to do what I need to do. Like all that stuff in already in you already like every single person has got unique ability and anything you need to learn along the way you can. Like to have just taken the plunge earlier like I probably would have been ready to start the business five years earlier like but I just didn’t have the confidence and I had all these expectations and limiting beliefs that was stopping me from doing what I was really meant to be doing which is what I’m doing with my life now. Jumping into property straight away and having belief in myself would have been the two biggest things.

Aussie Firebug
That seems to be a common theme with a lot of successful people and businessmen and investors. I wish I had done it years earlier. I think the guy that started KFC in America, he started that franchised at 60 or 65 I think. He has a quote that says, why didn’t I do this 30 years ago! That’s is crazy. I’m sure that a lot of people that are successful that have the same regret, but hey you’re super young so it’s not like you miss the boat by that much. It’s certainly something I think of. You just have to do it, you have to have a go at something because you don’t want to be nearing 60 and having to rely on retiring on the super and have in the back your heard what if I tried something and why didn’t I do it sooner.

Thank you so much than for being on the pod casts and I wish you all the best in the future I hopefully see you again soon.

Ben

Thank you so much and I really appreciate the time and I’m so excited for what you’re trying to do and I can’t wait to continue to listen in and see who else you get to interview.

Photo credit: Colleen AF Venable via Foter.com / CC BY-SA

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Wrapping Up

Podcast – Ben Everingham: The Stars Align In Paris…

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