Saturday, June 20, 2009
I got a little bit excited this morning...
No, it wasn't that I had a dream of eating KFC, it was a realisation upon reading this forum post. Rixter quite rightly puts forward a good argument here. After I read it, I decided to do a little tinkering and I have come up with my own strategy. I'm going to call it the "5/7 Strategy". It all makes so much sense with numbers, I got a little bit excited with the prospect that I could retire in 5 years time. Anyway, let's see it I can explain the 5/7 as clearly as possible:
In a nutshell, the 5/7 Strategy will allow you to retire in 5 years, by owning 7 investment properties.
This strategy assumes that the 7% annual growth that has historically continued, keeps going...there is little to suggest it wont.
In Year 1, you buy two houses, valued at a measly @200,000 each.
In Year 2, you buy one more.
Year 3, one more.
Year 4, one more.
Year 5, two more.
I would assume it would be vital to not cross-collateralise, as you will be drawing down on each properties' individual equity.
Year 6 - first year of semi-retirement
So by Year 5, you have accumulated 7 properties. The first property would now be worth $300,000 and you draw down the equity in this property to the maximum 80% LVR (loan to value ratio). So this gives you $40,000 for the year. You perhaps will need to continue to work part time to really sustain a higher standard of living, but you could easily live on this. This will provide you with approximately $770/week. Admittedly, this is not a huge amount, but you don't have to lift a single finger, or pay any tax on this amount. It's the equivalent of a $57,000 annual wage, before tax.
It's now time to draw down on IP2 - Another $40,000 for the year.
You continue to draw down 80% LVR on all of your acquisitions with 40K in your pocket every year.
Year 13: Jackpot!
By now, you have owned your first purchase for 12 years and, by following historical data, it will have doubled in value and it's now worth $400,000. This will mean you can now draw down the remaining $120,000 of your 80%LVR and this is the equivalent of a $171,000 pre tax wage.
That's it! It's really quite simple, well, definitely sounds very simple and it seems reasonable. Here is a little catch. If you can do this with $250,000 properties, EVERY YEAR you could draw down $96,000 and it would mean that by Year 13, you would draw down $104,000 tax free as well! Imagine that! Yes, you will have to repay the mortgages, but you have rental income coming in helping and you MAY need to work. At a minimum, imagine the extra cash coming in, tax free!
I think I may be able to do this...I'm getting a bit excited though and I'm sure there will be something that I missed and will mean this dream will crash. BUT, I'm optimistic. So here is where things get interesting (for me at least).
I have just purchased a $255,000 house, I also have another that was purchased for $390,000 and one for $151,000. I'm about to purchase another for $195,000. So I am possibly ALREADY in Year 2 of this plan. Furthermore, I have a block of land that has at least $100,000 in equity. The only issue for me, is that they are cross collateralised, but I'm sure my trusty broker and I can change that. SO, I have to acquire three more, one next year, one after that and one after that. THEN, I can possibly retire, or at least, a scenario that allows me to have some choices in my life. Like how much KFC I want to eat.