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This is a guest post from Dave who is very active in the Fire movement in Ireland. Today he is discussing using property to reach FIRE. While I often thought of the 3 + 1 strategy using property to fuel my income, my own personal circumstances around a split mortgage leave my options pretty slim.
As an Irish investor, this will be tailored to the Irish market but I think the strategy will remain the same regardless of your geographic location.
Over to Dave now
Background:
I’m Fire Dave of firedave.com. I am passionate about helping people to discover FIRE and find their own financial independence journey.
Currently, I am in my mid-30s, with family, living in Ireland, and I am a member of the international FIRE community. I discovered FIRE a number of years ago when searching out a higher meaning and purpose for my life. If you are like me then you may be sick of exchanging time for money with no end in sight.
It all started one evening when on the phone with someone from the US when I heard about their FIRE concept.
Vision
https://www.buymeacoffee.com/dividendtalk
“To inspire others through my own inspiration”
Definition
Financial independence is when your passive income covers your expenses. The Retire Early (RE) bit is optional!
FIRE in the US and even in Europe often work off the 4% Trinity Study model, which looks at determining a “safe withdrawal” amount over a 30-year period from various retirement portfolios with the lowest probability of the portfolio running out.
The formula is a 4% safe withdrawal from (25 x yearly expense).
So if your yearly expense is €40,000 x 25 = €1,000,000 portfolio value requirement.
So once we solve the money problem we free up time to do other things.
Property Only Portfolio
From an Irish perspective, I decided pensions and stock market investing were not the optimal asset classes for me to invest in. I started to focus on building a ‘property only’ portfolio against all advice and remove the safety net of a diversified investment portfolio, to wholeheartedly focus on generating as much liquid cash and using it to buy real estate.
I felt that the Irish taxation system was less favorable here than perhaps the US and the UK and coupled with my desire to cash flow immediately, this would put us in a position to FIRE and retire at a date we could control anytime we wanted with property v a pension with ever-changing rules and ever-moving dates.
Equally, the high rental yield on offer in Ireland compared to other European countries was another major advantage. Property was something I understood, was tangible in comparison to crypto, ETFs, investment trusts, stock-picking etc and I felt I could directly influence this asset class.
Some advantages of property investing
I got to work on the F.I.R. E concepts and made property our baby. You know the old saying, “Property is as safe as houses”
I also knew that the banks were willing to bet on you and lend against real estate all day long so this was a green light to me.
Furthermore, I know that property has many other advantages not only does it appreciate over time, usually there is a clear 10-year jump in capital appreciation – so property is a decent hedge against inflation.
You can often add value to the property to directly affect its value and in Ireland currently, you can offset 100% off the mortgage interest as an expense. That looks like free money to me.
It is common knowledge that everyone needs somewhere to live and there are additional options to long-term rental (short as short-term rental and nightly rentals) which can be very lucrative.
Calculating Properties
I sat down with my wife with a blank piece of paper and a pen in the kitchen table and drew a circle and wrote in the middle ‘our house’ (this was our main residence).
We started to draw lines coming off the main residence to represent Rental 1, Rental, 2, Rental 3 etc and tried to figure out how many we would need to actually FIRE, so we were completely reliant on our own personal resources.
I was only familiar with the 4% rule which did not help me here although I did consider the idea of having a total property portfolio equal to (the equivalent 25 x estimated yearly expense) but that felt like conforming and not relevant to my plan.
2+1 was my initial feeling however certain risk factors started coming to mind and made me feel uneasy such as:
Example Threats
- 1. Loss of rental income
- 2. Changes to tax rules
- 3. Unforeseen Increase in FI or RE yearly expenses
- 4. Property crash (I was simulating a 50% drop in rental rates)
- 5. A property emergency or extensive work required
- 6. The need to sell a property and loss of rental income
- 7. Inflation, rising interest rates
- 8. The tax bill and expenses.
3 + 1 Strategy
I decided that a 3 + 1 strategy (total 4 properties) would create room to breathe and once the debt was paid down and an ability to live well below my means would mean I could probably remain FI on 1+1 if my back was up to the wall. After this I could continue to buy property as long as I could.
I also feel that property offers many other advantages as to quote one of my investors who recently stated:
“Property is the cheat code to Financial Independence that is just not utilized”
As I went down this journey I started to seek out information on FI through property and I was pointed towards a book titled:
Why I chose the 3 + 1 plan
With pensions in danger and funds losing value at a record rate the book looks at how can you be sure you will be able to provide for your family when you retire?
The 3 + 1 Plan is exactly the strategy we have started with anyway and used to fund the lifestyle we always wanted.
The idea in Ireland could be that the third property is for your tax bill and you have multiple streams of income in the event one property has an issue.
I think the biggest threat to a property-only portfolio and validated this concern in my investor’s mastermind group recently is a political change to the law and rules around the property. When I explore this idea it is less and less likely to present a true concern as it possibly undermines the essence of the system of capitalism.
So as Robert Kiyosaki has always said as long as you have a healthy relationship with debt, and I am not talking about a stream of credit cards maxed out on consumerism purchases, instead of while the banks are lending why not leverage debt to create rental income and scale the portfolio.
The concept of getting a good job, working hard, keeping your head and bank on an equities-rich pension verses a smart working property portfolio that cash flows now gets me more excited.
Live FIRE Events
After interviewing over 60 members of the FIRE community worldwide showcasing their individual financial challenges and Early Retirement success I demonstrate there are many ways to reach FI and there is lots of strategies that I share through others’ stories.
I also host live FIRE events on Live. Firedave.com with multiple speakers presenting live on Tactics, Strategies, and Tips to help people FIRE and RETIRE early.
The next Live FIRE event is on April 2nd, 2022.
The speaker profiles can be viewed at:
https://live.firedave.com/april22/
Contact Info
Live Events: Live.firedave.com
Blog: www.firedave.com
Instagram: @firedaveg
Email: dave@firedave.com
Sponsor: www.dolphinutilities.com
Recommendations
Simply Investing Report review – For investors who might like to have all the research done for them
Sure Dividend – Ben and his team help individual investors build high-quality dividend growth portfolios for the long run and offer a lot of excellent content for free. I write company review articles on Sure Dividend each Quarter.
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