One thing the article didn't really touch on is what an early retiree (RE in FIRE) living off their income might consider doing a little differently to someone like FireinTH who is still working but planning to retire early. For the early retiree they may need the income from that portfolio to live off, whereas the worker is living off their salary.
If you have a portfolio of say SGD 400k you could borrow say 40% against that as the article suggests. You then have SGD 160k (THB 4mn) for your property. (Assuming a rate SGD/THB rate of 25)
That can be a good way to finance for someone working. But for the early retiree they than have less income to live off, as they now need to pay interest on that SGD 160k loan. OK they may save on rent, but there will be other costs, and let's say for arguments sake they want to largely try and maintain that income level.
What they could do is buy more investments and leverage a bit further if the income on those investments exceeds the finance costs
eg
1) before they have a portfolio of 400k. The natural income on that through dividends could be 4% or SGD 16,000 which may be a key part of their income for living
2) if they borrow at say 2.5% though they now have an interest expense of 4,000 on the 160k loan. So now only have income of 12,000 net from their portfolio after interest. That drop in income for someone not living off it may be fine. But for a retiree it's a 25% drop in available investment income
3) What they could do though is first buy more of the investments they own and are comfortable with (income yield is higher than interest cost) to offset some of that reduction in income.
eg lets say they borrow 100k against their 400k and invest it in the same type of investments yielding 4%
They now have 500k generating say 4% income = 20,000
If they now borrow 160k for the property they have 260k of borrowings (100+160k) @2.5% costing 6,500
so end up with net income of 13,500
Result:
That's a drop of SGD 2,500 income (instead of SGD 4,000), or just over 15% (instead of 25%) on the original income amount
In this case 260k on a 500k portfolio has also gone over 50% a bit (52%), but by playing around with numbers and applying the same principle, you can come up with different levels of income/ leverage etc
Note the portfolio is bigger and the loan is bigger. So risk is bigger, so someone might want a lower leverage or decide they are not happy with the risk at all
4) Taking things further: If you change the investments and potential yields rather than just more of the same investments you can vary things further, in terms of risk, reward and income.
In my case I decided to buy some more Singapore REITs which yield around 6.5% and higher than the average existing 4% investment income yield. But that extra yield can make quite a difference at a financing.
eg
a) start with 400k, borrow 80k and invest the 80k in REITS with a 6.5% yield or extra 5,200 in income
b) borrow another 160k for the property @ 2.5% finance cost, so total borrowing is 240k @ 2.5% = 6,000
as you can see the yield on the REITS covers most of the total interest expense, and most of the original investment income remains intact
Comparing the 4 scenarios: of 1) no loan 2) loan vs existing investments 3) loan with more of the same investments to increase portfolio size 4) loan and adding different/ higher yield investments to increase portfolio size:
1)No loan. 400k portfolio. No property/home. 16,000 gross income. Net income 16,000. No interest expenses or leverage risk
2)160k loan. 400k portfolio. Your own property/home. 16,000 gross income. 12,000 net income. 4,000 interest expense. Leverage of 40%
(25% or 4,000 drop in income and leverage risk to buy your own home)
3)260k loan. 500k portfolio. Your own property/home. 20,000 gross income. 13,500 net income. 6,500 interest expense. Leverage of 52%
(15%-ish or 2,500 drop in income, higher leverage risk may be above the 50% comfort level but buy your own home)
4)240k loan. 480k portfolio. Your own property/home. 21,200 gross income. 15,200 net income. 6,000 interest expense. Leverage of 50%.
(Extra new investments largely cover the interest expense, resulting in only a small drop in income but higher leverage though still acceptable)
While the person working may prefer option b) the FIRE retiree might prefer c) which while obviously higher risk and more leverage, doesn't suffer the same drop of income.
Of course none of the returns and expenses are guaranteed. Investments values as well as investment income rise and fall. As do interest rate and financing costs.
The numbers can also be tweaked according to your own risk/ return preferences
FWIW In my case I preferred the 4th model/option. Although my numbers differed
:
- I didn't want to see too much of a reduction in income (like option/model 2), and didn't want to leverage above 50% max (like option model 3).
- I also liked the idea of using the new portfolio of REITs to finance the loan, without really touching my old investments at all. A 160k loan financed by 80k of new investments you might say (my numbers differ though)
- While SGD REITS may perhaps be considered higher risk, they are tax free, denominated in SGD (matching the finance cost) and higher yield.
- Worth noting SGD REITs might actually diversify your portfolio and reduce overall risk if you have no property investment exposure to start with. So while the individual investment might be "risky" in some people's eyes, it's the portfolio mix that counts more. 80/480 (16.7%) isn't too concentrated for me either