Family On Fire – FIRE Magic – by Cam & Trish (but Trish’s Idea!)
It’s funny how life can throw a curveball at you. Sometimes it’s a great thing and can help shake up your thinking and plans. Recently, an opportunity to rent a friend’s property which is close to our kid’s private high school recently popped up while we were considering selling our house and moving closer to their school next year (our youngest starts at the high school next year). This got us thinking!
We spoke about so many scenarios – i.e, keeping our current house and renting it out, selling our current house, investing the proceeds of the sale into shares and buying another house once our kids have finished high school and we’ve decided where we’d like to settle down.
And then, one scenario popped up that we’d never considered before. Cam ran it through our trusty spreadsheet and we were gob smacked, we think we’ve discovered FIRE Magic!
Basically, we will sell our current home (which we paid the mortgage off 12 years ago) and invest the proceeds of the sale into our LIC/ETF trust. We will rent in the current arrangement until we reach our FIRE goal, then we will sell our two small investment properties and use the funds to pay off our beach house (largest investment property) which will become our primary place of residence – essentially giving us this house for free! FIRE Magic at work!
I’ll let Cam explain the actual nuts and bolts of how this will work below:
This strategy uses the best of every investment class and maintains security with diversity.
We have shared previously the FamilyOnFire 1/3 rule. This is the final implementation to reach high FAT FIRE with a lifestyle we could never even dream about.
Essentially our strategy has been to pay off our home early and mildly leverage (debt recycling) in LICs and leverage into investment properties (IPs). The IPs target was to have virtually no cash deposits and be close to cash flow positive from the start.
I’ve created a Family On FIRE – FIRE MAGIC flow chart below:
Following the FIRE Magic diagram above, the idea is to earn money in your day job/s whilst building equity in your home. Personally, we have also maximised our super contributions in recent years (now $27.5k pa each) and used carry forward contributions for any missed concessional contibutions – ato link. We try to get a balance between Super assets (only accessible at 60) and FIRE assets (Investment Income outside super). These both fund our FIRE plan.
- You can then borrow against this home equity to purchase IPs and LICs (banks love lending against property).
- The FIRE Magic utilises your home equity at the correct point (Pre-FIRE) to turbo charge your LIC/ETF balance. We plan to sell our home this year and put a large amount into our LIC/ETF trust (technically we have then reached Fat FIRE). As we both still enjoy working and plan to factor in lots of holidays and fun, we will keep working. In the meantime, we will rent a home closer to our kids’ private secondary school for the next few years.
- When we reach our FIRE goal, we will sell our IPs one year at a time which will clear the debt of our beach house (IP3) and minimise CGT. During this time of high gains all franking credits and dividends will go to others in our Family Trust. IP3 will then become our principal residence, debt free in high Fat FIRE while we part-time holiday around the world.
I’ve modelled in MS Excel a lot of different situations with all the factors (capital gains, land tax, net outgoings, transactional costs, etc.). The option of selling the IP1 & IP2 now and putting into our LICs/ETFs was also modelled. However this FIRE Magic is worth looking into and doing your own sums.
FYI – most friends (non-fire) said we are crazy (in a caring way) to sell our house and rent instead, but we have always gone against the grain and strangely use it as confirmation we are on the right track!
Hi Cam, great article, enjoy reading this and follow your family’s FIRE journey. I plan to sell my home property later this year ( among many reasons, release capital to start a LICs/ETFs folio). my question is that how would you invest a large sum of money, would you do it in one go say divided to 5 LICs then buy in one lot or purchase over time for psychological comfort?
I read ” property chat forum” there is advice How to invest a lump sum as below, what do you think? by the way, large sum is in the range $100,000 to $200,000 for me as a starter is large sum.
There’s a body of research that suggests it’s best to invest it all at once. The problem is you have just one shot and you may not to be able to afford the risk of dumping a huge sum into the share market and then seeing the market plunge 50%.
There are also the psychological issues in that if the market crashes soon after investing a lump sum all at once you are likely to feel deep remorse and experience negative emotions. However if you average in over an extended period of time there appears to be less sense of remorse in this situation.
A useful strategy by the author here Home – HumbleDollar is to invest the lump sum over a period or 2 – 3 years. Then divide this into however many chunks that makes
sense brokerage wise. Some suggest a minimum purchase of $3k if using a discount online broker. These chunks could be monthly, bi-monthly or quarterly depending on the sum involved. Move one chunk into your selected share / LIC with the goal of being fully invested within two or three years. If share prices drop 15% from current levels, double your planned purchases. If the market falls 25%, triple your purchases.
Hi Wendy,
Thanks for your reply and glad you are enjoying the ride and good to share a similar path.
We will also be investing all of our home proceeds to super charge our Family Trust share account. We now use the 5 LICs + Global ETF ex Aus for International exposure. Although we haven’t done yet we plan to pretty much do in lump sum over a few months. Our strategy is to check the NTAs of the LICs and buy in accordance of of our weighting ratio (no more than 25% in any one LIC or ETF). This levels out performance fluctuations and gives great diversification.
You are right that statistically it is best to throw it all into the market for best returns but you need to be prepared if it does dip the 50% to hold the course. Having sold my personal holdings with lots of small purchases over 25 years to put into our family trust I know the accounting alone encourages me to do large chunks to reduce the spreadsheet burden.
From a brokerage point of view I also look at the thresholds. Comsec have brackets of fees of $1k, $10k and $25k. After selling a house I would at least go $25k sums personally. However as we are not currently living off our investments I don’t care if it does drop (too much). Actually when it was dropping in 2020 I just uninstalled the Comsec App – fixed! I will just scramble to put more money in if we can afford while keeping a small cash buffer (offset from IPs).
Hope this helps understand our plan.
Please keep in touch and let me know how you go :).
Cheers
Cam
Hi guys. I read ur article about fire magic. And one of you… answered a question I had on aussie fire discussion. What u guys r doing is very similar to what I am trying to do too. I have a beach house That i go to three days a week and plan over time to add a day each few years to that before full time live there. I also have a house I live at next to my work and own my biz and commercial office (all loans) and own two IP residentials. What I was thinking instead of selling the two IP is to take money out of them (increase loan and put it into stocks outside of super) and sell the ip when I work only one or two days a week, due to tax issues. That sound like a sound plan? I also plan to work and own biz and commerical office and just own my beach house and travel a lot. Very similar to u both
Hi Nick, Cam here and thanks for your question! It does sound very similar to what we are doing/plan to do! Yes we modelled out some different options based on lifestyle, ranked them and put a dollar value based on the current situation. Definitely worth working out the best time to capitalise on selling the residential IPs. We then put together on cash flow when reducing work, increased travel, kid’s wedding, etc. The good news you have plenty of options and if the market is down and you need to rent them out for a few extra years you can do that too. Thanks for sharing your FIRE goals! Wishing you the very best.