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!