A balanced portfolio consisting of REITs, ETFs, & Bonds is easily performing above 7% in Canada.
But the post does seem extremely naive. What it costs to maintain real estate (property tax, maintenance, insurance, etc) makes even typically criminally-high mutual fund fees seem reasonable. Even if owning real estate really floats your boat why wait in fear for the next 2am call to fix a flooded basement when you can get a check every month from a REIT which being a dividend is taxed at less than half the rate of a rent income (which will likely be taxed at your highest marginal rate)?
If we have another financial crisis things are going to suck, but other than that, since this fund tracks the entire stock market, it's pretty stable by design. Mix in some bonds and you should be in good shape. (Note: I am merely repeating advice I've run into on financial advice forums.)
With FDIC-insured savings accounts, the best you can do is around 1%, which doesn't even beat inflation.
The VTSAX index is nice, if you're not unlucky. If you invested into VTSAX in mid-2007, then until today your annual return would be somewhere around 3.5%. Not horrible, but not 6% either. It does not matter that this year it's around 20%.
What I'm saying is that you cannot simply take 6% return as granted -- it's similar to saying that property prices double every 10 years. Yes, usually they do raise, but not all the time.
>If we have another financial crisis things are going to suck
We tend to have financial crises in every decade. .com-bust, property crisis, Russian crisis, Black Friday, Japan stockmarket crash... they happen all the time.
US Treasuries are practically zero risk, but obviously there are a lot of other risks - if you store your wealth in USD, then you have FX risk for example as most of your gadgets are produced in other countries like China, etc.
also, if you want to open a restaurant or anything for that matter-- DO IT -- even on a small scale -- try a food truck, or vending @ Fairs -- you need validation first to see if your food will even sell, if it sucks, then you're not out nearly as much as if you put out 1mill for a brick and mortar restaurant. -- Try your hand at catering as well maybe?
Personally, I hope he fails. Which sounds selfish but is driven by an anti-selfishness. The housing crisis in the UK is made worse by buy-to-rent schemes taking advantage of the incredibly low interest rates and government supported incentives to reduce the cost of housing.
Buy-to-let housing, as an investment vehicle, is fairly sickening in the UK. It traps the less wealthy into an almost indentured existence, with them spending the majority of their earnings to pay your mortgage and give you your profit. Their lack of future buys yours.
I'm all for people earning wealth, but do it by enriching their lives in some way. As a software dev able to create things that could help provide value for others, isn't that a better way?
A lot of people are buying houses on regular mortgages moving out of the property and then renting the property out.
You are supposed to inform your bank when you do this - but many do not because banks will increase interest as you are effectively converting to a buy-to-let.
I don't know anyone that has informed their bank and non-enforcement of this rule is allowing people with 5-10% deposits obtain buy-to-let mortgages when normally they would require 25%.
Oh and it's not legal. It's a breach of contract if you do not inform your bank.
It is worse than you were wondering. In the US, and it turns out most Western nations with "modern" banking systems, there is either outright or quasi-governmental support for taxpayer-guaranteed mortgages. The general public, as you, are for the most part completely unaware of this.
A common "business" in the US is to use various "housing assistance" programs to leverage cash for non-owner occupied housing. These debts are dischargeable in bankruptcy. Generally there are limits to about $2M aggregate and/or 7 properties, depending upon how you work the system. A great many of these "investors" are real estate brokers.
Imagine if your government announced software developers could get 3-10% cash down leverage on up to 6-7 $300K simultaneous projects. If you fail, the taxpayer picks up the tab. And you don't even have to go through YC to get it. Just show that someone else sold their similar project for however much you are proposing you get funded for.
One way to reform this system is to simply turn non-owner-occupied housing into non-dischargeable debt, with a 7-year phase-in on all legacy debt, and disgorging such mortgages back into the private market.
If you default, you lose the asset. The assumption is that the assets are minimally worth the value or the loans. Your comparison to software projects is way off. With mortgages there is a tangible and physical asset.
A software project that actually delivers code possesses the potential to generate income in a way that residential homes do not. In that respect, granting loans on flimsy pretexts to software projects is better than to non-owner-occupied homes. If it pleases you, imagine loans to anything else that this crowd works with on a daily basis. Don't let the analogy distract you from the core thesis pointing out the perverse incentive structures raised around residential loans leading to undesirable policy outcomes.
I'm very hard-pressed to come up with any other business where 4-5 figure sums of USD cash can lock in 6-7 figure values of assets, at preferential interest rates, over very long payment terms, with only consumer-grade credit ranking and formulaic "comparable value" asset analysis for loan approval. If you've ever owned a business for any length of time sufficient to talk with your business banker about credit terms, you'll immediately recognize the extreme disparity between those terms and normal business loans and lines of credit terms. It is indefensible to pledge taxpayer financial support to real estate businesses via these loan vehicles.
Almost all property that is rented out is somehow financed. Even big housing developments. The 4:1 leveraging the article details is actually quite mild compared to some schemes out there.
Of course it is. A lot of people I know in the UK do it exactly this way. Either get a mortgage to buy and let, or get a mortgage to live in a house, while at the same time letting out a room or two, which ends up paying the cost of mortgage.
Property bubbles notwithstanding, the underlying dynamics of supply and demand tend to inflate rental prices a lot more than interest rates, unless the interest rates are so crazy they're affecting the price of money itself.
So you'll slowly save a million pounds to lose it on a restaurant?
6% returns are not so easy to get by if you want to keep your money liquid. Performance in the past etc, funds can go down just as easy as they can go up.
You forgot to include the payments for those mortgages, upkeep of the buildings, the potential of a housing market crash (not that that would ever happen).
Also, you forgot to correct for inflation. A million pounds in 20 years is not the same as a million pounds today.
If you want to open a restaurant, go work for one today, live, eat, breathe and sleep restaurants for the next 5 years, save every penny you've got and offer to buy out your employer.
All in all, I appreciate your attitude and the effort that went into writing it all up but there are some bad holes in your reasoning and I think that it would be quite risky to follow your advice the way it stands right now, especially in combination.
Best of luck with your plans though, I hope that you will open a restaurant one day.
Just a few days ago someone on Reddit opined about the failure rates of food establishments quite eloquently:
"If your goal is to build your ideal cafe, set that. Be aware these are usually called "hobby cafes" and are mostly just a way for the moderately wealthy and idle to fill their time and reinvigorate their need for real employment by pissing money up the wall."
Agreed on above. You seem to be treating all rates, prices & predictions as static figures, where in reality they are highly variable. Have you though about potential changes in your own circumstances? Do you or might you have a family/spouse/dependants in the future? You need to make your strategy more agile and adaptive to changes that will occur over the lifetime of it.
The property market is volatile, and consider the fact that being a landlord for 4+ properties could eat into your time as a web developer.
> If you want to open a restaurant, go work for one today,
> live, eat, breathe and sleep restaurants for the next 5
> years
+1
You're going to work for 20 years in web dev, then open a restaurant, with no previous experience? Without any idea of whether you'd actually enjoy, or be any good at, running one?
Imagine your article written by a chef or a waiter, whose ambition was to save their earnings for 20 years then open their own web dev shop. Sound like a good idea?
Guy, this plan is like giving public transit directions to Superman. I love that you're lifestyle hacking and I love the dream you're going for, but if you're a web developer, you have a present day super power that is not only in really high demand itself, but you can put it to work for yourself to create derivative works for which there is a substantial demand.
My recommendation is this: If you're currently salaried, find out how to become an independent consultant to free yourself from full-time employment. If you do this wrong, it's worse than full-time employment. If you do it right, you'll make the same amount of money working half as many hours.
From there, identify pain points that still exist across multiple clients or leverage some insight you have into an industry you've worked in to create a business-to-business software-as-a-service product that generates recurring revenue.
It may take a couple years to figure it all out, but I have no doubt you can eventually launch a product that is bringing in the £4166.67 a month you want to save £1,000,000 over 20 years while also doing 20 hours a week in consulting if you still need that to cover your ongoing expenses. (I know a serious lifehacker who has that number down to 5 hours a week with a spouse and two kids, and he doesn't have a SaaS product yet. They're currently driving around the U.S. in an R.V. on a hunt for their perfect town to live in.) That would be on the low end of success in this space. It's also quite likely, you'll make much more in monthly recurring revenue and you can get out of consulting entirely if that's what you want to do.
There are a handful of people who have done this one way or another who are super open and transparent about it, which may be really helpful for you and other people who are interested in doing the same. A couple that come to mind are Patrick McKenzie and recently Josh Pigford. However, if you connect personally with other people who are doing this in chat rooms and such, you'll find that many people are quite open and willing to share numbers, tactics, advice, etc. if they feel it will help someone drum up confidence and help guide them along the way.
I think the first step is transitioning from full-time employment to consulting, because then you can scale your time commitment to people paying you up and down as you need to in order to build your business. And you never have to kick the coffee and wine habit you enjoy... just do another hour of work every two weeks.
- charging what you're worth to your client, not what you think you'd pay; (made this mistake for years)
- doing enough networking to keep business coming in. When you've got too much business coming in, see my first point.
- doing enough self promotion to keep business coming in
- learn something new frequently. New language, new toolkit, new mode of hacking (hardware vs software, for example)... Something that keeps you interested and engaged, and keeps you valuable. This is one of the harder ones, and probably the most important to future-proof yourself as you get older and have a family or other obligations. And it's damn hard for me to do if I don't follow #1.
There's a few other threads on HN about this subject that are worth reading, lots of good advice there. I don't always follow my own advice (and the above certainly isn't comprehensive) but I can say I've got a pretty good idea that I know what it takes.
Even doing it 'a little bit right' should net you well in excess of 100K 'credits' per year. Doing it right, anywhere from 200K to 350K. Especially if you take the GP at his word and do a bit of product development for yourself.
Mind you, it's not 'free money', it's really hard work.
The best possible “last job” to have before doing independent consulting is at a consulting firm that doesn’t just do staff augmentation. You'll learn almost everything you need to here that will help you avoid major mistakes in your own business. Don’t do anything shady here (e.g. stealing clients, etc.) and when you’re ready to leave, leave on good terms. (My old boss and I are still friends, we travel together, and he was the first customer for my SaaS product.)
Whether you work for a consulting company or not, you’re ready to leave when you’ve got two contracts from other developer friends who have too much work and want to refer some leads to someone who can help them. One of your initial contracts should be for a long-term engagement, as this helps manage your cash-flow risk. If you’re working for a consulting company, I can’t recommend you work on your own contracts at the same time… but I think you’re in the clear if you’re lining them up and you make a clear break from one to the other.
To leave your company on good terms and potentially gain a valuable source of work, you can offer to contract yourself back to the consulting company you already work for at whatever rate they typically pay outside contractors. (For the consulting company I left, this was $95/hour, which was the lowest rate I was willing to take at the time and only for contracts that were very advantageous to my business, e.g. regular, long-term work.) This can really help them if you were a "rock star" and were keeping important clients very happy.
If your pipeline is a little weak through word of mouth, reach out to consulting companies and agencies to see if they need any help on the deals they’re closing. This is easier for them than hiring new people especially if they’re not sure demand will keep up.
If your first track is a long-term engagement, increase your rate on every new project on the second track by at least $25/hour. You may find that people stop saying yes at a certain point, so maybe you level off there for a bit. However, if you don’t force this rate increase every time you have an opportunity, you’re really selling yourself short. Again, my lowest rate when I started in July 2012 was $95/hour. By the time I stopped taking new consulting clients, I was comfortably charging $200/hour and people were still saying yes at $300/hour.
Schedule three annual vacations right off the bat, one of them within the first few months of consulting and make sure you take it and disconnect. These are the recurring litmus test whether your business is actually optimized for happiness and whether you're really putting family first if you've got one.
Here's my favorite part: If you completely fail at this, it's no big deal. You're going to fall back into a safety net of regular full-time employment where you're still in ridiculous demand. The worse possible outcome for your business is everyone else's definition of success.
While I appreciate the writer's dedication, this article contains exceptionally bad advice. Unfortunately, the writer is choosing to use the absolute best case scenario in each of his points. This is dangerous.
Consider his spreadsheet showing his rental income. First, the spreadsheet assumes that 100% of his units will be occupied 100% of the time. Second, he says that most property owners will be looking for a 10% ROI from rental income alone. In practice, a 10% cap rate would be considered exceptional. Some very, very large real estate companies get close to 10% because they can take advantage of economies of scale. But, that is a horrible estimate for planning purposes.
In the real world, investing in rental properties requires either hiring a company to manage a property for you, or doing significant amounts of work yourself. When a tenant decides to throw a big party when they leave, you're on the hook for all the damage they do. And, you won't have access to a steady stream of income for all 12 months of every year - vacancies are extremely common.
If rental properties were as safe as he assumes and truly offered 10% cap rates, there would be too much demand, prices would skyrocket and returns would plummet. The invisible hand is an asshole.
Then, there's his talk about free money from the government. The program he references is for retirement.
If the numbers worked, this plan would be amazing. Alas, they simply don't.
I really admire that you are capable of thinking that long term but 20 years is a ridiculously long amount of time. You're on hacker news - what lean approaches can you take to test out ideas for making your dream come true now? Can you open a pop up for a weekend with a landing page to market it? Buy a food truck after saving for 6 months? Take the money you're saving and invest it in yourself, maybe you won't be guaranteed the mil, but at least you will move toward your goals now.
I've heard of some people successfully getting into passively buying and renting property. How easy is this to do in reality? By my calculations, it's pretty difficult to break even on mortgage when you're starting out, and that's if you decide to play landlord — which may very well end up being a full-time job! And if you want to live somewhere else, you have to hire somebody to do the landlordy stuff for you, which is even more money down the drain. How do people do it?
Regarding stocks + shares:
"For most of the past century, anyone investing for a 30-year period has been rewarded with a return in excess of inflation of between 4pc and 8pc a year if they were sensible about re-investing the dividend income from their holdings."
http://www.telegraph.co.uk/finance/comment/tom-stevenson/846... (just from a quick search)
You then take into account management fees, tax, relative currency value etc.
I stopped reading when the ridiculous statement that property will always rise in value and doubles in value every 10 years came up.
Simple (and I mean really simple) mathematics would make it obvious to anyone (who didn't really badly want to believe otherwise) that nothing can continue to rise in price over inflation indefinitely. There will always be a correction at some point.
Especially, nothing can double in price every 10 years consistently and indefinitely.
Sooner or later, the bottom falls out of the market for one reason or another and people get burnt.
While I agree with your sentiment about property values, your statement "nothing can continue to rise in price over inflation indefinitely" is not true, unless I'm misunderstanding something.
It is possible for an asset class to have greater returns than inflation (in fact, most do), but with increased risk. While this increased risk does mean 'corrections' will happen, returns for most asset classes (especially equity) are significantly higher than inflation in the long run. A world in which no asset class could outpace inflation would require zero economic growth.
I guess if the asset class is divisible it can rise in value indefinitely. But simple logic says that if anything rises in real value every year, eventually no-one can afford to buy it. Of course, this assumes that the average earnings don't rise alongside it, but that's the definition of inflation.
The London property market has been around for about 2000 years, more or less in its current form. If property prices really doubled every ten years indefinitely, and assuming it cost 1 penny to buy a London townhouse in 0ad, then ridiculousness ensues.
The last thirty years have been atypical of property prices. My theory, bolstered by little other than observation and deduction, is that we're seeing the effect of women entering the workplace. House prices are constrained by affordability (or the availability of money, which is why interest-free loans from Japan enabled Northern Rock to give 100% 100-year mortgages to people who couldn't normally afford houses) and over the last thirty years we've gone from most families having a single income to most families having a double income, so house prices rose consistently over the period and will settle at this new high. It used to be that your house was worth roughly 3x your annual salary, logically it should settle at 3x your combined annual salary. It'll be interesting to see if it does that.
Based on the author's "About Me" page, I suspect the article has a slight London-centric bias on this point. Quadrupling in 20 years (~doubling in real terms?) seems unlikely even for London's atypical market though.
Elsewhere, things are slightly better. Inflation does seem to have improved the prices a bit already, but real wages have dropped too, so they're still not that affordable. I can't say it's looking good for the author right now...
After reading this I was interested to read on his about page that in the past he was in the business of exporting "Audis, Aston Martins, Porsche and Japanese performance cars" to the Far East. Unless there's something I'm missing, surely something like that would require an amount of capital comparable with what you'd need to open a restaurant?
Easy if you choose not to have a family, or a social life spiced up with things that cost money to enjoy. The reason why most people decide to get rich is they enjoy spending money. If you live like a monk, you might as well say goodbye to the concept of prosperity, as there won't be any difference, and in 20 years your plans may well have changed.
Most people who open restaurants don't have all the required capital in cash, they get a loan from a bank. Then you can pay the loan back slowly over X years from the profit of the restaurant (or, more likely, since something like 90% of restaurants fail in 5 years, the profits from his next job).
My path: Become CTO for a startup, join an accelerator, accelerated companies have a 70% chance of success, if company can get to 10 mill and you only have 10% of shares, guess what, you're a millionaire! -- if it fails, rinse and repeat w/ other startups and accelerators.
Prices yes, value? no. Try measuring a property value in quantity of gold or oil barrels (or a highly traditional commodity mix) and see an almost flat valuation for most properties.
It's inflation magic baby!
AKA, Governments playing tricks with your currency.
Interesting point. When I used to make 50K a year, nice houses used to cost 300K. Today, I make x2.5 that amount and houses cost x2.5 that. Definitely not going to be able to afford a nice house in my area :'(
perfect example of what's wrong with our society.
The best part was for me the "property prices double every 10 years" part. Some people never seem to learn
> invested it in a fund with a 6% return - which is nothing special
There's no (close to) zero-risk investment at the moment that yields 6%.
> If you invest in a pension
That's nice, but it's usually only tax-free when you spend it as a pensioner, not as a lump sum when you're 50 years old.
>property prices double every 10 years or so
Yeah, they do. Except when not. And you also spend money on maintaining the property.
> This is a return of 100% on the initial investment. That sounds a bit better than 6%, right?
OMG, did he just compare a yearly return with a return 'over a few years'?
... and it goes on and on. If you want to have 1M, then first learn the _very fundamentals_ of investing and finance.
By the way, I have an advice: if your dream is to open a restaurant, do it now.