If I Lived in a House Hack…

Photo Credit: baunkjaer.dk

I moved to Copenhagen in 2009, because I had to start as a mason apprentice. The first apartment I lived in was one of my parent’s friends. He told me that I could stay there for three months to two years. So I thought to myself: 

“It must be a bit more than three months, in the worst-case”.

I lived there for three months.

After those three months had passed, I packed everything I had in one of my parents’ car. And I was ready to go live at my parent’s place again. Which was the most horrible feeling.

I didn’t even get to unpack the car before my mama called me and told me that she has just found an apartment for me. First I thought it was a joke. But it was a 50 m2, apartment at Nørrebro (my favorite spot in Copenhagen) for 2200 DKK/month and I could stay there as long as I liked.

It was like winning the lottery.

Still to this day, I freaking love that apartment.

But what if have bought the place?

I have never been a big fan of people who buy their house/apartment, and call it “their best investment ever”. Because they have never done any investing besides buying a property. And they would have been but fucked if they got fired from their job.

But recently I got introduced to the term “House Hack”.

House hacking is where you either buy a house or an apartment, where you live it in yourself, and rent one part of the house out, or rent some rooms out if you have an apartment.

By doing so, we can live cheaper, maybe even for free. Because our tenants/roommates will pay a good chunk of your mortgage and rent.

Three types of returns by House Hacking

If you start to House Hack you will see three types of returns.

  • Saved rent
  • Mortgage payments
  • Appreciation

Saved Rent

If we are capable of living for free in our House Hack we will save some rent from where we previously lived.

By taking me as an example:

I pay 3.000 DKK (500$)/month or 36.000 DKK (6.000$)/year.

This far my biggest expense in my budget, and by eliminating that. I would have 36.000 DKK more every year to invest. My yearly expenses will go down from around 100.000 DKK (16.000 $) to about 63.000 DKK (10.000$).

mortgage payments

The primary reason that I don’t think owning a home is an investment, is because of the mortgage payments. There are two things I don’t like them.

First is that you have to pay them every month. Having such a huge “bill” every month is the same as being in prison if you ask me. There is no room for adventures if you have to pay +6.000 DKK every month. I want a life where I can go away for the next six months without worrying about mortgage payments.

But if you House Hack your tenants will help you pay the mortgage.

This will not only make room for adventure, it means that you will earn money while you are away on an adventure.

Appreciation

Real estate in Copenhagen (Nørrebro, where I’m living) has gone up about 7%/year since 1980.

But appreciation is a random thing. And it will not be the main factor to determine whether or not I’m going to buy a House Hack.

While this is the most powerful return of all because of leverage.

Imagine that you buy a 2.000.000 DKK apartment with 100.000 DKK (5 %) of your own money. If the apartment appreciates 3.5 % (half of what it normally has), the return will be 70.000 DKK and your ROI is 70 %.

Not bad compared to a 7 % ROI in Stock Index Funds.

What if have House Hacked my apartment?

Calculating how much money we could have made if we just had “insert your regret of not investing”, is one of the stupids things we can do.

That is one of the main purposes that this blog and the whole FIRE community exists. To have fewer regrets about how you are dealing with your money, and your future freedom.

But to prove the power of House Hacking, I will calculate how much money I would have made if I have bought a similar apartment, and rented out a room.

Back in 2009, the average price of one square meter apartment in Nørrebro was 19.802 DKK. 

And my apartment is 50 m2, with a living room, bedroom, and a kitchen. You could live with two people there, in your own room.

The price of an apartment like that in 2009 would be:

50 m2 x 19.802 DKK = 990.100 DKK

A quick mortgage calculator will tell me that my mortgage payments with a 5 % downpayment (about 50.000 DKK) would be:

3600 DKK/month after taxes.

Where 2.700 DKK would be the down payment on the mortgage and the remaining will be the interest.

Taxes and similar on an apartment like that will probably be around 2500 DKK/month, which is similar to the average of my monthly rent in the apartment.

You can earn 4.000 DKK/month on a room in Nørrebro post taxes.

Let’s Sum it up

Ingoing: 

Roommate 4.000 DKK

Outgoing

Mortgage: 3.600 DKK

Taxes: 2.500 DKK

Total: 6.100 DKK/month

Outgoing – Ingoing: 2.100 DKK/month

It would cost me 2.100 DKK/month to live there. Which is 900 DKK less than what I pay now. But every month I will earn 2.700 DKK because of the down payment on the mortgage my roommate is helping me to pay off.

So the first year of having a roommate would look something like this.

  1. Saved rent: 900 DKK x 12 months = 10.800 DKK
  2. Mortgage payments: 2700 DKK x 12 months = 32.400 DKK

A total of = 43.200 DKK

And with a 50.000 DKK payment my ROI would look like this:

(42.300 DKK / 50.000 DKK) x 100 = 86.4 % 

Holy smokes! 86,4 % rate of return on your 50.000 DKK. That is more than 10 times the 7 % ROI we calculate with on our index funds.

But it gets better!

What about the appreciation?

From 2009 to 2010 at Nørrebro

Exactly one year later the average square meter for an apartment in Nørrebro has raised from 19.802 to 20.918.

Let’s have a look at what that means in my apartment.

(20.918 DKK – 19.802 DKK) x 50 m2 = 55.800 DKK

So if I sold the apartment the following year I would have made another 55.800 DKK.

So the total return would be:

42.300 DKK + 55.800 DKK = 98.100 DKK

And the ROI will be:

98.100 DKK / 50.000 DKK = 196 %

That’s an insane return! That would take almost 10 years to do with an index fund.

But it gets even better!!!!!

From 2009 till now

It has been 11 years since I moved into my apartment.

And we have calculated how much I would have earned in saved rent, and mortgage payments. Which was 43.200 DKK/year.

In 11 years I would have made:

43.200 DKK x 11 Years = 475.200 DKK

Not bad!

But the square meter on Nørrebro has appreciated too.

The average price on Nørrebro is now 42.942 DKK/m2. And I have paid 19.802 back in 2009. That means the appreciation would be:

(42.942 DKK – 19.802 DKK) x 50 m2 = 1.157.000 DKK

And my total return would be:

475.200 DKK + 1.157.000 DKK = 1.632.200 DKK

Or an ROI on:

50.000 DKK / 1.632.200 DKK = 3.164 %

With a stock index fund returning 7 %/year it will take 52 years to go from 50.000 DKK to 1.632.200 DKK which was made by House Hacking.

And yes. There will be some expenses by having an apartment. But even with 100.000 DKK allocated to refurbishing. And another 100.000 DKK allocated to the real estate agent to sell it. It is still an insane deal, that we all should consider doing.

Is it IMMORAL to house hack?

This is a thing that has been going on my mind. Is it immoral to let someone else help you pay off your mortgage?

And my conclusion is NO.

By House Hacking, you provide with several good stuff to your roommates.

Difficult to find a place in Copenhagen

It is super difficult to find a place where it is affordable to live in. When you arrive at the city, ready to start your studies at 20 something years old. You will probably be like most of us where you can’t afford to buy something.

If we share a room in our apartment we can live more people in the city. Without occupying a ton of space.

Is your boss immoral?

House Hacking is no different from your boss hiring you.

You are probably glad that you get paid every month from your boss. But we are hired to make our boss money. Which we don’t find immoral.

Renting out a room is no different from getting hired at a job.

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Coast FIRE – Ever Heard of That?

The other day I learned a new term – Coast FIRE.

The traditional way of chasing FIRE is to have all of your expenses covered by a passive income, often in a stock index fund.

We know that in order to have enough for the rest of our lives, we need to have 20-25 times our annual spending.

But Coast FIRE is a bit different. And it is quite powerful for many of the young fellaz out there trying to reach FIRE.

The power of compound interest is very big when we are able to save money as young. If we have a 7 % annual return, our money will double every 10th year or so. This means that if you have a 1000 $ it will double to 2000 $. From there it will double to 4000 $ and so on. If we have a good amount of money when we are 30 years old. That money can easily double 4-5 times.

Or said different. Our 1000 $ at age 30 can easily grow to 16.000-32.000 $ in our life time. 

What Is Coast FIRE?

With Coast FIRE we take advantage of that compounding.

Let’s imagine that you read this in age 25 (no worries if you are older). If you can to get to 500.000 DKK (76.000 $) by the time you are 30 years old, you never have to worry about that retirements saving again. From there we won’t have to add another dollar for the rest of our lives to that account. Because it will compound into A LOT of money.

If we leave 500.000 DKK (76.000 $) in a stock index fund from 1976-2016 we would have ended up with about 13.000.000 DKK (2.000.000 $) (adjusted for taxes, inflation and fees)*. That amount at age 70 will roughly put us in the top 1 % wealthiest here in Denmark.

And that is Coast FIRE. Figuring out how much money you will have to save and invest, and them leave the entire portfolio until the day that you retire.

If we earn 20.000 DKK/month (3000 $) after taxes, and saving 50 % of that in able to reach Coast FIRE, we are only spending 10.000 DKK (1500 $) a month.

If we are able to reach 500.000 DKK (76.000 $) at age 30, we can from there go out and take a part-time job that pays us 10.000 DKK/month. Because that is what our spending is. And with peace in mind know that our financial situation is going to be great because of compound interest.

We can take up jobs that we find more enjoyable than the stressful corporate job. I could see myself as a rowing/crossfit trainer or having a small mason company. Because that is something that I enjoy.

But even if we do stuff that we love for 40 hour/week, that too will be an ignoring task. I love rowing for example, but after two months on a training camp, doing nothing but, eat, rest and train, I look forward to come home. But I still love rowing.

How to Reach Coast FIRE in Two Years

And I’m here to tell you that we can reach Coast FIRE in as little as two years. If you are between 20-30 years old when you read this. You will be able to become very rich and not spend 40-50 hours/week on a job.

Let’s imagine that you get inspired to reach FIRE. but the numbers you need to reach are to overwhelming, so you decide to go for Coast FIRE.

At this very stage, your portfolio is at 0 $, but you have burning desire.

If we earn 20.000 DKK/month (3000 $) after tax, and save 50 % of it. That means we save 120.000 DKK/annual (18.000 $). Because we are young it can make sense to leverage our investments with as much as 2:1. Said another way, for every 100 $ we invest, we borrow another 100 $, so we end up investing 200 $ instead.

Now we are saving 240.000 DKK/annual (36.000 $) instead of the 120.000 DKK. That means that we can hit our 500.000 DKK in as little as two years from now.

But Loui?! Then I would have 240.000 DKK (36.000 $) in debt.

Yes that is correct.

240.000 DKK (36.000 $) can seem like a big sum of money when you are young. But if we compare it to how much money they can compound into AND how much money we can earn in our entire life. That money is only a couple of percentages of our entire earning power.

If you read this, and decide to do it. You can have a full-time job for as little as two years for your WHOLE life. From there you only have to make 10.000 DKK/month, which is something that you could do part-time with jobs you actually like. Or you could work full-time a couple of months, and then travel to cheaper places where 7.000 DKK/month would make you live a royal person.

And that portfolio is going to grow. If we want to, we could start to withdraw from it down the road. Because it becomes big enough to finance everything on our budget, and retire at a traditional age with bit less money than 13.000.000 DKK (3.000.000 $).

*IFA.com

Cut the Period You Reach FIRE in Half, Book Review

I have never read a book from cover to cover before I turned 21 years.

But reading since then has change my life radical. Being able to learn from the best minds in this world is something I love. A book can be distilled knowledge from people who have researched a topic their entire life. And I’m able to learn that in 5-10 hours by reading their books.

I still find that astonishing.

This article will be a review of the book:

Life Cycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Why this book?

Because it have made a huge difference on how I approach my investing. And it has been the reason why I might cut the period I reach FIRE in half the time.

If we just research a little about how to achieve financial independence. We learn that it is wise to buy stock index funds, in order to diversify. And if we want to diversify further, we can add bonds into the mix.

Now we have chosen our assets.

Is there another we can diversify aswell? YES!

We can diversify on time.

The stock market can be extremely volatile in single year. It can go 50 % up, but it can all so go 50 % down. If we start to look on longer time periods, like 5, 10, 15 or 30 + years, the stock market will become less and less volatile.

If we know that we want a million dollars to declare us self financially independent. With an allocation on stocks and bonds of 80 % stocks (800.000 $) and 20 % bonds (200.000 $). It would be way more ideal if would could loan the money upfront as young. And pay of the loan till the day we retire.

If a +50 % stock market crash happens early in our life, it wouldn’t be that catastrophic, because we will have time to rebounce. But if it happens when we are +50 years old. Then we are fucked.

When we are young, we don’t have that much money. So how can we get harder exposure to the stock market as young?

By leveraging.

The authors of Lifecycle Investing tested a leveraged strategy against a normal target date fund. This is where you pick a retirement date, and then the stock allocation ramp down from a 90 % stock allocation to 50 % when we retire. And they tested it against a fixed stock portfolio of 75 % stocks and 25 % bonds.

They tested it with different stocks and bond allocations to see if there was different scenarios where the traditional way would be better. With a stock allocation 200 % – 83 % (moving from a 200 % to 83 % stock allocation in retirement) we will have the same worst output as a 75 % stocks / 25 % bonds, but a median return there is 63 % higher, and in the 90th percentile it will be almost 100 % bigger returns. 

There are many more different allocations in the book.

But the biggest takeaway is even if we are really conservative about your retirement. It can still make sense to leverage early on.

Then the allocation would be like 200 % stocks moving to a 32 % stocks, and the rest would be bonds. By doing so we are likely to end up with 22 % more, than a traditional conservative allocation of 50 % stocks and 50 % bonds.

Lifecycle Investing will appeal to you, if you have bought into the idea of index investing to become financial independent, and want to take it a step further.

The worst enemy with this strategy will be our own psychology. When shit hits the fan, we need to stay calm, and follow our plan. And not everybody can handle that with a 200 % leveraged portfolio.

But if we think we handle the rollercoaster ride, we can diversify with time by leveraging as young. And reach our FIRE number earlier.

How Much Money Is Enough? Fuck the 4 % rule.

I often read blog posts on how people are retiring with 1.000.000 USD and then live off 40.000 USD/Year.

Put it another way. They stick to the 4 % rule.

There has been made a study called “The Trinity Study”. Which is often referred to in the FIRE community.

They took a close look on how much you can withdraw from a portfolio with different allocations to stocks and bonds.

I think the 4 % rule is ridiculous conservative. 

Take a look at the chart below from the trinity study:

This chart will tell us if you have a 1.000 $ portfolio and a 100 % stock allocation, and we withdraw 8 % of the initial amount (80 $), we have a 76 % chance of success.

76 % of every 30 year period between 1926-2009 would never run out of money.

That 76 % means that you NEVER EVER earn another dollar in your life.

So if we are 20 something years old spending a modest 15.000 $/year. (Which I do)

We could retire with as little as:

15.000 $ / 8 % = 187.500 $ 

And have a 76 % chance of NEVER running out of money if we NEVER earn another dime.

“But I don’t feel comfortable withdrawing 8 % of my portfolio”

All right. Then let’s round it up to a withdrawal rate of 7 %.

Then we can retire with a 100 % stock portfolio of:

215.000 $ and have 87 % chance of NEVER running out of money.

If we make a 30 year Monte Carlo simulation with a portfolio of 215.000 $ and withdrawing 15.000 $/year annual*:

If we look at the chart above. We can be pessimistic and say that 1 out 10 times the portfolio will not survive.

We can also be positive and see that 1 out of 10 times we will end up 7.200.000 $. Or put it another way, more than 30 times you initial investment.

We could also only do average. And end up with 1.500.000 $.

And we have done this by laying in over hammock for 30 years.

If we however can manage to earn some money.

And I’m not talking about a huge amount of money.

Let’s just say that we start a business of doing something we like. We don’t want the business to be something we do everyday.

Let’s call it a “Fooling-around-company”.

What if we could make 5.000 $/ year with this company?

Then we only need to withdraw 10.000 $/year on our portfolio. This is how a 30 year Monte Carlo simulation look like if we only withdraw 10.000 $/year instead of 15.000 $/year*:

We have now gone from a 87 % success rate to a 96 % success rate.

And in 30 years you will at the 50th percentile end up with 2.400.000 $ instead of your 1.400.000 $

So by earning 150.000 $ over that 30 year period. (5.000 $/year x 30 years = 150.000 $)

We are likely to have another million on our account.

Or we could withdraw 4 % each year instead of withdrawing a fixed amount of 10.000 $/year. This means if the value of our portfolio goes up, our spending can go up.

Then the situation will look like this*:

After 30 years of withdrawing we are more likely to withdraw 16.000 $ /year. And if we are lucky it will be +30.000 $/year. (Adjusted for inflation)

So please. Be a bit skeptical whenever you read the we need 25 times our annual spending.

If we are willing to be a bit flexible, by doing so we can retire A LOT sooner.

* www.portfoliovisualizer.com/monte-carlo-simulation

How I’m Retiring in 5 years or Less, and How You Can Too

Why should everyone try to become financial independent?

Billedresultat for freedom street art black and white

Whenever I tell people that I will retire in a couple of years they get excited. But whenever I tell them how I do it. They think it is to extreme.

You know what I think is extreme?

To work at the same desk for 30 + years of our lifes. People are getting more stressed by their work than ever before.

If we have the slightest form of ambition in our lives, the “normal” way of showing that is often by:

  1. Getting married
  2. Work 45 + hours/week in a job with a ton of responsibility
  3. Get a big house
  4. Brand new car
  5. Couple of kids
  6. Get some kind of expensive and time consuming hobby

And when we do those six things. We tie ourselves up for that demanding job, because we have a mortgage and car payment to pay. By obtaining all this stuff, we are not going to have time for our kids or our spouse. The only time we do have time for the family is the mandatory vacation in the summer and the winter.

Is this the life we want to live? Or is it just because that it seems to be the ideal dream for everyone?

The divorce rate has never been higher than it is today. So being in a relationship where everybody is working their ass off. Doesn’t seem to be the way to go if we want to stay together with our spouse.

I don’t think the six steps above is the best solution.

Here is the solution.

How to become financial independent

The media like to present rich people as someone who is having a successful businesses. Working 16 hours a day, 365 days a year. Earning + 1.000.000 $/year.

That is one way of doing it. But there is a way easier method.

Simplicity is powerful but it can be very boring.

The traditional way of dealing with retirement is to:

  1. Save 5-10 % of our pre tax salary
  2. Work for 50 years
  3. Enjoy the rest 15 years of our life when we are 70 years

Congratulation! We are now 70 years old and financial independent! (Not very admirable)

So what are we going to do instead?

Save a ton of money.

Saving + 50 % of our salary is the way to go if we want to achieve financial independence in the nearest future. By raising how much we save, also means that we can live on less. And will be able to be retire early faster.

The table below shows us how increasing our savings rate will cut off the time we have to work. Table credit: www.mrmoneymustache.com

Savings rate % Years until retirement
5 66
10 51
15 43
20 37
25 32
30 28
35 25
40 22
45 19
50 17
55 14,5
60 12,5
65 10,5
70 8,5
75 7
80 5,5
85 4
90 under 3
95 under 2
100 Zero

But what are we going to do with all the money we have saved?

We invest it.

The table above is assuming that we get a 5 % annualized return on our investments. So we can invest in whatever that gives us that return.

What I suggest?

Stock index funds. As broadly diversified as possible.

If you ask me they are the most simple and easy way to invest our money.

Now you might thinking:

“But Loui, didn’t you write how to retire in less than 5 years?”

Yes I did. But I’m not going to tell you how to save 85 % of your take home pay. There is a solution for that as well. But I’m going to warn you. It will only be for the risky people who can stomach the stock market going up and down.

Early retirement on steroids

This is only for a few people. With a burning desire to give the corporate day the middle finger as soon as possible. And it will make a lot of sense if we are between the age of 20-30 years.

What is the “steroids” for investing?

Leverage.

Leverage is where we borrow money to invest. People do this everyday with their houses. Often 20:1. (This means we pay down 5 % of the house payment, and borrow the rest 95 %)

We can do this with stock investments to. So whenever we buy for 100 $ we borrow another 100 $ to invest for. We then end up with 200 $ investment.

If we save 50 – 75 % of our take home pay, and borrow the same amount. We have gone from retiring early in 7-17 years to retiring early in 4-9 years.

This method is not something I have invented myself. There is to Yale professors who had written a very informal book about this concept. It is called “Lifecycle Investing” . (Or visit them on there website for the book here, there is a lot of free videos on it)

Why leveraging short-term can make sense

Let’s say that we earn 4000 $/month and spend 1400$/month or 18000 $/annually on housing, food and transportation. And we decided that we wanted to quit our day job as fast as possible so we are aiming for an SWR of 7 %.

This means we need to hit:

18000 $ / 7 % = 260.000 $ 

And that we have a monthly savings rate of:

65 % 

If we are conservative and say that we will not have any ROI on the money we are investing, we will hit that 260.000$ in 8.5 year.

But the power of financial independence lays not in how much we are making, but in how much we are saving! And this is where the power of leverage comes into the picture. If we leverage 2:1 that means for every 1 $ we are investing, we borrowing another 1$ and invest that as well.

Now we have reduced our working period from 8.5 years at the desk, to 4.25 years. Without any form of return on our investment.

This means that if you read this post as a 21-year-old, you could be retired by your 25th birthday.

Why leveraging long-term can make sense

Let’s imagine that we have read the text above and decided leveraging is not for us. And we do it the traditional way and dollar-cost-average into the stock market. Doing this from a young age means that we have very little money in the market when we are young, and a lot of money in the market when we are old.

If we invest 10.000 $/year, and get 7 % ROI + 2 % inflation from age 25 to age 65, this is how our wealth will increase:

2 % of our wealth is created between the age of 25-34. And an astonishing 64 % of our wealth is created between age  55-65. This also means that we are super exposed late in life, where we don’t have the time to make up for a bad period.

People often talks about bad years. But bad decades occur too. From 2000-2009 the S&P 500 made nearly no return for investors. And how do you think your portfolio would look, if you are expecting to make 64 % of your wealth late in life, and you end up with a decade like that?

Let’s recap

If our take home pay is 4000 $/month, and we are able to save and invest the difference of 2600 $.

We are now saving 65 % of our salary. If we can borrow the same amount. Then we are saving 5200 $/month, and our retirement is 3-4 years away. 

This is a super extreme way to deal with early retirement. And dealing with leveraged investments is only for educated people. But if we are willing to study this, our corporate lifes has never been looking better (AKA shorter)