Recovering from financial ruin - have I achieved my goal?
Well, well, well, it's been a few moons now hasn't it?
It's high time that I provide an update on my progress towards becoming debt free in 2 years, especially given that it is approaching 2 years since I made the biggest financial blunder of my life.
If this is the first time you've encountered one of my posts then, welcome. You can find a summary of my financial failure in this post. The post you are reading now is one of my semi-regular updates on my progress towards achieving my goal of recovering from the failure described within that original post.
So, where am I at with my debt today?
Progress has been good. And there have been many developments in recent months. From my original post, my debts were as follows:
- I had $20k in credit card debt
- $25k owing to the tax office
- $90k owing on a business loan
- $12k owing to my accountant
And now, roughly 1.5 years since I sold my failing business, my level of debt looks like this:
- I have no credit card debt
- Nothing is owing to the tax office
- My business loan has been rolled into my investment property loan
- I owe roughly $500 to my accountant
So from what was once roughly $147k debt, I'm now in a pretty good position. The most obvious question is:
How did I achieve this in less than 2 years?
If I'm honest, I didn't expect to be in this position in under 2 years. I actually expected that recovering from my business failure would take as long as 3 years. And I really didn't expect to be buying a home to live in so soon. But that's exactly what is happening.
When I sold off my business, I managed to retain one asset. This asset is an investment property that I purchased a few years ago. The property had been recently valued at about $650k which meant that it hadn't increased in value all that much since the day I purchased the place.
During my recent conversations with my bank, I had asked if it would be possible to roll my business debt into the loan against this investment property. And, despite my constant attempts to achieve this, the bank repeatedly told me "no". I've mentioned in previous posts that I can be pretty persistent in getting what I want, so after a few attempts with my current bank, I approached a mortgage broker and described to her what it was that I was attempting to achieve. She agreed that it should be possible, and during our conversation asked if I was also looking for a loan to purchase an owner occupied property (a home to live in). "Of course", I said. But would that even be possible?
My broker asked me to give her a couple of days to speak with a few lenders and test out some valuations against my property. When she eventually called, she had some incredible news.
A bank had accepted a valuation of my home at a value of $800k.
This is pure insanity. There is absolutely no way that I could sell this house for $800k. I had no idea how my broker pulled off this valuation (well, I have an idea, and will write about it in a future post) but I wasn't about to question her.
Once the bank accepted the valuation it was time to go through the application process. Given my recent financial troubles, I had assumed that this is where we'd fall flat, and I'd have to continue building on my assets before applying for re-financing again. But, incredibly, the process went somewhat smoothly and before we knew it, we had conditional approval to not only refinance my existing loans, but also to purchase a new home!
The search begins
I feel like I could write a book about the home buying process after what I just experienced. This was a challenging experience:
- From the search through various suburbs before settling on the right area for us.
- To the various strategies to implement when making an offer.
- And the negotiations that follow once you have an offer accepted.
And this post isn't the right place for the above information. I'll write about the challenges faced when house hunting on #LeoFinance.
We attempted to buy 3 homes and failed before finally having our offer accepted on the fourth home that we liked. And, realistically, the home that we are purchasing is actually the best of the houses that we first attempted to buy.
And now it's time to finalise the settlement process for the purchase, sign documents issued by the bank, and pack up our belongings to move in to our new home.
But what does all this have to do with getting out of debt?
This is a great question, especially since I have just increase our debt by approximately $500k.
What I have achieved here is quite significant. And it's better read as a list:
- I've converted my business debt to debt held against an investment property. This means that the interest on this loan can be deducted from my taxable income.
- I have a much lower interest rate than before. And this is saving me a substantial amount of money.
- The loan against my newly purchased home has a very low interest rate. In fact, the monthly repayments on this loan are less than what I currently pay in rent.
All up, I am close to $2000 better off per month, while taking on an extra $500k in debt.
There's good debt and bad debt
So while I've increased my debt by quite a large amount, I am fine with this. Good debt is where you have debt against an asset, especially an asset that typically increases in value over time.
Bad debt is debt such as credit card debt, car loans etc. Basically debt that is held against assets that depreciate over time or no assets at all.
What I am basically saying here is that I am fine with debt against property. Especially when it makes my cost of living lower, which it has done in this example.
So is it goal achieved?
Have I achieved becoming debt free in two years? I think I am on the brink of achieving this. Did I cheat? A little, yes. I rolled my remaining business debt into a debt against a property rather than paying it off. Am I OK with this? Absolutely.
Once I have finished paying back my accountant, I think I'll consider this job done. I'll have no more business related debts and can commence growing my asset base to make further intelligent investments, rather than high risk ventures into business ownership.
So, during the strangest and most disturbing year of my existence with all this Trump and COVID stuff going on, I have managed to achieve my sole goal 6 months earlier than my targeted date. I'm incredibly pleased to be in this position. And even more happy to be moving into a new home at least 12 months earlier than expected.
What about future goals now that this one is all but complete?
Now that I have more or less achieved my initial goal of getting out of horrendous debt, my new goal is quite simple.
My new goal is to purchase one property per year for the next 5 years.