My dear dudes,

Because I bought another Rental Property, I spent my Sunday redefining my plan for the next 6-10 years. Here it is:

First, note that I bought a lot of Real Estate this year (3 properties and another one coming up soon) as I found what I think are excellent deals. I am getting fixed-rate 30-year mortgages at less than 5%*. I think that inflation and interest rates will be low for the next 2,5 – 5 years. After that, I think that both will raise, but all bets are off regarding figures**. I would like to limit my real estate portfolio to 50-60% of my overall net worth, in the long run.

My plan revolves around inflation, interest rates and liquidity. Based on the situation, I will take appropriate action each year. There will be years in which I care about liquidity (L) (which means that I will not amortize my mortgages and buy assets that are not liquid, such as real estate) and years in which I care little about my liquidity (NL) (just like this year), in which I will try to pay off debt as quickly as I can, and have non-liquid assets that either have capital appreciation or high yields.

In particular, I will try to be and remain liquid (1) when interest rates are high, as interest bearing accounts are easy, lucrative and very safe yield investments and (2) when either the stock market or the real estate market crash. Let me describe the type of year liquidity is not important, and non-liquid assets are, just like today. In Portugal, as banks are only lending money to very creditworthy people, the economy is unstable and full-time long-term jobs are hard to come by, and a new generation of people who prefer to be mobile is emerging, the rental market is very hot (as opposed to the last 40-50 years). I think this will remain like so for the next 5 years, at least.

Here is the plan for the next 6-10 years:

2016 (NL) – Buy Real Estate, Pay off debt. Real Estate is such a great asset class in Portugal right now! Low prices and high rental demand, although I don’t expect any type of appreciation of Real Estate for the next 20 years in Portugal. As I said before, I have different types of rental properties, but I explain this in one of my next posts. Money: ~25k, Equity in RE: 80-100k, Other assets 0-20k.

2017 (NL) – Portfolio re-balancing, Pay off debt. In order to lower my exposure to Real Estate, I will have to buy into a well diversified portfolio. In the long run, I plan on having at least 40% of my portfolio on ETFs, stocks, bonds and assets other than Real Estate. I plan on having some liquidity, but it won’t probably be more than 25k. Money: ~25k, Equity in RE: ~110k, Other assets: 30k.

2018 (NL/L) – Small portfolio re-balancing, Partially pay off debt. At this point, I should have a fairly well-balanced portfolio, otherwise I will be doing a bad job. The goal is to have about 50k liquid at the end of the year, so I am not sure I will be able to pay off a lot of debt. Real Estate will be expensive in Portugal and mortgages will start to increase. I will have something around 50k in the bank/very liquid assets. It is tough to say if I will be buying real estate: it will probably mark the increase of mortgage rates but Real Estate will be expensive, I am sure. Will probably buy a lot of stocks this year. Money: ~50k, Equity in RE: ~120k, Other assets: ~50k.

2019 (L) – (Very) Possibly buy Real Estate, if the market crashes (as I predict) and I get a <5% 30-years fixed rate mortgage, still. Start building liquidity aggressively, which means that I will not be paying off debt this year but rather pilling up some money in the bank or very liquid assets. Why? Well, I think that interest rates will increase from 2021 onwards and I want to capitalize on that. I hope to end the year with 75k in the bank/very liquid assets. Money: ~75k, Equity in RE: ~140k, Other assets: ~50k.

2020 (NL/L) – Portfolio re-balancing, Building liquidity and Paying off debt. If I buy Real Estate in 2019, I will have to re-balance my portfolio. I will also work towards building some liquidity, and make sure I end the year with 100k in the bank/very liquid assets. Once I hit 100k, I can concentrate on non-liquid assets. The rest of my cash will go towards paying off debt. Money: ~100k, Equity in RE: ~170k, Other assets: ~60k.

Note: from this point on, I will try to keep 100k in the bank/very liquid assets. If, for some reason, I have to spend the money, I will re-balance that with excess from rental income or dividends.

2021 (NL) – Small portfolio re-balancing, Paying off debt aggressively. Having 100k in the bank/very liquid assets renders the game easier. This money will work hard for me and help me pay down my mortgages. 100k should generate 6k a year, which should be enough to pay for one of my rental properties in about 5 years time. On top of that, all the excess cash from my rentals will go and pay off as much debt as I can. Money: ~100k, Equity in RE: ~190k, Other assets: ~80k.

 

2022 (NL) – Small portfolio re-balancing, Paying off debt aggressively. Same as 2021. Inflation and interest rates will be moderately high, I think. Money: ~100k, Equity in RE: ~210k, Other assets: ~115k.

2023 (NL) – Small portfolio re-balancing, Paying off debt aggressively. Same as 2021 and 2022. Real Estate will be expensive and mortgage rates will be sky high. Money: ~100k, Equity in RE: ~240k, Other assets: ~135k.

2024-2026 (NL) – I will stick with the same strategy. If a nice deal crops up, I may use my liquidity but will work towards building it up will I hit 100k thereafter.

 

* Interest rates in Portugal for fixed-rate mortgages are kinda high as banks aren’t used to lend fixed-rate and you have a big penalty if you ask for fixed-rate mortgages.

** The interest rates in Portugal are currently low as the European Central Bank is lowering them to stimulate the economy.