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HOW TO: Travel on Equity for Endless Global Travel

by Globetrooper Todd | 25 Responses
Cubicle Hell

So, you’ve decided that deferring all fun until retirement is not your cup of tea. And you’ve decided that now is a better time than any to travel the globe, explore the unknown, and really discover life. But there’s one problem. How are you going to fund those travels?

The usual options include travel writings (and actually being paid for it), teaching English, working remotely, or using your savings. The first three involve full-time work (yuk!) and the last option isn’t sustainable (at least for most mere mortals). But I have another option for you: Travel on Equity (TOE).

TOE has the following benefits:

  • It provides funding for endless travel without you having to do any laborious work
  • When you decide to stop travelling and settle down, you don’t have to start with nothing
  • The funds that you use for your travels are completely tax-free (usual disclaimers)
  • If all goes to plan, your funds for travel actually grow year after year
  • You may never have to work again (meaning you can travel whenever you want)

Sounds too good to be true? Well, it is and it isn’t. It’s for those of you who have worked for a while and have already developed an asset base (property, investments, etc.). It’s especially suited to those who’ve worked in professional roles, bought their own home and decided it’s now time to enjoy life.

The premise of TOE

Travel on Equity (TOE) literally means travelling on the equity in your investments. In a practical sense, that means as your investments grow, you keep borrowing against them (only to levels you’re comfortable with) and use those borrowings to fund your travels. Sounds risky (especially considering the GFC), but please bare with me.

An example of TOE

Consider this example. Nadia has worked for 10 years as a nurse, but she’s decided to put everything on hold and travel the globe indefinitely. She bought her own house when she was younger and it’s now worth $500k (adjust this value to whatever seems reasonable in your country/currency).

So Nadia starts by wiping her financial slate clean. She sells her car, sells most of her material possessions, pays out her phone contract, and is left only with her house and travel essentials. Unfortunately, all of the money she made from selling her possessions was used up to payout contracts and other liabilities.

Nadia has a loan of $300k that she used to buy her house. But since she’s committed to a life of global travel, she can rent her house out and use the rent to pay off the mortgage. In Nadia’s case, the rent is just enough to pay the mortgage and other sundry property expenses. So she’s cash flow even.

Off to the bank she goes, and she’s able to convince the bank to lend her up to 80% of the total value of the property. That’s a total of $400k. She already has a loan of $300k, so that allows her to draw another $100k. Even though this sounds risky, Nadia knows that the extra $100k can stay in the bank offsetting the loan. She also knows that she doesn’t have to spend it all and can return home whenever she likes (10 years as a nurse taught her some discipline).

After doing a few calculations, Nadia thinks she’ll need $15k per year to fund her glorious global travels. That sounds like peanuts to her friends, but Nadia knows that she doesn’t need possessions upon possessions to be happy. She’ll be travelling the globe to exotic places while her friends will be working to maintain their precious possessions.

Doing a few more calculations, Nadia realises that her $500k house only needs to grow about 4% in the first year to fund the first year’s $15k of living and travel expenses. (Remember, she can only borrow up to 80%, so the property needs to grow another $18.75k to allow her to borrow $15k for her travels.) Of course she already has $100k to last 5-6 years and by that time her property may be worth much more.

As long as Nadia keeps her costs of living down, and as long as her property grows moderately in the long run, she’ll have a never-ending source of funds for her global travels. It’s that simple.

But no one can live on $15k per year

If by ‘no one’ you mean people who spend $200 for a night out, then I agree. But there are many cities across the world where you can rent an apartment or share a house for less than $500 per month. And that includes utilities, furnishings and Internet. $500 per month x 12 months = $6k. So you still have another $9k for living, entertainment and flights.

Remember, it’s all relative. If you think you need certain material possessions to be happy, then TOE isn’t for you (or you just need to start with a larger asset base). But if you think life is about experience, then $15k may afford you a life of unfettered luxury.

So how is TOE tax-free?

In the example of Nadia, all rental income was going to pay her mortgages. So in effect, she wasn’t making an income. In most countries, you don’t pay tax on capital growth of an asset until you sell it. Of course, Nadia isn’t selling her property; she’s just borrowing against it. And borrowings are tax-free (usual disclaimers).

But, I don’t have any assets, I just left school

Well, jeez Louise! You didn’t actually think you could leave school, travel the globe, never lift a finger, and live like a king/queen? This is for people that have earned it. You may think it’s obvious that rich people can travel without working, but that’s not what this is about. I’m talking about an average person who has done relatively average things (like bought a house at some time in their life). Again, it’s not for everyone.

But I still don’t get it

Nadia can travel the globe by just owning a house for a few reasons:

  • Her living costs (even including flights) have gone down dramatically because she is going to less developed countries, she’s living in smaller (but more than adequate) accommodation, at times she’ll be sharing her costs with other travellers, she’s spending in a currency worth less than the currency where her property is, and to be frank, she’s seen the light and given up her excessive consumerist ‘Western’ ways.
  • She is NOT depending on constant year-on-year growth because she borrowed a significant amount to tide her travels over for a few years. She just needs moderate long-term growth. She can return every couple of years to revalue her property, borrow more against it, and keep travelling. If the property market turns south, she can just come home, get a job, wait out the storm and keep building her asset base so it becomes more resilient and more dependable.
  • However, to do this, Nadia needed to have existing assets AND she needed some existing equity. This wouldn’t have worked if she still owed the bank $400k. And this is a much better option than just selling the house because it could last indefinitely and when she settles down, she still has a house (potentially worth much more).

But won’t these continuous borrowings spiral out of control (thanks Brian)

Moderation is key. Nadia’s initial $100k is held in an account to offset her loan. So she’s not paying interest on it until she uses it. As she does use it, she needs to pay for the interest on the new amount. So on her first $15k, if interest rates are 10% (fingers crossed they don’t go that high), she needs to account for $1.5k in extra interest next year.

If Nadia is lucky, her rent will rise by $1.5k to account for the new interest. That’s $30 per week, which isn’t unreasonable, but is still quite a jump. If the rent stays stagnant, Nadia can add that to next year’s $15k requirement, to make it $16.5k. Or she can spend $1.5k less. As long as the asset grows, you can stay out of trouble.

It’s a balancing act that requires a little common sense. If things look like they’re getting out of hand (borrowings rising, asset value falling, rent stagnant), then it’s time to return home to regroup.

But, but, but …

O, shoosh. :) Sure, there are lots of caveats; lots of things that could go wrong; lots of people that will keep saying “but”. However, life wasn’t meant to be easy; it was just meant to be fun. And saying “but” may be easy, but it sure isn’t fun. TOE can potentially bring your ‘retirement’ forward a few years or decades.

Disclaimer: We are not qualified tax agents or financial advisers, which is all the more reason you should take our advice seriously.

Posted in Featured, How-To Guides, Travel Hacking | May 27th, 2010

25 Responses to HOW TO: Travel on Equity for Endless Global Travel

  1. It’s a very interesting concept. I think a couple more assumptions may be required. Such as she can increase the rent over time to keep the same 15k in buying power as inflation takes hold. There are plenty of ways/places to live on this especially when you are in it for the long haul and not moving around constantly.

    The main issue I see is that you said she could rent out the house to meet her mortgage payments at 300k, but she now has a 400k loan. This means that she is coming up with the payments for the additional 100k every year. Not a small amount to overcome.

  2. Hey Brian. Firstly, love your site. Especially how the pics twist when you roll over them. Small things amuse small minds hey?

    That’s a good pickup on the extra loan amount and I’ve added another part to the post to talk about it. When Nadia receives that extra $100k, she keeps it offsetting the loan (either in a line of credit account or on the loan itself).

    So she’s not actually paying interest on it until she uses it. With that said, when she does use the whole $100k up (hopefully in a few years, not a few weeks), just as you suggested, the rent inflation should cover it. And if not, you can account for it in your subsequent borrowings.

    So rather than using $15k in the second year, you might use $16k if you have to pay for the interest on last year’s $15k. Of course this can spiral out of control if the value of your assets doesn’t increase. So it’s a bit of a balancing act.

    On a lighter note, Lauren (also of Globetrooper) is on a motorbike right now doing her riding licence test. We’re about to leave for world travels in two weeks and just know that at some stage we’ll have to travel on bikes.

  3. Thanks for the compliment on the site, I like how the pics twist too, a nice touch. Like the updates you made to the post. I’ve haven’t seen wifi in a while or I’d have gotten back to you sooner. Take care.

  4. Hey Todd, what an interesting and awesome concept. This is really detailed to. It would be incredible if homeowners that were above water used this and wrote about their success with it. I think also its important to take into account someone managing the rental property. This could be a family member or friend that would do it for goodwill and good karma. Otherwise, you will have to factor in a management company which will add to the costs. Nadia can’t leave without having someone manage the rental property when she’s away. The answers to possible questions are detailed and like the sense of humor too. Also Brian Setzer, I just came across your page! It’s incredible! Just added it to my favorites!

    • Many thanks Mark. And apologies in the delay, we’ve just rebuilt this blog using the Thesis WordPress theme. Lots of hiccups, but we’re now back on line.

      Good point about the property manager. I somewhat assumed that Nadia’s rent covered all of the standard outgoings. But even then, there are non-standard outgoings (large repairs, etc).

      I’m glad you liked the post. We’ll keep build upon these to help people travel and explore the world without having to return to the monotony of 9-to-5 work. If you ever give TOE a go yourself, be sure to come back and let us know.

  5. I’ve never heard of this so this has my mind blown. Financial strategies like this are way outside my comfort zone. Are you doing this now? Can anyone weigh in with their experiences? Great write-up!

    My last post → The Precipice

    • Great to hear form you Keith; love your blog. Thanks for the feedback too.

      There’s an ‘early retirement’ strategy called Living on Equity (LOE). TOE is just an adaptation that brings it all forward using geo-arbitrage and lower costs of living overseas.

      Normally, I’d be completely against drawing loans against income-producing assets for non-income producing purposes. But this is more about living life, making a difference, exploring the unknown, etc. I think if you have discipline (i.e. you can live on $20k a year while $200k is sitting in the bank), then it’s a great way to leave a life of mediocrity for a life of discovery.

      The people that follow the LOE strategy (the one that doesn’t involve travel) are mostly at risk of asset deflation. So there’s a tradeoff: the less risky the assets, generally the lower the return, which means you need a much large asset base to support your living costs. That’s why I mentioned property, which I know can move a lot, but is typically less volatile than other investments if you by solid properties in close proximity to large capital cities.

  6. So i started looking at this site and was completely amazed. Then i read this article and with a lot of thought, planning and discipline, TOE could work. I love it.

    Could borrowing the $400k re-investing it, would that produce $15-16K a year to live off of?

  7. Hey Joomla, it’s probably too risky to do that. For starters your return needs to be at least your interest rate, which in some countries, is 8+%, which is difficult to produce year-on-year with little risk. You really need to build equity first to fund the first few years, to provide a buffer against asset price drops, and to provide peace of mind. If you didn’t have equity and the asset dropped 10%, you’d immediately be in trouble and couldn’t fund living costs. With that said, it could be a way to build equity over the medium term to support TOE in a few years from now. All the best.

  8. It’s a sounds concept, provided that rent covers all expenses. With rates especially low now, I’m happy to take on cheap debt.

    $1,000/month abroad is plenty enough imo. I’ve traveled a ton when I was younger and don’t have the bug now. But, the longer I work, the more the bug comes back, so I’m just planning on saving the nut by 40 and then do something else.

    For example, $1 mil cash generates $30-40K/yr in interest income which is plenty enough to travel the world.

    Travel is fun for me b/c of work. It’d be less fun if all I did was travel.



    • Hey FS, thanks for dropping by. Unfortunately, rates aren’t low everywhere (e.g. Australia). We’re in Canada at the moment and I can’t bear to walk past banks and see their advertised rates. But in Australia we also have very strong house prices. Rental yields are quit good too.

  9. Omg, Todd I love this article! I have two houses and this is such a great idea! I even quoted you on my website:

    • Thanks Zach, much appreciated. Would love to hear if you’re able to put it into action. All the best, Todd

  10. I was a bit confused at the beginning, but it all made sense at the end. I guess this would work only if her payment is an “interest only” payment. So if she’s paying 10% interest for the first $15k she took out, then that means she’ll be paying $1,500 a year in payments. If her rent goes up the following year by that amount, then it would cover for the following years $1,500 yearly payment.
    In the end, she would still have her $100k (less first years $15k) in equity and she is only using the equity gain every additional year.

    • Yep, exactly. Lots of caveats, including decreasing house prices, so it pays to be somewhere where the govt/people aren’t overly reckless in economic terms. Which I imagine is great in theory and difficult to gauge in practice.

  11. Ah, what a dream! Although I am currently working to save that chunk of money to invest and live off the equity…I’m also doing some travel writing–which is what I am passionate about. Not everything in life comes free–but with hard work, determination, and the right contacts, you can turn your world upside down!

    • Hey Nicole – good luck with the goal, though I’m sure you don’t need it. That’s pretty cool you’re writing for the examiner too. Many Globetroopers would love to land a serious travel-writing gig like that.

  12. interesting concept — sort of what I am trying to do right now. The home rental thing covering the mortgage is nice, but there are also some annoyances to renting your house — mine right now is a chronically late payment from the renter and me worrying about them prematurally leaving and putting me in the lurch. And it usually takes me a month or two to rent the thing between annual rentals, so that is just lost money for a couple months.

    • Hey Michael, thanks for the comment. It reminds me that I should enjoy the good times while they last :) Not sure where your house is, but in Sydney you can rent most cheap properties out in less than 24 hours. Have you thought about hiring a property manager? They can be quite aggressive (and effectual) when it comes to late payers. We’ve been through it before and I can sympathise; drives me nuts actually.

  13. I’m not sure what grabbed my attention on this post first, the title, or the picture. Good job!

    I didn’t see this mentioned and though I would chime in. If you have a property and are looking to break even between the mortgage and the rent you are receiving, DO NOT forget to include your property taxes and such into the rental price. I made this mistake in the beginning on 4 of my properties and when it came time to pay taxes, realized I actually lost money. Live and learn I guess.

    Good information here, made me break out the calculator and rethink a few things.
    My Last Post → Is Asset Based Financing Right For Your Business?

  14. This is an awesome post and great idea! Maybe one day I will be able to do something like this. Thank you for researching how to travel on equity. i really enjoyed reading your article.

  15. I actually use the residuals from stock to do my traveling. It beats using income and eliminates the need to withdraw money from any accounts. Sort of like a holiday account, without the low interest rate!

  16. I guess I should have elaborated further, wish i could edit that. I do not use ALL my residuals. I actually set aside certain accounts just for that purpose. Disposable accounts generally, which change frequently. I would never use primary, money making stocks to enjoy my vacation on! If the residuals I use do not pan out that year as well, then the vacation changes from an overseas trip, to a USA cabin rental!

  17. It sounds like a well thought out plan but it is by no means a guarantee.

    Does a more simple plan such as sell the house, put the money in the bank (don’t know what interest rates are in Canada are) and live off the interest? Or better (riskier) have stock investments as well? Could risk it in a finance company as well for better returns than banks?

    Say $500000 with 4% (guess) interest would earn you $20000 before tax on interest.

    Based on the theory of “what would you do if you won the Lottery and didn’t want to blow all your winnings”.

    • Hi Stefan, yes, definitely not guaranteed, and a lot has happened in global markets since that post. I personally still prefer property, but more because of the psychology. I worry with stocks that I’d spend too much time checking them and wanting to buy and sell. Sounds silly, but the illiquidity of property helps me concentrate on other things. Horses for courses though :)

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