Living off equity – a Reality Check

MJK · 4th Mar, 2005

Thanks Steve! for your persistance, patience and willingness to help us all understand.

I must confess I have a foot in both camps at the moment

and look forward to more discussion. Please continue with the topic.

Thanks Duncan M for your great spread sheet from another thread. Its a great tool to run senarios from this threads concepts.

MJK

kissfan · 4th Mar, 2005

Sailesh Channan said:
My goal is to maintain an annual income of $200k or more from my investments

Hi again Sailesh.

Glad to see you have recovered from your perils and are on your way to achieving your goals. I was wondering if the $200K you mentioned is going to be net or before expenses like interest on loans etc. Hope I'm not being too nosey, just love finding out how different people get their passive income.

Regards
Marty

austini · 4th Mar, 2005

Hi Steve,

Fantastic stuff as usual and greatly appreciated.

I admit that I could never fully follow your strategy. But I also admit that this has nothing to do with the robustness of your strategy but it is due to my underlying conservative nature. I would be a lot richer if I could change my risk personality to implement more of your strategy. Unfortunately there will always be far too many lazy dollars sitting in our accounts. However there is no doubt that having read your previous posts over the years I have certainly improved a heck of a lot compared to how conservative I used to be.

Cheers - Gordon

PS: Although it is not intended to be funny I had to laugh at the

"Frustrated Steve". Those faces definately have personality.

Sultan of Swing · 4th Mar, 2005

MJK said:
Simon,

I don't kow if you where trying to help with the Farmer parable but really mate It doesn't help me understand. I was hoping for easier to understand explaination but I suppose you've got your reasons for being vague and thats your perogative.

Cheers
MJK

Hi MJK

A lot of the talk on LOE in this and the other thread that started this one off is, we're talking about things that MAY happen quite some time away in the future, our long term plan etc.

The way i read Simon's post is, although we all have long term plans, we need to MONITOR our plan as it progresses.

I see the so called conservatives being called negative and the LOE camp being called positive however both have a lot of valid points.

The way I see it is, most are actually agreeing with each other. It just comes to monitoring your particular portfolio's progress during the economic ups and downs and taking action when and where you think its required.

This may mean selling some assets or it may mean increasing your LVR and buying more.

Most of won't know what action to take until we're further down the track.

Some of our elder forumites are further advanced and don't want the hassle of managing a large portfolio and want to simplify their structures. Its easy for some of us younger ones to say we'll still want to be involved in managing our portfolios to the same degree we are now but seriously, how DO we know what we'll feel up to doing when the time comes. At 40, I don't want to do the things i did when i was 20. How do I know I'm going to want to do the things I'm doing now when i reach 60?

As has been said, its horses for courses. For me, I'm getting a lot out of what Steve is laying out for us regarding structure and am grateful to him for taking the time to lay it out for us.

Cheers

simonjulie · 4th Mar, 2005

MJK said:
Simon,

I don't kow if you where trying to help with the Farmer parable but really mate It doesn't help me understand. I was hoping for easier to understand explaination but I suppose you've got your reasons for being vague and thats your perogative.

Cheers
MJK

Hi MJK

Simon can afford to be as vague as he likes. He is living off equity.

Not wanting to blow our own trumpet here but it seems that few on this thread can make this claim. Simon and I have been living off equity (no wages) for the last few years and even with a slowing market at present we are still seeing growth in some of our portfolio.

The reason for this post is to affirm that living off equity is a very real possibility and when it comes to spending it is all about balance. As Steve said "NO GROWTH - NO SPEND". And as Simon inferred, it is best to have equity on hand, not being used, so you have something to fall back on in harder times. Or as Steve would suggest - a balance of CAPITAL - being property, shares, cash and PEOPLE (don't forget the value of people).

Hope this shines a light.

Regards
Julie
Audentes Fortuna Juvat
Fortune Favours the Bold

Sailesh Channan · 4th Mar, 2005

kissfan said:
Hi again Sailesh.

Glad to see you have recovered from your perils and are on your way to achieving your goals. I was wondering if the $200K you mentioned is going to be net or before expenses like interest on loans etc. Hope I'm not being too nosey, just love finding out how different people get their passive income.

Regards
Marty

Hi Marty

My goals seem to keep changing as I evolve as a person. At this stage the minimum income plan is $200k nett. Therefore need at least $20m in investments earning 5%....my safty net. Now that I have come this far I can see the law of compounding kicking in and things accelerating quickly.

However I know that I can achieve far greater income amounts through my development and business activities. So it is a matter of having the correct investment mix in my portfolio according to my risk profile and just keep moving forward.

Regards

Sailesh

duncan_m · 4th Mar, 2005

Sailesh Channan said:
Hi Marty
My goals seem to keep changing as I evolve as a person. At this stage the minimum income plan is $200k nett. Therefore need at least $20m in investments earning 5%....my safty net. Now that I have come this far I can see the law of compounding kicking in and things accelerating quickly.

5% of $20M is $1M.. did you mean $4M earning 5% Nett? or $20M earning 5% after costs?

simonjulie · 4th Mar, 2005

Sultan of Swing said:
Hi MJK
Some of our elder forumites are further advanced and don't want the hassle of managing a large portfolio and want to simplify their structures. Its easy for some of us younger ones to say we'll still want to be involved in managing our portfolios to the same degree we are now but seriously, how DO we know what we'll feel up to doing when the time comes. At 40, I don't want to do the things i did when i was 20. How do I know I'm going to want to do the things I'm doing now when i reach 60?

Cheers

Hi SOS
Horses for courses - One of the great things about this forum is taking a look at different strategies and approaches used successfully by other members.

How do you know what you will want in 10 or 20 years? Who knows but here is some food for thought.
Do you remember when you were learning to drive a car? You were probably a bit nervous and realised that you had a lot to learn. Once you got your licence and got experience on the road you gradually became more and more proficient, to the point where you no longer put a great deal of concious thought into the process. Hence a capable driver's ability to arrive at a destination realising that he has had so much on his mind he doesn't remember focusing on little things like putting on blinkers, changing lanes etc. He just drives. Things that were a big deal when you are learning become water off a ducks back.

When I began as a property investor I worried much more than I do now about our properties. I have much more debt now but am much less concerned because I understand so much more. If you stay in the game for 10 years or more you will most likely find that it gets easier and easier and you will get better and better at making money.

Look into your crystal ball and see yourself in 10 years time. You will be looking at someone with 10 years more experience.

Regards
Julie
Audentes Fortuna Juvat
Fortune Favours the Bold

see_change · 4th Mar, 2005

Steve Navra said:
Yes, and I REPEAT that the question was asked in the context of one SPENDING the equity.

So what's your point??
Or do you just contribute to be negative

see-change which of the following words are you failing to understand?
”No growth = NO SPEND”

I have explained MANY TIMES that one assesses what the previous years growth has been and that you cannot spend more than that.

Furthermore in your very own post:
(From March 04)

So it seems patently clear that you did understand EXACTLY what I was saying; and given that there can be no misunderstanding on your part again I ask you:

What is the point of your latest post?

I can find NOTHING positive in this post, only CONTINUAL NEGATIVITY. (Read it again yourself)

We all have a right to an opinion, I respect your right to whatever opinion you wish to express on the forum . . . but really if you have NOTHING but NEGATIVITY to contribute, rather don’t spoil it for everyone else.

Frustrated,
Steve

Now I know what Bill feels like ......

First point , though unrelated . My understanding of the internet is that when someone starts writing in enlarged bold writing , is that they are doing the verbal equivalent of shouting. I have met you several times before over the last four years, so I know that's not your actual nature which is probably why no one has raised with you before , but when I read your above response it comes across as an angry tirade directed at me ,with a certain amount of venom . Maybe that is you intention , but I don't think that helps the cause of reasoned debate.

If that it is your intention , then I am disappointed that you feel the need to use that tone with people who are questioning your methods.

I also think your use of the word

negative

to describe views that are different to yours or questioning your views as ....um ... negative ??

Back to the point ....

Steve it may well be that when you said the " D word " that in your mind the context was related to some thing that you had said prior to saying it , however my recollection of the context was that was not the case. Maybe I should have stated that clearly in my previous post.

I havn't had a chance to read through the entire thread that I linked to in my previous post , ( so correct me if I'm wrong ) but I don't recall you adding your current clarification when I previously quoted you quoting the D word. Maybe it would have been worth while correcting me at that stage to avoid future confusion...

See Change

Sailesh Channan · 4th Mar, 2005

duncan_m said:
5% of $20M is $1M.. did you mean $4M earning 5% Nett? or $20M earning 5% after costs?

Duncan my mistake.

Its funny how the mind works and I guess I have been caught out here because my new goal is to earn $1m per year.

Am I dreaming ...may be But you know what they say about shooting for stars.

However going back to the last lot of calculations yes you are right about $4m nett or $8m at 50% gearing for $200k per annum.

Regards

Sailesh

keithj · 4th Mar, 2005

simonjulie said:
Not wanting to blow our own trumpet here but it seems that few on this thread can make this claim. Simon and I have been living off equity (no wages) for the last few years and even with a slowing market at present we are still seeing growth in some of our portfolio.

The reason for this post is to affirm that living off equity is a very real possibility and when it comes to spending it is all about balance. As Steve said "NO GROWTH - NO SPEND". And as Simon inferred, it is best to have equity on hand, not being used, so you have something to fall back on in harder times. Or as Steve would suggest - a balance of CAPITAL - being property, shares, cash and PEOPLE (don't forget the value of people).

Hi Julie & Simon,

It's good to have resources like you guys who have done it & are happy to talk about it - thanks.

I hope these questions won't appear negative, but as making people (including me) think about LOE and risk. I have retired, but chose not to LOE because I wasn't satisfied with my answers to some of the questions below.

Do you have your own spreadsheet showing worst case scenarios ?
What do you consider to be a worst case scenario ?
How do you plan to survive if a worst case scenario happens ?
Did you consider alternative ways of retiring ?
Are all your assets in IP (no shares, funds, LPTs, commercial property etc) ?
Do you consider LOE as risky ?
Have you been through a prolonged period of no growth yet ?
How big a buffer (in months/years) do you have assuming no growth ?
Assuming 0% growth for a few years. For how many years would you spend up big (ie on luxuries) and watch your equity decrease before starting to spend only on essentials ?
Do you expect banks/credit providers to continue to allow you to draw down against equity ?
Do you have dependants ?

I'd also be interested to hear answers from anyone else who is currently LOE.

Cheers,

Keith

kissfan · 4th Mar, 2005

Steve Navra said:
Question to Forum members: Do you find this interesting and useful?
Please indicate by poll or other if you wish me to continue.

Steve, your posts are always a good read, full of so much information and humour at times as well, so in answer to your question
OF COURSE WE WANT YOU TO CONTINUE. Please don't take too long so we don't lose the momentum.

Regards
Marty

P.S. That last sentence was a wish not a demand (don't want to get offside)

simonjulie · 4th Mar, 2005

MJK said:
My asset base is at a point where it will continue to grow with capital gain and the equity is retrieved through the rents. It may not make sense but is possible even with a negative cashflow as long as your asset base and spending are balanced.
kind regards
Simon

Simon,

I wish you would elaborate on this. Do you mean that you capitalise costs excluding interest and live of excess rent flows?

MJK

Hi MJK
I will try to give you another answer to the above Posts

Lets say you have a 5ml asset base with a 5%(250K) rental income pa and a 5%(250K) of asset base interest bill/holding costs pa.
Because of the above we have a nuetral cashflow position.
If we say have 5%(250K) capital growth in that year then the asset base goes to 5.25ml.
So what sought of LVR would allow enough flexibility for an investor to stop working and live off the 250K equity gained last year?(open ended question)
Lets say for the purpose of this exercise LVR=60%
Also lets say you draw down a LOC of 500K against your assaet base.
New position
LVR approx 70%
asset base 5.25ml
500k to spend.
replace the 250k costs for next year from the LOC + reinvest the other 250K(leveraged)witch can be done by buying another IP for say 250K(80/20 leveraged)
This will leave a good chunk of next years rent income for you to use for lifestyle or what ever

New position at the begining of the next period.
Asset base of 5.5ml
LVR 70%
real equity = 30% of asset base(5.5ml) + whatever is left over from rentals and other income streams at the end of the period.
Note: this is just an EXAMPLE to show the proccess.
Hope this helps
Simon

Steve Navra · 4th Mar, 2005

see_change said:
to describe views that are different to yours or questioning your views as ....um ... negative ??

I havn't had a chance to read through the entire thread that I linked to in my previous post , ( so correct me if I'm wrong ) but I don't recall you adding your current clarification when I previously quoted you quoting the D word. Maybe it would have been worth while correcting me at that stage to avoid future confusion...

Hi see_change,

I'm not angry nor am I shouting

I am happy to agree to disagree as I do with Bill.L.
(I hold Bill.L's views in high esteem and thoroughly enjoy the challenge of addressing his valid point of view. The forum is made up of the full spectrum of investors: As such ALL contibutions are NECESSARY otherwise there would be no balance.)

So on a softer note:
I don't describe views that are different to my own as negative, in fact I welcome these. I get frustrated when someone is negative WITHOUT expressing a view. You DID NOT express a view, you continued to attack a word "Disaster" which was clearly out of context. (Your other views on risk, balance and your personal methadology are valid . . . and I am trying my best in this post to address many of the issues you have raised so as to give all members a basis upon which to form their own independent structure)

I didn't previously correct you . . . I let it go so as NOT to be confrontational. I mentioned the out of context use of the word and reiterated the no growth = no spend concept, which should have put that one to bed.

I will happily address any issue you wish to raise; like for example:
"Steve I think your idea of ^%^&%% is insane, nuts, risky . . . BECAUSE of . . . !!" In other words, give me something to debate / justify / explore.

I think you will find many answers to your concerns through the conclusion of this post.

Sincerely,

Steve

Pete · 4th Mar, 2005

another explanation

Thanks Simon,

I use a quite similar approach when explaining it to interested people.

It is easier to understand with some big numbers. As in, say you had a $10,000,000 portfolio and owed no debt.

Even with no income, one could borrow, say $100,000 for a year's expenses. After a year, go and borrow another $100,000. And the next year. And so on.

People can accept that one could maintain this borrowing when the initial asset base is $10,000,000 and is increasing in value at, say, 5% per annum (conservative average long term rate for well located property). That is, $500,000 per annum.

So, one is increasing borrowings by $100,000 p.a. when the asset is going up at $500,000 p.a. [Initial rates; keeping it simple by ignoring compounding.]

If that is understandable, then scale it back, well what if one had $5,000,000 of assets. Could one do the same thing?

And adjust further for actual annual requirements (different from $100,000) and different assumed capital growth.

I usually neglect rent/yield and also interest on the loan. But if questioned, explain that by borrowing say twice as much - $200,000 p.a. - intially when one actually needs $100,000; then the "surplus" amount can be available to pay interest.

People generally can understand the idea when starting from the $10,000,000 equity position and understand that a reasonable and sustainable position can be acheived with a smaller and partially encumbered portfolio.

regards,

simonjulie · 4th Mar, 2005

Hi Keith
Thanks for you reply and it is refreshing to know that my post has given rise to your questions.

keithj said:
keithj said:

Do you have your own spreadsheet showing worst case scenarios ?

Click to expand...

Yes, absolutely. Simon is always crunching the numbers and we both always look at both best and worst case scenarios. I think it is important to look at both because dreams are built on best and risk assessment is built on worst

What do you consider to be a worst case scenario ?

Click to expand...

This is an interesting question and to understand my answer you would need to get inside my head. I am an incurable optimist. I do not spend a lot of time thinking about worst. The reason is that I have enormous faith in my ability to bounce back. But if you really want one here goes:
Aliens land and take over our planet. I approach the leaders but find them difficult to negotiate with and they decide to kill me.That may sound strange but falling prices, high interest rates, recession, depresion, bankruptcy etc. doesn't scare me. Not having fun any more would be my worst case scenario.

How do you plan to survive if a worst case scenario happens ?

Click to expand...

Being resourceful and staying ahead of the pack.

Did you consider alternative ways of retiring ?

Click to expand...

No. We kind of fell into this without realising how well we were doing.

Are all your assets in IP (no shares, funds, LPTs, commercial property etc) ?

Click to expand...

Mainly residential IPs. A little dabbling in shares and cash on hand. Not very exciting to some perhaps but it is working for us and we love it!

Do you consider LOE as risky ?

Click to expand...

NO

Have you been through a prolonged period of no growth yet ?

Click to expand...

Only with PPOR. Yet to be tested with IPs long term

How big a buffer (in months/years) do you have assuming no growth ?

Click to expand...

10 years and beyond

Assuming 0% growth for a few years. For how many years would you spend up big (ie on luxuries) and watch your equity decrease before starting to spend only on essentials ?

Click to expand...

[IGood question. If money was running low I would find another way to produce income. Being resourceful is important

Do you expect banks/credit providers to continue to allow you to draw down against equity ?

Click to expand...

Probably. But again I am not concerned about this. Resourceful people find ways to convert capital into income

Do you have dependants ?

Click to expand...

Yes but most have left home.

Regards
Julie
Audentes Fortuna Juvat

Steve Navra · 4th Mar, 2005

Sultan of Swing said:
The way I see it is, most are actually agreeing with each other. It just comes to monitoring your particular portfolio's progress during the economic ups and downs and taking action when and where you think its required.

Yes, this is spot on

We are all after achieving the same end . . . Financial Independence.

The journey will be different for everyone, simply because we are different people with different risk profiles, at different ages and with very different dreams.

One should never dogmatically (Or egotistically!) get stuck with a method . . . flexibility of structure is the key. Priciples should not be compromised, but structures will and in fact must change as times and circumstances are always changing.

Nobody need ever feel "offside" !!

So let's get back onto the topic

More to follow later today.

Regards,

Steve

Merovingian · 4th Mar, 2005

Steve Navra said:
More to follow later today.

Rubbing my hands together with anticipation...

austini · 4th Mar, 2005

Hi again Steve

I think that it is only a matter of time before living off borrowed money becomes more widespread even amongst more conservative types. Take for example the growth in Reverse Mortgages. These have been very popular overseas for quite awhile now and are really starting to take off here.

It is sad to see many retirees struggling to meet day to day living expenses when quite often the equity from the house they are living in could provide them will a very comfortable lifestyle and still leave something for the kids when they die.

Hence there is a very potent message that you are delivering here. Finding the courage to make better use of one's capital could make a massive difference to one's lifestyle.

On another note it was interesting to see that you purchased your PPOR in a trust. If you don't mind me asking do you still use trusts to hold your IPs and shares? I do recall you saying once that all your strategies should also work using trusts. Out of curiousity are you aware of any possible disadvantages of implementing your strategies via a trust as opposed to doing it in an individuals own name?

Cheers - Gordon

Steve Navra · 4th Mar, 2005

austini said:
On another note it was interesting to see that you purchased your PPOR in a trust. If you don't mind me asking do you still use trusts to hold your IPs and shares? Out of curiousity are you aware of any possible disadvantages of implementing your strategies via a trust as opposed to doing it in an individuals own name?

The disadvantages of using trust structure is that it is a HASSLE.

That together with the cost and loss on CGT are what makes me mostly recommend rather just using one's individual name.

I use trusts purely for spreading the land tax obligation (NSW sob) and also to isolate assets between different families. (Divorce

)

There are many advantageous reasons for trusts regarding asset protection.
Expert advice is necessary as each situation is different.
I have for this reason included a time slot at the end of my courses for Nic Moustacas to address these concepts for these that wish to remain after the course, for this info.

Regards,

Steve

Living off equity – a Reality Check

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MJK

kissfan

austini

Sultan of Swing

simonjulie

Sailesh Channan

duncan_m

simonjulie

see_change

Sailesh Channan

keithj

kissfan

simonjulie

Steve Navra

Pete

simonjulie

Steve Navra

Merovingian

austini

Steve Navra

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