Living off equity – a Reality Check

As a quick aside, has anyone had any historical experience with the following?

I don't mind if property prices did dramatically overshoot reality as long as I've drawn down my LOC's based on these 'ridiculous' values and used it accordingly.

What I want to know is has anyone had any experience in the past with Banks realising that because the property market 'comes back' that their security is no longer as great and they decide not to continue the LOC capacity?

How secure is a LOC?

Hi Alan
Great Question
It is my understanding that if the LOC is fully drawn and there has been no default it would be difficult for the lender to justify calling in the loan.
Kind regards
Simon

To all the D&Gers out there.
If I were to have all my wealth taken from me by whatever means I, through my experience gained the knowledge to get it back again.
As I have said before
I am not afraid of financial risk
There are many more important things in life than money or the thought of losing it.
Kind regards
Simon

Alan H said:

As a quick aside, has anyone had any historical experience with the following?

I don't mind if property prices did dramatically overshoot reality as long as I've drawn down my LOC's based on these 'ridiculous' values and used it accordingly.

What I want to know is has anyone had any experience in the past with Banks realising that because the property market 'comes back' that their security is no longer as great and they decide not to continue the LOC capacity?

How secure is a LOC?

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Probably as secure as any other loan. I have heard of people with no history of late payements , being given notice by the bank to repay the loan. If you read your loan documentations , most loans give the banks the option to do that. Of course no one expects a bank to act irrationally , but after all they're just a collection of humans ......

See Change

simonjulie said:

To all the D&Gers out there.
If I were to have all my wealth taken from me by whatever means I, through my experience gained the knowledge to get it back again.
As I have said before
I am not afraid of financial risk
There are many more important things in life than money or the thought of losing it.
Kind regards
Simon

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Don't be smug Simon.

I don't have time or health to do it again but I am, for the first time in my life making giant strides towards a reasonable retirement. In so doing I, too, am takings risks. I'm just careful about maintaining my capital.

Being constantly called a Doom 'n' Gloomer is why I no longer post my real thoughts here.

Thommo

see_change said:

Probably as secure as any other loan. I have heard of people with no history of late payements , being given notice by the bank to repay the loan. If you read your loan documentations , most loans give the banks the option to do that. Of course no one expects a bank to act irrationally , but after all they're just a collection of humans ......

See Change

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Hi SC.

I remember my solicitor taking me through my first Mortgage Document in great detail.

I was shocked. The Banks could just about do whatever they liked!

My solicitors comment was: "If most people ever actually FULLY read their mortgage documents they'd NEVER feel comfortable signing them. Don't worry about it. That's the way it is. Sign here."

this thread is really starting to bug me

of course simon is going to have the point of view that financial risk doesnt concern him and his family because he has the time left to recover if he needed to (i am guessing simon & julie are in there early 40's or so)

of course thommo is not going to have this point of view because he is coming at it from a different point of view, position in life, and perhaps a different age group (early 60''s as a guess....)

keith - is a paradox. i dont know how old he is but it seems like he has retired in late 30's or 40's (as he mentioned he was expecting a retirement period of 40 years or so. And he also appears to have a very conservative, risk adverse way of looking at things.

dunc is the same as simon but younger.

thommo, simon isnt being smug, he is just stating his position.

Can we all just except that if people dont want to Live off Equity then just dont.

Whatever alternative mechnism that you have that you think would work or has worked for you then feel free to post, but I just think that people are going to either feel comfortable with LOE or not and we kind of keep going around in circles - any attempt for common ground which has been made by some posters is fruitless as the two concepts are polars apart.

Keith - has your original post been answered?

Corsa said:

this thread is really starting to bug me

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Hi Corsa,

Corsa said:

keith - is a paradox. i dont know how old he is but it seems like he has retired in late 30's or 40's (as he mentioned he was expecting a retirement period of 40 years or so. And he also appears to have a very conservative, risk adverse way of looking at things.

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That's a polite way of describing me. See my R&R activities posted earlier (canyoning, rock climbing etc) for a glimpse at my attitude towards risk - even more of a paradox!.

Corsa said:

Can we all just accept that if people dont want to Live off Equity then just dont.

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I accept people may or may not wish to do so. I don't accept that people should not be fully aware of the risks - which is what my original post was about.

Corsa said:

Whatever alternative mechnism that you have that you think would work or has worked for you then feel free to post, but I just think that people are going to either feel comfortable with LOE or not and we kind of keep going around in circles - any attempt for common ground which has been made by some posters is fruitless as the two concepts are polars apart.

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I disagree - Steve and I agree on much regarding LOE.

To summarise the thread so far -

• LOE is defined as living SOLELY on equity.
• Using solely LOE as a retirement strategy is v. risky because No Growth = No Spend
• The LOE strategy is v. tax efficient
• The LOE strategy should be used in conjunction with another lower risk strategy.
• The Navra Strategy as described above (& mine) combines a LOE strategy and an income strategy – it is not solely a LOE Strategy.
• The only income & capital guaranteed retirement strategy is Govt bonds.
• Depending on your risk profile you can use the following in conjunction with the LOE strategy to reduce the risk -

• • guaranteed risk free low return strategy,
  • 99.99% guaranteed strategy
  • or some of the high return & high-risk strategies.
  • any combination of the above

Corsa said:

Keith - has your original post been answered?

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I think we've had a 'full & frank' discussion. And the above summary doesn't contradict anything I said in post #1. Judging by the 7000 views, I think it is making a lot of people think - which is great. Although, I confess that at least 100 of the views are mine.


Cheers,

Keith

keithj said:

Judging by the 7000 views, I think it is making a lot of people think - which is great. Although, I confess that at least 100 of the views are mine.

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Hi Keith,

Good summary to date

And I am about to give my 2c worth . . . chapter 4 coming up soon.

Regards,

Steve

Steve Navra said:

Chapter 4

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I see a Steve Navra book coming out soon

(and well overdue too!)

Cheers,

Aceyducey

Aceyducey said:

I see a Steve Navra book coming out soon

(and well overdue too!)

Click to expand...

Well didn't you know that you were my proof readers
(And critics too )

Steve

Steve,

Thank you so much for putting so much of your IP out there for us all to peruse and contemplate.

This capital growth can be accessed and used by way of a LOC/offset or a cashbond as a tax free income.

I have a quick question about the above quote from your example regarding accessing capital growth as tax free income. I am not a tax guru so please bear with me if I am missing a basic point. The way I see it the tax treatment of capital draw downs can have a dramatic impact upon the number of years required to set up the LOE scenario or the amount available per annum after the ten years your recommend.

Assuming that our assets are all held in a HDT for asset protection. Further, in order to access the capital we must take a further loan i.e LOC. Will the ATO allow the interest on your new loan to be deductible going forward? Same for the debt created to arrange a cashbond.

By the way I love your structure. I'm just trying to understand all the assumptions you have made and the implications for some of the more mechanical pieces.

Regards


CB

Steve Navra said:

The gross share fund should produce distributions of 10% which will produce $325,000 per year of income, paid quarterly. Okay, if you are not confident of achieving this amount of distributions, then lower the figure accordingly. Realise though, that if you have employed the structure for up to 10 years to reach this point, then you will have far greater confidence regarding the efficiency of DCT to produce such distribution incomes, because you will have seen it happen up to this point in time.
Important to note is the fact that the income from distributions is fully taxable.

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Steve:

Looks very good subject to the 10% return of share fund on 7.5% interest rate environment, or the share fund return 3% higher than interest rate.

If the interest rate is more than 10%, what return the share fund will be from history data?

Still I think it is a good strategy because if rate is too high comparing to the return on share fund, the investor can sell the share.

Regards

TGP

WOW

I feel like I just sat down for a 4 hour seminar.

as frustrating and heated as some parts of this thread have become it has overall been an absolute gem.

I must have stashed half of the thread away in various 'future reference' files

Steve if you ever come back to Perth I will be there with bells on.

I myself am getting to the point that on my limited income it will be had to service further loans without diversifying through shares etc to boost my servicability.

Close to completion of the IP I am building expect a LONG phonecall from Perth

The phonebill will be worth it. But then again the book may be out before then

<KS>

<KS> said:

WOW

But then again the book may be out before then

<KS>

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Hi KS,

Thanks for that

Guys, please don't hold your breath for the book to come out!! After completing this forum post, I still have to write numerouse chapters on Rental Reality, Selection Criteria; Financing, Lazy Dollars, cashbond etc, etc, etc AND then combine that with the Dollar Cost Trading share paradigm- which is a book on its own.

It is part of my journey; it is a work in progress and I am enjoying doing it . . . but we are still some way off the final product. (If I ever get it published.)

Either way I am happy to share my methodology and I couldn't have picked a more educated audience to offer me this real life critique

So thank you all for your feedback. (Hmmmm even Bill.L)

Regards,

Steve

Coach B said:

Will the ATO allow the interest on your new loan to be deductible going forward?

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Hi Coach,

Yes the draw down of equity (Lazy Dollars)which is then reinvested for further growth and income is a vital part of the equation, in the building stage.

The ATO test is whether the money is used to acquire an income producing asset, which clearly the shares and the cashbond both are. (This way you will get the standard sec. '10' deduction.)

However, please be aware that at the end of the 10 years when you are drawing down income to live on, this portion of the loan will NOT be deductible. (Which is why you need to reinvest or draw down a third less to cover the non deductible interest cost.)

Seems harsh I know, but the value of tax free dollars far outweighs this small sacrifice.

Regards,

Steve

Steve Navra said:

Each step of the ‘building the portfolio stage’ entailed drawing down lazy dollars and investing these into the share fund to reach the balance as shown above: with Property LVR at 80% and Shares at 50%.

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Hello Steve,

Up until this stage you've been drawing out any available equity from your IP's to 80% and re-investing these lazy dollars into the share fund....until you have sufficient funds for the next deposit and costs. If you've continually been pulling money out of the share fund to purchase 6 IP's over 10 years how did you end up with $3,250,000 in property equal to $3,250,000 in shares?

Wouldn't the portfolio be heavily weighted in favour of property with a much smaller portion still held in the share fund? I'm wondering how you ended up with an equal value of property and shares in your example.

Ebbie said:

Wouldn't the portfolio be heavily weighted in favour of property with a much smaller portion still held in the share fund? I'm wondering how you ended up with an equal value of property and shares in your example.

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Hi Ebbie,

I am in favour of weighting towards property initially , because of the greater leverage available.

In setting up the Financial Plan, one has a general idea of what they would like as a future income and from that one can approximate what the Total Final Portfolio value should be.

One then works towards acquiring half that value in property as quickly as one can, by value adding with shares and as you say then using this growth for the next property deposit.

Then you simply stop buying property and the share portfolio quickly builds up to the desired 50% : 50% split. (All the equity growth from the properties gets channeled across to shares whenever it accrues.)



Regards,



Steve

Steve Navra said:

Hi Ebbie,

I am in favour of weighting towards property initially , because of the greater leverage available.

In setting up the Financial Plan, one has a general idea of what they would like as a future income and from that one can approximate what the Total Final Portfolio value should be.

One then works towards acquiring half that value in property as quickly as one can, by value adding with shares and as you say then using this growth for the next property deposit.

Then you simply stop buying property and the share portfolio quickly builds up to the desired 50% : 50% split. (All the equity growth from the properties gets channeled across to shares whenever it accrues.)



Regards,



Steve

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Hi Steve.

Sorry to sound a bit thick-headed here (something I do very easily), using the above scenario, if someone wanted $100K net P/A (passive income), and assuming they currently had no holdings in the managed fund, how much equity do you calculate would be required to get the ball rolling and approx how long before they could live off this full time.

Regards
Marty

kissfan said:

. . . if someone wanted $100K net P/A (passive income), and assuming they currently had no holdings in the managed fund, how much equity do you calculate would be required to get the ball rolling and approx how long before they could live off this full time.

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Hi Marty,

I would need heaps more info

1) Current Gross asset value
2) Current debt.

Note:
Just the net equity alone is not good enough, because the CG on the gross asset base is part of the equation.

3) Current incomes (Serviceability assessment)
4) Current budget. (Cashflow assessment)
5) Lifestyle circumstances. (Future desires - private schooling, o/s holidays, dream car boat etc . . . need to be factored in)
6) Risk Profile. ( SANF : From guaranteed income (Cash) investments all the way through to Hedge funds and Futures)

Note:

If one was to rely purely on guaranteed cash vehicles as a means to acquiring Financial Independence I don't think they would ever get there!

On the other hand if one was to attempt only options and futures I don't think they would get there either!!! (Chaos)

So it is the construction of a risk for reward program using the entire spectrum that will provide the answer.

The answer to how long it will take is a bell curve; depending on what a client chooses as a comfort level and is dependent on the assets and structure they choose. ( Chapter 5 will answer this question for you. )

Regards,

Steve