Living off Equity - is this still an option?

grossreal said:

hi markpatric
couple of things i'm not selling anything and my structure is set up for this system and unlike know nobody told me how to set it up it just evolved.
by pegging rentals above cpi the the redraw should be available and by mixing resi with comm you can draw as you wish.
I currently don't as I have developments but could live off this system now except I have a time line that I'm keeping to and using this equity for my developments.
compounding growth you use prior to starting to draw down so you land bank your investments and leverage off them to the next investment.
If you are developing you draw a loan or line of credit against the value that the rent will cover and use this cash for the next investment and if you get a group of like minded people and you pool your available cash then you have a developing group.
(The bottom line is though that you need a lot of equity to begin even thinking about this strategy) not sure about this you can start this strategy with the first investment you just must set it up correct from the start. I have posted gross and his system.
To start in that system can be minimul and any body can do it.

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Ok Grossreal, then so to begin with you are not living off equity, you are using the equity to leverage into more property, it is one thing to say you can and another to do it over a period of time without going backwards, and without working is the real issue, if you work and earn an income from that you are not living off equity full stop, most if not all investors including myself live off equity to some extent but that is no mystery.
Also imo over the next 2 years will come the crunch, yes I lived off equity for a year or more but it`s been a dream run.
Things are going well for you that`s good but we are still at the tail end of a extremely good run in R/E.
You are not there till your "there" but all I`m saying is in my experience it`s not a worthwhile aim to have imo, but of course the few at the top could easily make it work over a long period of time but certainly without some kind of effort there fortune would slowly slip away, everyone who gets anywhere and stays ahead of the game must work in some capacity.

equity

hi markpatric
Not sure of your point, you have to set up a system to live off equity and to get there you leverage off your investments, in my case I develop because the path is quicker but nobody I know thought it was a mystery it is good business sense.
The post asked is living of equity still an option and the answer is yes and if you structure it correctly depending on the live style you wish depends on your structure.
all you have to do is think equity is the same as cash you just need to structure around if and when you need to access that equity.
As I posted I'm not selling this system the post asked a question I'm only replying to it.
As for going backwards that is impossible if you have your rent cpi or 6% linked you must at all times be infront of inflation and if so you can't go backwards I haven't seen a market were rents went backwards.
if you structure your rentals and mix comm with resi you can achieve relatively easy.
If your land bank grows and your rental returns grows in front of inflation I'm not sure what you see as slipping away.
as for staying a head of the game it depends
A. which field you are on
B. whether you are playing the same game.
C. if you are playing with the same rules as me.
D. and if you are aiming for the same goals
For me I don't try to be at the front of any pack I know my goals and aim for my goals and am very focused in getting there.
The real estate market is a long haul process and I make money in a bear market or a falling market it just adjusting to the market conditions.

G'day all,

I've heard a number of ideas over the last few years re this "Living off Equity" - and I reckon I can believe in it - but......

It would be worthwhile to consider that borrowing off Equity is going to cost more - so, if you need to have $100k per year to live, I'd be wanting to CONSERVATIVELY see $300k growth per year in my holdings.

Is that too conservative? Well, it's a personal thing, but, for starters, a $300k growth doesn't allow you to BORROW $300k (let's say it allows 80% of that). So that's $240k. But, if you've no Income, you might be restricted to 65% (only $195k)!!! We don't borrow it ALL, though - we simply borrow what we need, and INVEST the rest, or leave it for next year. But anyway, let's say you've added another $100k of debt, so there's another cost to be added (not huge, but another $7000 to come off the top - or more if Interest Rates go up). Inflation adds its bit too.... (Excel starts paying off about now....)

But then, property values DON'T always go up every year - so it's worthwhile to allow for some years of no growth........... Aren't there 100 year floods? What if we were to encounter a "100 year" excessive down-turn in property values? Hmmmm!

How conservative is conservative?? As I said, it's personal. I do believe LOE IS possible, but not on a shoe-string.

What do YOU think? Am I too bullish???????????????

Regards,

les

hi les
I wouldn't say your wrong but I'll clarify a couple of things.
I'm talking of my system here
first there is income rental which is increasing and the amount of increase in rental income increase the amount that can be drawn out.
growth is only looked at if you find you wish to sell to go to a better investment which does happen but you don't lend on my system on growth the only time growth comes into the equation is if you re rent out a property and the the new rental is dependant on the value in the area.
as for a shoe string I haven't heard of any body on this system on a shoe string budjet there are lots of this type of system but yes you must have a reasonable investment bank of properties to make it work but that is what most investors are striving for.
I don't understand the first bit that
It would be worthwhile to consider that borrowing off Equity is going to cost more - so, if you need to have $100k per year to live, I'd be wanting to CONSERVATIVELY see $300k growth per year in my holdings.
Not sure why you would require this amount as long as your returns matched your outgoings why would you want three times the growth because growth is only materialised on sale and this type of structure is a hold structure you can if you wish use any excess funds to invest in high growth areas and sell and use this income but thats not the design of this system( this is my system there maybe others here that use a different system).

Hi all,

I think Les has hit the nail on the head here.

"But then, property values DON'T always go up every year - so it's worthwhile to allow for some years of no growth........... Aren't there 100 year floods? What if we were to encounter a "100 year" excessive down-turn in property values? Hmmmm!"

The LOE thing is great in theory and is possible in practise, but it could go wrong at some point. The myriad of unknowns is what can bring the "system" of LOE undone.
What if the banks change the rules for borrowing, and lower the lvr that applies to no-doc/low-doc lending???

What if the banks change the rules in regard to annuities some use for dsr???

What if the valuations on your properties come in lower after a few years when you had expected an increase???

What if your personal circumstances change and you have to sell, and find that the sum total of paying off your loans, paying agents fees,and paying CGT, leaves you behind the funds received??? (This is possible though many will argue not probable)

The alternative of living off the rental income, or taking some profits to invest elsewhere, is a less risky method.

bye

Les said:

G'day all,

I've heard a number of ideas over the last few years re this "Living off Equity" - and I reckon I can believe in it - but......

It would be worthwhile to consider that borrowing off Equity is going to cost more - so, if you need to have $100k per year to live, I'd be wanting to CONSERVATIVELY see $300k growth per year in my holdings.

Is that too conservative? Well, it's a personal thing, but, for starters, a $300k growth doesn't allow you to BORROW $300k (let's say it allows 80% of that). So that's $240k. But, if you've no Income, you might be restricted to 65% (only $195k)!!! We don't borrow it ALL, though - we simply borrow what we need, and INVEST the rest, or leave it for next year. But anyway, let's say you've added another $100k of debt, so there's another cost to be added (not huge, but another $7000 to come off the top - or more if Interest Rates go up). Inflation adds its bit too.... (Excel starts paying off about now....)

But then, property values DON'T always go up every year - so it's worthwhile to allow for some years of no growth........... Aren't there 100 year floods? What if we were to encounter a "100 year" excessive down-turn in property values? Hmmmm!

How conservative is conservative?? As I said, it's personal. I do believe LOE IS possible, but not on a shoe-string.

What do YOU think? Am I too bullish???????????????

Regards,

Click to expand...

I agree with you Les. It might work , but it could also go pear shape, and if it does you could be in deep do do when the market is at it's worst.

I think there are safer ways to invest. I think there is a role for IOE ( Investing on Equity ) inparticular coming out of the market slump , but using it as and ongoing strategy and as end game , in particular with high LVR's is a potential disaster.


See Change

Bill.L said:

The myriad of unknowns is what can bring the "system" of LOE undone.

What if the banks change the rules for borrowing, and lower the lvr that applies to no-doc/low-doc lending???

What if the banks change the rules in regard to annuities some use for dsr???

What if the valuations on your properties come in lower after a few years when you had expected an increase???

What if your personal circumstances change and you have to sell, and find that the sum total of paying off your loans, paying agents fees,and paying CGT, leaves you behind the funds received??? (This is possible though many will argue not probable)

The alternative of living off the rental income, or taking some profits to invest elsewhere, is a less risky method.

bye

Click to expand...

This has been my concern and we've recently seen an example where a bank has changed how they treat income from annuities.

See Change

Bill.L said:

The alternative of living off the rental income, or taking some profits to invest elsewhere, is a less risky method.

Click to expand...

LOE, largely the "Navra way", gives me a shot at the GREAT years NOW, exploring passions, looking after the kids, learning new skills.. Living off rental income, for me would be a LONG time away.

So I'll take the upside NOW as I have no idea what's going to happen in the meantime.. I could die, get ill, bird-flu could decimate us, the kids could get sick, the kids could grow up, I could lose a leg.. Now is very important to me.

But if it all goes pear shaped in 5 years, I'll go back to work. No problem with that. But I cant see that happening, the time I'm going to have available is just enormous when the pressures of commuting and work and "toeing the company line" are lifted from my shoulders then, in addition to hobbies and kids, I'll be investing even more actively than I have been in the past..

duncan_m said:

LOE, largely the "Navra way", gives me a shot at the GREAT years NOW, exploring passions, looking after the kids, learning new skills.. Living off rental income, for me would be a LONG time away.

So I'll take the upside NOW as I have no idea what's going to happen in the meantime.. I could die, get ill, bird-flu could decimate us, the kids could get sick, the kids could grow up, I could lose a leg.. Now is very important to me.

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Duncan , in all the debates I've seen on LOE , that's the best reason I've heard for doing it.... .... But that's not the normal justification.

See Change

Yes - LOE is still an option.... BUT...

Yes - LOE is still an option....

BUT....

....only if you have a solid backup plan - eg

• you're happy to return to work
• have sufficient rental/dividend income for essentials
• sufficient equity to last forever
• high locked-in c/f increases
• you're able to return to work to create equity eg renos, trading

I use LOE for luxuries ONLY IF the equity is available. I have +ve c/f for essentials & small luxuries. This buys me TIME - with the kids, or to invest. I am confident rents & dividends will rise at least with CPI, I'm not confident that growth will occur, I am confident I can keep my essential costs below my +ve c/f. I don't consider that I use pure LOE.

I reduce the risks with -

• long leases
• fixed interest rates
• diversify between IP, comm IP, LPTs, blue chip shares
• sensible LVRs

Also, I think that some people who claim to be using LOE are actually still doing renos or getting CG through trading and wouldn't last long if they stopped & the required growth didn't occur. My definition of pure LOE doesn't require me to leave my yacht in the bahamas .

KJ

Living off Debt

Reading through all the comments in this thread, I come to conclusion that many people would like to live off the equity, or want to believe that they are, but are actually not. Doesn’t matter, that's their problem, I'm not trying convince anyone otherwise.

Living of +cf IP's, dividends, interest, rental income etc is great, and it works, I can name hundreds of people that I know use it in some sort.

LOE, meaning drawing equity down less then what the potential CG on that property is, is very risky in my mind. Would anyone use LOE from BHP shares for example? Why not, BHP is a great company, with great potential and clear future outlook... why not LOE that BHP shares? No... People say it’s too risky, "you know what happened to the .com shares" etc...That can never happen to property.... RIGHT...

The point is you can’t live off debt! That is banks business, don’t try to get that from them.

Duncan_m I appreciate you honest answer, and your reason for doing it, I would love to have the mindset to look at things the way you do.

Thx
V

nice

duncan,
i think your reasons and explanations for LOE now are fantastic... you obviously have measured concern for the future but its great that you are game enough to let that work itself out. you can therefore live (somewhat)like a child - knowing that tomorrow hasnt happened yet, yesterday is gone and whats important is here and now.
nice...

I tend to agree. Great to see people out there actually doing it even though 'it's too risky'. Can't do that now! It's too risky, you know!

Mark.

Hi All
I must admit that I am a little frustrated with the way this thread keeps chasing its tale.
IMHO, using equity to grow a portfolio enables an investor with a substantial asset base to live off the rents even when the properties are not cashflow positive as long as values keep rising. That is why an investor needs other financial safety nets and alternate strategieswhen growth is not present.
Yes, it is risky and can sometimes make one feel like they are on a financial roller coaster. What works today does not always garantee that it will work tomorrow.
Those who argue that it is too risky, I would say for them that they are right because they believe it.
Alternatively, those who have found ways to LOE or use it in such a way that they feel comfortable must also see that veiw as a reality.
Kind regards to all
Simon

G'day Gross real,

gross real said:

I'm talking of my system here

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My post followed yours, but my reply was not considering just your posts.

I was thinking more of "living off ONLY equity gains" (which is how I consider "living off Equity" as I've read of it). Heard it from Investor Club and others - and reckon it can work, but............

Thus, I was coming more from the slant of replacing an "income" by borrowing against growth in equity - period. And, on that basis, I was wondering if 3:1 (growth of 300k enabling $100k withdrawal) was sufficient to cover most events. (But as I said, "Am I being too bullish?" - should it be 5:1?)

Yes, we'll have rents - but I haven't been focussing on cf+ deals - I have preferred to leverage against growth to purchase more (leap-frogging). So, just cf+ income is not going to be enough for me. Hence, I'm looking at LOE or, borrowing against the capital growth, to fund personal cost of living, plus all other costs.

BUT, once I have ENOUGH, it'd be a cold day in hell that doesn't allow me to simply Live Off Equity.

The only question (to me) is "What value of IP's is ENOUGH to fund a $100k p.a. lifestyle when Living Off Equity?" JamesGG headed some way with his spreadsheet (thanks, James !!) - and I've added one more bit to it (LVR) - 'cos if you try to LOE and your LVR is INCREASING, it ain't gonna work long-term.

Possibly the only answer to my dilemma is "How retired is retired?" As long as I can reno another property, or add value, maybe a semi-retirement can bring "retirement" closer, but in steps - and helping to grow the assets to the point where LOE can begin. A great puzzle - thanks to all those who can help - and, yes, my Excel still gets a good workout over such things

Regards,

keithj said:

Also, I think that some people who claim to be using LOE are actually still doing renos or getting CG through trading and wouldn't last long if they stopped & the required growth didn't occur.

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(emphasis is mine)

I think this brings up an issue that hasnt been raised yet, and something that might be contributing to the frustration Simon mentioned in his post above - what is exactly is living off equity?. Does it mean never lifting a finger to earn money again and drawing down on equity solely to live on, or does it mean living on equity and also using it to invest? Obviously, some people who have replied in this thread believe in the former, and others, the latter.

I guess its the same as asking people what they think retirement means - for some, it means never having to earn another cent, and for others it means being free from working for others, but still taking an active part in investing when it suits.

For me, living off equity would mean that I am drawing down on equity for lifestyle, but that Im also using this equity to invest in other asset classes, to trade shares, to buy and renovate property etc. From my perspective, it doesnt mean not using the equity to invest - it just means that I would be dictating how I earnt my money, and from what sources. This is obviously just one point of view.

As Simon has mentioned before, he and Julie buy, renovate and hold properties, reval and move on. They dont work in paid employment. This, to me, is living off equity - they have no source of income other than the rewards they reap from investing in property. Others might not see this as living off equity, because it still requires active involvement in investing the equity, rather than purely living off it.

In the end, I guess it comes down to semantics - just thought it might be useful to seek some sort of clarification from others as to what they believed living off equity meant, to make sure whether we are actually discussing the same thing.

Jamie

Hi Les
I am glad you mentioned the investors club and the Kevin Young formula.
I liken the above to back in the days when most people thought the earth was flat and that if one was to sail to close to the edge they would fall off.
I read Kevin Young's formula before it had been proven and at that time thought there may be something to it. And just like the bold adventurers of history I believed that theory to be doable. Although I have never been a member of the Investore club I believed there must be a way to LOE and set about finding my own way to make it possible.
As I have said before, we left our jobs over four years ago with an asset base of around 2.4 mil and a LVR of around 50% wich we increased to 80% to enable us to leave payed employment. We have since more than tripled this asset base( the LVR under 70%) and have no reason not to continue this strategy. Fortune favours the bold they say. I believe too many peoples circumstances stay ordinary because they spend too much time planning and not enough time doing.
Thank you Kevin Young for the vision.
Simon

G'day Simon and Julie,

we left our jobs over four years ago with an asset base of around 2.4 mil and a LVR of around 50% wich we increased to 80% to enable us to leave payed employment

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Yeehaaa!!! Now that's WAY BETTER than a gold watch !!! Well done, both of you - you're a bloody inspiration to this "young" bloke



And, Jamie, thanks for bringing an important point forward (i.e. what's the DEFINITION of LOE?) We can argue for hours if we all look at something from different angles.

For me (approaching voluntarily retirement) LOE means the capability of living off the assets built up, without having to spend all of my time in forcing growth (e.g. reno's, buy/sell, etc.).

Ideally, if I hold enough assets that are growing, and their growth can allow extra borrowings that more than cover my total expenses (including living costs) then that's good enough for me. The only concern comes from ensuring that growth continues - so maybe that means "semi-retirement" by default

Anyway, a great thread - I only noticed tonight it didn't have 5 stars. It deserved it, and my vote "flipped the coin" - deservedly so. Well done to all participants. This is a classic IMHO,

Regards,

simonjulie said:

As I have said before, we left our jobs over four years ago with an asset base of around 2.4 mil and a LVR of around 50%

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Simon,

Did this asset base include or exclude your PPOR?

Thanks.

Hi Glebe
Yes. Does it matter?
An asset is an asset whether you live in it or not. All our loans are for investment purposes. Yes, even the loans on our PPOR. This is also possible and legal. Financial structuring is an important facit to investing.
Simon