Living off Equity - is this still an option?

As many forum members know, in the last year or so there have been several threads about people living off equity. Not any more, so I thought to my self I should start one :)

My question to the forum members is weather this is still a valid option or is this something that has been swept under the carpet?

I would like to hear from some forum members who promoted this as a very valid option and who felt strongly that there is nothing wrong with that strategy, i.e. just buy lots of property and wait for it to double.

Thx
V
 
I think you would need to ask that question of the same people in 10 years time. It is hard to gauge the effectiveness of a long term strategy in a short term time period.

one school of thought suggests that if you have neough equity to survive the flat years and hold together a decent portfolio, then you probably don't need to be harvesting the equity in the first place. not to mention complications of taxation and purpose of funds, serviceability etc.

alternatively, some such as Michael Yardney swear by it. others suggest harvesting the equity to gear into shares.

personally I think a balanced approach (as with all things in lfe) is the answer
 
IMHO, the concept of LOE is still alive and well depending on how much one has to start with. How many days, weeks, years wealthy are you? this question is the key to a success or failure in this area. Meaning, that one only needs enough $$$ to last until the next boom to stay in the game. Some will and some won't.
Kind regards
Simon
 
Panic said:
My question to the forum members is weather this is still a valid option or is this something that has been swept under the carpet?

What have changed since last time that could make you think this could not be any more an option?.

The economy goes in cycles and property is not inmune to that. Thus, it shouldn’t be an issue as long as we understand that and take the due "precautions" and actions?

Cheers,
James.
 
Dear Panic,

1. For me, nothing has changed at all, fundamentally speaking, despite the various thread on this topic discussion.

2. I am still officially living off my equity as a full time property investor despite not having attained the desired financially free status as yet. Neither do I have a minimum of nett A$1 million equity as advocated by Michael Yardney, to comfortably live off the equity.

3. I certainly agree with Michael Yardney's assertion that is is better for one to accumulate a mininum of A$1 million equity before living off one's equity, though it needs not neccessarily be so. I am a living proof of what I believe.

4. I am now working at creating a regular income through my own Australian real estate development compnay. This is to further increase my borrowing capacity to better support an ever increasing larger property portfolio holding in future.

5. In the meantime, having been better educated by the various discussions, I will need to further review my living off the equity position more thoroughly, with respect to possible deferred CGT implications, though I am still continuing with my own present practice.

6. For your kind update,please.

7. Thank you.

regards,
Kenneth KOH
 
Panic said:
I would like to hear from some forum members who promoted this as a very valid option and who felt strongly that there is nothing wrong with that strategy, i.e. just buy lots of property and wait for it to double.

Thx
V
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Dear Panic,

1. I am a bit concerned about your own conclusion about living off the equity:- " i.e. just buy lots of property and wait for it to double."

2. I think that you have missed some of the basic fundamental points about living off the equity, such as the following

a. do not "over-leverage" yourself with loans until one is unable to service the monthly loan repayment comfortably.

b. need to cater some cash/equity buffer as reserve to meet the unforseen contingencies. A minimum of 6-12 months buffer is recommended.

c. the returns on investments must always be much higher and comes with regular income to allow one to service the monthly loan repayment comfortably. Ideally, the nett returns should be at least 10% higher than the annual loan/total outgoing expense servicing costs, to make it a worthwhile consideration.

3. For your kind update,please.

4. Thank you.

regards,
Kenneth KOH
 
Hi Simon

Increasingly, Im working with people that are LOEG. Most, believe it or not are using the strategy by accident rather than design.

Looking at their numbers, its hard to see how in general if one sucks up only 25 % to 40 % or so of the growth as "income" that this cant work once one reaches critical mass.

Im always amused at how some people that havent been "there" are detractors of something (im sure im guilty of it myself too, cos you know Im often wrong but never in doubt)

Every day I hear, this or that doesnt work, or I have tried that, or I know someone that tried that.............. The old adage of "Dont ask a 50 K PAYG earner how to make 300 k in business applies just as much here I believe".

Ta

rolf
 
agent007 said:
The economy goes in cycles and property is not inmune to that. Thus, it shouldn’t be an issue as long as we understand that and take the due "precautions" and actions?

Cheers,
James.

I agree too, I'm just a bit concerned about my previous experience where "perfectly normal" countries and their economies went down the drain or their economies stayed flat for decades.
I'm not suggesting that this may happen to OZ, but I can never rule that out.

Kennethkohsg said:
4. I am now working at creating a regular income through my own Australian real estate development compnay. This is to further increase my borrowing capacity to better support an ever increasing larger property portfolio holding in future.

I'm a bit confused. Is this because you want to expand? Does this mean that LOE in your opinion is not sufficient?
Kennethkohsg said:
c. the returns on investments must always be much higher and comes with regular income to allow one to service the monthly loan repayment comfortably. Ideally, the nett returns should be at least 10% higher than the annual loan/total outgoing expense servicing costs, to make it a worthwhile consideration
YES, 100% agreed, and this is not LOE. What you are saying here is that the ROE in this case rent must bee higher then all holding expenses (including loan). That way you live off your investments which are producing profit, not off your equity.
I'm a firm believer in profit from property, but I'm still new to the strategy of "eating your apples untill next summer when the apple tree will give you more apples" What if the apple tree die?

Thank you all for your replies
V
 
Hi Panic,

It's all about volatility and therefore risk.

Using a LOE strategy is guaranteed to work IF property is guaranteed to double in value every 10 yrs and a sensible amount (< 40%?) of equity is drawn down in that period. There are some gurus who would have recommended LOE to Japanese IP investors 20 yrs ago - they have acheived 0% growth pa since then.

I believe a significantly lower risk strategy that incorporates LOE is to get a low minimum income from +ve c/f IP,LPTs, shares etc and then use LOE for non-essentials if and only if the equity growth is there to support the drawdown.

KJ
 
keithj said:
I believe a significantly lower risk strategy that incorporates LOE is to get a low minimum income from +ve c/f IP,LPTs, shares etc and then use LOE for non-essentials if and only if the equity growth is there to support the drawdown.

I agree with this. I see it as sensible, from a real estate point of view, to have the rental income from the IP portfolio to live off of, by means of groceries, bills, little non-essentials, kids' education, etc. Then, if there has been growth in the portfolio recently, use some of that to buy the big boat, the nice car, or the trip overseas, etc...
 
Dear Panic,

1. What exactly do you have in mind in LOE?

2. As far as I am concerned, as a full-time property investor with no regular income since 2003, I am in effect living off my equity and using the excess equity to further invest in the Australian property market with zero money down, to expand on my own property portfolio. This is partially attributable to "buy-and-build" investment strategy, which I was able to generate more than 100% cash-to-cash ROI within a 12 months period.

3. Yes, by creating another money tap and regular income from my real estate development company and to increase my borrow capacity further, I am expanding my own wealth creation process through a new business channel, using a company structure. In essence, this does not really concern/affect my LOE, technically speaking. However, it will certainly allow me to expand on my property portfolio faster.

4. I hope this will help clarify my position.

5. For your kind update,please.

6. Thank you.

regards,
Kenneth KOH
 
Panic said:
I agree too, I'm just a bit concerned about my previous experience where "perfectly normal" countries and their economies went down the drain or their economies stayed flat for decades.
I'm not suggesting that this may happen to OZ, but I can never rule that out.

I support the idea of leaving out of equity however, I also believe that there is not right or wrong answer here. It will be based on each individual risk profile and how risk or its perception is managed. At the end, I think, we have to do what's right for us.

I also understand your concern. Personally, I have seen (suffer) the entire financial structure (all the Banks, Insurance companies, currency, 75% interest rates, etc) of a country going down the toilet in a matter of only 2 years. It is not nice but, can tell you that life goes on no matter what.

Cheers,
James.
 
Panic said:
YES, 100% agreed, and this is not LOE. What you are saying here is that the ROE in this case rent must bee higher then all holding expenses (including loan). That way you live off your investments which are producing profit, not off your equity.
V
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Dear Panic,

1. I think that you've missed my basic point.

2. Technically speaking, we do not really need to have a real higher rental income cashflow stream to repay the monthly interest loan repayment/outgoing expenses. This is especially for those investing in high capital growth properties, using negative-gearing investing strategy.

3. The required cashflow to service the monthly interest/outgoing expenses can also be in the form of "excess house equity" converted into real monies flow. This can take the form of getting an LOC from the bank, to draw out real monies for our own use.

4. I trust I have further clarified my point made.

5. For your kind update,please.

6. Thank you.

regards,
Kenneth KOH
 
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3. Yes, by creating another money tap and regular income from my real estate development company and to increase my borrow capacity further, I am expanding my own wealth creation process through a new business channel, using a company structure. In essence, this does not really concern/affect my LOE, technically speaking. However, it will certainly allow me to expand on my property portfolio faster.

Hi Kenneth,

If you dont mind what is it you actually do re the new business channel,the company structure etc?

Just trying to understand the creating another money tap and creating more servicability.

Are you simply using the new equity from developments for income and servicability(annuities)?

thanks Darren
 
Dear Darren,

1. I'm trying to convert my passion in real estate property investing into a commercial business model in the near future.

2. I am presently using my Australian real estate development company to create another wealth channel by buying vacant lands to build for sale at a profit.

3. Say, I will build 2 houses a year, sell one and keep one long term, under the Company's name. This is to generate some equity/capital reserves for the company to be self-financing as well as boost its future borrowing capacity, in/by itself. In this way, my wife and I are no longer required to act as gaurantors for the company's loan.

4. In the mean time, I will continue with LOE and continue to build my private investing property portfolio, by drawing out the excess house equity, uptend the loan to have the equity converted into cash to finance my lifestyle and to further re-invest in more properties.

5. I hope I have answered your question to your satisfaction.

6. Thank you.

regards,
Kenneth KOH
 
Kenneth,thanks for answering my questions.

So how many have you had built so far and how is your strategy going?

Surely with tax and selling costs, there wouldnt be too much profit left unless in rising market?
 
Dear Beech,

1. I am building 2 new houses this year. My expected profit margin is about A$75,000 per house.

2. Rockingham suburb is still in a fast rising market. Last 12 months growth averages about 26.5%p.a while the last 5 years average growth = 16.6%p.a

3. I'm quite happy with the returns.

4. For your kind update,please.

regards,
Kenneth KOH
 
IMHO, the concept of LOE is still alive and well depending on how much one has to start with. How many days, weeks, years wealthy are you? this question is the key to a success or failure in this area. Meaning, that one only needs enough $$$ to last until the next boom to stay in the game. Some will and some won't.
Kind regards
Simon

Actually been considering LOE for quite sometime.

Ive got 3 small developments lined up and i think bricklaying full time is costing me money because im not devoting my time to the developments.

So in about 6 weeks im most likely going to work only 2-3 days for a little cashflow and push on with the developments.

I intend to keep all townhouses i build and leverage the equity into others while using some equity for maintaining my property porfolio.

Im using conservative valuations on the new townhouses so like Simon says above re going forward toward the next boom,i expect to multiply my wealth by buying inner ring property and ride that wave all the way to outer suburbs.

So as i finish each development i shall refinance and tuck away (Navra fund) equity and wait.
Using only what i need personally to keep the ball rolling.

This will be my version of LOE.
 
Dear Beech,

1. What are your figures like? What are your internal safeguards when you goes LOE?
I am starting small first in order to try out my own business system. Are you doing that too?

2. When I LOE, I am actually to leverage my time in property investing. In this way, I will have better chances of succeeding in life as I am full time concentrating on things that I enjoy doing in my life to create wealth for my family. Are you also trying to do the same thing?

3. Looking forward to your kind update,please.

4. Thank you.

regards,
Kenneth KOH
 
I am starting small first in order to try out my own business system. Are you doing that too

I agree Kenneth.
The land in my 1st site has tripled in value and being a builder can complete development also cheaper.
Plenty of profit in this.

When I LOE, I am actually to leverage my time in property investing. In this way, I will have better chances of succeeding in life as I am full time concentrating on things that I enjoy doing in my life to create wealth for my family. Are you also trying to do the same thing?

Absolutely.
And i cant wait to take the next step.
 
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