Hi! I'm new here, my situation

Hi there!

A little about myself.

I'm still quite young at 25 years, I own 4x interest only properties at a value of $1.5million with a total debt of $1.1 million.

I've been investing for roughly 2 years so far.

I'm looking to add to the portfolio slowly, maybe 1 or two properties per year from here on in and my main goal is to live off equity once rents are equal to all repayments. (I'm around 12k out before tax atm)

I'm crystal balling by adding 7% to my total portfolio per annum, and in a few years if all goes right (3 years or so) I can quit my job and go travelling like I've always wanted.

I plan to take a 240k LOC and use 60k per annum for four years.

I calculate (if all goes well) that I will have more equity than I originally started with after this time-frame and will take it from there.

Problem is. It seems too good to be true, am I missing something here?

Lets say in 3 years I have a portfolio worth (assuming no more purchases) $1,837,000 and debt of $1,100,000, rents cover repayments. (standard 7% compounding)

And I take $240,000 to live off for 4 years.

I now have loans of $1,340,000 and $2,407,932 (thats $1,067,000 equity) and rents have been rising during that four year period.

The only 'flaw' I can see would be 'if' property did not do much within that period. Causing me to have to get another job at the end of my four year trip.

What do you guys think?

Good forum by the way, lots of advice.

Welcome! Excellent portfolio for 25yo!

My first thought - the LOC you are drawing and spending is not tax deductible so you are creating non-deductible debt every time you draw that money.

I would look at debt recycling by drawing the loan repayments from the LOC and then use the rental income as your travelling money.

Where are you going? I love travelling... *sigh*.

Hey, great position to be in moving forward, mate. Best of luck with your plans there.

A couple of thoughts spring to mind (which I'm sure you've already taken into account, somewhere);

- What happens if property prices stay stagnant - or even move backwards slightly...?

- Does your financial position, from a banking perspective, lend itself to living on equity given the difficulties in getting cash out without a specified purpose...?

There's a lot that you can do with the base that you have there, I'm sure. What I would be thinking about, would be if there is a way that you can achieve the same goals in a more sustainable manner?

GreenTreeFrog said:

My first thought - the LOC you are drawing and spending is not tax deductible so you are creating non-deductible debt every time you draw that money.

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Hey Melissa, this is often an argument people raise when the LOE discussion comes up.
There is a bit of a flaw in this argument. The debt is only deductable when there is income to offset against. Under this scenario, there is no income, so the deductability of the debt is moot.
Therein lay the true beauty of the LOE strategy.

I have one question for Investor2009 - can I come, too??

What about the rental income?

GreenTreeFrog said:

What about the rental income?

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It's a neutral or negatively geared portfolio (or will be), so interest costs and other expenses will take care of that just nicley.

I am working hard to get my head around what you are saying...

Eventually though, won't the rising rental income outstrip the repayments on the original debt?

By using LOE, aren't you are increasing the % of debt that you can't claim against the rising rental income?

By using a LOC to repay the loans, aren't you increasing the deductible debt which can contribute to keeping the portfolio neutral or negative?

What am I missing?

GreenTreeFrog said:

I am working hard to get my head around what you are saying...

Eventually though, won't the rising rental income outstrip the repayments on the original debt?

By using LOE, aren't you are increasing the % of debt that you can't claim against the rising rental income?

What am I missing?

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You're not missing anything Melissa. Your observations are right on the money. One answer to this problem is to buy more property, so as to keep the portfolio running at a theoretical loss.
I can hear the positive cash flow brigade screaming as I type this ...
Light blue touch paper and stand back

Positive Cash Flow brigade member reporting for duty sir!!!

Rob....I believe there is a balance. Nowadays I like buying property around the 5-6% return range and look towards to turning them into 7.5% -10% return properties in 2-3 years.

Cash flow is very important if you intend to build past a portfolio past 2-5 properties. Getting to double digits is a lot harder on a an average income. Without cash flow you have less serviceability and without Cap growth you have not deposits + cost to keep buying.

I have been fortunate to still have serviceability and plenty of cahs to keep putting deposits in property. But I am now choosier about the property I buy!

Rob Williams said:

You're not missing anything Melissa. Your observations are right on the money. One answer to this problem is to buy more property, so as to keep the portfolio running at a theoretical loss.
I can hear the positive cash flow brigade screaming as I type this ...
Light blue touch paper and stand back

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sash said:

Rob....I believe there is a balance.

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I agree. Yet, to most, it's always a black and white argument. No balance.
I like the idea of using some positive cash flow deals to fund more negative geared deals which will give me juicy capital growth.
As you say, its all about balance. Not just when it comes to investing, either.

as every day goes by I become more of a CF investor. I am actually starting to question the value of big numbers onthe balance sheet that yield stuff all. a proiperty with a value of $1 that puts money in my pocket is probably more valuable to me personally than a negative geared cash drain that has equity of $100k

Welcome to the darkside....CF is king....but if you can get both CF & CG then that is a perfect portfolio.

Not many people get this right...

Ausprop said:

as every day goes by I become more of a CF investor. I am actually starting to question the value of big numbers onthe balance sheet that yield stuff all. a proiperty with a value of $1 that puts money in my pocket is probably more valuable to me personally than a negative geared cash drain that has equity of $100k

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couldn't agree more. Bluecard has it pinned...go CF+ first, then allow yourself to go into a neg geared. your cashflow risk is covered and you have - hopefully - growth exposure. It all seems so clear now that the dust has settled.

if your cashflow is fine then you have no headaches.

it's about balance.

banks love it when you x-col a CF+ and CF- property together in "parcel one", then repeat into "parcel two", then "parcel three".... repeat ad infinitum. expose your DD to the bank - show them why it's such a good deal and they are in a better position to approve you.

my broker flipped when i told them my strategy. it's like it's some huge forgotten "secret" or something...?

oooh maybe i could start a seminar circuit.

Ausprop said:

couldn't agree more. Bluecard has it pinned...go CF+ first, then allow yourself to go into a neg geared. your cashflow risk is covered and you have - hopefully - growth exposure. It all seems so clear now that the dust has settled.

if your cashflow is fine then you have no headaches.

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Yes, This is correct. I realised once I got to the 5th property and then 6th that my first choices should have been as CP as possible. It also looks better on your Loan Applications and gives you greater Serviceability as you move forward accumulating.

If your objective is to build a Portfolio then Cash is King.

Regards JO

Good, my plan looks to be quite solid

Thank you everyone for throwing your thoughts in.

I see LOE gets some funny looks around here I have a few friends that have been living on equity for many years, and they are doing well so got me jumping on the bandwagon also.

I never will sell any of my assets, as the cost of buying is high enough, let alone selling.. I don't understand this, and think that only those who don't fully understand property kill the goose who continually lays golden eggs, AND get charged by the Government by doing so

Rob, I like the way you think. You got style and thanks for your input.

investor2009 said:

Hi there!

A little about myself.

I'm still quite young at 25 years, I own 4x interest only properties at a value of $1.5million with a total debt of $1.1 million.

I've been investing for roughly 2 years so far.

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Excellent work investor09!

Just wondering how you managed to do this so quickly, did you save up for deposits with a high income, use your own equity or have any parental assistance?

Thanks.

investor2009 said:

I see LOE gets some funny looks around here I have a few friends that have been living on equity for many years, and they are doing well so got me jumping on the bandwagon also.

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It has always raised eyebrows around here, and elsewhere. It can be possible, certainly, but it's a high-risk plan that relies on a lot of external factors. Talk it over with your broker or banker. I'm not against the idea by any stretch of the imagination, but there is a lot to consider.

Check out this thread as well, and check out the 'living on equity v2' spreadsheet in my first post. There's a few others in that thread as well that are worth playing with. I think that it's important to understand the risks involved with a flat or backwards market when you're using that strategy.

I know quite a few people using LOE to some extent, including a few who fund their retirement in the same way. I also know a few who have been caught out by the Sydney market of 2003-8 and the changing attitude of the banking squirrels in the last two years or so.

The practical results don't always match the theoretical aspects.

investor2009 said:

I never will sell any of my assets, as the cost of buying is high enough, let alone selling.. I don't understand this, and think that only those who don't fully understand property kill the goose who continually lays golden eggs, AND get charged by the Government by doing so

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What if you find a bigger and better goose that you can't purchase without selling a property first?

Or, your goose isn't laying eggs of quite the same quality gold that it used to?

I can assure you that it is not just the ignorant that choose to sell property. Your achievements to date are impressive for your age, and your knowledge will serve you well moving forward. But if I may, I would like to humbly suggest that you change your attitude and keep an open mind to new ideas rather than looking for confirmation of your existing bias.

Thanks JIT!

I'm humbled by your words.

I saved one deposit, and borrowed against the rest. Nothing special but its nice when others say differently so thanks.

I've always earned a low income, was earning around 36k after tax when I saved for the only deposit. (no/1) Now I don't even think about cash. Only investment equity.

Cash now means very little to me, as I know that it just comes and gets spent again. Giant credit card type equity just keeps getting bigger the longer you wait, and you don't have to do anything for it like you do for cash. It takes a long time to fully comprehend but its well worth it once you can. I've stopped being a 'slave' to money since I 'got it'