Are you happy to retire by "living out of capital"?

[MJK]

The other day it occured to me that if you have a "nuetrally geared portfolio after tax deductions" and you then quit work to live out of capital....you will then have no income to offset the the losses against! The capital income is not treated as income by the tax office. Beautifully tax free but not able to take any offsets.

Therefore you not only need to fund the interest of borrowing your capital but also the portfolio shortfall needs to be funded.

So this system of living out of capital, to my way of thinking needs a nuetral or positive cashflow portfolio before tax deductions.So it may be prudent,still, to sell a couple of properties, take some gains, and get the remaining portfolio cash positive as the base for future capital drawdowns.

It may also be wise not to buy properties that rely to heavily on tax deductions to get the numbers to stack up.

Most of us would recognise the idea that good capital growth properties are rarely cashflow positive and waiting for rents to increase on such a property could take a long time. We may have to sacrifice a couple of properties to realise the gain to then get the portfolio into shape.

MJK

 

[Steve Navra]

The other day it occured to me that if you have a "neutrally geared portfolio after tax deductions" and you then quit work to live out of capital....you will then have no income to offset the the losses against! . . . So it may be prudent,still, to sell a couple of properties, take some gains, and . . .

Hi MJK,

NO NEED to sell any properties!!

You are quite correct that "you will then have no income to offset the the losses against", because your income is of a capital nature and therefore not taxed.

The solution is to draw down equity (instead of selling) and invest these dollars in shares. The income from the shares (taxable) and the expense of the draw-down loan can then be offset by your property deductions. The balance will be in the structure.

Regards,

Steve

 

[MJK]

Steve,

To create a 50K income from shares you would need to invest 500K and if you borrowed this amount it would cost you 33K pa in interest leaving only 17k to live on.

If for example you had a portfolio worth 1.5mil and had 300k equity. Say this portfolio showed before tax losses of 10k.
...then to get the portfolio neutral before tax you would need to invest 300k of equity into shares and there would be no equity left to live on.

Investors that have borrowed 100% to fund their portfolios may have great equity but cashflow often is not robust and I still think there is a case for selling , taking a gain and getiting LVRs and cashflow into good shape before launching into "retiring from capital".

MJK

 

[rambada]

Try setting it out in a table and establishing LVR on IPs at 80% and overall net equity on the right. It demonstrates the working model of the structure.
In terms of cash flow, the previous example given demonstrates our position. Our IPs were cash flow positive but going part time dropped the income & tax bracket so the properties are now negative geared. The servicability issue is met by a cash bond.
I believe there is a table on the forum demonstrating the net equity increasing. The servicability/lifestyle issue is funded by respective cash bonds. It is an overall structure/picture that needs to be looked at, understood and then the decision to go this way or not is made with clear knowledge.

 

[T.M.A.]

I was directed to this thread by someone who posted in it and took a quick look through. Admittedly, I did not read every post but I did read some of the longer early posts by Steve Navra (and others) and would like to ask these questions...

What is the point of providing figures to support a 'strategy' that totally discounts the compounding effect of the interest expense on the funds drawn down when tapping into equity?

Is this an oversight or a deliberate attempt to sugar-coat the figures?

Have the correct figures been posted somewhere else and I have just missed them?

These are the figures I am referring to...

$2,000,000 of property growing at 5% p.a. for 5 years = $2,552,557-59 at the end of the 5th year. Equity gain of $552,557-59.

Assuming you have drawn down the full 80% of the gain: = $442,046
Cost of repayments at 7% pa = $30,943 X 5 years = $154,716
$442,046 –$154,716 = $287,330 / 5 years
Therefore passive income per year = $57,466 p.a.

 

[Aceyducey]

TMA,

Go to one of Steve's seminars to understand his strategy.

It works and plenty of people have used it. The doubting Thomases have been those who comment about it on a forum and refuse to meet the man himself.

Cheers,

Aceyducey

 

[Sim]

I don't want to start this thread up again after more than a year - if you want to discuss something on this topic, start a new thread.