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

[simonjulie]

See Change - I couldn't agree with you more.

I don't know that Simon and I are typical "Mum & Dad" investors. We really enjoy researching and analysing and probably spend more time on this than many other investors we know.

As for looking ahead, I'm with you all the way there. I'm guessing that's why you have chosen your psuedonem. A lot of our confidence comes from our readiness to look ahead, be resourceful and prepared for change.

Any strategy should be reviewed with appropriate due diligence and applied with resourcefulness and foresight.

Regards
Julie

Audentes Fortuna Juvat
Fortune favours the bold

 

[simonjulie]

Hi Seechange
Our LVR is around 60% because through the boom we have continued to buy a mixture of higher cashflow, high growth unique properties.(just lucky I guess )
IMHO the size of an investors LVR does matter and here is why....
The below examples show two versions of returns on similiar asset bases.
Let's say:
both are pretty much neutrally geared.
However, the (first example) has managed to free up equity through various strategies.
and (first example)also proceeds to use those funds to grow their portfolio.
The second example is concentrating on maybe owning their portfolio with a pay it off attitude.
1.LVR 80% on $3,000,000asset base
$600K equity(narrow safety net)
2.4mil debt exposed to Cap growth (leverage)
rents nuetralise all costs (probably a bit -ve if some of the equity has been transfered from LOCs through shares or other accounts for growing portfolio)
RETURN ON ASSET LOAN EXPOSURE (2.4ml) @5%p/a = $120K
2.LVR 40% on $3,000,000
$1.2 ml(big safety net)
$1.8ml debt exposed to C/Growth(Leverage)
rents neutralise all costs (probably a bit cashflow +ve, or should be with that size LVR)
RETURN ON ASSET LOAN EXPOSURE (1.8ML) @ 5%P/A = $90k

My point is that even though in both examples their asset base has increased by 5% p/a (example one) has made greater use of their borowings by leveraging the debt and opening other avenues of growth.
Example 1 gets their money back on a regular basis while example 2 does not.


Kind regards
Simon

 

[Steve Navra]

I can see the logic behind his system as a whole , but I think it makes too many basic assumptions to be a stand alone system.

See Change

Hi See Change,

Yes your comments are valid . . . however please note that the "too many BASIC ASSUMPTIONS" made are part of a generic presentation in a workshop and are thus presented to encapsulate an overall situation for the entire groups edification.

Beyond the course (And very much an extention of the course) each attendee gets the free opportunity to have their personal situation assessed.
It is based on this assessment, once we know all the circumstances that relate to an individuals personal circumstances, that the structure is "tailored" to provide what each individual might require. (You might choose to comment after your situation has been assessed)

Even then as Simon and Julie mention, I still recommend that each individual performs their own due dilligence.

Steve.

PS:
1)You still talk of debt rather than net equity?? The principle of an 80% LVR doesn't change as the figures get larger!!
2) Just as a reminder . . . it is fine to lower your LVR if you 'sleep easier' but for goodness sake please make sure this value is re-invested. (Otherwise you are culpable of retaining LAZY $$$$$$' )

 

[Steve Navra]

Size DOES matter!

IMHO the size of an investors LVR does matter and here is why....

My point is that even though in both examples their asset base has increased by 5% p/a (example one) has made greater use of their borowings by leveraging the debt and opening other avenues of growth.

YES Simon is 100% correct . . .

The difference is that his (Example 1) contains LESS LAZY $$$$$!!

Steve

 

[MJK]

All these extra costs can be paid out of the annual passive income, but will of course reduce the net passive income for financial independence.
The solution is obviously to go further into “net credit” so as to reach the desired level of passive income required for Financial Independence.

I think the above quote is the key to feasability and comfort factors.
LVR required will be determined by the size of the rental income and costs to maintain.

MJK

 

[Steve Navra]

Oops nearly forgot!

3) While Steve points out that Technical Analysis doesn't predict the future , in the way he sets up his system , he in a sense , is making predictions about the future.

NEVER I tell ya . . . NEVER!

Don't EVER be predictive!

Steve

 

[MJK]

Hi Seechange
Our LVR is around 60% because through the boom we have continued to buy a mixture of higher cashflow, high growth unique properties.(just lucky I guess )
IMHO the size of an investors LVR does matter and here is why....
The below examples show two versions of returns on similiar asset bases.
Let's say:
both are pretty much neutrally geared.
However, the (first example) has managed to free up equity through various strategies.
and (first example)also proceeds to use those funds to grow their portfolio.
The second example is concentrating on maybe owning their portfolio with a pay it off attitude.
1.LVR 80% on $3,000,000asset base
$600K equity(narrow safety net)
2.4mil debt exposed to Cap growth (leverage)
rents nuetralise all costs (probably a bit -ve if some of the equity has been transfered from LOCs through shares or other accounts for growing portfolio)
RETURN ON ASSET LOAN EXPOSURE (2.4ml) @5%p/a = $120K
2.LVR 40% on $3,000,000
$1.2 ml(big safety net)
$1.8ml debt exposed to C/Growth(Leverage)
rents neutralise all costs (probably a bit cashflow +ve, or should be with that size LVR)
RETURN ON ASSET LOAN EXPOSURE (1.8ML) @ 5%P/A = $90k

My point is that even though in both examples their asset base has increased by 5% p/a (example one) has made greater use of their borowings by leveraging the debt and opening other avenues of growth.
Example 1 gets their money back on a regular basis while example 2 does not.


Kind regards
Simon

Isn't the 3 mill exposed to capital growth in both examples, that is capital growth on your equity as well as OPM ?

MJK

 

[simonjulie]

Financial independence is a journey and the numbers are always changing - never static - therefore I don't see any one strategy or solution as being clear cut or easily summed up in a nutshell.

Julie

 

[simonjulie]

Isn't the 3 mill exposed to capital growth in both examples, that is capital growth on your equity as well as OPM ?

MJK

Let me rephrase my piont.
Example one gets all or most of their money back on a regular basis
Kind regards
simon

In other words example one has greater exposure to the market for capital growth and is using their money over and over.
Julie

 

[MJK]

Let me rephrase my piont.
Example one gets all or most of their money back on a regular basis
Kind regards
simon

In other words example one has greater exposure to the market for capital growth and is using their money over and over.
Julie

Agreed, but too high an LVR may leave very little difference between costs and income/equity grab.

MJK

 

[simonjulie]

MJK

It depends on your balancing act. I would imagine that most investors who reach 80% LVR would have a goal of that reducing over time through capital growth. The idea is not to maintain an 80% LVR but rather to use it to that level when you are ready to chase opportunity.

The balancing act also depends on whether you are neutrally geared and costs are being met by rental income and/or sale of assets. Also depends how much one holds in liquid assets eg shares, cash in offset accounts and lines of credit before raising the LVR.

Again there are so many variables and the numbers are never static and that's why our ideas need to keep up with the changing financial environment.

Regards
Julie

Audentes Fortuna Juvat
Fortune favours the bold

 

[Bill.L]

Hi all,

This is a facinating thread, with great detail.

See-ch has brilliantly articulated the problem with any method of retiring on capital in the longer term. You don't know what the changes will be.
I'll have to disagree with Steve here as one prediction I am prepared to make is that there will be massive changes in the next 10-20 years. Tax laws will change, bank lending criteria will change, historic growth rates(20 year averages?) will change.

The part that always concerns me with any financial adviser is how they use historic averages like 5% average cap growth to formulate a plan for the future. In another thread Always-learning states that the long term return on property in Japan still remains in the 5-10% per annum category, however those that bought at the height of the boom 15 years ago are now down 75%!! So in Japan it was possible to buy property 10 years ago that had increased in yield during the previous 5 years!!

To keep a LVR at 80% to fund a retirement is living very dangerously, and one 5 year downturn of 10% could bring a fire sale and loss of assets, however funding one on See-ch's 35% LVR by the same method, is a totally different story.

Keep the thread going , it's very interesting.

bye

 

[see_change]

NEVER I tell ya . . . NEVER!

Don't EVER be predictive!

Steve

Maybe not a prediction, maybe assumption is a better word.

Brty

I can imagine at some stage I may have a LVR of 80 % at some stage. But that will be when I've decided I do want the waterfront house in Pittwater ( ok Steve no comments.... ) , the ski lodge in the USA ( Australia will be affected by global warming ) etc and I will have been watching the property market very closely for signs ( in share terms ) of an impending "breakout "

When I retire I expect to have a portfolio of an LVR of close to zero.

See Change

 

[always_learning]

In another thread Always-learning states that the long term return on property in Japan still remains in the 5-10% per annum category, however those that bought at the height of the boom 15 years ago are now down 75%!! So in Japan it was possible to buy property 10 years ago that had increased in yield during the previous 5 years!!

Also interesting is that the Japanese "property" bust was a slow leak, -35% one year, -20% (of residule) the next, -15% the next, -10%, -10%, -6%, -5%. So the biggest property boom in human history (ie the greatest paper lost of all time) was ended over a number of years. One interesting statistic was that during the bubble in Tokyo if you drop a 10,000yen note on the ground (AUD$140) the area 200cm2 area the noted covered could not have been purchased with by the value of the note.

 

[simonjulie]

Hi Brty
When I invest I want to know how quickly I can get my money back so that I can use it again.
Living off capital is simply a fringe benefit of our investment strategy.
As for your doom and gloom predictions - resourceful investors thrive on challenge and change and are not dominated by fear.


Simon

PS Seechange - you may get to love this game so much that you won't want to retire.

 

[Alan H]

Maybe not a prediction, maybe assumption is a better word.


See Change

DON'T use the word 'predictive' with Steve!

But I'd have to agree that some of Steve's approaches are certainly done with some large 'assumptions'. Nothing wrong with that........as long as you realise what you are assuming.

For example, buying a stock 'against the herd' is different to saying "Well.....I think it will be $10 higher in 6 months so I'll buy now and make a killing". Quite rightly, I think Steve takes the approach that ANYTHING could happen in the next 6 months and therefore being able to accurately pick a future stock price is a mugs game.

However, surely buying a stock that is currently 'out of favour' is at the least making a reasonable assumption(some may call this predictive ) that it will 'return to favour' within a timeframe that makes the outlay worthwhile..........but again.........anything could happen within that timeframe. Maybe a fundamentally sound stock will remain 'out of favour' for an extended period of time and then the fundamentals could suddenly deteriorate causing a poor investment outcome.

Obviously there is a range of risk minimisation techniques that could be implemented to reduce these risks but certainly some large assumptions are being made. Mind you, who here isn't buying property with the 'assumption' that it will always rise in price to an acceptable level over an extended period?

 

[austini]

Hi gang,

All of these strategies can work and some are riskier than others. However in the end it comes back to the "can I sleep at night" rule.

In my case I have seen all the calcs and graphs for the benefits of using interest only loans as opposed to P & I loans etc and living off borrowed money in retirement (preferably early) etc. However I would never be comfortable having a very high LVR especially as I get older.

I have been through the 17% plus interest rate era and it amuses me every time I hear it will be different this time and/or will never happen again. I'm not by any means suggesting that we will have rates this high in the immediate future. However to think that history will not repeat itself and to not managing these potential risks could be a very painful lesson further down the track.

Oh my god I'm getting philosophical in my old age but then again I have been sampling my new bottle of scotch.

Cheers - Gordon

 

[Steve Navra]

Hi All,

I thought I might include my response to an e-mail I received; regarding the example I used earlier in this thread:

Thanks for the example, I think it clarifies it well. And thanks for the chin wag Suellen. Sorry to be a pest - I'm just tenacious when I want to clearly understand something - shame I'm slow on the uptake sometimes. So as I can make sure I'm on the right track please confirm the following, if not, just shoot me!!!!!!!!

- The 5% capital growth is drawn down as a LOC or similar. The amount drawn down is 80% of that 5% growth (80% LVR).

Correct

- Part of the draw down is used for living i.e. income of a capital nature and not taxed. And part of the draw down is invested.

Correct

- The part of the loan that is for living is not tax deductible, the investment side is.

Correct

- Cashbond provides serviceability for being able to draw down this base or original LOC if needed.

Correct

- To reduce the holding charge of 7% bank interest, a cashbond is purchased eg 4.5% credit(cashbond income) and 7% debit(bank interest), cost of money 2.5% (which is budgeted for)

Correct

- So towards the end of our days we end up with some non-tax-deductible debt and some tax-deductible debt. Both within the 80% LVR on our properties, with our 20% net credit, and we also have some other growth assets on the side as shares, etc.

Correct

If this is correct then it leads me to more questions.

The original draw down is pre-emptive so would be based on 5% capital growth and in 5 years you would reassess how much growth you really had for use in the next 5 years? To stay within budget then, you make sure that your property is increasing by 5% pa and if it does not, then you need to readjust your budget.

Correct

Or do you just base the whole lot on 5% and any extra can be invested?

Generally I advise clients to allocate for a 5% return in the first year . . . If the growth is greater, then the excess can be invested. On the other hand if the growth is less, then an adjustment is made for the second year and so on.
EXAMPLE:
If actual growth in the first year is 3%; then on the assumption that growth in the 2nd year will be 5% . . . average the two; so: 3% + 5% = 8% / 2 years = 4%. So only 4% can be allocated towards income and expenses in the 2nd year. Further if the actual growth in the 2nd year is also only 3% then: 3% + 3% + 5% (assumed for 3rd year) = 11% / 3 years = 3.67% allocation towards income and costs for the 3rd year.

MORE:
If 3rd year actual growth is 11%, then: 3% + 3% + 11% + 5% (assumed for 4th year) = 22% / 4 years = 5.5%. Allocated as follows: 5% towards income and costs and 0.5% re-invested.

Do you advocate accessing capital during the 5 year growth period for the purpose of investing? eg a bumper year occurs, do you grab the equity and buy more and increase your net credit?

Correct

If this is so, do you only access the growth above 5 %? My guess would be to get the growth required to meet the future 5 year need, then invest the rest. eg as per your example, make up the anticipated/required growth of $552,557.59 then buy. Is it wiser to do this on an annual basis to gain the extra time and $ gain?

It is more about employing the excess so that you are not left holding LAZY $$$$$$. I invest the excess in shares and wait until this amount has compounded to a figure sufficient to acquire the next property. This can be done in two ways: Sell the shares and use the proceeds as the next deposit and costs; or Margin Loan against the share fund at 60% and use the proceeds for the next deposit and costs. (This method is more efficient as you retain the minimum amount of Lazy $$$$.)



Into the future:

One continues with this methodology at 80% LVR until such time that you are holding sufficient assets to provide the required level of living income (net of expenses) for Financial Independence. Beyond that you will see that your overall LVR (All loans, property and shares and cashbonds) will start to decrease down to a level that is comfortable for retirees. (Who would ever want to be a retiree??)



NOTE FURTHER:
It is the overall LVR that decreases . . . so even though the LVR remains at 80% against the properties, the build up of net value in the shares keeps the dollars actively employed, whilst at the same time reducing the overall LVR. Eventually as the income from the share fund increases (Taxable) it is offset by the deductions against the 80% LVR of the properties and their various deductions. Beyond this, when the income from the share fund is in excess of the property deductions; then . . . you are obliged to buy more property, or pay tax . . . whichever you might prefer!!



Hope this helps,



Steve

 

[MJK]

Steve and all,

Thanks for your explainations. Its all good stuff.
So if some of us agree that its the way to go another "what if" crops up regarding finance. Now I know we've touched on it before but this thread would not be complete without further discussion. Then we can print it out and use it as our text book He He!

So the first draw down / equity grab is easy because we are not retired. We have jobs and the banks love us! BUT after being "retired from paye" for five years we become "rent reliant". This is our goal of course but the banks dont like it.

Questions;

Cash bonds help diversify our income/servicability but how many Banks will be wanting to help us out ?

Are Lo Docs the answer?

Do we worry about that when we get there and enjoy life for five years then go to plan B ?

Is it necessary to use a financial institution that Navra has primed up for us and accepts the philosophy ?

Or will the banks still love us ?

Can we discuss this aspect?

MJK

 

[rodimus]

How does living on capital work? Is this where you increase the loan you have and access the equity? I know this equity is tax free, but u still will have to pay the interest to the bank dont you?
What other ways?