Hello Everyone,
I’m interested to hear the strategy you would use if you had net equity of over $600,000 and could happily retire on $50,000 pa. How would you turn this equity into cash-flow to replace your income?
Using the following scenario as an example:
10 properties – average value $220,000. Total property portfolio: $2,200,000.
Borrowings of $1,540,000: 70% LVR.
Available equity: $660,000.
To start with I can think of 3 possible options:
1. Buy an income stream (Cashbond)
Increase borrowings to 80% LVR to access $220,000.
Use this $220,000 to buy a three year Cashbond.
This will provide an income of $73,000 pa (capital return tax free) for three years, plus a taxable interest portion of say $1,400 after tax.
The total tax free income will be $74,400.
Subtract the costs of using the $220,000 (at 7%) = $15,400.
Leaves an after tax income of $59,000 - which is equivalent to a $100K+ taxable income.
The downside of using a Cashbond is you would be continually revaluing and increasing the debt every three years. The advantage is the interest would be tax deductible since it was used to buy an income stream , and the Cashbond would help
with serviceability.
2. Tax-free trust distribution
Providing the properties are all held in a family trust, the trustee can increase the borrowings to 80% LVR against the increased value of the property to access the $220,000. The trust can then distribute this unrealised capital gain to you (minus the $15,400 pa interest cost), giving you a tax free income of $57,900pa over three years.
This is similar to the Cashbond strategy except it doesn’t provide an income stream that helps with serviceability and doesn’t include the small interest portion of the Cashbond. The loan taken out by the trust should still be tax deductible.
3. Liquidate half the property portfolio
Sell 5 properties for $1,100,000 and pay out the loans of $770,000. Use the profit of $330,000 to reduce borrowings on the remaining 5 properties to $440,000.
Remaining property portfolio would be as follows –
5 properties – average value $220,000. Total: $1,100,000
Borrowings of $440,000: interest at 7% = $30,800 pa.
Rental return at 5% = $55,000 pa.
This would only leave $24,200 pa to live off - but it would actually be much less as this figure is before tax. Also, other property expenses and the Capital Gains Tax on profits have not been taken into account. Therefore this option would only work for someone who is prepared to wait a few more years for the increased equity through capital growth before they retire.
Feel free to pick at my figures – I’ve just made them up as an example – it is the strategies I’m interested in. Look forward to anyone’s thoughts on this subject.
I’m interested to hear the strategy you would use if you had net equity of over $600,000 and could happily retire on $50,000 pa. How would you turn this equity into cash-flow to replace your income?
Using the following scenario as an example:
10 properties – average value $220,000. Total property portfolio: $2,200,000.
Borrowings of $1,540,000: 70% LVR.
Available equity: $660,000.
To start with I can think of 3 possible options:
1. Buy an income stream (Cashbond)
Increase borrowings to 80% LVR to access $220,000.
Use this $220,000 to buy a three year Cashbond.
This will provide an income of $73,000 pa (capital return tax free) for three years, plus a taxable interest portion of say $1,400 after tax.
The total tax free income will be $74,400.
Subtract the costs of using the $220,000 (at 7%) = $15,400.
Leaves an after tax income of $59,000 - which is equivalent to a $100K+ taxable income.
The downside of using a Cashbond is you would be continually revaluing and increasing the debt every three years. The advantage is the interest would be tax deductible since it was used to buy an income stream , and the Cashbond would help
with serviceability.
2. Tax-free trust distribution
Providing the properties are all held in a family trust, the trustee can increase the borrowings to 80% LVR against the increased value of the property to access the $220,000. The trust can then distribute this unrealised capital gain to you (minus the $15,400 pa interest cost), giving you a tax free income of $57,900pa over three years.
This is similar to the Cashbond strategy except it doesn’t provide an income stream that helps with serviceability and doesn’t include the small interest portion of the Cashbond. The loan taken out by the trust should still be tax deductible.
3. Liquidate half the property portfolio
Sell 5 properties for $1,100,000 and pay out the loans of $770,000. Use the profit of $330,000 to reduce borrowings on the remaining 5 properties to $440,000.
Remaining property portfolio would be as follows –
5 properties – average value $220,000. Total: $1,100,000
Borrowings of $440,000: interest at 7% = $30,800 pa.
Rental return at 5% = $55,000 pa.
This would only leave $24,200 pa to live off - but it would actually be much less as this figure is before tax. Also, other property expenses and the Capital Gains Tax on profits have not been taken into account. Therefore this option would only work for someone who is prepared to wait a few more years for the increased equity through capital growth before they retire.
Feel free to pick at my figures – I’ve just made them up as an example – it is the strategies I’m interested in. Look forward to anyone’s thoughts on this subject.
