Creating income from investing in properties

[bennos]

I got this idea from talking to people at The Investors Club (TIC) but wanted to know how it is possible. I’m new to investing in properties and have only attended one of their meetings. I guess what I’m asking is for the details of how it can be done.

Example:
If I have 3 IPs and want to draw an income from it. What TIC suggests is that once the properties build up enough equity you can create a line of credit account and use the equity behind the IPs to draw an income, say for an amount of 10,000.00 (annually).

Can anyone explain how this is done in a little more details?

What other ways do people use their IPs to create an income? I’m struggling with the idea of how multiple IPs can be used for an income in the short to medium term. I am interested in this because I have a 14 month old daughter and I want her to experience things/life as she grows up and my regular income just doesn’t cut it. I’d hate for her to miss out on life because of lack of funds.

I apologise if this post is ‘dumb’ (for the lack of a better word). Please help me understand the reasons behind multiple IPs.

 

[Sunfish]

If you search Living off equity here you will find it discussed ad nauseum.

But why anyone opts for such complexity, I don't know.

 

[gerd.]

Interesting reply Sunfish


(If you search Living off equity here you will find it discussed ad nauseum.

But why anyone opts for such complexity, I don't know. )


Could it be that you have a more direct way of achieving a similar result.
If so I for one would be more than a little interested in your tragedy's to achieve this.

Gerd

 

[LynnH]

I agree with gerd and Sunfish - am perplexed as to why someone would want to live off equity. Seems to me that using the equity to purchase more IPs which give you rental income to live off would be the way to go. Am I missing something here?

Cheers
LynnH

 

[wylie]

In a way we are living off equity right now. Our last house we purchased has made us so negatively geared that I either have to get a job or we had to draw down our equity to make our payments - or sell a house, which we don't want to do.

Having said that, with rents increasing so much lately, this situation is getting better and I think we will be okay.

The amount we drew down to pay a year's interest in advance is less than our houses have increased in the past year, so I feel comfortable, but wouldn't want to do it when prices are flat.

Wylie

 

[Xenia]

What TIC suggests is that once the properties build up enough equity you can create a line of credit account and use the equity behind the IPs to draw an income, say for an amount of 10,000.00 (annually).

.

If you buy them from TIC you may be waiting longer to build enough equity because they tend to sell them above CMA. There is also no value add potential.

Do your own due diligence on the property, established properties on subdividable blocks tend to be better investments than house and land on postage sized blocks!

 

[bennos]

I think I didn't explain myself properly. I don't mean to completely live off the equity without leaving for future investments but to draw a small percentage (when available) annually or even bi-annually.

I hope this clears up what I am trying to ask. I hope to receive some answers to my OP.

Cheers!

 

[Xenia]

B
Even if you were planning to leave off the equity totally, there are investments that offer more growth potential than those sold by TIC. Please do your homework before jumping into it!

 

[alexlee]

Some ways of coverting a property portfolio into cashflow:

1) LOE - borrow against equity to fund living expenses

2) Borrow against equity to buy shares, LPTs, commercial property, bonds, etc to produce cashflow

3) Sell down some properties and pay off enough debt to produce cashflow

4) Use the equity to reno and/or develop properties, and get cashflow from the business side

Bennos, you don't have to see the end game just yet. Focus on the first steps for now. In the future if you go to a financial planner or whatever and say 'I have a couple million in equity in my IPs. How do I turn it into cashflow?' I'm sure SOMEONE will be able to help you. In other words, even if you can't see for now how having lots of equity will help you, it sure can't hurt to have it.
Alex

 

[Ol School Skata]

I agree with gerd and Sunfish - am perplexed as to why someone would want to live off equity. Seems to me that using the equity to purchase more IPs which give you rental income to live off would be the way to go. Am I missing something here?

Cheers
LynnH

Yes i think you are.

By doing this, it will not automatically create a positlve cashflow to live off the rents. You are increasing your debt which increases your expenses which more than likely will be more than the rent received net of ownership expenses.

In time the rents may increase to cover the expenses and throw off surplus cashflow but that may be a considerable amount of time and the daughter may be in her teens by then.

Bennos, if you have considerable equity and you are prepared to accept the increasing debt for personal expenses, set up a separate LOC and have no tax deductions on the interest for this personal borrowing then maybe it is worth considering.

Personally I currently have an LOC against one property with almost all funds available to be used for whatever i want. Bank wouldn't care as long as I meet the interest obligations.

Certainly tho you should speak to someone qualified to give you advice on this

OSS

 

[Sunfish]

Interesting reply Sunfish


(If you search Living off equity here you will find it discussed ad nauseum.

But why anyone opts for such complexity, I don't know. )


Could it be that you have a more direct way of achieving a similar result.
If so I for one would be more than a little interested in your tragedy's to achieve this.

Gerd

I think I have but this is a very emotive subject and my reply may be heresy on this forum so I will let this pass to the keeper.

The need to live off equity arises when someone is asset rich and income poor. I have been working for years on retiring with an income stream derived from a small portfolio with a minimum of administration on my part, ergo, a large portfolio of -ve geared houses does not attract me.

 

[wish-ga]

Bennos are you talking about using the equity for one-off needs? Converting equity into liquidity? A bit of cashflow ? .... I think that is what a line of credit is for (ie don't have to sell off anything)

I'm not experienced but gather dollars aren't spent here and now. Use equity instead of a cash deposit to build portfolio. At retirement (sometimes before age 40) rents provide income.

Incoming rent minus expenses = an income from their property portfolio.

(....or sell a property for three/four times more than you paid and live off that..... positive cashflow not suited to everyone's setup but an asset that has appreciated in value never goes astray!)

'buy and hold' means you eventually have an income stream.... but drawing on the equity in the meantime won't help. Fans of buy and hold rarely put equity to use for living expenses prior to using the rents for income. If you sneak a tim tam from the pkt all day long by the time you have a cuppa for afternoon tea there are no bikkies left

 

[MichaelW]

The need to live off equity arises when someone is asset rich and income poor.

Quite right.

To save me double-posting how it works, let me direct you to this post over on InvestEd where I spelt out the option with a few different scenarios. There's an excel attachment to this post which has the LOE scenarios worked out for you. If you need more info, then there's heaps of articles/threads on that forum that spell it out ad nauseum.

If you want to read that whole thread, then here's the link to the first page. There's a mirror thread running here on SS addressing the same question at present but I've been posting replies on InvestEd as its a bit more share friendly and my recommendation incorporates shares as an income stream.

Here's the link to my actual recommendation for this specific situation. It should not require LOE as I state in that post. I see LOE as an option of last resort, though workable in theory. I don't like the ongoing interest on a loan that is used for consumption/expenses purposes. This is one of the reasons I am so pro "structure". I see the right mix of assets for income/growth as critical, however most of the discussion on SS seems to be around generating "growth", i.e. building your net worth. While a critical enabler to financial freedom, it is also critical that the assets generate you an income to retire on. That's why I advocate including shares in your asset mix. But hey, I'm a wee bit of a pariah over here too...

Cheers,
Michael.

 

[Sunfish]

I only scanned the InvestEd thread (may read it in detail later, maybe not) but will stick to my original assessment that it is an emotive subject that I will leave to others.

And, as you say Michael, I would need a more shares friendly forum than this one.

 

[geoffw]

Bennos

Also do a search in the forum on "Investors Club". There's been a lot of discussion.

Your question is not dumb. It's only that, if you haven't been on this forum for long, you won't know that this, and similar, have been discussed.

Search, read, and ask questions after that.
It will give you some good results, I would suggest.

 

[BoatBoy]

I agree with gerd and Sunfish - am perplexed as to why someone would want to live off equity. Seems to me that using the equity to purchase more IPs which give you rental income to live off would be the way to go. Am I missing something here?

Cheers
LynnH

Hi LynneH,

Could you explain how this would work in today's market please.

Dave

 

[LynnH]

Hi Boatboy

When I said that it "seems to me that using the equity to purchase more IPs which give you rental income to live off would be the way to go", it was an opinion expressed in the light of our own particular situation - I have an aversion to using borrowed money to fund lifestyle choices.

Some time ago, I looked into TIC's LOE strategy with respect to providing an income for one's retirement, but was unconvinced that this would necessarily work in the long term if property prices took a nose-dive or stagnated for a lengthy period of time, as they did for a most of the '90s.

Ol School Skata pointed out in his post, he thought that perhaps I was missing the point - and that such an option would not automatically create sufficient positive cashflow to enable one to live off the rents. A fair comment.

You have asked me to explain how this would work in today's market - geez, that's a hard one! It could work in some situations, depending on the location of the properties in one's current portfolio, the property to be purchased, current rental income and whether it is possible to increase that, given the shortage of rental accommodation in many places. We're about to use equity and some cash to purchase another IP - there'll be a small negative cashflow on that property for a short period of time until current leases expire and rentals are brought up to market levels and total cashflow starts 'heading north' again - but, again, that's our situation. As far as a general explanation as to how that would work in the current market - sorry, BB, that's way beyond my level of expertise.

Cheers
LynnH

 

[BoatBoy]

Fair enough LynneH,

As the original post was about "Creating income from investing in properties" it caught my eye, as that is what I thought we were all on here to do.

I did'nt think we were here to collect property and have wad's of unusable fund's on paper which allow's us to buy more property for the collection.

Apart from selling the property later on and realizing the CG and paying the hefty CGT asociated with it to pay out left over IP debt eg: sell 4 own 2, I can see no real way of getting an "income" as such .

The method that Michael discussed on Invested http://www.invested.com.au/31950-post63.html and his option 4 http://www.invested.com.au/32024-post79.html however makes sense to me, as it allow's us to keep all investment property while providing a "real income", for us to live on.

If anyone else has a method of generating an income that does'nt involve selling "The Goose", or working our gut's out until we own all IP's outright, I'd certainly love to hear it.

Dave

 

[bennos]

I did'nt think we were here to collect property and have wad's of unusable fund's on paper which allow's us to buy more property for the collection.

You know Dave, that is exactly my thought too when I started this post. It's something that I don't understand... "How to create an income from investment properties". What you said here (quote box) couldn't have been worded better.

The strategy from The Investors Club (TIC) caught my eye because it was about providing an income as well as building IPs. Again I know little, hoping those in-the-know here can enlighten me (and others). I'm now in a position to invest but would like to do it myself and not through TIC.

By using the equity in your IP to fund all the little extra lifestyle 'wants/needs'. In a way, isn't that using borrowed money because that amount of equity that is taken away is no longer helping reduce interest? I don't understand because TIC says to use a LOC to fund lifestyle, don't you have to pay interest if you use funds in a LOC?

 

[Rixter]

I don't understand because TIC says to use a LOC to fund lifestyle, don't you have to pay interest if you use funds in a LOC?

Thats correct interest is debited to the LOC. But the idea is to have your portfolio structured correctly growing at a faster rate than you are redrawing and then using rental income, and any other form of income to cover the interest on the LOC drawings. Any short fall between income and LOC interest can also be capitalised - but as I said as long as your portfolio is growing faster than you are redrawing upon it. Which is not hard at all if you have built yourself a portfolio big enough to do so.

Hope this helps.