equity question

[mikezen]

hi there, im sure this has been asked before, but i couldnt find a answer to this part of it so im asking, forgive my nievity if i have got this all wrong, im simply trying learn to create a strategy

i have seven properties valued at 2.2 mil and my debt is 1.7 mil and rent received covers all my costs

Each property grows in value of a minimum of 5% a year

i pull a line of 15k credit out of each property or 5% of the growth so i have 100k available and live of this and the cost for this a year is 7k, (7% rate??) and i pay this out of the line of credit i have drawn out

the following year i do the same and so on and so on

have i got this all wrong? or can this be done?

 

[Aaron_C]

The problem is whether the increased LOC is tax deductible or not.

 

[mikezen]

what if it isnt? will the ato see it as income?

 

[depreciator]

Putting aside the tax implications, this may be a tad optimistic:

Each property grows in value of a minimum of 5% a year

 

[mikezen]

ok how about a maximum of 5% a year, is it still doable?

 

[mikezen]

how do u make this work then?

 

[Aaron_C]

what if it isnt? will the ato see it as income?

No they'll just consider it to be non-tax deductible, which means you have to pay more tax than you otherwise would.

 

[tobe]

theoretically yes, but....

In todays lending environment it can be hard to pull equity without a purpose, or with the purpose of replacing your income. Much harder if you dont have an income with which to porve you can pay the loan back.

the risk is there wont always be growth to your portfolio, or the lending environment changes again leaving you hamstrung.

A similar effect can be achieved by borrowing and purchasing a higher yeilding investment, such as cashbonds etc. then use the income from these to live off, rather than spending the borrowings. there are obviously risks to this strategy as well, but at least it manages the growth and lending change risk a little better.

 

[Bigtone]

No they'll just consider it to be non-tax deductible, which means you have to pay more tax than you otherwise would.

he is talking about living off it and not working so there would be no tax payable anyway.

i think it is doable but the gap between equity and value is too low in this case for my comfort. I wouldn't do it unless the gap was a minimum of $2-$3m.

Otherwise in periods of no or back wards growth the party could end with there is no equity to borrow.

it is very easy to spreadsheet, i am sure there are some live of equity spreadsheets in the sticky threads and you can put your assumptions in there and see where you would end up in different scenarios.

 

[depreciator]

Mikezen,
Do a search on 'Living off Equity' or 'LOE'. Rixter is the poster you are looking for.

 

[Aaron_C]

he is talking about living off it and not working so there would be no tax payable anyway.

I disagree. He has rental income from the properties to cover the interest - so of course the tax question is important.

 

[Bigtone]

I disagree. He has rental income from the properties to cover the interest - so of course the tax question is important.

the tax question has an obvious answer and is irrelevant to what he is trying to achieve

 

[Aaron_C]

the tax question has an obvious answer and is irrelevant to what he is trying to achieve

Yes but it aids in servicing which is directly relevant to his strategy.

 

[wategos]

What happens when prices start going down 5% per year with interest rates rising ?
Pretty soon you've got no equity and a huge debt.