Exit Strategy

From: Anton Madievski

Hi everyone,

Would like to see a discussion on exit strategies (aka retirement).

I am aware of two basic strategies: cashflow based and value based. The former - I shall call it Somers-Kiyosaki strategy for no apparent reason - goes like that: borrow a million to buy a million dollar property portfolio with rent and depreciation benefits covering interest on the loan. Growing at 10% pa your property portfolio doubles in value in short 7.3 years. At this point you sell half of your portfolio and repay your loan. Now you can retire and live off the rental income from your million dollar debt free property portfolio.

The other strategy - I would like to call it H.Kaye-Investors Club strategy - is to borrow a million to buy a million dollar property portfolio, wait for a year letting the portfolio to appreciate by $100K. Then you can re-borrow extra $90K (or $80K if you want to avoid bank insurance), retire and live on the tax-free $90K repeating the process every year. Of course, interest on only original $1M borrowed is tax deductible, so the more you borrow, the smaller portion of the interest is tax deductible, which would slow the rate of growth of your retirement funds. (Didn't want to call it income for it is not taxable).

Obviously, the second strategy with its ever increasing debt is more aggressive/risky, but, on the other hand, it lets one retire much sooner with more money.

Thoughts? Comments? Ideas?

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Reply: 1
From: Rixter ®


It's not what we think is the best one, its what you think is best for you. Everyones is and thinks differently...Theres is no right or wrong way. Just do what fits in with your finacial retirement goals and what you feel is the most confortable strategy for you.

Happy Investing,
Rixter :)
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Reply: 1.1
From: Alan Hill


Great topic!

Let's broaden 'retirement' though, from stopping to do what you HAVE to do to, to doing what you WANT to do. This for many may still involve some type of 'work'.

Personally, I could only lay on a beach for so long.....but ahhhh, wouldn't it be nice to have the choice?

.....10 minutes passes......

Sorry I was just having a little day dream there.....back to it.....

With the 'HK/IC' strategy you mentioned, do you know how they recommend structuring this? Is it simply a Line of Credit drawn on the Equity each year and they recommend you live off that? Rolf....from your experience, how do the banks like you coming back every year for another LOC if you didn't have a job?

Interesting topic.....hope it gets plenty of discussion going........

Those of you that have 'left the rat race', what strategy did you use? One of the above or other?

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Reply: 1.1.1
From: Rolf Latham

Hi Allen

Most Lenders dont care that you dint have an income, indeed even if ALL your income is from rent or annuities, just sometimes they may want to reduce the LVR a little.

Even the much maligned Lo Doc loans are now around the 6.3 % to 7.3 % mark and can be used by "full time" investors if the prime lenders dont want to play ball.

Horses for courses, but beware of the quick buck because *

Terms, fees and Conditions apply :eek:)


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From: Tibor Berenyi

What I dont quite understand with the H.K./IC strategy is how do you keep servicing an ever increasing debt. Is it realistic to expect to increase rent by such an amount each year to service that debt ?
What happens if property prices stall, and if your IP goes backward (too late now to realise you made a bad choise of IP), the lenders could well be asking you for money instead of lending it to you! Am I off track ?

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From: Rolf Latham

Hi Tibor

All strategies have their risks, and obviously the more leverage you have the greater the upside AND the greater the downside.

I know of a person that has managed to control 6 Ips off the plan with what I would call a modest income and not a lot of cash. If he can settle on them OR he can flick them on while there is still a rising market he will be fine. If not then it will be interesting to see how the bond issuers go after him to collect their dues.


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From: Alan Hill


With the HK/IC strategy it would 'appear'(don't quote me on this as I've never been to either of their Seminars!), to be all about Capital Growth.....don't worry too much about the increasing rent as I don't think this will play too big a part in the equation. Capital Growth does.....this strategy relies VERY heavily on achieving reasonable and ongoing Capital Growth over an extended period.

Your income stream to 'live off' and repay the interest on your LOC/s is accessed from the increased equity in your portfolio.

No increase in equity and your going to have trouble accessing anything......

When you access your equity through this LOC you are actually accessing your Capital and this should be tax free. However you will obviously have non-deductible interest payable on the LOC/s.

I'd agree with Anton....this type of strategy is more aggressive/risky and will suit some but not others. Also your selection of property type/location would really need to be looked at carefully as Capital Growth is important.

This is my very simple reading of the situation.

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From: Simon St John


You said in reply to Tibor "don't worry too much about the increasing rent as I don't think this will play too big a part in the equation".

Can you explain that a bit. Surely you'll have extra payments of $i (i = interest) on the $80-$90 you draw from the LOC each year. How does this get paid? From the proceeds of the LOC itself, plus hopefully increasing rents?

Cheers, Simon
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Reply: 2
From: Diane -

Hi Anton,
We are just at the point of retiring and have used a mix of strategies. Our property portfolio of 9 ips has been built up over 8 years and we are accessing equity to do a 2 year holiday or whatever we want to do. At the end of two years we will look at things and sell some property to pay some property off or if we are bored and decide to go back and do some sort of paid work (because we WANT to not because we HAVE to) we will delay selling property for longer. As it stands our property portfolio is cash flow positive and will take care of the interest on our LOC for the next couple of years.
Hope this helps.

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From: Alan Hill



I guess how big a factor the rent will be will partly depend on the Cashflow situation of your asset base.

In Diane's case below, because her situation is reasonably Cashflow positive, she is able to use this to cover the interest on the LOC. However, let's assume our asset base is neutral(cashflow in equals cashflow out) and you want to use this strategy. Your asset base is simply being used to generate that equity you will draw down(well...80-90% anyway) to live off. If you have no other source of income, I agree, I guess you would have to use part of your LOC to cover the interest cost.

I guess my point really was that while rent obviously makes a difference, RELATIVELY, for this sort of strategy, Capital Growth is the most important factor. You can certainly discuss the finer points of how you will service the loan, but unless you've got the Capital Growth in the first place it becomes a pretty redundant topic.

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Reply: 2.1
From: Anton Madievski

Thank you, everyone. Very educational discussion.

Tibor, re your question about servicing continuously increasing debt: keeping our assumptions simple, rent can be seen as a function of property current value and interest rate. Assuming interest rates and general state of economy unchanging, rent is a certain fixed percentage of current property price (or fluctuates around this value, sometimes slightly lagging). So, when a property doubles in price, so does the rent. (On the other hand, tax deductible interest remains the same).

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Reply: 2.1.1
From: Donna L

In my experience, rental return may match
price initially but unless you are
renovating regularly the rate of return will
drop a little as the property ages (i.e. the
land increasing in value, property being
rented decreasing in value). Brand
sparkling new properties will often give
excellent returns for the first 3-5 years but
when the lustre dies off so does the
percentage rental return (May be still very
good against original loan of course and
percentage on this may be rising.)


Unit purchased 1994 for $120000 with
loan of $128000. Rent $180 p.w. or
around 7% gross return. Now worth
$185,000, rent $210 p.w. or around 5.9%
but against original loan is 8.5%.

With regard to the retirement plan, I like
the equity drawdown approach because
you don't pay tax on the rental income and
you're not paying CGT on the properties
you have to sell to pay out debt. As long
as you are borrowing less than the CG on
the portfolio (ideally less than 40-50% of
annual growth) you should be OK. I
prefer the notion of the 5yr cashbond
because you draw on the equity less
frequently and 5 years is a better
timeframe to allow for capital growth and
rental rises. Also you know what you are
doing for at least 5 years so you can
make plans to allow for interest costs etc.
NB, I haven't retired yet but this is my
game plan.

Donna L
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