How is true financial independance acheived?

[Electro]

I've got a newbie question...

How is financial independance actually acheived through investing in property?

From reading others stories and general info I have gathered from this forum and other sources I am slightly unclear of how this is really acheived (or I have missed something).

Lets see if I got this correct. ( An example )

I buy an IP. I put in the minimum deposit and borrow the rest on the recommended IO loan. I rent this IP out. Overall, the rent covers at least the costs ( interest/rates/mainainence etc). Lets just say I break even - CF nuetral or slightly CF+.

Over time this IP will experiance Capital Growth.

I continue to do this buying 1-2 properties per year for 10 yrs. I eventually amount $5 milliion dollars worth of propery of which I still owe a great deal of principle because I have been paying IO - say $2.5 million priciple remaining.

I know I have 'grown' $2.5 million capital but if I don't sell any of these properties and the rents continue to cover only costs how do I earn the money (say >$100k pa) to live on and not have to work to live. Do I sell and reinvest? Or is that up to me?

From the stories i have read I don't quite understand. Can someone please fill in the gaps or correct my bad assumptions...

 

[Propertunity]

You need to do a search on LOE - living off equity

You are getting close...........the penny is nearly dropping for you

 

[Rob Williams]

If you get lucky, Rixter will post his CGA/LOE strategy here for you. It pretty much answers all your questions. I can't find the link to his recent post outlining the strategy. Sorry.
OK, here it is:
http://www.somersoft.com/forums/showpost.php?p=425864&postcount=2

 

[Nathan]

good work electro...

sound like you need to go get some properties now which fit criteria... make sure you include unexpected expenses...

also another tip lets say after 10 ips there all cf neutral for example.. in 10 years the rents shoulda gone up 50-100 pw each for example... + cap growth..

therefor 10x $100 is $1kpw surplus or cf+

happy days.

also the debt will be in old $$ figures so your LVR will get more positive.

sounds like your on the right track.

 

[Electro]

You need to do a search on LOE - living off equity

You are getting close...........the penny is nearly dropping for you

I think it already has. I have become increasing obsessed. I can't do enough research.

As a great robot once said "Need Input" - Johnny Five, Short Circuit

I have always considered property as a means for wealth but its not until recently when I thought it is the right time for me to start and began researching that I realized this can be done for real!!

 

[The Y-man]

Do I sell and reinvest? Or is that up to me?
..

Great question - and one to which everyone has a different answer at different times

It is up to you.

I figured if when I had enough equity, I would sell up, and throw the proceeds into some income generating managed funds (pretty much like your standard "retiremet practice" with super). This plan seems to have serious shortcomings in economic climates such as the one we are seeing now - crap returns from managed funds, crap returns from interest bearing accounts.... so I am trying to figure out another way.....

Cheers,

The Y-man

 

[Electro]

If you get lucky, Rixter will post his CGA/LOE strategy here for you. It pretty much answers all your questions. I can't find the link to his recent post outlining the strategy. Sorry.
OK, here it is:
http://www.somersoft.com/forums/showpost.php?p=425864&postcount=2

Thanks Rob, I have read this post about 10 times and I love the thought of it.

So the idea is that once you have built equity you basically just keep 'drawing' on that to fund your lifestye and use CG to keep this going.

Is it tax free because it is a loan not an income? And will the tax man only get his money if it is sold via CGT? ( The tax man ALWAYS gets his money )

Does the fact that the principle I owe the bank today not being worth as much in 10 yrs time play a significant factor in the whole scheme of things?

Is there a catch? If it were as easy as it sounds everyone would do it? Obviously you are only successful if you put in the time and effort like anything else?

 

[Rob Williams]

Yes, it is tax free. It's NOT income, for taxation purposes.
No, the tax man won't get his/her money because you don't EVER sell!
I'm not sure how significant the declining value of the loan principle is. I see it as a good reason not to get excited about paying it back. Like Bill Zheng says "your mortgage is an asset" as it is a liability that declines in value (in real terms) over time.
The only catch that I see, and it's one that can be mitigated, is that in times like these, it can be difficult to pull equity out of your properties if you don't have a "real income". You can milk equity over time when times are good and park it in an offset account until you need it. There are other LOE strategies, too which you can research.
I'm heading down that path, but might utilise a bit of a hybrid strategy. Maybe I'll use some rents and other income streams for day to day expenses and look at pulling equity to cober big ticket items like holidays, new car, huge plasma to watch porn .. woops .. meant sport (clearly) etc etc.

 

[Electro]

Like Bill Zheng says "your mortgage is an asset" as it is a liability that declines in value (in real terms) over time.

Great way of putting it.

Thanks for your input Rob - very informative.

Just one other thing before im crystal clear:
The equity you draw on is essentially a loan (via a LOC) and so interest is to be paid on it. Where does the money come from to pay this interest?

 

[Rob Williams]

The equity you draw on is essentially a loan (via a LOC) and so interest is to be paid on it. Where does the money come from to pay this interest?

That will depend on a number of factors. It could be that the interest on the loan for living expenses could be paid by rent increases, over time or additional funds so that some of the loan pays its own interest. Or a combo of both.
Get ready for the people who will tell you this is "bad debt" and the interest is not tax deductable. Guess what .. who cares. You won't be paying tax, anyway

 

[jaycee]

That will depend on a number of factors. It could be that the interest on the loan for living expenses could be paid by rent increases, over time or additional funds so that some of the loan pays its own interest. Or a combo of both.
Get ready for the people who will tell you this is "bad debt" and the interest is not tax deductable. Guess what .. who cares. You won't be paying tax, anyway

I like the way you explain things Robbie Williams

 

[kissfan]

I continue to do this buying 1-2 properties per year for 10 yrs. I eventually amount $5 milliion dollars worth of propery of which I still owe a great deal of principle because I have been paying IO - say $2.5 million priciple remaining.

Hi Electro.

LOE is definately one way, but using your example above...once you are at this stage you could sell a few properties to retire most or all of your debt, then live off the rents (which have steadily increased over the years and will continue to increase). Yes, you will have to pay capital gains tax on the IP's sold and tax on that income but you won't have ever increasing debt. Or you could sell some IP's, reduce debt and invest in some income producing mgd funds to have income coming in from rents and mgd funds.

There a re multiple ways of achievibg your goal, perhaps a combination of LOE & debt reducing. Will probably depend on your SANF, but for me personally, I don't like the system that involves entirely LOE. That's just me as I perceive it to be a little too risky.

Regards
Marty.

P.S. Welcome to the forum

 

[want2bewealthy]

There are many ways to achieve true financial freedom from investment property and all you need to do is work toward it.

Education and mindset/action are the keys to wealth, pair it with leverage and dedication and before you know it you'll be wealthy, beyond your wildest dreams if thats what you wish for

 

[Rixter]

Thanks Rob.....I couldnt have explained it better my self.

 

[crc_error]

I continue to do this buying 1-2 properties per year for 10 yrs. I eventually amount $5 milliion dollars worth of propery of which I still owe a great deal of principle because I have been paying IO - say $2.5 million priciple remaining.
..

I dont think its possible to do this.. there is no way you can purchase decent capital growth properties which are CF+ and keep buying 2 per year. How do you save for deposits?

Plus what happens when interest rates go up? 5% PA to 8% PA will be a massive increase on 2.5mil of borrowings and you wont necessary be able to increase rent to cover these extra costs.

Your better been more conservative, save up a reasonable deposit, and buy a IP ever 3 years.

 

[want2bewealthy]

CRC, I've managed to do so, why cant anyone else?

Let me show you how I'd go about this, Id be fixing at 6% for 10 years

I'd also be buying whenever I could afford to do so, there are so many cashflow neutral properties around at the moment its not funny.

I did it, so can everyone else unless they're no good with their finances or not prepared to take 'risks' which I don't actually see as risks.

 

[crc_error]

want2bewealthy, if you have been able to purchase 2 IP's a year, this would indicate to me that you have some foundation already. either a nice cash holding, or equity in existing properties.

doing this with nothing would be impossible.

I dont see to many properties with 6% yield at the moment.. maybe apartments, but I dont consider these to be the best in capital growth.

 

[want2bewealthy]

want2bewealthy, if you have been able to purchase 2 IP's a year, this would indicate to me that you have some foundation already. either a nice cash holding, or equity in existing properties.

doing this with nothing would be impossible.

I dont see to many properties with 6% yield at the moment.. maybe apartments, but I dont consider these to be the best in capital growth.

Fair assumption,

Well I wasn't aiming for yield on my latest property but it happens to yield at 5.45% and it is not in a high yielding area so it is quite easy to hold most properties with current rates, after depreciation the property should pretty well be CF neutral so no holding costs after tax.

Also, everyone has to start somewhere, you need some sort of deposit to start with but in saying that remember that the Government give you lots of money for buying your own home these days...

Theres some money for one property, if you save more money for another theres the ball off to a good start and the rest is up to you, equity will follow, you just take care of the rest.

All I'm really saying is where theres a will theres not only a way, there are many and those who will not accept 'no' for an answer will prosper and I take my hat off to them.
figure of speech, I don't really wear a hat

 

[Witzl]

SEMANTICS!!

Who really cares if you arent buying exactly 2 properties each year??? So long as you buy properties as often as you can reasonably afford to, does it really matter?
Are you going to lose sleep at night because you didnt buy 2 properties each year?
Hardly.

Electro - kudos to you for researching and understanding some options on how to achieve financial independance from property investment. It took me a fair while to fully understand how to achieve it, and the mechanics of how to "retire" using a LOE or similar strategy.

As for the naysayers.... BAH to them i say!
my fiancee and I have just bought our 3rd property (which is now our PPOR). Considering she bought the 1st IP in mid-2005 without much equity, we are doing pretty good. Now have a >$1million portfolio, achieved in under 4 years (our goal was one $250K house per year).

Good luck to you! Keep researching, reading and getting even more excited.

 

[peastman]

Is there a catch? If it were as easy as it sounds everyone would do it?

The catch is you have to be prepared to do it. There are many people who feel its too risky or have trouble understanding the difference between good and bad debt. Others just cant think outside the square of work till 65 and retire on a pension.

The fact is there are so many ways to acheive financial independance other than the traditional 9 to 5 job, and property is one of them.

You may be interested in my plan, Lazy persons guide to property investing, see link below. Its just another perspective on what has allready been said above.

The important thing is to get a plan and work it. Good luck