Living off equity – a Reality Check

[keithj]

Hi Steve,

Selling hurts the equation so badly

I agree that it hurts the growth equation, but it helps the risk/volatility/SANF equation immensely.

Why sell and give up all the potential future growth on the asset before you know IF a problem will occur? (And all the costs involved.)

Because you can pre-empt the no-growth problem.

Why wouldn't you rather draw down the net equity
(Up to 80% LVR) and invest these dollars for a return??

If I was obsessed with growth (as I was in the pre-retirement phase) I would agree wholeheartedly, but now I'm more balanced and I'm obsessed with SANF AND reliable income & a bit of growth.

If it all went pear shaped because of the many fears that are being suggested, then (And ONLY then) you can sell the property and you are back to the conservative approach.

By then it may be too late - LVR is maxxed out, spiralling interest, IP prices have slumped etc.

Why be predictive? (IE predicting a disaster)
Rather be prepared and react to an event. (IF it actually happens.)

Be pre-emptive instead of merely prepared - avoid a disaster.

Maybe . . . just maybe the next BOOM is just around the corner and in this case it would have been far better to have held onto your "Hard earned" asset.

Maybe the next 22 year slump is just around the corner and in this case it would have been far better to have put some of your "Hard earned" asset into a lower risk, high yielding asset.

My question then is what have you got to lose, by NOT selling now instead of (improbably) later?

When you are forced to sell later (after no growth), IP price will have slumped ('cos IP sentiment is low).
Your LVR will be high (80%?) ('cos you've been drawing down against little growth), so the CGT & expenses will probably take the majority of the remaining 20% of equity.
And you lose a valuable growth asset at the worst possible time.
Then the next year, you may lose another one.
That forever sets you back significantly for future growth.

Steve, would you have recommended LOE to Japanese IPers in the 1980's ?

Cheers,

KJ

 

[Steve Navra]

Steve, would you have recommended LOE to Japanese IPers in the 1980's ?

ABSO(F)LUTELY !!

Seems to me there is VERY LITTLE undertanding about what living off capital actually entails

I will give a detailed response to these many questions hopefully sometime later today.

Regards,

Steve

 

[Sailesh Channan]

Duncan

I am new to this forum and I dont know who Steve Navara is.

I assume if he is promoting this strategy then Steve has been following this concept for a number of years now and through at least 2 property cycles to vouch for its validity.

If he has not done this himself then he probably has come across other investors who have achieved this.

I do not mean to cast nasty dispersions. I thought this forum if people to express thier opinions in various ideas based on thier experiences.

I also like to see thind working for other people successfully before trying it myself.

Regards

Sailesh

 

[kissfan]

Hi all.

Whilst I realize this thread is about living off equity in retirement, I wanted to see what peoples thoughts were about using equity to add to an existing portfolio, i.e once you have reached serviceability limits but have plenty of equity, you could get access to the equity, use some as a deposit (get a new loan) and the rest to service the new loan/s through a line of credit. In figures, lets say you had $700K in equity and used $200K as the deposit on 1 $800K I/P or 2 $400K I/P's, you then borrow another $600K which leaves you with $500K to service both loans for approx 10 years. What do you guys think?

Regards
Marty

 

[Pete]

Marty,

To me, that is virtually the same thing. It uses some of the excess equity for another IP instead of living expenses. And the wonderful comments that this thread is generating could be equally applied.


Thanks all for comments so far; I'm keen to see where this thread leads.

regards,

 

[see_change]

Hi all.

Whilst I realize this thread is about living off equity in retirement, I wanted to see what peoples thoughts were about using equity to add to an existing portfolio, i.e once you have reached serviceability limits but have plenty of equity, you could get access to the equity, use some as a deposit (get a new loan) and the rest to service the new loan/s through a line of credit. In figures, lets say you had $700K in equity and used $200K as the deposit on 1 $800K I/P or 2 $400K I/P's, you then borrow another $600K which leaves you with $500K to service both loans for approx 10 years. What do you guys think?

Regards
Marty

This is one of the thing that Steve suggests, though he would suggest you buy a Cashbond with the drawdown from the LOC , as the income derived from the cashbond is treated by the banks as income , and thus increases your servicability.

I'm more comfortable with this than using this for living expenses , though I still think that there are times in the property cycle when it would be safe to do this and times when it is not. At the moment , having just gone through supposedly the biggest property boom around, I don't think now is the time to be doing it, but that's just my opinion

See Change

 

[simonjulie]

Hi All
The Cash bond(annuity) was a great thing for me because at that time the market was rising with no end in sight for at least twelve months.
The structure designed by Steve was to last five years. however after only five months I got out by cashing the annuity and buying two more properties. I added value to both and sold one which gave me serviceability to set up a new series of loans with another lender. Since then I used Low doc's to achieve more growth.
While I was doing this I was living off the growth and rents only.
What a balancing act it had become. My asset base is at a point where it will continue to grow with capital gain and the equity is retrieved through the rents. It may not make sense but is possible even with a negative cashflow as long as your asset base and spending are balanced.
kind regards
Simon

 

[quoll]

Just thought I would throw my 2c in.

We won't use equity to live off, happier paying tax and living off rent / dividends / profit, but we will use equity to help buy stuff.

I was thinking along the lines of buy a house, wait for it to increase then sell and use profit to purchase a ...... (insert expensive toy here). Lately I've been thinking that I would be better off to borrow against the house, purchase the thing, pay the interest and leave the asset alone to continue on it's merry way, that way I don't have to pay CGT or selling fees to an agent.

Always flexible
Quoll

 

[Sunfish]

Just thought I would throw my 2c in.

We won't use equity to live off, happier paying tax and living off rent / dividends / profit, but we will use equity to help buy stuff.

I was thinking along the lines of buy a house, wait for it to increase then sell and use profit to purchase a ...... (insert expensive toy here). Lately I've been thinking that I would be better off to borrow against the house, purchase the thing, pay the interest and leave the asset alone to continue on it's merry way, that way I don't have to pay CGT or selling fees to an agent.

Always flexible
Quoll

If you pay off your toy through the business account as "drawings" the debt is gradually transferred back to investment borrowings. Does that make sense?

It does to me and I do it........ Thommo

 

[keithj]

You make some good points, thanks for persisting with me.

Selling pains me.. maybe I'll get over it one day and use your idea of an each way bet.. it certainly has value.

Hi Duncan,

Sorry to have helped cause a sleepless night. Selling & paying $250K CGT in this scenario would certainly pain me too. But I believe growth (& avoiding tax) has a lower priority than reliable income when retired, and the price for swapping a relatively volatile asset for a reliable one is the 24% CGT.

I'm sure you've already done yourself a spreadsheet, but just to spell out one possible scenario. Assuming the $1.3M equity one way of structuring it is as follows -
- sell enough IPs to realise $1M, pay $250K CGT & expenses
- invest in low risk CPI linked assets eg LPTs yielding 8% giving $60Kpa
- pay < $10K tax pa on this income giving $50Kpa nett guaranteed
- keep the remaining $1M IPs (assuming 70% LVR).
- ensure remaining IPs are c/f +ve or neutral
- if CG occurs then draw down (say) 50% of it tax free (eg 7% growth would give you $35K tax free) - ie follow the LOE principles - abet on a smaller scale.

So I would end up with a reliable nett income of $50K and on average an extra $35K of tax free spending money pa.


Cheers,

Keith

 

[ToGetProperty]

Keithj:

- invest in low risk CPI linked assets eg LPTs yielding 8% giving $60Kpa

How about this does not work in next 5 years?
Why not put all funds into your 1M IP and pay it off to live from rental incomes as Bill suggests? No worry at all of the retirement.


When you read carefully, actually, Duncan's example spreadsheet is cash flow positive already. Half of the living fee is from rental incomes. Your point below is considered in Duncan's spreadsheet-

- ensure remaining IPs are c/f +ve or neutral

I still think that all of your guys' views are valid for your own situation.

 

[duncan_m]

When you read carefully, actually, Duncan's spreadsheet is for his own portfolio which is cash flow positive already. Half of his living fee is from rental incomes. Your point below is not an issue for Duncan -

Just a quick note.. the figures in the spreadsheet are not mine. Just an example.

 

[keithj]

Hi TGP,

How about this does not work in next 5 years?
Why not put all funds into your 1M IP and pay it off to live from rental incomes as Bill suggests? No worry at all of the retirement.

The issue is yield - IP yields around 4% nett - LPTs yield around 8% nett. It would take a lot longer to get to a comfortable retirement stage relying on IP rental income than using a LOE type strategy. Roughly twice as long?

LPTs are often partially tax deferred. LPTs are perceived as lower risk - they have a diverse range of blue chip tenents with 10 yr+ leases indexed to CPI, in a diverse range of $100M+ buildings, with staggered lease expiry dates, professional managers, have liquidity. IPs have a completely different set of characteristics. The ASX is a great place to start some research.

When you read carefully, actually, Duncan's spreadsheet is for his example portfolio which is cash flow positive already. Half of the living fee is from rental incomes.

Sure, everyones circumstances are different. I'd suggest you put together a spreadsheet tailored to you circumstances - I've certainly got one for my circumstances with dozens of different asset allocation scenarios.

Cheers,

KJ

 

[ToGetProperty]

Just a quick note.. the figures in the spreadsheet are not mine. Just an example.

Duncan:

I just modified my text. This spreadsheet actually points out the important of cash flow positive in the retirement portfolio. It also provides a good tool for us to work with in our own scenarios. Thank you very much.

Cheers

TGP

 

[Sailesh Channan]

Hello Everyone

It looks like the thread is moving towards different income streams now so here is my 2c worth.

My goal is to maintain an annual income of $200k or more from my investments

For me long term residental property will form the backbone of my investment portfolio. However as we have all discovered that this type of investment has defencies with yield.

Rather then selling all my portfolio I would prefer to utilise the equity to diversify into assets such as :
Commercial properties
Property development
Businesses
Share trading

Currently I have moved into property development and have set up my own business.

I started with my first property in 1990 at the age of 25. Unfortunately I lost money in this property and in shares.

Approximately 7 years ago I started from scratch again in property and this time with greater knowledge. Now I have around $2m in property.

However it has not all been plain sailing. In 2000 I was made redundant and had to rely on my equity to survive for 2 years. In this time I tried a small business that failed. I was aware of the impending boom in Brisbane but could do very little about growing my portfolio aggressively. So I lost a lot of oppotunities.

After resigning from work 6 months ago I am back on living on equity while I build my business and focus on my property development activities.

I am happy with my progress over the last 7 years but, I realise I could have done a lot better had if I had a stable income in that time.

Regards

Sailesh

 

[MJK]

My asset base is at a point where it will continue to grow with capital gain and the equity is retrieved through the rents. It may not make sense but is possible even with a negative cashflow as long as your asset base and spending are balanced.
kind regards
Simon

Simon,

I wish you would elaborate on this. Do you mean that you capitalise costs excluding interest and live of excess rent flows?

MJK

 

[MJK]

"Why wouldn't you rather draw down the net equity
(Up to 80% LVR) and invest these dollars for a return??"

Unencumbered funds have so much more income producing power dont they.

eg. 100K equity realise by sale may leave you with 70K after selling costs and tax. The 70 k invested into 10% yeild will give 7k income.
If you didn't sell and drew down 80% you would have 80K to invest at 10% yeild = 8K less interest 7% $5600 = net income 2.4K.

MJK

 

[Sim]

MJK - you're failing to take into account the potential growth of the assets which could produce a far greater return in the longer term rather than investing unencumbered funds.

That's the basis of Steve Navra's "lazy dollars" - make them dollars work hard for you.

Look at how businesses run - they go to great lengths to maximise the use of capital - it's a rare commodity, and not something you want to waste (or under-utilise).

 

[Sailesh Channan]

MJk

By selling you are slaying the goose that lays the golden egg.

Sailesh

 

[simonjulie]

It is like having a well run rural farm. When times are tough the good farmer has enough food for his stock stored up to see him through. For me, equity is like the farmers food store. Other farmers who don't have enough will end up selling their farms to the farmer who holds out the longest. Yes, when things get better he will soon grow more food to replace that which was used up during the tougher times.
On the other hand, a good farmer will only set up sufficient structures to store only enough to see him through to the next season or two. He would not build lots of storage sheds on his good food producing land.(In other words be careful not to set up complex structures that will limit your future growth.)Stay flexible!
Also in tough times a farmer does not make his income from hand feeding his stock but rather from the sale of replaceable stock and other produce. His store of hay(equity) will see him through.
Simon