Living off equity for the long term ?

Hi Guys,

A lot of the books I have been reading mention that living off equity is the ultimate goal. So do not have to continue your day job to support yourself and your investments but rather use your equity to cover living and interest expenses.

Has anyone achieved this and done it in the long term?

I am assuming what the bank gives you, it can take away. For example if I got a 200k LOC, and I lived off 6k a month using a portion of that to cover the interest.

If property prices were rising I am guessing it would not be to difficult to extend that LOC assuming some CG in my properties and my LVR was ok

What if we had a fall in house prices, what would it take for the bank to reduce or cancel my LOC?

If after 15 months I had spent 100k or my 200k, and house prices had been falling could the bank cancel my remaining 100k?

This would leave me in a bad position of having no cash to cover the interest on the 100k I had already spent would it not?

I know I might be over thinking as I have been told before but I just like to understand.

Thanks
 
All the arguments for and against LOE as a strategy notwithstanding, the one thing that doesn't change is the fact that cash in an offset account trumps a LOC anyday.
It's your cash. The bank can't take it back, restrict how you use it or charge fees for drawing it down.
 
You could just draw the loc in full and put it into an offset account. That would make it harder / less likely the money is cancelled.

In the last couple of years, we've seen pure asset-based lending change significantly in terms of lvr and interest rates. If you, for example, start your loe period when you can get asset based loans at 80% lvr, then in a few years need to re-finance but asset based loan lvr limits become 60%, you're going to have trouble. The longer you have to loe, the higher the risk you might hit one of those periods when lending is tight.

One solution would be to have many, many years of equity to live off. 15, 20 years, say. Then you can safely ride out tight lending periods. However, if you have THAT much equity, you can probably just switch to more income producing assets.
 
All the arguments for and against LOE as a strategy notwithstanding, the one thing that doesn't change is the fact that cash in an offset account trumps a LOC anyday.
It's your cash. The bank can't take it back, restrict how you use it or charge fees for drawing it down.

Not true Rob. Read your loan contract. It will have provisions in it that the bank has the option, at any time, to call on all monies in your name that it holds on deposit. The "all monies clause". It may be less likely they will exercise but even that is debatable. It's not nice to be around banks when they change their minds...

Cash in a different bank to the one that has your loans trumps the lot. Unless the bank with your loans buys the bank where you have your cash. In which case you may have to move it again! :eek:
 
That's our plan.
We'll reduce debt to a level where our rents will provide us with the income we need to live comfortably

Dont forget enough rent level to also pay your increasing incomes taxes, portfolio repairs/maintenance plus holding costs before LOR.
 
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I don't see how living off equity can possibly work unless you actually use that equity to get income from - in which case its a bit more than just equity. I have wads of the E word and it is quite the struggle to access it. We're still one house off having rent pay for *all* property related expenses, but then we've only been in the landlording gig a few months ...
 
I got really excited about LOE a few months ago, here is the link to my blog post that had me wetting my pants. I did come down to reality though very quickly when I realised that, house prices unfortunately stay stagnant for years on end, before the boom IN THAT PARTICULAR PART OF AUSTRALIA occurs. I site Sydney as a current example. LOE on paper sounds like a possibility, some claim to have done it, but overall, I think even for a successful investor, it's difficult to achieve and manage. LOR too seems like a great idea, but to have $1000/week (the amount I would need to semi-retire) means approximately $1,000,000 of paid off IPs. It's easily possible. In fact, I think I'm about a third way there already in just 4 years of investing.

Here is what I had recently discovered though, well, all I did was use an online calculator, but let's just say I discovered it. UBank are offering 5.62% for online savers and at that rate, every $1000 is $1/week in return. Soooo, 1 million is $1000 per week, with no pesty PMs or tenants. I know which I would take.

Let's say you work out that you can survive on $600/week, that's $600,000 needed and so on....just my thoughts.

Of course, growth disappears. :eek:
 
Of course, growth disappears. :eek:

Yes growth disappears plus the value of your $600 is going backwards from the effects of CPI/inflation each year as time goes by. Your living expenses are always increasing as your $600 deminishes.

To top it off, all this comes after your income has already taken its biggest hit due to tax liabilities.

Not an effective viable way to sustain a comfortable lifestyle.
 
UBank are offering 5.62% for online savers and at that rate, every $1000 is $1/week in return. Soooo, 1 million is $1000 per week, with no pesty PMs or tenants. I know which I would take.

Let's say you work out that you can survive on $600/week, that's $600,000 needed and so on....just my thoughts.

Of course, growth disappears. :eek:

It wouldn't last very long. How much return would you be getting in 10 years? Probably about 600 a week. What about 20, 30, 50 years? Inflation will kill you. The younger you are the more growth you're going to need because you're battling inflation over a longer period.

In your example, I know which I would take. I'd start switching to income producing shares, drp and build it for another couple of years at least until I could produce most of the income I need from shares AND keep the property portfolio. THEN I would reconsider the situation.
Alex
 
Of course, I neglected to mention that I'm an advocate for a "BALANCED" approach to investing...not just IP, not just shares, not just cash. :D

But thank you for the comments...:D
 
I’ve been looking at strategies for equity and capital to fund lifestyle quite a bit lately and the one theme across most of these strategies is that there are a lot of variables and you want to have a lot buffer. Interest rates, vacancies, lending policy, tax legislation, capital and rental growth; none of them are static and too great a shift in any can derail an LOE or LOR plan really quickly unless the buffer it there to ride out the down periods.

Personally, I think the best insurance is to maximise the capital value of the portfolio early on so only smaller portions are needed later for LOE. Likewise, LOR is going to be a lot more achievable if you’re working with a larger income base and you’re getting increases on top of this to fund lifestyle. Maximising these early in life and exercising them as late a you can bear minimises the risk.
 
I’ve been looking at strategies for equity and capital to fund lifestyle quite a bit lately and the one theme across most of these strategies is that there are a lot of variables and you want to have a lot buffer. Interest rates, vacancies, lending policy, tax legislation, capital and rental growth; none of them are static and too great a shift in any can derail an LOE or LOR plan really quickly unless the buffer it there to ride out the down periods.

Personally, I think the best insurance is to maximise the capital value of the portfolio early on so only smaller portions are needed later for LOE. Likewise, LOR is going to be a lot more achievable if you’re working with a larger income base and you’re getting increases on top of this to fund lifestyle. Maximising these early in life and exercising them as late a you can bear minimises the risk.

Couldn't agree more. I would also add that income streams from other investments is another prong to the strategy. Either business or investments funded with relaeased CG from property. Just as there are many variables, there are, too, many paths to the same goal.
 
Personally, I think LOE is quite a risky scenario, and one I am not comfortable taking. LOR, however, I see as low risk. The last few years has seen rent rises of around $100pw for several IP's. Give us some more good CG so we can sell down a couple and add a couple of Granny Flats and LOR becomes a reality. :cool:
 
I would also add that income streams from other investments is another prong to the strategy.
Mmmm. Our shortish-term goal is to have as many expenses as possible covered by passive income - mainly rent - to keep us alive while we concentrate on business activity. Said business should payback $lots per year eventually and then we can move to the Bahamas. Property is kind of a slow way to get places unless you are developing. Which we are. Hrm.
 
Property is kind of a slow way to get places unless you are developing.

That can be true, but not necessarily. It's not so much about the strategy as finding the strategy that resonates with the individual. What works well for one may not work for another for a variety of reasons.
I've not found property to be a slow way to get places. My equity growth over the last couple of years is anything but slow. I don't attribute that to my strategy, but to the fact that I found my "flow" and just kept working it, over and over.
 
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