Living off equity for the long term ?

[troyhunt]

Personally, I think LOE is quite a risky scenario, and one I am not comfortable taking.

I think it’s a question of degrees; if you’re working on an LVR of 50% across a portfolio of $5M and you pull down $100k a year, you’re increasing your LVR by 2% which should be well and truly outstripped by CG. Lower LVR, greater buffer, less risk.

 

[alexlee]

I think it’s a question of degrees; if you’re working on an LVR of 50% across a portfolio of $5M and you pull down $100k a year, you’re increasing your LVR by 2% which should be well and truly outstripped by CG. Lower LVR, greater buffer, less risk.

If you had 2.5m equity, surely you could generate 100k a year in income.

 

[RumpledElf]

My equity growth over the last couple of years is anything but slow.

Same with ours in the last 18 months, the two that will be rented will be at 20% yield and the new house will be worth over double the build cost when it is finished. Which does help, since we're caught down in lo-doc 60% land and all this doubling or tripling of values just scrapes us in over the edge. We'd only get wildly ahead if we sold something, equity is too hard to get out. Its not exactly doubling our income or anything. But then we have other plans for that.

 

[skater]

I think it’s a question of degrees; if you’re working on an LVR of 50% across a portfolio of $5M and you pull down $100k a year, you’re increasing your LVR by 2% which should be well and truly outstripped by CG. Lower LVR, greater buffer, less risk.

While this is true, I have seen a few that want to gear up to 80% and LOE. I'd rather play it safe, as they say, it's all about how well you sleep at night, and personally I wouldn't sleep well if I was so bold as to try to LOE.

 

[Rixter]

While this is true, I have seen a few that want to gear up to 80% and LOE. I'd rather play it safe, as they say, it's all about how well you sleep at night, and personally I wouldn't sleep well if I was so bold as to try to LOE.

Neither would I at 80 LVR ... for my sleep patterns I'm more a sub 50 kind of guy.

 

[skater]

Neither would I at 80 LVR ... for my sleep patterns I'm more a sub 50 kind of guy.

That's more like it, but even then I'm still a bit reluctant. For my personal comfort, I still would prefer a solid 100% LOR coming in for my living expenses. Don't get me wrong though, I'm very comfortable with a bit of a combined effort whereby LOE can be used for some luxuries.

 

[JIT]

If you had 2.5m equity, surely you could generate 100k a year in income.

How Alex?

eg. 8% income, 6% interest... 50k pa net (pre-tax) and only half way there... ?

 

[wobbycarly]

How Alex?

eg. 8% income, 6% interest... 50k pa net (pre-tax) and only half way there... ?

If you are earning, say, 5% on the $5M, that's about $250k pa. 6% interest on the $2.5M debt is $150k pa.

That's $100k. (pre-tax, excluding other costs and depreciation)

Push your yield to 8% on the $5M and get it into a tax-effective environment...

 

[alexlee]

How Alex?

eg. 8% income, 6% interest... 50k pa net (pre-tax) and only half way there... ?

I'd be starting early. Say 5-10 years before you get to that point, start moving a couple hundred k into shares, bonds, etc. Resi ips isn't the highest yielding asset class around.

I see this as part of the long term plan. You don't get to 5m property and 50% LVR and suddenly decide to go for income. You start 'switching' when you have a mil or so in equity.

 

[WASP]

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.

Are you saying, take it out of the LOC and put it into an offset account??