I’ve been thinking for a while about the income phase of property investment. How can we convert equity from residential property investment into an income stream? Selling some properties to pay off the debt and live on rent provides a low net yield (around 3.5%). That requires $4m of property with no debt to get a $150k income. Another solution is to sell some properties and convert the equity into income assets yielding, say 7%. About 15% of the equity would be lost through CGT though.
Another possibility is living off equity. I thought that possibility was gone after the lending criterias changed since the GFC. But maybe not. According to Michael Yardney’s latest newsletter, it’s possible. The scenario that he describes is as follows
http://propertyupdate.com.au/how-many-properties-do-you-need-to-retire/
If you think about it, it will be much easier to amass a $5million property portfolio with $2.5 million of debt than the same size portfolio with no debt.
You could then go to the bank and explain you’ve got a self-funding portfolio that isn’t reliant on your income and in fact, there’s a little cash left over for serviceability. You would then ask for an extra $100,000 loan, so you’re increasing your LVR slightly.
The good news is that you don’t have to pay tax on this money because it’s not income. But you would have to pay interest, which won’t be tax deductible if you use the money for your living expenses.
This means after the interest payments you’re left with around $93,000 to live off.
Is this realistic?
What is the max LVR the banks would be happy to lend using an LOE strategy?
What would be the interest rate compared to standard residential? 1% above? 2% above?
What are the serviceability requirements? is it enough to have a real positive CF from property portfolio, or would some banks add a 2% interest rate buffer to assess serviceability?
How frequently is loan reviewed? can you do that for 10 years? for as long as you can keep lvr below bank threshold (assuming they don’t change their policy)?
Who are the financiers willing to do this?
Do you have to put all your properties with one lender, or can you spread your portfolio among several lenders?
I’d be keen to hear from people who have actually done this, to get a better idea of what is achievable with LOE under current policies. I'm after a rough idea of what is feasible.
Another possibility is living off equity. I thought that possibility was gone after the lending criterias changed since the GFC. But maybe not. According to Michael Yardney’s latest newsletter, it’s possible. The scenario that he describes is as follows
http://propertyupdate.com.au/how-many-properties-do-you-need-to-retire/
If you think about it, it will be much easier to amass a $5million property portfolio with $2.5 million of debt than the same size portfolio with no debt.
You could then go to the bank and explain you’ve got a self-funding portfolio that isn’t reliant on your income and in fact, there’s a little cash left over for serviceability. You would then ask for an extra $100,000 loan, so you’re increasing your LVR slightly.
The good news is that you don’t have to pay tax on this money because it’s not income. But you would have to pay interest, which won’t be tax deductible if you use the money for your living expenses.
This means after the interest payments you’re left with around $93,000 to live off.
Is this realistic?
What is the max LVR the banks would be happy to lend using an LOE strategy?
What would be the interest rate compared to standard residential? 1% above? 2% above?
What are the serviceability requirements? is it enough to have a real positive CF from property portfolio, or would some banks add a 2% interest rate buffer to assess serviceability?
How frequently is loan reviewed? can you do that for 10 years? for as long as you can keep lvr below bank threshold (assuming they don’t change their policy)?
Who are the financiers willing to do this?
Do you have to put all your properties with one lender, or can you spread your portfolio among several lenders?
I’d be keen to hear from people who have actually done this, to get a better idea of what is achievable with LOE under current policies. I'm after a rough idea of what is feasible.
