Living off Equity: how feasible is it?

[sash]

Kum as it is just myself and assuming that a house is paid off....100k net is very good. It is the equivalent of earning $140k per annum. Not many people have this net ....and if you are retiree....you would be in top 0.5%.

I am not planning to throw in the hat totally till my mid 50s....that would give me only about 30-40 years to fund for. I have a plan to eventually have 6-8 good quality properties (preferable units) in Sydney to manage.

As for moving property to SMSF....I believe you cans still do it post tax. I think limit is still 450k over a 4 year period. I not totally sure but will get advice on this at some point.

Hi Sash,
I like your response to this question. I have employed the same mix at various times plus I had to sell recently, earlier sold from choice / speculative {Sigh}fear while I was still working. That was a BIG mistake.

I have singled out my comments to you because we were in the same bracket in one poll on passive income.

I have quite a few years on you & I remember thinking now that's the position I should have been in when I was 40.

I have retired for 7 years & found that I need more income than expected. I'm still tweaking & trimming. Comfortable & more than most people have but big time spending, no no. Not as much fun when having to watch the $

$60K after tax is still in the ordinary bracket. Even for a single retiree like me, don't ask me why!!

Maybe your $100K needs revision? Especially in Sydney.

Good luck with your planning.

Kum Yin

 

[kum yin lau]

Hi there again, you've 30 years to go & you match my passive income! You hatchling, don't make me green.

I'll bet anything you like that in your mid fifties, your final passive income will be heaps more than $100K

Well done.

KY

 

[Sheryn]

On a more serious note.....I believe there is also a way to move properties into a SMSF prior to retirement. Whilst you will pay CGT....the income in the SMSF will be more tax effective. Need to read up more on this....

At some (when not working) I will sell a residential property, pay GCT due and build another property in SMSF.

Would aim to sell IP at beginning of financial year so we would have a full year before CGT due.

Two problems that I forsee are;

1. As you drawn down your allocated pension from SMSF there is a percentage minimum and maximum amount so as you get on in years you would need to sell building assets to fund allocated pension.

2. Assets left in SMSF when both husband & wife have passed away will be taxed at 16% when distributed to non-dependant benficiaries. So in essence you will fund your own retirement which I think is good, but the no tax payable on super funds after 60 years of age is to organise people to make sure all their funds & assets are in a superfund so the government doesn't miss out on their tax in the end.

My understanding may be a little fuzzy as I am trying to work out 'what to do' to minimise the amount of tax non-dependant kids will have to pay when hubby & I kick the bucket.

BTW
We have sold our PPOR and put funds in offset accounts against IP's so are LOE while we travel.


Regards
Sheryn

 

[sash]

Thanks....I am not quite a hatchling......i am in my mid forties.

I agree the 100k in 10 years is conservative....but that is assuming that there are not train wrecks along the way.

Interestingly...I am taking more interest in super...even with government fiddling this is still going to offer a tax advantage. This is because then the govt will need to fund less pensions. They may tax more of it as more baby boomers retire but it will still be less than PAYE.

The way I see it is that govt wants people to have super that will fund at least the current pension. Then they will decrease the threshold of assets and income at which they can get still get the part pension as they have less people paying tax.

Did you know something like 95% of retiree couples have less than 40k in net income. Will be interesting to see how people adjust from getting a wage of 100k plus to less than40k.

Most of the people I know in their 40s have less than 120k in super!

People have said to me that you are lucky that you have a high income. I think it is also a curse because it is really hard to replace a high income just via super and on IP!

The people who have it made are people on incomes say 40-50k and have managed to buy IPs and have it full paid off and have reasonable super ..say 250k when they retire.

This is because they will be able to get about 15k in income from their super converted to an allocated pension, top up say another 10k net from IP, and also qualify for say part pension of say 13k per annum. This leaves them about 38k net...add to that the seniors discounts and they will be better than when they made 40-50k when they were paying 6-10k in taxes. Obviously, they would have needed to have paid off their PPOR.

Hi there again, you've 30 years to go & you match my passive income! You hatchling, don't make me green.

I'll bet anything you like that in your mid fifties, your final passive income will be heaps more than $100K

Well done.

KY

 

[Highlygeared]

Well I'm not single and kids still young -the plan for full retirement will be when I hit 50 or so and I can assure you, any passive Y that includes a modest mortgage/rent with a spouse and maybe an older kid or two still at home has to be north of $150K NET. I really don't know how you guys live COMFORTABLY on so little, and I'm not even extravagant.

Sash, you may be by yourself now but unless you know it will be me, myself and I 10 yrs from now, I'd probably up your numbers.

 

[kum yin lau]

Hi again, I misread. Thought you had 30 years to go before retirement.

This is off tangent but still interesting. To have any passive income is an achievement & anything more than 30K takes some doing.

Back on topic, I did a form of LOE, really, sometimes in reverse.

I had Super [come from a land where EVERYONE has Super] which I plonked into a house. Then borrowed against the house, I actually used $10K for living expenses!

A long time later, I "retired", misspent much money and borrowed against the commercial property [which I bought by borrowing off the residential properties] and had about $50K left after allowing for expenses to develop a 4-house subdivision.

When interest rates went North, I had to re-borrow to pay expenses et al.

By the 3rd re-borrowing, CBA got shirty & I had to go to Auckland to borrow again!!

Believe me, LOE is hard if it is long term. Mine only lasted a short while.

BTW, I had about 40% in reserve too.

Rent is far more stable.

Currently, I'm recouping & probably will build up a cash reserve of $100K in the SMSF which also houses one small shop.

Sash, as we move along the mid-forties, it is natural to look at Super but I'd be very careful to factor in the govt making U turns about the tax etc

To cut a long story short, my sassy attitude about the stock market has evaporated, along with a big chunk of my SMSF cash!

BUT I'm pig-headed, will continue to build towards half a million otherwise not worth the effort.

Interesting days ahead.

KY

 

[kathryn d]

Pay off the properties and Live off Rent.
Rent is a renewable source (it appears again every week or month)
Simple and easy.

 

[redwing]

A number of retirees would be LOE to an extent?

By the end of 2010, over 41,000 Australians were using reverse mortgages as an option to fund their retirement, loaning a grand total of $3 billion. An incredible increase of 11% compared with the previous year.

The ability to free up equity has seen many older Australians content to squeeze every last cent out of their assets before they die. In fact, surveys have shown that of all people surveyed, more than a quarter would be satisfied to use up all of their own assets leaving nothing for their children when they die.

Source

Then along came the reverse mortgage, a product for the over 60s that did not require regular repayments. Instead the lender would capitalise the interest rate against the value of the property and take it back when you died or sold the property, whichever came first. The effect on this is that you are paying interest on interest and the compounding effect of ‘capitalisation’ can raise the effective interest rate to nearly double the going rate (at present this could be as high as 11% - 12% compared to variable home loan rates in the 6.5% - 7.5% range).

Another model for the reverse mortgage product doesn’t apply an interest rate, rather it values the property, discounts it and applies a percentage of the final sale price as the repayment. For example, an $800,000 property where the owner wants to unlock $100,000 in cash. The lender, using a formula and actuarial life expectancy tables says your life expectancy is 15 years and the cost of providing the $100,000 today over the next 15 number of years at Y% rate will be $300,000 so our contract with you today will state we are buying $300,000 (37.5%) worth of your property at net present value for $100,000. If in 15 years your property doubles to be worth $1.6m your lender will take their 37.5%, or $600,000, from your estate.

Either model is not particularly attractive compared to the following fractional investment model.

Using the same example under a fractional investment model you sell $100,000 worth of your property (12.5%) to one or more investors. In return for this you agree to pay them a rental yield of say, 3.5% or $3,500 pa. If cash flow is a problem then sell an additional fraction of your property as needed to pay the rent on the outstanding fractional interest sold. This should result in a much better outcome for you as you will be paying a rent yield rather than a higher reverse mortgage payment.

Fractional property investing enables you and other investors to buy and sell their interest on a secondary market. As vendor you control how much is available to other people but at all times you know what your equity is worth.

Source

 

[AlmostBob]

LOE LOR are apple trees

Live on equity,
cut branches off tree, eat branches, tree lasts just so long not enough branches to sustain tree, tree dies, sit on stump, starve

Live on rent,
eat apples, tree keeps getting bigger, more apples, too many apples to eat, plant apples, more trees, more apples, leave orchard to posterity

 

[sash]

My net spend per month is 4K at the moment. Obviously, I don't pay rent or mortage where I live so this is why I can live very comfortably.

I also eat out a lot ...bu whatever I want.

It is easy to live on 48 net for a single very very comfortably. I do ensure that I get the best priced insurance, mobile plan, home phone plan, etc. I also don't have any car repayments as I buy my cards outright.

HG.....100k is still a lot to live on if you have no mortage. Most middle income families would have this sort of next income.....but the issue is that they would be paying close to have of this in mortage payment in Sydney.

Well I'm not single and kids still young -the plan for full retirement will be when I hit 50 or so and I can assure you, any passive Y that includes a modest mortgage/rent with a spouse and maybe an older kid or two still at home has to be north of $150K NET. I really don't know how you guys live COMFORTABLY on so little, and I'm not even extravagant.

Sash, you may be by yourself now but unless you know it will be me, myself and I 10 yrs from now, I'd probably up your numbers.

 

[redwing]

LOE LOR are apple trees

Live on equity,
cut branches off tree, eat branches, tree lasts just so long not enough branches to sustain tree, tree dies, sit on stump, starve

Live on rent,
eat apples, tree keeps getting bigger, more apples, too many apples to eat, plant apples, more trees, more apples, leave orchard to posterity

I think with LOE they assume the tree grows a lot faster than LOR due to location when planting

 

[Aaron_C]

$4,000 a month is much more than enough for a single person of course. Not for a couple with children, especially if private school fees are involved.

 

[Dazz]

LOE LOR are apple trees

Live on equity,
cut branches off tree, eat branches, tree lasts just so long not enough branches to sustain tree, tree dies, sit on stump, starve

Live on rent,
eat apples, tree keeps getting bigger, more apples, too many apples to eat, plant apples, more trees, more apples, leave orchard to posterity

This is all very true AlmostBob,

The sticky bit comes in two parts ;

1. The 'normal' residential properties that people invest in, simply don't produce enough apples. Even if they are positive cashflow, the tiny amount they are over and above the mortgage (if any), plus all outgoings added on simply isn't enough for them to live off. You need literally dozens and dozens for it to even come close to supporting one family.


2. When people think they are getting close and get into that transitional zone......they do their calculations and it is far more appealing and tantalising to jump from the work commitments earlier rather than later. LOE now and have a crack at it with the Bank's blessing of course, or carry on with the drudgery for another X years to see if we can do it via LOR and don't need the Bank's blessing.


Depending on how big X is (for us it was 3.5 years, but for normal plain vanilla residential X might be 15 or 20 years) will determine usually which way you jump.

I can confirm that when you get into that transitional zone, it is very weird indeed. You don't need to suck up to your boss anymore, but you need to keep the Bank on-side....very weird.....hard for it to not change your work attitude.

When you get to the LOR stage and you don't even need to suck up to your Bank.....that's when your attitude changes again.

Being completely and utterly debt free and living off rent must be truly exhilirating. We are nowhere near that stage yet, but I imagine you become 10 foot tall and bullet proof.

 

[HiEquity]

Excellent post Dazz - all very true from where I sit.

I can confirm that when you get into that transitional zone, it is very weird indeed. You don't need to suck up to your boss anymore, but you need to keep the Bank on-side....very weird.....hard for it to not change your work attitude.

I can confirm the same thing. We are now in this transitional phase where we really only need the job for the bank's benefit alone. I find myself hopelessly conflicted between effort at work and investing effort. I make more money out of the latter but spend far more time in the former. Hard to see the point in climbing the greasy pole when you see the stress, hours and 100% dedication put in by those above you and all you really want is to have control over how you spend your time, including spending more time with the family while the kids are young. Remove the financial imperative and the world looks very different.

I'm watching work / career opportunities pass me by that I previously would have been all over - some days I care about that but other days it doesn't bother me in the least and I wonder what was ever the attraction? Serious illness in the family resets the priorities as well of course. But I'm beginning to see the transition will take some time for me to get my head around it all.

The sheer number of options out there is just mind boggling. Work a bit longer for a better PPOR, holiday around Oz for a year with the kids, keep investing and working hard for the additional income and safety buffers - it does my head in sometimes! But I'm extremely grateful to have this problem at the same time... I'm guessing we'll just trundle along without changing anything much for awhile just so we can let it sink in.

 

[Dazz]

I'm guessing we'll just trundle along without changing anything much for awhile just so we can let it sink in.

Indeed - it is a weird feeling.

It's similar to being a dragon chained down in a dungeon. You've spent your entire life chewing through the chains that hold you down, permanently dwelling in the cave.

When you get big enough teeth to finally chomp through the chains, you simply sit there flapping your fledgling wings, letting them dry out a while.

Of course, you need to sit and pretend you are still chained down when the dungeon master (boss) comes through, cos you can bet your boots their attitude will change enormously if/when they find out you are no longer chained down.

Practicing flying around, drying out your wings and getting the confidence to take a leap and bust out of the dungeon is scary stuff...and difficult to do without alerting the dungeon master of your activity. You need to get the practice in however, otherwise when the time comes you won't have the confidence to do it for real.

When you do finally bust out (and believe me, no matter what they say, the dungeon master and all your fellow dragons still chained down won't be happy) you find it's a fairly lonely quiet place. At this stage you can only fly a few feet off the ground, weighed down by your heavy chains, which were cut, but not removed. It's bigger and brighter and much freer than down there in the dungeon, but nastier beasts patrol these regions....far nastier than dungeon masters.

These beasts are the chain makers (Credit officers) and they have the ability of not only ripping off your wings, but also sending you back to the dungeon if you don't fly the right way, taking account of the chains that still trail around you.

It's only when you finally get rid of all of the chains that you get to fly up into clear air, where freedom is truly yours.

 

[Rob Williams]

Tell us about the crabs in the bucket Dazz. That's one of my favourite Dazz parables. Nobody can tell it like you can ....

 

[Rixter]

Yep, im in the same vote guys..its a weird feeling.

When I do pull the pin it will be another 7 years before I reach super preservation age, without any employer contributions going in before I can draw down on it for lifestyle purposes.

Im currently setting up a SMSF to roll over and get my hands on my work super and invest it to get it working for me better than my employers super fund manager.

Its all part of my transition to financial freedom.

 

[HotRod]

Excellent anecdote Dazz.

Explains my situation perfectly.

Have had massive rises in rent and cuts in IR, meaning I do not have to work NOW. To keep the chain makers happy I have to work so we can keep doing what we like outside the dungeon.

Luckily my dungeon master is very understanding and I will be switching to a 3 day week in about 6 months time and then cut the chain completely in about 12 months.

Mind you, my mindset is getting hard to shift to working in the dungeon, when I really see that there is no real reason to (except keeping the chain makers happy) and could fly now. My wings are dry nd I know I can fly.

 

[Highlygeared]

This is all very true AlmostBob,


Depending on how big X is (for us it was 3.5 years, but for normal plain vanilla residential X might be 15 or 20 years) will determine usually which way you jump.

Dazz from what I know of what you've done and no doubt its the envy of most on this forum (including me ), do you think one could conceivably achieve the same results NOW accumulating CIP?

ie Did that accelerated timeframe of 3.5 yrs have a lot to do with timing the boom in Perth/WA or is it a result you could replicate if you were just starting that CIP journey now (with careful asset selection etc).