Living off Equity: how feasible is it?

One should not dump on something without an alternative so I will offer the [absurd] assumption of all your investment being in BHP. You get a tax paid 3% dividend. You can present it as collateral to a margin lender and draw down equity as you choose to a minimum of 30% WITHOUT PAPERWORK!

Point is, you get a monthly statement which allows you to pull your horns in if things aren't going well, or buy a new car if they do. I am retired and now reject complications.

Good point Sunfish. Using margin lending is another option to consider. It would have to be at low LVR (30%) to be protected from share volatility and margin calls, but it is an interesting option that can increase cash flow on shares.
 
This is going to annoy some people...but here goes...

I believe that LOE by itself is not a sustainable strategy.

I feel that that can form part of your strategy but given a less agressive growth real estate market driven by tighter credit does bode for well for this strategy.

As strategy which I have developed uses LOE, excess cashflow, Super, and disposal of assets to develop a strategy which continues portfolio growth as well as provide a decent income!

The premise of strategy is something like the below. Assume that you need a target income of 80k net per year. For this strategy to work you need about 10-15 properties and some of them would have needed to a grown well in terms of CG and CF. It is also assumes you have only 10k in income per year from part time work and 50k pa in positive CF. So this would not work with people who do not have less than $1m net in assets.

The steps would be as follows assuming you retired at 52 yrs of age:

1. Sell 1 property evey year. Assuming 100k net CG you will need to add 50k to you income and pay tax. The other 50k yours to keep.

2. Of the 50k taxable income you salary sacrifice 24k and pay only 3600k in contributions tax.

3. Take 25k and add to your living income. Of the 80k in income you have a assuming you have about 40k in depreciation across say 15 properties you only need to pay about $4500 in tax based on the new tax rates. So the TOTAL TAX including super contributions is now about 8k. Note as you sell down depreciation reduces so you may pay a bit more in tax...but every second year you buy a new property to keep this deduction...see below.

4. Repeat this every year till 60 at which point your super would have grown by at least 200k (less assume you had 300k in super at 52). Assuming say you have 600k in super that should give around 36k income...but by this time you have reduced your CF+ by 5 properties to say 35k. But you still have 70k coming in and simply supplement by 10k through your property disposals.

5. Every second year buy another properties - preferably a unit a major city. That means your property portfolio still grows but at lesser rate.

6. Keep repeating....and this strategy is an endless packet of Tim Tams as your super and property values keep growing. At some point you cannot contribute to super....but by then you will be about 70 and probably will not need a large income.

This is complex strategy but can explain in detail at some point. My plan is to use this strategy to given me 100k income net every year.
 
but by then you will be about 70 and probably will not need a large income.

Not picking on you per se

But this concept of not needing income as one gets older is one of the greatest injustices and short sightedness in FP terms generally.

I personally know many 70s and 80s that travel extensively still, its nice to have the choice of business class or an outside cabin.

Better, once you get OLD OLD (which used to be 80) you will really enjoy the option of high quality care, being able to give some of your hard earned away early etc.


ta

rolf
 
Given this is probably the pre-eminent property / Landlord's forum in Australia, you've obviously come to the right place.


I'm sure if it's feasible, there will be many many successful Landlords here who are right into it and have been employing LOE for many years.


Unfortunately no-one has actually turned up just yet, but I'm sure they are all still there.


Out of the 1000's and 1000's of property investors here, you would think if it was feasible, there would be a whole swag of the senior investors who are LOE.


I'm getting the feeling, in today's banking climate, LOE is not a feasible option, and that's probably why you aren't getting inundated with replies.


Try speaking with a credit officer at a Bank and see what the reaction is when you show him your 5% growth projections and how you wish to sit on yer bum and spend their money......it ain't gonna be pretty.

Thanks for that Dazz. Another great post that made a lot of sense. I did call my banker (from Commonwealth Bank) to find out what their policy is. Essentially, the bank does not lend only on equity, not matter how much equity you may have. The bank needs to be comfortable that you can service the debt. You need to show income to meet serviceability requirements.

Perhaps you could use cashbonds to transform equity into income, but that assumes you have something like a LOC in place upfront (which would itself have serviceability requirement initially). Maybe possible but could hit hurdles, especially as policies can change down the track.

The only straightforward equity-based lending product they have is the reverse mortgage. It is limited to 45% of LVR, you must be over 65 years old, and the interest rate is 2% above the standard rate. It could be used to draw a small amount of income from the equity in your home, but not enough to live on.
 
Thanks for the many suggestions. I found lots of useful info on previous threads, notably this one.
http://somersoft.com/forums/showthread.php?t=19649

After reviewing all this and talking with my banker, I’ve come to the conclusion that LOE is not something we can rely on for retirement income. We might be able to pull it off occasionally, but not reliably over 30 years. Also, LOE provides a lower net income than selling properties and converting into income assets, assuming a 15% CGT loss. It doesn’t make any sense from a risk / return (income) perspective. It could be used as a tactical measure though, possibly by setting up a large LOC. Setting up a large LOC when your income is high might be the best strategy, but it is not repeatable during retirement.

For us, progressively selling properties would make more sense.
 
After reviewing all this and talking with my banker, I’ve come to the conclusion that LOE is not something we can rely on for retirement income.

While I dont disagree with this generally, getting advice from your current banker on this is like going to the ATO for aggressive tax planning.

It aint gonna happen.

There are reasonable and responsible ways to get at available equity IF the planning has been done before hand, IE dig the well before you need the water

LORE should in no way be relied upon as a sole source of income


ta

rolf
 
We've lived on 80% LOE for 1-2 years every 3-4 years in the past whilst we had kids. We topped it up with casual work in our respective career areas if and when we wanted just to keep the CV ticking over. That was we could both look after the kids when they were little and I could stay home without bothering about maternity leave. Worked well but wouldn't do it long term, and would need to be quickly employable too just in case of disaster.
 
No offence taken....the strategy talked about will still given one $90k net.

That should definitely pay for high quality care.

Not picking on you per se

But this concept of not needing income as one gets older is one of the greatest injustices and short sightedness in FP terms generally.

I personally know many 70s and 80s that travel extensively still, its nice to have the choice of business class or an outside cabin.

Better, once you get OLD OLD (which used to be 80) you will really enjoy the option of high quality care, being able to give some of your hard earned away early etc.


ta

rolf
 
Hey Dazz it does not have a "Wh" in front instead of the "L"! :p

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....

Hey Rolf,


Is that fat finger syndrome, or is that some whizz-bang new combo of living off equity and living off rent that I haven't heard about yet ??
 
Living off Residential Equity

I know that goes without saying................but folks LOE all the time, thats what an allocated pension is : )

ta
rolf
 
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....

My only concern about the SMSF is that I think this will be the target of future governments to plug the tax gap. We've already seen Labor cut the superannuation contribution from $50,000 to $25,000. Who's to say they won't tax the SMSF more as it becomes more popular for investors?
 
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....

It is only business real property that you can transfer into your SMSF.Residential cannot be transferred from a related party into the SMSF. I don't know what this is the case.
 
Hi, haven't they done more than cut contribution threshold to 25K?

There was something about 12.5% of income or something like that.

Most people don't make 200K p.a. so the 25K has effectively gone.

I haven't checked closely yet so do your numbers before you contribut 25K into Super.

KY
 
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
 
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