Living Off Equity In Retirement

[marcodepaul]

My wife and I expect to retire in 8 years time and we are not sure to what extent the banks will come to the party with high debt, considerable equity but limited income.
Please see figures below. We are three IPs away from our plan.

Age now 51 Age: At retirement 2015 = 59
ASSUMPTIONS CG 9%
INTEREST = 7.5%
RENTAL YIELD =4%
PPOR purch 300k in 1999 and est val in 2015 = 1191 OWING 200 000

IP 1 purch 255k in 2002 and est val in 2015 = 781 OWING 270 000

IP 2 purch 285k in 2005 and est val in 2015 = 674 OWING 300 000

IP 3 purch 365k in 2006 and est val in 2015 = 792 OWING 380 000

IP 4 purch 375k in 2007 and est val in 2015 = 747 OWING 390 000

IP 5 purch 385k in 2008 and est val in 2015 =703 OWING 400 000

IP 6 purch 385k in 2009 and est val in 2015 =645 OWING 400 000


In 2015

TOTAL EST VALUE =5 533 000
TOTAL DEBT = 2 340 000
LVR = 42%
lOAN [email protected]% = 175500
RENTAL INCOME @yield of 4% =173 680
Sundry costs LEVIES ETC. = 40k
Shortfall =42k
Living expenses for 2 in 2015 calculated on current amount of 80k x 1.03 pa
=101k

Will the lenders finance required borrowings of 143 pa, to maintain these expenses, given our only income is 173k rent?

Apologies if you have seen this posting on the main property page. It got buried in the middle of a CGT enquiry and I figured it belonged amongst the property finance threads.

All comments, greatly appreciated

Marco

 

[XBenX]

Your rental yield calculation looks like it needs some work.

With a LVR of 42% you should be fine for low/no doc borrowings, although the brokers can confirm.

 

[marcodepaul]

Thanks for your reply xbenx. It's gratifying to know that it is possible to hang on to your properties without cutting off the head of the goose that laid the golden egg.

What is the critical LVR point where borrowings become dodgy?

Relating to your other comment, the rental yield calculation was based on the yield from the investment properties. Of course our PPOR is not factored into this.

Is there something I don't know or I have missed.

Thanks again.

Marco

 

[tobe]

I was interested in your earlier post that has morfed into this one. To answer your question, there are many lenders who will lend up to 70% of the properties value, without any income verification, and an ABN registered (a No Doc loan). Many others will go to 80% with an ABN and GST registered, when you sign a form declaring your income to the bank (a low doc loan).

So it is possible to do, it just comes back to how comfortable you are with borrowing money to repay interest on money borrowed earlier. There were some spreadsheets posted on your earlier thread that show this is possible, as long as the capital growth continues. Its called living off equity, or LOE for short. It is one way of dealing with the low yield but high capital growth of residential property. Another alternative is to diversify into more higher yielding investments like commercial properties or shares. The original solution is to simply sell enough property to repay the debt enough to have the remaining rental income replace your worked income.

 

[tobe]

BTW, its a great problem to have, congratulations!

 

[marcodepaul]

Thanks Tobe,

Very succinctly put. Yes there is something "icky" about borrowing to pay interest on previous borrowings. Many do it, I imagine. I know we are now starting to build buffers into our borrowing to cover anticipated shortfalls over the next few years. It's important to take care that if the proverbial bus ran you over and you could no longer work, you would have time (say 6 months) to liquidate (not fire-sale) one of your properties so as not to be tipped out on the street.

Incidentally, many thanks for your salutations, but I'm afraid you have prematurely congratulated. I think our next three properties will be the hardest to acquire, with serviceability issues. And no doubt our smug future projections will be modified against unanticipated local and world events.

Marco

 

[kissfan]

Hi Marco.

Another scenario (which I'm sure you've pondered) would be to sell one or two of the I/Ps and retire the debt (or most of it anyway).

Yes, you'd have to pay tax on the rental earnings, but it still also gives you the option of living off equity of existing portfolio, not just totally dependant on LOE.

Regards
Marty

 

[marcodepaul]

I had thought about it vaguely but have never done the sums on it. I'll punch the numbers into the steam driven computer today.

Thanks Marty!

 

[BV]

Marco,
Have you considered using your super?
I am planning to do the same as you but I will consider using my super to lower my debt
or perhaps to increase it depending on how the figures look and also depending on
where we are in the property cycle.
Good luck.

 

[marcodepaul]

Thanks BV!

 

[BV]

Another idea would be to draw down from your super to cover your living expenses as well as
the shortfall for a few years and to let your IP's appreciate nicely in the mean time.
Finally, when the super runs out you could start your LOE plan.
You can estimate what your super will look like in x number of years.
If you go to
http://www.australiasuper.com.au/toolsandresources.aspx
and click on Calculators ( on the left hand side) there are several to choose from.
One of them will estimate your super at your chosen retirement age
and will also tell you how long it will last depending on what your annual expenses are.
Cheers

 

[marcodepaul]

Thanks BV

Had some fun with the calculators.

Do you think the high growth estimate of 8% is rather conservative?

 

[BV]

Thanks BV

Had some fun with the calculators.

Do you think the high growth estimate of 8% is rather conservative?

The High growth package will generally earn you a lot more than 8%
unless ofcourse we have a share market crash in which case you can go -ve..
I personaly prefer the balanced fund, it had very good returns last time I checked my statement.
Cheers

 

[TTRTR]

Trying to borrow more each year to cover regular expenses is a slippery slope to ruin IMO as each year will then bring a greater interest expense than the last year, not to mention that you'd also have to pay that interest out of after tax dollars.

Why aren't you considering selling enough of the portfolio to leave you with a passive ungeared income from the remainder? That has always been my plan, to sell enough to clear the debts and keep the remainder to have an income producing hedge against inflation.

Also, hae you considered options to try to get a better income from each property? Extensions etc. Or are they simple units with a fixed layout?

 

[Rolf Latham]

Hiya TT

You are right, it is a slippery slope, but with good management on the outgoings side, and a bit of adjusting on the way on the income equity side, many clients have managed the LOE thing by making that slope into manageable steps

The concept of LOE isnt one of fixed and forget, its a combination of many things, including sellling off assets that arent performing, diversyfing property equity into higher CASH yielding ones etc etc.

ta
rolf

 

[accumulator]

I have had varied advice about the tax deductability of the interest on the money borrowed against properties in this situation that is used to live off rather than re-invest.

Can anyone shed some light?

 

[BoatBoy]

Marco,
Have you considered using your super?
I am planning to do the same as you but I will consider using my super to lower my debt
or perhaps to increase it depending on how the figures look and also depending on
where we are in the property cycle.
Good luck.

But what if you want to start using LOE at 43 years of age, super 'aint going to help.

Desperatly trying to get as much info as we can, as the equity is there, just need a plan to make it work.

BB

 

[BV]

I have had varied advice about the tax deductability of the interest on the money borrowed against properties in this situation that is used to live off rather than re-invest.

Can anyone shed some light?

Of course if you are borrowing money for personal use
the interest won't be tax deductible.
cheers

 

[BV]

But what if you want to start using LOE at 43 years of age, super 'aint going to help.

Desperatly trying to get as much info as we can, as the equity is there, just need a plan to make it work.

BB

At 43??
We all dream of the day we would not have to go to work
but we should also have a plan on how we will spend all that
spare time because being retired with nothing to do can be very boring.

Anyway, there are many threads on early retirement and LOE.
Here are a few but keep searching because there are others,
and some of them are very informative.

http://www.somersoft.com/forums/showthread.php?t=19649
http://www.somersoft.com/forums/showthread.php?t=14486
http://www.somersoft.com/forums/showthread.php?t=8934&highlight=early+retirement

Good luck

 

[BoatBoy]

Thank's for that BV, there is a world of reading [and goodness]there for me to wade through.

But being retired with nothing to do at 43 ???

If you look at some of my post's, you'll see Bloss and I have a half built 50 ft cat like the pic and plan on cruising her full time with a yearly project to help with the finances.

We did plenty of miles on our last cat that we built , so know about the expense and hardship that can be part of the lifestyle.

It can also be relatively cheap and full of adventure.

Apart from doing the East Coast lot's we sailed to New Caledonia, I just delivered a boat to Vanuatu, and we are about to holiday in Langkawi and Penang to see if we want to base the boat there.

We have 100 lifetimes of stuff to keep us busy, and can't wait to get back in the island's to start living it again.

Thank's again for the link's

BB