Living off Equity - is this still an option?

[Pete]

kph wrote

Was wondering, what sort of rental yields are you achieving on your properties, and are the rents improving.( are rents increasing in line with the capital growth of the properties)
As we all know the rent return in Perth is pretty poor and I was curious as to what percentage the rent equates to as a percentage of the expenses incurred in holding the properties.

And, if the rents are not keeping up with capital value of the properties, then as you increase ( revalue) the borrowings, effecively its costing more of this equity to service the increased borrowings.
Sounds inefficient to me ( and now I'm confused)

And this is non deductible debt ?

I haven't all the figures on me - but basically the yields are modest. They are increasing a very little but certainly not in line with the recent very strong capital growth. However, the expenditure is comfortably less than the funds 'created' from equity. I'll always have debt. It probably is inefficient, and maybe not smart in other respects too. Hence my recommendation for expert advice. Tax deductability of interest is as you would expect - only for funds used for investments not for personal use.

 

[Monopoly]

A NODOC loan is purely based on the asset. Can go to 70% and there are no questions re employment or income, assets or liabilities other than the property being financed.

Making it a very dicey predicament to get yourself into IF you don't take into account your ability to service such a loan. How often have people been burnt because of NO/LO-DOC loans??? Especially in an climate that so highly favours taking out more and more "equity mate"!!!

Personally, I believe that unless you can adequately (and by that I mean "comfortably") address the serviceability aspect, NO LOAN application should be entered into - NO/LO or FULL DOC!!!

 

[simonjulie]

Making it a very dicey predicament to get yourself into IF you don't take into account your ability to service such a loan. How often have people been burnt because of NO/LO-DOC loans??? Especially in an climate that so highly favours taking out more and more "equity mate"!!!

Personally, I believe that unless you can adequately (and by that I mean "comfortably") address the serviceability aspect, NO LOAN application should be entered into - NO/LO or FULL DOC!!!

That is why I keep harping on about the importance of keeping your LVR balanced.
Let me ask this question.
Is it better to have a LVR of 50% on 2mil or an LVR of 70% on 10mil?
I know which one I want.
Kind regards
Simon
Ps Great stuff Pete

 

[Rixter]

That is why I keep harping on about the importance of keeping your LVR balanced.
Let me ask this question.
Is it better to have a LVR of 50% on 2mil or an LVR of 70% on 10mil?
I know which one I want.
Kind regards
Simon
Ps Great stuff Pete

Which one you prefer Simon Is this a trick question

 

[Pete]

I'll take the 70% of $10,000,000 every time. But I won't 'spend' all of it...

 

[simonjulie]

Amen brother Pete

 

[Pete]

Yes, amen, brother Simon!

We're all different and there are many ways. This is very right for me now. It is life changing stuff.

 

[Simon]

Making it a very dicey predicament to get yourself into IF you don't take into account your ability to service such a loan. How often have people been burnt because of NO/LO-DOC loans??? Especially in an climate that so highly favours taking out more and more "equity mate"!!!

Personally, I believe that unless you can adequately (and by that I mean "comfortably") address the serviceability aspect, NO LOAN application should be entered into - NO/LO or FULL DOC!!!

I agree Mono - very sage advice.

 

[see_change]

That is why I keep harping on about the importance of keeping your LVR balanced.
Let me ask this question.
Is it better to have a LVR of 50% on 2mil or an LVR of 70% on 10mil?
I know which one I want.
Kind regards
Simon
Ps Great stuff Pete

I'd say it depends .....

Depends on returns

Depends on outside income / servicability

Depends on stage of the cycle

Depends on where the properties are ( eg I would not want a 10 mil portfolio bought in rocky at this stage ....)

Lots of Factors

As with much of the debate on property investing , creating pitchable neat packages is dangerous....

See Change

 

[simonjulie]

Hi Simon and Monopoly
So does that mean you would settle for the LVR of 50% of the 2mil asset base?
Isn't the alternative strength of the 10mil asset base with a 3mill equity ratio comfort enough especialy when previous equity grabs are still liquid in offset accounts. I could quite easily sleep at night with the knowledge that I would have a number of escape plans/safety nets before I would have to sell or go back to work.
Simon

 

[Rixter]

Hi Simon and Monopoly
So does that mean you would settle for the LVR of 50% of the 2mil asset base?
Isn't the alternative strength of the 10mil asset base with a 3mill equity ratio comfort enough especialy when previous equity grabs are still liquid in offset accounts. I could quite easily sleep at night with the knowledge that I would have a number of escape plans/safety nets before I would have to sell or go back to work.
Simon

Im with you Simon.

 

[Monopoly]

Hi Simon and Monopoly
So does that mean you would settle for the LVR of 50% of the 2mil asset base?
Isn't the alternative strength of the 10mil asset base with a 3mill equity ratio comfort enough especialy when previous equity grabs are still liquid in offset accounts. I could quite easily sleep at night with the knowledge that I would have a number of escape plans/safety nets before I would have to sell or go back to work.
Simon

I think Seech summed it up perfectly "IT DEPENDS". You cannot assume one (50% LVR of 2 mill or 70% of 10) to be a "safer" option just because your asset base is greater. Granted, on the surface it may appear the more feasible option, BUT if all the other pertinent factors (ie. serviceability, asset/investment type, economic climate, current market conditions etc etc etc etc) are not taken into account, it is (IMO) playing tom-foolery.

I guess my conservatism with respect to investing comes from early childhood memories of watching quite a few of my parents friends, the "big boy" players, go down in the blaze of glory because of such mindset, and I never really got my head around it.

Bottom line, "IT DEPENDS" on your goals and your level of comfort (or SANF) and if you can do so comfortably at the higher end of the scale Simon, my hat off to you.

Cheers,

Jo

 

[simonjulie]

Hi See change and Monopoly
"It Depends" Off cause it depends on al lot of things.

Lets all jump on to the merry go round for another spin around in circles.

It has all been said before but at least we now have people now contributing to this thread who have done it or can do it at any time(LOE). That fact cannot be taken away from them. How long will they last? IT DEPENDS! but I don't hear any complaints from those who are living off the equity gained through Property investing. But I will add it is not for the faint hearted.
It all comes down to how much the reader desires financial freedom and are inturn prepared to give to achieve it. There are risks!
Kind regards
Simon

 

[see_change]

Hi See change and Monopoly
"It Depends" Off cause it depends on al lot of things.

Lets all jump on to the merry go round for another spin around in circles.


Simon

As long as people make simplistic statements without qualification and expect them to be accepted without comment we'll keep going around.

Why ?

See Jo's Quote

I guess my conservatism with respect to investing comes from early childhood memories of watching quite a few of my parents friends, the "big boy" players, go down in the blaze of glory because of such mindset, and I never really got my head around it.

Same here. I've seen more people go bankrupt through property investing than through any other cause because they took risks at the wrong time of the cycle . Of course they didn't think they were risks at the time.......

Simon you started this last round with your comparison which obviously Jo and I felt shouldn't go unchallanged . Maybe the next number will be a tango

BTW , I think your comparison has nothing to do with LOE.....

See Change

 

[Bill.L]

Hi all,

I wish I had the eloquence of Jo or See-ch....

So I will just agree,

but of course I am just a chicken little religious zealot, who hides all his money under the bed, whithout any means, or understanding of any investment approach, and no possibility of ever being in such a position.

This bit Simon.

"There are risks!"

That is what I want the proponents of LOE to spell out.

I do not mean don't invest,
I would just like those who throw up how easy it is, and give the indication that any retiring grandparents can do it by going into an 80% LVR; to acknowledge/spell out some of these risks.

If it means going in circles, so be it. Personally at 234 posts I think this thread has run its course.

bye

 

[Pete]

Reminds me of Kiwosaki's line something like "the difference between a successful investor and an unsuccessful investor is managing the risk".

Simon seems to think very much like me. I think we have very similar approaches.

For my part, I've learnt a lot about what I'm doing and I've analysed it to death in spreadsheets. As Simon eloquently expressed,

Isn't the alternative strength of the 10mil asset base with a 3mill equity ratio comfort enough especialy when previous equity grabs are still liquid in offset accounts. I could quite easily sleep at night with the knowledge that I would have a number of escape plans/safety nets ...

In our minds the risks are covered. There are unused borrowed funds sitting available to cover planned "worst case" scenarios. I believe I am not taking the sort of risks that past 'big boy' property people may have done.

For example, my last purchase was in July last year. I'm not planning to buy again for some time. The markets I'm in are still growing strongly - current REIWA website data on median house annual prices to June 05 (that is basically one year since my most recent purchase) shows growth Mandurah 21.3%, Singleton 24.3% and Golden Bay 19.5%. The Perth places have only grown fractionally less. I last re-valued in January. I am reasonably confident that there will be a further total 20% growth in the next two years. (To be clear, about 10% per year.) I believe I'm not taking unreasonable risk. I am comfortably servicing all debt and the portfolio is growing. The region I've bought is forecast to be the best population growth area in Australia in the next 30 years. There is heaps of new infrastructure. The WA economy is strong. Etc., etc.

I can't see it happening, but, if it all goes wrong, then I'll no doubt do things smarter next time!

There are risks. There are always risks. I refer again to the opening sentence of this post.

regards,

 

[simonjulie]

Hi See change
IMHO, Anyone who is prepared to invest should also be responsible for their own decisions.
I would never suggest that anyone take on something that they are not feeling confident in accepting consequences of their actions.
As for my opinions being judged by you as simplistic and nothing to do with LOE, that's your opinion.
How many others feel the same as you
Let me know?
Simon

 

[simonjulie]

Hi Bill
The risks are that "you might go broke!" And there are one hundred and one ways for that to happen.
Simplistic! Sorry SeeChange
I presume that you Bill are aiming your questions toward others like Steve and Alan who are useing multiple investment strategies to enable LOE but havn't they already said that there are risks.
I suggest that poeple you are concerned about who have not educated themselves as to both the up and downside of investing strategies could start by DOING something about the own ignorance.
Kind regards
Simon

 

[House_Keeper]

Many people are talking about risks but few a willing to specify them.

I am not living out of equity. I am far from being an expert. Nethertheless, here is a list of risks I can think of. Others may then add on to it.

Risks from living out equity:

Increase in interest rates over a long period
Reduction in rents
Change in taxation laws
Change in banks lending policies
Banks recalling the loans
Change in tenancy laws
Change in government housing policy
Lawsuit from tenant
Long economic recession
Long property slump
Reduction in population growth

Feel free to suggest others that I have missed.

Cheers,

 

[simonjulie]

Risks from living out equity:

Increase in interest rates over a long period
Reduction in rents
Change in taxation laws
Change in banks lending policies
Banks recalling the loans
Change in tenancy laws
Change in government housing policy
Lawsuit from tenant
Long economic recession
Long property slump
Reduction in population growth

Hi Housekeeper

Julie here (not Simon) - just want to ad my two bobs worth.

These risks you have listed are all valid but in fact relate to all property investors whether or not they are LOE.

Regards
Julie
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