Living off Equity - is this still an option?
- Thread starter Panic
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Hi HK,House_Keeper said:
I agree with Julie - most of these risks are applicable of any IP investing.
The issue with using LOE as a strategy is 2 fold -
– the consequences if failure occurs
– the likelyhood of success
The consequences of failure are permanent – suddenly there’s a property downturn, an extended vacancy or 3, a fire in IP, or the banks change policy. You either return to work (aged 60+) or you have to sell assets in a dead market probably at 30% below fair value. If you’re lucky you’ll have just enough to cover all your loans and be left with $zero.
The likelihood of success over a long period depends largely on how big your buffers are – how much locked in equity do you have, and how many years will this cover your living expenses assuming no growth.
Assuming a buffer of 10 years living expenses is required (ie the length of the down part of the average property cycle). Eg Average $100K expenses for 10 yrs means you need $1M loans locked in. At a 66% LVR (so you can use No-Doc loans) - you need $1.5M equity.
A 'glass half empty' sort of investor would probably allow for 20yrs (like the last 20 yrs in Japan) so he'd need $3M.
If you have $1.5M equity then you could sell all IPs (one per year to keep CGT to a min), invest in LPTs that return 8% (linked to inflation) which would return you $120K (before tax). Of course, the downside is growth is linked to inflation (ie your living expenses).
So the bottom line is –
If you have enough equity to use the Pure LOE strategy then you have more than enough equity to invest in a lower risk strategy that returns a similar income.
A combination of both may be an even better strategy for some – sell a few IPs, invest in LPTs for a reliable base income, keep a few IPs for growth and use LOE only if the growth occurs. As you age & your risk profile becomes more about SANF than ever increasing non-deductible debt you can sell IPs and invest in lower risk assets.
KJ
The following are some suggestions WITHOUT resorting to the use of other asset types (well .. I guess you need to include CASH in this strategy but thats a given).
Increase in interest rates over a long period
=> Staggered fixed loans
=> Drawdown on equity to help cover interest
Reduction in rents
=> Only purchase unique, highly desirable RE
Change in taxation laws
=> Hire a great accountant
Change in banks lending policies
=> Hire a great mortgage broker.
=> Make firm contacts inside your lending institution
Banks recalling the loans
=> Use multiple banks to fly under the radar
=> Refinance with non bank lenders
Change in tenancy laws
=> Hire a great property manager
Change in government housing policy
=> Invest in sectors less likely to be affected (dunno about classifying which tho - maybe the market above the median would be more resiliant? - slums may be hit harder?)
Lawsuit from tenant
=> Use multiple trusts with company trustees to spread risk
Long economic recession
=> Invest in diverse regions/countries
=> People still need a place to live - rents may go up
Long property slump
=> Invest in diverse regions/countries
=> People still need a place to live - rents may go up
=> Purchase mixture of RE - -ve +ve commercial industrial etc if not direct the use LPTs
Reduction in population growth
=> Invest in capital cities, major regionals, follow easy to predict population trends
Lets brainstorm some more useful suggestions. If these dont make you comfortable enough to invest in IP for the long term then i'd say you got problems. Of course I consider you have problems if you arent ready to supplement with other income streams, but thats just my opinion.
T.
Increase in interest rates over a long period
=> Staggered fixed loans
=> Drawdown on equity to help cover interest
Reduction in rents
=> Only purchase unique, highly desirable RE
Change in taxation laws
=> Hire a great accountant
Change in banks lending policies
=> Hire a great mortgage broker.
=> Make firm contacts inside your lending institution
Banks recalling the loans
=> Use multiple banks to fly under the radar
=> Refinance with non bank lenders
Change in tenancy laws
=> Hire a great property manager
Change in government housing policy
=> Invest in sectors less likely to be affected (dunno about classifying which tho - maybe the market above the median would be more resiliant? - slums may be hit harder?)
Lawsuit from tenant
=> Use multiple trusts with company trustees to spread risk
Long economic recession
=> Invest in diverse regions/countries
=> People still need a place to live - rents may go up
Long property slump
=> Invest in diverse regions/countries
=> People still need a place to live - rents may go up
=> Purchase mixture of RE - -ve +ve commercial industrial etc if not direct the use LPTs
Reduction in population growth
=> Invest in capital cities, major regionals, follow easy to predict population trends
Lets brainstorm some more useful suggestions. If these dont make you comfortable enough to invest in IP for the long term then i'd say you got problems. Of course I consider you have problems if you arent ready to supplement with other income streams, but thats just my opinion.
T.
keithj said:
Interesting reply Keith.
The proponents of LOE emphasize that income from LOE is tax free. That would be a significant advantage.
However, I like your idea of combining the two approaches. Maybe you could get a reliable income from LPTs that keeps you on a low tax rate, then takes the rest from LOE.
Interestingly enough, a few of the people who have achieved LOE still choose to work in some way. So maybe the goal should not be to attempt to live purely from LOE but to have enough equity so that you don't have to work for a living.
Cheers,
TomL said:
Great mitigations strategies suggested here.
Cheers,
Aren't we forgetting "acts of God" you know lightning bolts, flash floodings and locus plagues???!!! Ever heard of "the one you just didn't see coming"??? 
I think taking risks is great (but, as with most things, in moderation) and more importantly is the power/value in accounting for the "worst case scenario" BUT.....and here's my "simplistic" thought for the day/week/month....ahhhh what the heck....this cycle:
Forget you SANF (sleep at night factor)..SLEEP WITH ONE EYE OPEN!! That way you can always see (whatever threatens you) coming!!!
I think taking risks is great (but, as with most things, in moderation) and more importantly is the power/value in accounting for the "worst case scenario" BUT.....and here's my "simplistic" thought for the day/week/month....ahhhh what the heck....this cycle:
Forget you SANF (sleep at night factor)..SLEEP WITH ONE EYE OPEN!!
That way you can always see (whatever threatens you) coming!!! 
equity
hi all
It is good to see this post hasn't died, sea change may think it should have.
most of the opinion from what I have read is to do with risk and what risk you are happy with.
mine keeps getting bigger and I SANF easy every night as my coverage is well over my lending.
you must work out you plan.
mine is set and working well and a head of my time line.
make sure that your system are in place that if changes happen your system can change to the new enviroment.
The world of business is not a new thing and problems occur all the time you must have a system that can change to allow this.
I like this debate because you see the two sides to the coin one the risk takers and the other the money under the bed or fixed interest Ive always been the risk taker and a couple of my investors are the money under the bed.
Its always interesting.
hi all
It is good to see this post hasn't died, sea change may think it should have.
most of the opinion from what I have read is to do with risk and what risk you are happy with.
mine keeps getting bigger and I SANF easy every night as my coverage is well over my lending.
you must work out you plan.
mine is set and working well and a head of my time line.
make sure that your system are in place that if changes happen your system can change to the new enviroment.
The world of business is not a new thing and problems occur all the time you must have a system that can change to allow this.
I like this debate because you see the two sides to the coin one the risk takers and the other the money under the bed or fixed interest Ive always been the risk taker and a couple of my investors are the money under the bed.
Its always interesting.
Rubbish, what you see is what people are prepared to show you, and that is usually a fraction of the real deal. Sure it is easy enough to beat one's chest and grunt like some primitive caveman (or woman) "uggghhhh....me big risk taker, you big sissy"!!!grossreal said:
But I have to laugh, because I have seen it all too often, those that sing the loudest are usually the ones silenced the first when asked to put their money where their mouths are!!! I have been at both ends of your extreme scale grossreal. At one time, I took some massive risks (and luckily for me, albeit I got burnt some, it wasn't fatal) and so to, I have regretted my mistakes and stuck to being the "money under the bed" type. What am I now??? You seem to have it all worked out in your own mind, that people are one or the other, so you tell me!!!
But hey, I'll let you in on a little secret....I'm a LOE kinda gal; have been for some years, and the only reason I would consider taking on any financial risk at this point in time is not to make more money, but rather to keep the taxman at bay!!! Who exactly are you refering to with your above comments?Monopoly said:Rubbish, what you see is what people are prepared to show you, and that is usually a fraction of the real deal. Sure it is easy enough to beat one's chest and grunt like some primitive caveman (or woman) "uggghhhh....me big risk taker, you big sissy"!!!
Simon
MonopolyMonopoly said:What am I now??? You seem to have it all worked out in your own mind, that people are one or the other, so you tell me!!!
You said have been living off equity for some years now. Can you enlighten the readers of this forum with an overview of the strategies and structures you used to reach your current status(LOE)?
It is only fair that you put up too just as Pete, I and others have done in this thread.
Look forward to hearing your story
Kind regards
Simon
Relax Simon, no one person in particular. What (rather than whom) I am referring to, is the ease with which we as individuals can (and often do) become complacent in our interpretation of other people's behaviours, that it is often tempting to get cocky and play the "he-man" or woman, beating our chest (or drums) so to speak.simonjulie said:
You want ALL the nitty gritty details Simon??? Hell, I don't think I can give you each little bit (I could try but geez, I'd have to write a book).simonjulie said:
Nonetheless, I'll try and sum it up as concisely as I can, so here goes:For starters, as a youth, I worked as many as THREE jobs at once, seven days a week!!! This helped get me save up enough to buy my first IP at 18, pay "my own way" through uni and finally into an extremely well paying career which led me into establishing my very own successful medical practice. When the business reached record takings in 2000 I decided it was time to "sell out" and kick back (after all, I'd worked like a dog for so long, I deserved it). Plus, my life's ambition was to retire before my 40th birthday (and I did).
Overall:
I only ever bought property with CASH; I have never borrowed from any lending institution (unless you count my parents). And although they had money, I have always very stubborn/proud so had refused to take "hand outs" and always made sure I paid any borrowings back with interest!!
I invested in high risk (extremely volatile) shares on the advice of financial advisors (at the time) thus realising exceptional gains, as well as even more exceptional losses!!!
I still invest in shares, but these days it is mostly into managed funds (not really classed as proper share trading to many I know, but for me, it's a lot easier on my pace-maker) I married one of the "big 4" corporate bankers, and on the surface of things this may appear a perk, but with a gambling addiction and tendency to throw 80-100K (at any one time) across a roulette table, trust me, it's anything but!!!
Although I predominantly stuck to (and still prefer) residential property, I did venture into joint ownerships of commercial and industrial properties.
I employ a costly, but extremely competent and reliable team of financial/legal people, whom without I would be at a total loss. When it comes to money matters, hell...I don't buy milk unless I get counsel from them first!!!
I don't believe in taking unnecessary risk, even for the sake of making more money. I am happy with what I have achieved thus far. My LVR is 0% and my assets are (similar to many others here, nothing extraordinary) in the millions+ with a passive income (from various investment sources) in vicinity of 150K annually.
Does that help paint the picture???
Cheers,
Jo
Morning Jo
Wow! So great to read your story, you sound like a real inspiration, a selfmade millionaire and have definately done some hard yards to get to where you are - well done!!!
The one thing that occurred to me in reading your story is that if we define "Living Off Equity" as borrowing money against an existing portfolio to fund further investments and/or lifestyle and/or to fund the gap between current earnings and lifestyle requirements. And if we define "Living off Income" as living off the passive income derived by an existing portfolio that generates sufficient income net of costs to fund required lifestyle and investment requirements.
From reading your story and with an LVR of 0%, you are probably not living off equity per se, but rather living off income, that is the passive income of $150k generated from your portfolio.
I am not living off equity (or income ) at this stage, but it would seem to me that the problem most people have with the concept of living off equity is that it increases there borrowings and therefore there debt levels and it makes them nervous.
Probably a minor point, your story is fantastic and you are a role model for other women!
Best Wishes
Corsa
Wow! So great to read your story, you sound like a real inspiration, a selfmade millionaire and have definately done some hard yards to get to where you are - well done!!!
The one thing that occurred to me in reading your story is that if we define "Living Off Equity" as borrowing money against an existing portfolio to fund further investments and/or lifestyle and/or to fund the gap between current earnings and lifestyle requirements. And if we define "Living off Income" as living off the passive income derived by an existing portfolio that generates sufficient income net of costs to fund required lifestyle and investment requirements.
From reading your story and with an LVR of 0%, you are probably not living off equity per se, but rather living off income, that is the passive income of $150k generated from your portfolio.
I am not living off equity (or income
) at this stage, but it would seem to me that the problem most people have with the concept of living off equity is that it increases there borrowings and therefore there debt levels and it makes them nervous.Probably a minor point, your story is fantastic and you are a role model for other women!
Best Wishes
Corsa
Well Done Mono.
You disappeared off the forum for a while due to reasons which appear to have swung around in your favour once more.
With a story like yours its proves you're a fighter and can triump over anything. The forum is richer for your input. Once again well done and thanks for sharing your story.
You disappeared off the forum for a while due to reasons which appear to have swung around in your favour once more.
With a story like yours its proves you're a fighter and can triump over anything. The forum is richer for your input. Once again well done and thanks for sharing your story.
Thanks Corsa, and yes you are right of course. In that respect, I am not really LOE but rather LOI (income derived from the equity). Although I do re-invest a great deal of my income back into funding new initiatives in order to expand my portfolio (like most sensible investors) an LVR of 0% is not something I would recommend for anyone who has years of working life ahead of them. There is much to be gained (and learnt) from being in debt, and provided it isn't to a level beyond one's means, such an exercise can only spell financial success.Corsa said:Morning Jo
Wow! So great to read your story, you sound like a real inspiration, a selfmade millionaire and have definately done some hard yards to get to where you are - well done!!!
The one thing that occurred to me in reading your story is that if we define "Living Off Equity" as borrowing money against an existing portfolio to fund further investments and/or lifestyle and/or to fund the gap between current earnings and lifestyle requirements. And if we define "Living off Income" as living off the passive income derived by an existing portfolio that generates sufficient income net of costs to fund required lifestyle and investment requirements.
From reading your story and with an LVR of 0%, you are probably not living off equity per se, but rather living off income, that is the passive income of $150k generated from your portfolio.
I am not living off equity (or income
Probably a minor point, your story is fantastic and you are a role model for other women!
Best Wishes
Corsa
Cheers,
Jo